Thursday, December 14, 2006

Has Nonresidential Construction Peaked?

by Calculated Risk on 12/14/2006 09:10:00 PM

Most of my focus has been on residential construction and the impending residential construction layoffs. Now is probably the time to start looking for declines in nonresidential construction.

Historically nonresidential investment (including nonresidential construction) has trailed residential investment by about 3 to 5 quarters. Since residential construction spending peaked in December 2005, and residential construction employment peaked in February 2006, it is about time for nonresidential construction to peak - if spending and employment follow the common historical patterns (note: there have been a few exceptions).

Click on graph for larger image.

The first graph shows seasonally adjusted private employment for both residential and nonresidential construction. Note that the graph does not start at zero to better show the changes in employment. Source: BLS.

Residential construction employment is clearly trending down, and is probably about to fall "off the cliff". But look at nonresidential construction employment: it is too early to say for sure, but it appears employment might have peaked.

Construction spending shows a similar pattern. Private residential construction spending peaked in December 2005, and it appears all other construction spending (public and private nonresidential) might have peaked in August. Source: Census Bureau.

It is early, and these small changes might be normal monthly noise, but since the historical pattern suggests nonresidential construction will probably start declining soon, this might be the first evidence that nonresidential construction has peaked.