Private Nonresidential Construction Investment
During the current recession, investment in residential structures and investment in private nonresidential structures have experienced markedly different paths. The sharp fall in residential investment led the economy into recession, while private nonresidential investment held up relatively well until the last two quarters. The recent steep decline in the latter reflects both a drop in investment in traditional buildings such as commercial and office structures and a steep fall in drilling activity in the oil and gas industry.
Rig activity peaked in the third quarter of 2008 and then fell by half by the second quarter of 2009, according to the Baker-Hughes rig count. The drop-off in rig activity exerted a considerable drag on investment in nonresidential structures in the first two quarters of 2009; however, this has been offset by some relative strength in the value of construction put in place (VCPIP) over the past several months. Data on the VCPIP come from the Census Bureau, which tracks construction activity in the United States for both private and public projects. Nonresidential VCPIP (unadjusted for inflation) has held up reasonably well over the recession, though part of the growth in this measure reflects a rise in construction material prices (unadjusted for inflation) that occurred during much of 2008.
A key reason why private nonresidential VCPIP has held up so well during this recession is the strength of power and manufacturing construction. Since December 2007 (the start of the recession), spending on power construction projects has risen 35 percent, while spending on manufacturing construction has increased 56 percent (both unadjusted for inflation). This is quite remarkable growth in a recession. Indeed, non-inflation-adjusted spending on other types of projects has declined by 18 percent since the start of the recession. Moreover, the strength in this type of construction spending continued into late 2008 and the first part of 2009, even as the economy slipped further into recession and the prices for construction material inputs fell (which should lower non-inflation-adjusted values).
Most of this continued strength in nonresidential construction spending stems from energy-related projects that were initiated prior to the recession. Some of these projects represent multibillion dollar investments with long lead times and multiyear construction timelines.
In the power sector, construction spending is spread across a range of project types, including electric utility infrastructure; oil and gas exploration, drilling, and investments; and pipeline construction. In manufacturing, the petroleum and coal products industry is responsible for most of the sector’s growth in VCPIP, while primary metals contributed to a lesser extent. Combined, these industries accounted for about 58 percent of manufacturing VCPIP in May 2009. Overall, the power and manufacturing sectors’ share of VCPIP has expanded markedly, rising from 22 percent in 2005 to 39 percent in 2009.
These investment trends in nonresidential construction are surprising, especially when compared to the sector’s employment rate, which has fallen 14 percent since the start of the current recession. To put this drop in perspective, note that it is similar in magnitude to the decline observed in manufacturing employment. It is also important to note that this employment series includes public sector construction projects, and VCPIP on public sector projects has actually held up even better than VCPIP for private projects.
Going forward, it is likely that there will be some retrenchment in construction spending for energy-related projects, as capacity utilization in both power and petroleum and coal products remains at low levels with additional capacity coming online. This may already be happening in the petroleum and coal industry, as there have been several recent announcements detailing the delay or postponement of a number of large ongoing and planned refinery expansion projects.