Government Construction Spending Plummets to Nearly 7-Year Low

While private-sector development has fueled construction industry growth, government spending has dropped to the lowest level since 2006.
by | July 12, 2012
 

An upswing in residential development has helped push U.S. construction spending to the highest levels in more than two years, signaling a recovery in the housing market.

But as private development continues to rebound, construction firms are unlikely to see additional government funding anytime soon.

The most recent May figures released by the Commerce Department indicate public spending for construction dropped to a seasonally-adjusted annual rate of less than $269.6 billion. State and local spending, which accounts for the bulk of public construction funding, further plunged to $242.6 billion, the lowest total since November 2006.

In many cases, grant funding for new schools, infrastructure and other projects has been largely depleted. Instead of pumping money into construction projects, governments are working to bridge budget gaps, replenish underfunded pensions and tackle other issues.

Ken Simonson, chief economist for the Associated General Contractors of America, said he expects a 1 to 5 percent annual decline in public construction spending in the coming years.

"Other priorities have elbowed construction out of the way,” he said.

Just two years ago, government funds accounted for 39 percent of all construction spending. That share has now dropped to less than one-third, according to preliminary May Commerce Department figures.

At the local level, Simonson said many municipalities are struggling with lower property tax revenues and fewer parcels added to tax rolls.

Education construction funding, in particular, has dried up. State and local spending for schools and other education-related construction projects recorded an annual rate of about $63 billion in May, a 29 percent reduction from 2009. Migration is slowing in some areas that had experienced rapid population growth, lessening the need for new schools, Simonson said.

Sewage and waste disposal infrastructure spending has also gradually declined in recent years, Commerce Department data shows.

For state governments, tax revenues have begun to rebound, but officials are opting to fund other priorities. Medicaid costs and chronically-underfunded pensions usually take precedence over construction projects.

This is coupled with the fact that federal stimulus dollars are now mostly exhausted.

The federal transportation bill, which president Obama signed last week, should help to stop the erosion of highway spending. But Simonson said the funds will likely only stabilize construction spending or allow it to rise slightly.

With low steel and copper prices, Simonson said now is a good opportunity for governments to invest in new construction projects if they can afford to do so. "We're in a period in which public agencies can get a bargain in terms of material cost," he said.

While public spending has plummeted, private sector construction has fueled overall growth in the construction industry.

Spending for new single-family homes has swelled to an annual rate of $121.3 billion, up 15 percent from a year ago.

Manufacturers expanded or modernized facilities across the country, posting a nearly 27 percent increase in construction spending over the year. New Marcellus Shale sites, Simonson said, also jumpstarted construction, requiring access roads, storage ponds and other infrastructure.

Even with fewer government -funded projects, Simonson said total construction spending will increase this year for the first time since 2006, and he expects continued growth for at least a few years as the economy recovers.

Construction Spending Data 

View national seasonally-adjusted figures for various categories of state and local government construction spending:

Source: U.S. Commerce Department. Data is seasonally-adjusted.

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