US Private Construction: First Rise in 6 Years?

U.S. private construction will grow this year for the first time since 2005, and will be an important driver of gross domestic product growth and job creation in the coming year, according to a report by investment firm AllianceBernstein.

Source: Cat Corrigan

In the report, U.S. economist Joseph Carson predicted private construction spending this year will rise by nearly $10 billion, based on data available from the first three quarters of 2011.

“We believe that the small gain marks a significant turn for the U.S. economy,” Carson said, adding that in 2012, real private construction activity will expand by around seven percent.

“The unfolding recovery of private construction is an important component in our above-consensus real GDPgrowth estimate of three percent for 2012. We believe that it may also herald a further decline in the U.S. unemployment rate,” he said.

According to the report, this year's rise in construction spending was driven by nonresidential, rather than residential, construction.

New contracts for the nonresidential sector rose by 36 percent in October, according to the FW Dodge Construction Contract Index, which measures the value of new construction contracts. The increase was largely driven by manufacturing construction, with office and warehouse construction also posting strong gains.

In contrast, new construction projects for the residential sector rose by only two percent in October.

Carson said a “modest” recovery in residential investment would continue in 2012, with between 650,000 and 675,000 new houses being built, representing an 8 percent to 12 percent rise on 2011 levels.

Should private construction growth of seven percent and GDP growth of three percent materialize in 2012, then unemployment could fall to as low as 7.75 percentby the end of next year, said Carson.

“Construction activity is highly correlated with job creation and unemployment, because the construction sector is a cyclical industry, " he said. "When it does well, the general economy tends to perform well, too."

Carson added: "Moreover, construction is a labor-intensive sector, so its fluctuations are quickly reflected in labor market data.”

Real private construction spending peaked at $1.267 trillion in 2005, but contracted over the next five years to $640 billion in 2010.