Magazine article Economic Trends

Private Nonresidential Construction Investment

Magazine article Economic Trends

Private Nonresidential Construction Investment

Article excerpt

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08.10.2009

During the current recession, investment in residential structures and investment in private nonresidential structures have experienced markedly different paths. The sharp fall in residential investment led the economy into recession, while private nonresidential investment held up relatively well until the last two quarters. The recent steep decline in the latter reflects both a drop in investment in traditional buildings such as commercial and office structures and a steep fall in drilling activity in the oil and gas industry.

Rig activity peaked in the third quarter of 2008 and then fell by half by the second quarter of 2009, according to the Baker-Hughes rig count. The drop-off in rig activity exerted a considerable drag on investment in nonresidential structures in the first two quarters of 2009; however, this has been offset by some relative strength in the value of construction put in place (VCPIP) over the past several months. Data on the VCPIP come from the Census Bureau, which tracks construction activity in the United States for both private and public projects. Nonresidential VCPIP (unadjusted for inflation) has held up reasonably well over the recession, though part of the growth in this measure reflects a rise in construction material prices (unadjusted for inflation) that occurred during much of 2008.

A key reason why private nonresidential VCPIP has held up so well during this recession is the strength of power and manufacturing construction. Since December 2007 (the start of the recession), spending on power construction projects has risen 35 percent, while spending on manufacturing construction has increased 56 percent (both unadjusted for inflation). This is quite remarkable growth in a recession. Indeed, non-inflation-adjusted spending on other types of projects has declined by 18 percent since the start of the recession. Moreover, the strength in this type of construction spending continued into late 2008 and the first part of 2009, even as the economy slipped further into recession and the prices for construction material inputs fell (which should lower non-inflation-adjusted values).

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Most of this continued strength in nonresidential construction spending stems from energy-related projects that were initiated prior to the recession. …

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