The construction industry, historically a cyclical business, is sliding down a steep slope now.

And the evidence is building that the current cycle will be deep and long, which will have a deleterious effect on a wide swath of the economy since construction provides a large number of good paying jobs and supports businesses ranging from concrete suppliers to lenders.

Construction spending fell 1.7% in January from December, the fourth straight monthly drop and the steepest decline in 14 years.

While the slide in residential construction accounted for the biggest part of that, spending on the more stable, non-residential construction projects slid a surprising 0.8%, the Commerce Department reported last Monday.

And there's no rebound in sight. The National Association of Home Builders has forecast a 31% drop in single-family housing starts for this year. In California alone, new home permit applications fell 62% in January.

Perhaps more ominously, public construction, which is typically prefunded and involves long-running jobs for governmental entities, fell 0.2% in January, the second monthly decline in a row, while private, non-residential construction also fell, for only the second time in 31 months, as commercial work slowed.

Patrick Newport, U.S. economist for financial research firm Global Insight, said the industry's resources had shifted from building homes to building commercial buildings after the residential slide began, which supported its performance for several months. "But now, going forward, I don't think it will. The drop in private non-residential construction may be a sign of things to come. Its recent growth rates were unsustainable." [Read full article]

March 10, 2008

By Frank Byrt - Financial Week