BUSINESS

US construction spending rises 1.1 per cent in October; homes and schools drive gains

12/02/2014 04:49 EST | Updated 02/01/2015 05:59 EST
WASHINGTON - Newly built homes and schools boosted U.S. construction spending in October to the highest level since May.

The Commerce Department said Tuesday that construction spending rose a seasonally adjusted 1.1 per cent in October, after having slipped 0.1 per cent in September.

Fueling the gains in October was a 1.8 per cent increase in spending on single-family houses. A similar boost in building schools led to a 2.3 per cent increase in government construction spending. Meanwhile, private construction of power plants and commercial centres slipped in October.

Building activity has been slowly improving for much of 2014, although its contribution to broader economic growth has been relatively modest. Homebuilding has crept upward, limited by meagre wage gains that have barely outpaced inflation. That has cut into the amount of money that people have to spend on homes or rent.

Diane Swonk, chief economist at Mesirow Financial, called the report "welcome news" but cautioned that single-family house construction "remains a shadow of previous levels."

"This is showing up in less construction employment and a smaller acceleration in wages than we would like given the age of this recovery, which in dog years is well into middle age," Swonk said.

October's solid growth in homebuilding underlines that sector's weakness.

"The October rebound does not undo the damage" caused by the marked slowdown in construction spending since the start of 2014, said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Over the past 12 months, private residential construction spending has risen just 1.9 per cent to a rate of $353.8 billion. That lags behind total construction spending, which has climbed 3.3 per cent from a year ago to $971 billion.

New-home sales have risen only 1 per cent, according to a separate Commerce Department report. Builders are largely targeting wealthier buyers. That can boost profits but often means less construction to fuel economic growth. The median price of a new home has risen 15.4 per cent in the past 12 months to $305,000, a pace that's more than double the average annual price increase for sales of existing homes tracked by the National Association of Realtors.

Still, builders are hiring at a slightly faster clip than last year. Construction companies are adding an average of 14,000 workers a month so far this year, compared with a monthly average of 11,083 in 2013. The challenge is that stronger hiring and economic growth during 2014 has yet to translate into the wage growth that could further propel construction spending and hiring.

And because Tuesday's report contained upward revisions to August and September construction spending, the sector likely fed into faster overall economic growth. The revisions suggest that gross domestic product rose at an annual rate of 4.1 per cent during the July-September quarter, rather than the 3.9 per cent figure recently reported by the Commerce Department, said Daniel Silver, an analyst at JPMorgan Chase.

Architectural firms are also reporting greater demand for their services, however, a sign that construction spending should improve in the months ahead.

The American Institute of Architects said that its October billings index was 53.7. Any score above 50 indicates that billings increased. A breakdown of the index suggests that municipal governments and nonprofits are spending more on architectural designs, after having kept their spending in check during the more than five-year recovery from the Great Recession.