Total construction spending has declined 1.5% since the January peak with new residential steady, remodeling up 2.3%, nonresidential down 2.7%, and heavy off 5.7%. Residential trends will hold, but nonres and heavy spending are expected to be rising by summer. This is because of the $190 billion tax cut due by the end of 2004, at least a 5% rise in federal highway funds, and the return of speculative commercial building, anticipating stronger space demand next year.
Highway construction spending fell 6% in the last three months from the previous three months. Bad weather contributed to the fall, but government issues were more significant. The flow of federal money slowed to avoid aggravating the overall deficit. And state and local highway departments abruptly slowed spending to balance budgets late in the fiscal year. These restraints will ease in the summer, so the pace of spending will pick up.
Growth in 1Q GDP was revised up slightly to 1.9%. All of the cyclical sectors except construction were weak. Residential construction rose at an 11% annual pace, and spending on nonresidential buildings was unchanged. Exports were unchanged, business investment and consumer durables declined slightly, and inventories fell relative to sales. The modest growth was the result of a large gain in consumer packaged goods purchases and a decline in imports as the dollar depreciated.
Construction equipment prices are up 1% year-to-date through April after nearly a year of no change. This was spurred by the 8% increase in equipment sales from April through December last year. But equipment sales have fallen 15% so far in 2003 during the weak winter quarter. There is a risk of substantial price increases for imported and import-competitive equipment at the end of the year from the continuing dollar depreciation.
Industrial production has declined for three months through April and is 0.4% below last April. Semiconductors and computers are the only industries with significant growth so far this year. But in both industries, it is more content per part and not more parts. Manufacturing capacity utilization has declined below 75% for the first time since the early 1980s. Only the semiconductor industry is building additional capacity. Nonetheless, a postwar recovery is expected, driven by exports and tax cuts.