Construction spending takes troubling plunge

WASHINGTON -- U.S. construction spending posted the steepest plunge in more than a decade in January, driven in part by a troubling decline in money spent for commercial real estate projects.

That news, coupled with a separate monthly report on a stalled manufacturing sector, raised the odds that the U.S. economy is facing recession.

The Commerce Department said spending on housing, public works and commercial real estate construction fell 1.7% from December, the biggest monthly fall since 1994. Most of the decline was in housing, which plunged 3% from December, and nearly 20% from a year earlier.

But Ian Shepherdson, chief economist of High Frequency Economics, called a "grim new development" the 1.2% January dip in spending for commercial construction. Commercial development had risen for 15 consecutive months and had buoyed contractors in the midst of the sharp housing downturn.

The commercial real estate market "lags housing, and a sharp downturn is now way overdue; there is every reason to think this is the start," Shepherdson said. "With banks increasingly reluctant to lend … activity will plunge for the foreseeable future, adding to the downward pressure on growth."

Commercial real estate spending is still up 17.3% from a year ago, but Shepherdson predicts it could easily fall 20% by this time next year.

Adding to the gloomy view, government public works spending declined for the second month in a row. State and local governments face tight budgets due to a slowing economy and lower tax receipts.

"I'm getting increasingly concerned," says Ken Simonson, chief economist of the Associated General Contractors of America. Simonson had expected a slowdown in hotel and office construction, but he anticipated that spending on power plants, hospitals and other similar projects would remain strong.

Federal Reserve Chairman Ben Bernanke, in congressional testimony last week, predicted that non-residential construction, after surging most of last year, will likely "decelerate sharply in coming quarters as business activity slows and funding becomes harder to obtain, especially for more speculative projects."