Spending dipped 0.1 percent in April after rising for 10 months. This is the beginning of a period of little change while cutbacks in residential construction offset rapid expansion in the rest of the construction market. The value of starts measured by Reed Construction Data suggest near double-digit expansion of both nonresidential building and heavy construction well into next year. Housing starts will stabilize around the 1.9 million range later this year.
Spending is currently 10 percent higher than a year ago after a surge in the last three months. Yet more than half this gain is from inflation with materials costs for highway construction 13.7 percent higher than a year ago. Project starts are only 6 percent higher year-to-date vs. 2005, but according to Reed Construction Data, April starts — especially for bridges — were more than triple April 2005 starts. Spending will outpace inflation in states able to supplement federal funds.
Factory production expanded at a 6-percent pace through April to support double-digit gains in exports and business investment and to rebuild inventories. Production will continue to expand faster than the economy through next year as both the investment and export sectors continue to grow more than twice as fast as the domestic economy. The fastest expansion is for durable equipment. The output of nondurable goods will slip further below the overall pace of economic growth.
Equipment prices are 5.5 percent higher than a year ago. Expect slower price increases ahead even though overall inflation in the economy will increase slightly and equipment import costs will rise as the value of the dollar is declining again. The price trend turnabout will come from both weak steel prices, due to foreign supply increases, and from the peak in capacity pressure on manufacturers at the end of last year.
Economic growth has slowed to 3.5 percent (averaging the post-hurricane decline and rebound quarters) and will slow further to a 3-percent pace by late next year. This is enough to support real construction spending growth at almost the same 3-percent rate. But it is also enough to cause modest further tightening in materials, labor and equipment supplies. Unusually strong exports and investment spending are largely offsetting weaker spending growth by consumers struggling with rising inflation.