Associated Builders and Contractors See Modest Pickup in Nonresidential Fixed Investment

According to a recent report by the Associated Builders and Contractors (ABC), nonresidential fixed investment increased 4.4 percent in the fourth quarter of 2010 following a 10 percent increase in the third quarter, according to the Jan. 28 gross domestic product (GDP) report by the U.S. Commerce Department. For the year, nonresidential fixed investment increased 5.5 percent, following a 17.1 percent drop in 2009.

Nonresidential fixed investment in structures inched up 0.8 percent in the fourth quarter, compared to a revised 3.5 percent decrease in the third quarter. Investment in structures declined 14.1 percent for the year, following a 20.4 percent drop in 2009. The ABC notes that investment in equipment and software increased by 5.8 percent in the fourth quarter after jumping 24.8 percent and 15.8 percent in the second and third quarters, respectively. In 2010, investment in equipment and software increased 15.1 percent, compared to a 15.3 percent drop in 2009.

Residential fixed investment increased 3.4 percent in the fourth quarter, marking the first increase since the third quarter of 2009. Exports increased 8.5 percent for the quarter as exports of goods were up 10 percent and exports of services were up 5.1 percent. Total imports declined 13.6 percent as imports of services fell 15.5 percent and services were down 3.8 percent.

Personal consumption expenditures grew 4.4 percent in the fourth quarter as expenditures in goods jumped 10.1 percent and expenditures of services increased 1.7 percent. Change in private inventories took away 3.7 percentage points from real GDP in the fourth quarter as private businesses added $7.2 billion to inventories. Final sales - GDP less change in private inventories - shot up 7.1 percent in the fourth quarter – the largest increase since the second quarter of 1984.

Federal government spending decreased for the first time since the first quarter of 2009, down 0.2 percent in the fourth quarter of 2010, as defense spending fell 2 percent. However, federal nondefense spending increased 3.7 percent in the fourth quarter. State and local government spending decreased 0.9 percent in the fourth quarter, following a 0.7 percent increase in the third.

Gross domestic purchases decreased 0.3 percent in the fourth quarter following a 4.2 percent increase in the third quarter. Overall, real GDP increased 3.2 percent in the fourth quarter, the sixth straight month of expansion. In 2010, GDP expanded 2.9 percent, the largest annual increase since 2005, when the economy expanded 3.1 percent.

Commenting on the report, Anirban Basu, ABC’s chief economist, says, “As predicted, the fourth quarter GDP data reflects a general acceleration in economic momentum late last year. Moreover, economic growth has become increasingly broad-based, fueled by a combination of consumer spending, exports and business investment. In the long-term, this should mean good things for virtually all construction segments.

“Unfortunately, real estate, residential and nonresidential construction have been the last segments of the economy to rebound. While spending on nonresidential structures was up during the fourth quarter, it is only relative to the unusually low levels of activity in previous quarters,” Basu adds. “This is true for a number of reasons, including the fact that many of the nation's most significant economic excesses during the previous growth cycle were concentrated in real estate, with those excesses often translating into expected levels of construction.

“Meanwhile, commercial real estate continues to be generally associated with high vacancy rates and a lack of demand for new construction. Additionally, there is evidence that credit conditions remain strict, particularly in real estate-related segments,” Basu says.

“Another interesting aspect of the fourth quarter gross domestic product report was the slowdown in federal, state and local government spending. While many may cheer the emergence of greater fiscal discipline in various levels of government, construction volumes in publicly financed segments may be suppressed going forward as governments slow the growth of, or shrink, both operating and capital budgets,” says Basu.