Construction Spending Rebounds Unexpectedly

Bloomberg Business News

WASHINGTON _ U.S. construction spending unexpectedly rebounded during April, government figures showed Friday, though a drop in homebuilding expenditures suggests that lower interest rates haven't encouraged wary consumers to buy.

Construction spending rose 0.4 percent in April to an annual rate of $526.6 billion, spurred by increased expenditures on commercial and public projects, Commerce Department figures showed. In March, construction spending declined by 0.4 percent.

Nevertheless, spending on residential buildings and home improvements fell 2.0 percent in April as single-family home construction tumbled 3.2 percent to the lowest level since October 1993.

"Even if interest rates are fairly low, if people lack confidence in the economy, sales and starts will be lower," said Dan Mercer, an economist with the National Association of Homebuilders in Washington. Weak labor markets, a dip in consumer confidence, and dampened consumer spending are "part and parcel of the housing slowdown," he said.

Before the report, analysts expected a 0.4 percent decline in construction spending for April, according to a survey by Bloomberg Business News.

A separate Labor Department report showed that in May, the U.S. economy subtracted 101,000 jobs _ the biggest monthly loss in more than four years _ suggesting the economy has slowed more than previously thought.

The U.S. housing market has suffered as the Federal Reserve's seven increases of the overnight bank lending rate raised the cost of borrowing for consumers and homebuilders. Higher rates slowed the overall economy _ pushing up the unemployment rate and cooling consumer confidence _ which has further dampened demand for housing and led to a buildup of unsold homes.

"We're not seeing further deterioration, but there is a stabilization of housing at lower levels," said Marilyn Schaja, an economist with Donaldson, Lufkin, Jenrette in New York.

Earlier this week, the Commerce Department revised downward its initial estimate of first-quarter economic growth to 2.7 percent from 2.8 percent as the Clinton administration stuck by its prediction of 2.5 percent growth for all of 1995.

"Slower growth, particularly in the current quarter, does not mean that the current expansion is in danger," said Everett Ehrlich, undersecretary for economic affairs at the Commerce Department.

The optimistic outlook springs from the recent decline in interest rates, which has some analysts betting on a rebound for housing. "Things should bottom out in the second quarter," said Mercer of the homebuilders' association, adding that construction should pick up again in the second half of 1995.

The loss of 101,000 jobs from nonfarm payrolls in May was the biggest monthly jobs loss since April 1991 and follows a decline of 7,000 last month. Analysts said a weak labor market is likely to make consumers pull back their spending on big-ticket items, such as cars and homes, even if interest rates remain low.

The average monthly payment for principal and interest on a $100,000, 30-year fixed-rate loan at April's average interest rate of 8.32 percent was $756.19. When rates bottomed out at 6.74 percent in mid-October 1993, the monthly payment was $647.93.

Mortgage rates have been moving lower since Christmas, when they set a recent peak of 9.25 percent. This week, the rate averaged 7.71 percent, the lowest rate since the week ended March 11, 1994.

Even with the employment news, some analysts still say the economy is poised to rebound in the second half of 1995.

"Lower interest rates haven't yet generated increases in activity, but they will," said Russell Sheldon, an economist with Mellon Bank in Pittsburgh.

Just as higher rates slowed the economy, "lower rates will save it and get us back on the road to expansion," he said. "There have been a lot of capital gains in the stock and bond markets, and it's high-income people who buy houses," he said.

The construction report showed that spending on commercial projects, such as factories, rose 2.2 percent in April.

Meanwhile, spending on public projects, such as municipal water works and public housing projects, rose 1.3 percent in April, the Commerce Department said.

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