Construction spending rises unexpectedly in March

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Martin Crutsinger
AP Economics Writer

Washington — Construction spending rose unexpectedly in March after five straight declines, as strength in nonresidential projects and government building offset a further slide in housing.

The Commerce Department reported Monday that construction spending increased 0.3 percent in March, the best showing since a similar rise last September. Economists surveyed by Thomson Reuters had expected spending to drop 1.5 percent.

The surprising rebound may be temporary, however, given all the problems facing the industry. The worst housing slump in decades and a severe financial crisis have made it hard for builders to obtain financing.

Still, pending U.S. home sales rose more than expected in March. The National Association of Realtors said Monday its seasonally adjusted index of pending sales for previously occupied homes rose 3.2 percent to 84.6. Economists expected a reading of 82.1.

The index was 1.1 percent above last year’s levels and has risen for two straight months after hitting a record low in January. Typically there is a one- to two-month lag between a contract and a done deal, so the index is a barometer for future home sales.

But spending on private residential projects fell 4.2 percent in March, the latest in a series of declines that began three years ago when the housing bubble burst with disastrous effects for the home industry and the overall economy.

Nonresidential construction rose 2.7 percent in March, the biggest advance in nine months. It marked the second straight increase and was led by gains in office construction, hotels and power plants.

Government building activity also showed strength in March, rising 1.1 percent. A 1.3 percent gain in state and local activity offset a 1.7 percent drop in spending on federal projects.

The various changes left total construction spending at a seasonally adjusted annual rate of $969.7 billion in March. Even with the unexpected increase, building activity is 11.1 percent below year-ago levels, reflecting the country’s steep recession.

With the financial sector embroiled in its worst crisis in seven decades, banks tightened loan standards, making it harder to get financing for shopping centers and other commercial projects.

The Federal Reserve will release results on Thursday of “stress tests” for the nation’s 19 largest banks, providing guidance on which banks may need more government support to withstand a more severe recession. The banks that need more capital will be given six months to raise it and if they are unable to do so, the government will step in with support from the $700 billion set aside for a financial rescue.

The initial stress test results showed Citigroup Inc. and Bank of America Corp. would need to raise more capital. Investors also have grown concerned about regional banks that carry risky loans on their books in such areas as mortgages, credit cards and commercial real estate.

Many analysts are worried the commercial real estate market could topple into the worst crisis since the last great property bust of the early 1990s. Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or close.

Economists, however, are more hopeful that the three-year slide in housing could be nearing a bottom although they don’t see a significant rebound for some time.

New home sales have plunged 74 percent from their peak in July 2005. Sales of new homes hit a record low in January, posted an increase in February and then edged down 0.6 percent in March to a seasonally adjusted annual rate of 356,000 units.

Analysts said it appears the steep slide in new home sales is bottoming out. Prices, however are still falling.

The median price of a new home sold in March dropped to $201,400, a 12 percent decline from a year earlier.

The demand for new homes appears to be recovering faster than that for previously occupied homes. In March, sales of existing homes fell 3 percent to an annual rate of 4.57 million from a downwardly revised pace of 4.71 homes in February, the National Association of Realtors reported.