July Construction Starts Slip 2 Percent

constructionAt a seasonally adjusted annual rate of $586.3 billion, new construction starts in July fell 2% from the previous month, according to Dodge Data & Analytics. A steep drop by electric utilities pulled down the nonbuilding construction sector, which in turn contributed to the slight decline for total construction starts.

On the plus side, moderate improvement was reported for nonresidential building, helped by greater activity for its commercial building and manufacturing plant segments, while residential building benefitted from a stronger pace by multifamily housing. During the first seven months of 2016, total construction starts on an unadjusted basis were $372.2 billion, down 11% from the same period a year ago. The January-July period of 2015 had featured 13 very large projects valued at $1.0 billion or more, including a $9.0 billion liquefied natural gas export terminal in Texas, an $8.5 billion petrochemical plant in Louisiana, and two massive office towers in New York with a combined construction start cost of $3.7 billion. In contrast, the January-July period of 2016 included only four projects valued at $1.0 billion or more. Excluding these exceptionally large projects from the comparison leads to a smaller 4% decline for total construction starts year-to-date.

The July data lowered the Dodge Index to 124 (2000=100), down from 126 in June. After the improved pace reported during the first three months of 2016, the construction start statistics showed an up-and-down pattern during the April-June period, and June’s 7% slide has now been followed by the 2% drop in July.

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While the loss of momentum for total construction starts in June and July may raise some concern about the overall health of the construction industry, it’s useful to keep in mind that the recent declines were tied to two segments, public works and electric utilities, that are prone to volatility on a month-to-month basis,” stated Robert A. Murray, chief economist for Dodge Data & Analytics. “June’s retreat for total construction reflected a pullback by public works after a strong performance in May, and July’s retreat for total construction reflected a subdued amount of electric utility starts for that month. At the same time, nonresidential building was able to register moderate growth in June and July, while residential building can be viewed as essentially stable when taking the average of June and July.”

Murray continued, “The year-to-date comparisons so far in 2016 have been skewed by the number of exceptionally large projects that reached the construction start stage during the first half of 2015. There were fewer such projects during the second half of 2015, which should help the year-to-date comparisons as 2016 proceeds. It’s true that the July statistics showed only slight improvement with the year-to-date comparisons, but that improvement should become greater with the August and September construction start reports. This is due to the fact that last year August and September witnessed a broader slowdown for construction starts, as investment grew more cautious given concerns about the global economy and the continued drop in energy prices. This year the uncertainty related to energy prices has diminished, with the price of oil hovering in the range of $40 to $50 per barrel. Admittedly though, this year has a new element of uncertainty with regard to the upcoming November elections, which conceivably could dampen some investment in the very near term.”

Nonbuilding construction in July plunged 17% to $121.7 billion (annual rate). The electric utility and gas plant category fell 56% in July, while public works as a group was unchanged from the previous month. July’s steep drop for electric utilities and gas plants reflected the comparison to June’s elevated amount, which included three huge natural gas-fired power plants located in Tennessee ($975 million), New York ($900 million), and New Jersey ($600 million). In contrast, the power plant projects that were entered as July starts were generally smaller in scale than what was reported in June, as July’s largest power plant projects were a $385 million solar power facility in California and three wind farms located in California ($300 million), North Dakota ($250 million), and Minnesota ($135 million).

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The public works group in July showed a mixed performance by category. On the plus side, sewer construction jumped 86%, supported by the start of the $415 million EchoWater biological nutrient removal project in California. Water supply construction advanced 48%, lifted by the start of four water main projects totaling $376 million in Chicago. On the negative side, decreased activity was reported in July for highways and bridges, down 8%; river/harbor development, down 8%; and miscellaneous public works (site work, rail projects, pipelines, etc.), down 29%.

Nonresidential building, at $187.9 billion (annual rate), grew 4% in July following its 7% gain in June. The commercial building group advanced 3%, with much of the lift coming from a 20% jump for office construction. Large office building projects that reached groundbreaking in July were the following – a $400 million data center in Grand Rapids, Michigan, a $133 million office building in Dallas and the $100 million Comcast office building at Sun Trust Park in Atlanta.

During the first seven months of 2016, the top five metropolitan areas ranked by the dollar amount of office construction starts were – New York, Washington, D.C., Dallas-Ft. Worth, Atlanta and San Francisco.

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