Economic Update – Census Bureau Confirms Drop in Residential Construction Value, with Commercial Right Behind It

Where is that bottom? The economy is like a murky lake with no bottom visible. Construction is certainly feeling the pinch: the U.S. Census Bureau has reported that the value of construction in 2008 was about $1.078 trillion, down 5.1 percent from 2007. That total was dragged down by sagging private construction activity, especially–little surprise here–residential construction.The value of private residential construction in 2008 was about $358.4 billion, down 27.2 percent from the previous year. On the other hand, the value of public construction in 2008 was $308.5 billion, 7.4 percent higher than 2007. Of that, educational construction was up 7.9 percent and highway construction was up 6.5 percent. Congress is still arguing about the stimulus, but in some sense it’s already started.As for private, nonresidential construction, that was actually up in 2008 by 15.3 percent over 2007, but then again that’s the nature of the commercial development pipeline. The slide in nonresidential construction is already starting, dropping 0.6 percent in December, the biggest drop since July. Few would argue that 2009 will see more commercial development than 2008. “There’s no doubt that development has slowed down considerably,” William Kenney, Jr., president of the Newport Beach, Calif.-based Kenney Co., told CPN, referring particularly to retail real estate, which is his company’s specialty as a developer and landlord. “The demand from retailers simply isn’t there, as the number of retailers shrinks through bankruptcy and acquisitions.”In the short run, he added, having fewer retailers to deal with clearly limits the number of opportunities for leasing and maintaining tenant mixes. But on the other hand, he said, “in the long term, the development slowdown is healthy,” since it will limit the potential for overbuilding. Not only that, the surviving retailers will be stronger and thus better able to expand again when a recovery comes.Those retailers intent on surviving are indeed cutting costs where they can. Number-two department store company Macy’s Inc. has taken on cost-cutting measures in the face of the recession, including slashing nearly 4 percent of its work force (7,000 jobs), cutting its dividend and buying back bonds to reduce its debt load. The company also announced some internal restructuring on Monday, including the national expansion of the localization initiative called “My Macy’s,” the thrust of which is to concentrate management in local markets.The market was unimpressed, however. Macy’s lost about 4 percent on Monday, while the Dow Jones Industrial Average zigzagged all day and ended down 0.8 percent. The S&P 500 was down ever so slightly, 0.05 percent, and the Nasdaq edged into positive territory, gaining 1.22 percent.In the financial realm, a spot of good news: Wells Fargo & Co., which took $25 billion from TARP last fall–one of the program’s largest recipients–is paying the U.S. Treasury $371.5 million dividend on the 25,000 shares the American people bought. The bank also said it made $22 billion in loan commitments in 4Q08, up $9.7 billion from the previous quarter. Wells Fargo was up 1.75 percent today.