Construction Economy Update

July 31, 2008 – More Second Quarter GDP: Positive, but Disappointing

Real nonresidential fixed investment, which includes the purchase of nonresidential structures, increased 2.3 percent during the second quarter of 2008, compared with a 2.4 percent increase in the previous quarter, according to data released July 31 by the U.S. Commerce Department on the nation’s gross domestic product (GDP).

This most recent GDP report reveals that investment in nonresidential structures increased 14.4 percent in the April-to-June period, compared with an increase of 8.6 percent in the first quarter of 2008. Real residential fixed investment continued its slump by declining 15.6 percent. Personal consumption increased 1.5 percent this quarter, up from an increase of 0.9 percent in the January-to-March period. Exports surged 9.2 percent in the second quarter compared to 5.1 percent during the first. Imports declined 6.6 percent during the second quarter.

Overall, real GDP increased an annualized 1.9 percent in the April-to-June period compared to a 0.9 percent increase in the first quarter of this year. While GDP rose in the second quarter, it fell short of consensus expectations of 2.6 percent. The fourth quarter of 2007 was revised downward to 0.2 percent, the first negative growth quarter since the third quarter of 2001.

What’s New
GDP growth was well into positive territory during the second quarter. However, according to Associated Builders and Contractors (ABC) chief economist Anirban Basu, there remains significant room for caution. First, GDP data releases are subject to substantial revision, often downward. Also, the second quarter GDP was undoubtedly bolstered by the economic stimulus checks sent to American households in May and June, which stirred spending and therefore supported the nation’s expansion. The tax rebate’s impact on third quarter activity is unlikely to be as consequential. Finally, consumers, businesses and bankers remain subdued with respect to near-term economic prospects. This suggests diminished consumer spending, business expansion, employment growth and lending for the balance of 2008.

For ABC members, the implication is that new business generation will continue to become increasingly difficult with the exception of certain business segments such as energy production facilities and export-oriented manufacturing. Commercial builders are likely to be among the most impacted by ongoing economic weakness due to diminished demand for additional office, hotel, and retail square footage. Going forward, builders associated with government-financed projects will also be impacted as government tax collection at federal, state and local levels generally fall short of expectations.