Construction Spending in U.S. Unexpectedly Rose in August on Local Outlays

Construction spending in the U.S. unexpectedly rebounded in August, propelled by the biggest jump in state and local government outlays in more than two years.

The 1.4 percent gain reversed the revised 1.4 percent drop in July, Commerce Department figures showed today in Washington. The median estimate of 52 economists surveyed by Bloomberg News called for a 0.2 percent decline. The industry was up 1.4 percent from August 2010 before adjusting for seasonal variations, the first positive reading this year.

Increased building of multifamily residences, like apartments and townhouses, adds to evidence that Americans are moving away from home buying in favor of renting. Even with the gain in state and local spending in August, public construction was down 5.3 percent from a year earlier, showing the pain caused by budget cuts.

“Home sales and housing construction continue to struggle,” Steven Wood, president of Insight Economics LLC in Danville, California, said before the report. Public projects face “increasingly difficult budget conditions,” he said.

Estimates in the Bloomberg survey ranged from an increase of 1.2 percent to a drop of 1.1 percent. The prior month’s reading was previously reported as a 1.3 percent decline.

Private construction spending rose 0.4 percent. Homebuilding outlays increased 0.7 percent, while private non-residential projects climbed 0.2 percent.

Spending by public entities jumped 3.1 percent from the prior month, the most since February 2009. Federal construction spending fell 0.5 percent, a third consecutive drop, while state and local agencies spent 3.5 percent more.

Government Spending

The gain in total government spending reflected increases in the building of schools, streets and highways and waste disposal plants.

Work began on 571,000 homes at an annual pace in August, the weakest in three months, figures from the Commerce Department showed on Sept. 20.

“There’s not much that points to an improving housing market at any point in the near future,”Ara Hovnanian, chairman and chief executive officer of Hovnanian Enterprises Inc. (HOV), said on a Sept. 8 conference call with analysts. “Our internal business plan assumes market conditions do not improve.”

Purchases of new houses declined in August to a six-month low as the biggest drop in prices in two years failed to lure buyers away from even less expensive distressed properties, Commerce Department figures showed on Sept. 26. The median price fell 7.7 percent from August 2010, the steepest 12-month drop since July 2009.

Fed Outlook

“There are significant downside risks to the economic outlook,” Federal Reserve policy makers said in a statement on Sept. 21 after its two-day meeting. “The housing sector remains depressed,” and there is “continuing weakness in overall labor market conditions.”

The Fed, aiming to lower borrowing costs and spur housing and refinancing, last month announced additional steps that include a decision to reinvest maturing mortgage debt into mortgage-backed securities instead of Treasuries.

Government agencies are under pressure to cut spending. The Census Bureau reported last month that property-tax collections – – the main source of income for cities and counties — dropped 1.2 percent in the second quarter, the third consecutive decline.

To contact the reporter on this story: Shobhana Chandra in Washington

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