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January Construction Retreats 12 Percent

By Mark S. Kuhar

The value of new construction starts dropped 12 percent in January to a seasonally adjusted annual rate of $469.1 billion, according to McGraw-Hill Construction, a division of The McGraw-Hill Companies. The decline followed a sharp 23 percent increase for total construction in December, and brought the level of contracting back to the average pace that was reported during 2012.

Much of January’s downturn was due to decreased activity for nonresidential building and housing, while the nonbuilding construction sector (public works and electric utilities) held close to its December volume. Highway and bridge construction climbed 14 percent.

“The pullback for construction starts in January was not surprising, given the up and-down pattern that was present for much of 2012,” said Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction. “The large increase in December followed two months of lackluster activity in October and November, and it’s likely that December benefitted from the start of projects that were earlier put on hold given the uncertain economic and political environment. Some of the uncertainty was eased by the January 1 agreement between the Obama Administration and Congress, which averted the fiscal cliff for the time being, as well as by the move by Congress to push back the debt ceiling deadline to May. However, the automatic spending cuts as part of the sequestration process are scheduled to begin on March 1, and their implementation is likely to restrain the fragile economic expansion. The upward trend for housing is still expected to continue during 2013,

along with modest improvement for commercial building, but this year’s prospects for institutional building and public works remain in doubt.”

Nonresidential Building

Nonresidential building in January fell 20 percent to $150.6 billion (annual rate), retreating after the 33 percent jump that was reported in December. On the institutional side, the educational building category in January dropped 9 percent, following a brief upturn in December. Healthcare facilities in January plunged 35 percent, down from December, which had been boosted by several large hospital projects.

Most of the smaller institutional categories showed weaker activity in January, including declines for transportation terminals, down 54 percent; public buildings, down 39 percent; and churches, down 35 percent. The one institutional category able to report a January gain was amusement-related work, which rose 13 percent relative to December.

On the commercial side, office construction in January retreated 27 percent from December. Store construction in January decreased 19 percent. There was a substantial increase for the hotel category. Warehouse construction also strengthened in January, rising 11 percent. The manufacturing plant category in January dropped 39 percent from its heightened December amount.

Residential Building

Residential building, at $172.7 billion (annual rate), dropped 11 percent in January. Much of the decline reflected a steep 30 percent retreat for multifamily housing, following elevated contracting for this category in December. The January pace for multifamily housing was down 13 percent from its average monthly rate during 2012.

Single family housing in January slipped 5 percent, pausing after the steady improvement that was shown over the course of 2012. The January pace for single-family housing was still up 11 percent from its average monthly rate during 2012, and up 33 percent on a raw (not seasonally adjusted) basis from the same month a year ago.

By major region, single family housing showed this pattern for January relative to December – the West, up 4 percent; the Northeast, down 2 percent; the South Central, down 7 percent; the Midwest, down 8 percent; and the South Atlantic, down 11 percent.

“Multifamily housing can be volatile on a month-to-month basis, and single-family housing is considerably stronger than the same time a year ago. On balance, the housing recovery should be able to continue during 2013, even with a lackluster performance by the overall economy.”

Nonbuilding Construction

Nonbuilding construction in January receded 1 percent to $145.8 billion (annual rate). The electric utility category in January fell 45 percent after its sharp rebound in December. Although January did not receive the same boost from large projects that took place in December, there were several noteworthy electric utility projects included as January. The public works portion of nonbuilding construction showed generally stronger activity in January.

Highway and bridge construction climbed 14 percent, lifted in particular by a $1.4 billion tunnel project in Norfolk, Va., and the $235 million upper deck replacement of the Verrazano-Narrows Bridge in New York.

Murray noted, “Highway and bridge construction during 2013 may be able to withstand much of the downward pull from fiscal restraint, since several very large projects are on track to reach groundbreaking this year. In addition, the Highway Trust Fund still receives much of its support from gasoline tax revenues, as opposed to the general fund, which makes it less vulnerable to the automatic spending cuts scheduled to take place as part of the sequestration process.”

The miscellaneous public work category (which includes site work, rail projects, and pipelines), also had a strong January, rising 53 percent with the help of a $240 million railroad hub project in New Mexico.

Other January gains were shown by river/harbor development, up 17 percent; and sewers, up 10 percent, while water supply construction dropped 9 percent.

The 11 percent increase for total construction starts on an unadjusted basis, for January 2013 relative to January 2012, was due to this performance by major sector – nonresidential building, down 1 percent; residential building, up 27 percent; and nonbuilding construction, up 8 percent. By region, total construction for January 2013 relative to January 2012 revealed increased activity in the South Atlantic, up 36 percent; the Northeast, up 30 percent; and the South Central, up 24 percent.

Decreased activity in January on a year-over-year basis was reported for the Midwest, down 4 percent; and the West, down 16 percent. Additional perspective can be obtained by looking at 12-month moving totals, in this case the 12 months ending January 2013 versus the 12 months ending January 2012, which lessens the volatility present in one-month comparisons. E

Monthly Construction Starts

(Seasonally Adjusted Annual Rates, In Millions of Dollars)

Jan. 2013 Dec. 2012 % Change

Nonresidential Building $150,599 $187,669 -20

Residential Building $172,695 $195,013 -11

Nonbuilding Construction $145,802 $147,792 -1

Total Construction $469,096 $530,474 -12