Spending increased 0.8% in February and is back on track with the expected 7–8% increase for the full year. Surprisingly, the residential sector, including remodeling, accounted for more than 90% of the February gain. Recent Reed Construction Data starts trends indicate that activity at nonresidential building and heavy/engineering jobsites will be expanding enough in the next few months to offset most of the growth decline now underway in the residential market.
Highway construction spending is expanding at around an 8% annual pace, about the 8.7% annual gain anticipated for both this year and 2007. This growth rate is the result of annual increases in federal highway funding below 8% and about 10% annual gains in other funding sources, primarily state, municipal and toll funds. Spending on pavement is unchanged from a year ago, and bridge spending is up 5.7%. Spending on related lighting and rest facilities is more than 30% higher.
Construction equipment prices increased 0.8% in February and are 5.7% above February 2005. Improved manufacturing and distribution margins in an increasingly tight-supply market account for most of the increase. Manufacturer order backlogs have declined slightly since last fall, but they will remain high enough at least through yearend to maintain sales margins. Higher materials, credit and logistics costs have also contributed to the price increase.
Although manufacturing construction spending fell 3% from January to February, production capacity needs are expanding rapidly enough to ensure a third consecutive year of double-digit construction spending growth in 2006 and nearly that much growth next year. Manufacturing capacity has increased 3.5% since it began expanding 18 months ago, but it has not kept up with production schedules. The capacity utilization rate has pushed above 80%.
The Conference Board's index has remained slightly above 100 for the past year (except for post-Katrina), but it is expected to rise about 10% higher over the next year with stable to slightly lower energy prices and an improving labor market. Yet this increase will still leave the index 10% below the sustained high level at the end of the last business expansion when the unemployment rate was more than 1.5% lower.