Construction spending dips in November

Tuesday, January 4, 2005

WASHINGTON -- Construction spending declined in November by 0.4 percent, the first drop in 10 months, as private builders reined in spending on residential and commercial projects.

The latest snapshot of construction activity, released by the Commerce Department on Monday, surprised some economists, who were forecasting a 0.5 percent rise in spending on building projects.

Still, even with the drop, the level of spending -- $1.01 trillion on an annualized basis -- was quite healthy. And, construction activity in October turned out to be significantly stronger than initially thought.

Revised figures showed that spending in October rose by 0.3 percent, compared with a flat reading first reported.

Construction activity throughout 2004 has been mostly supported by brisk home building, while spending on commercial projects has been spotty.

In November, spending by private builders on residential buildings dropped by 0.4 percent, the largest decrease since January 2002. In October, spending on residential projects dipped by 0.1 percent. Monday's report suggested that builders are keeping a closer eye on the number of new homes they break ground on.

Economists believe sales of both new homes and previously owned homes hit all time record highs in 2004, powered by low mortgage rates.

For all of 2004, rates on benchmark 30-year mortgages averaged 5.84 percent, second only to last year's 5.83 percent, the lowest annual rate in Freddie Mac's recordkeeping.

Analysts believe home sales will moderate in 2005 but that the housing market will remain in good shape. The moderation is based in part on the expectation that mortgage rates will move higher this year.

Some analysts believe rates on 30-year mortgages could climb to around 6.5 percent by the end of this year, which would still be considered low by historical standards. A few think rates could hit 7 percent.

Private builders also trimmed spending on commercial ventures, including hotels and motels and office buildings, in November by 1.2 percent. In October, spending on commercial projects was flat.

Spending by the government on big public works projects, however, rose by 0.4 percent in November, following a 1.6 percent rise in the prior month.

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