Construction spending drops by record 2.6%

Biggest decline since 1994 driven by 18.3% drop in residential projects by private companies, says Commerce Department.

February 1 2008: 11:35 AM EST

WASHINGTON (AP) -- Construction spending fell by a record 2.6% in 2007 - mostly reflecting record cutbacks in home-building projects by private companies.

Private companies last year slashed residential projects by 18.3%, the largest drop on records dating back to 1993, the Commerce Department reported Friday. Such spending was flat in 2006 and was up by 13.5% in 2005.

The new figures were the latest evidence of the damage wrought by the housing bust.

The 2.6% drop in total construction spending by both private builders and government last year came after a 5.3 % increase in 2006 and a 10.6% jump in 2005, the department said.

The previous record drop in total construction spending was 1% in 2002. The previous record decline in spending by private builders on housing projects was 4.3% in 1994.

For the month of December, construction spending dropped 1.1%, the most in 15 months.

New home sales: Biggest drop ever
The decline was twice as big as the 0.5 % drop economists were forecasting. The 1.1 % decline followed a 0.4% decrease in November.

The weakness was led by a 2.8% decline in spending by private builders on housing projects. That came after a 3% decline in November and marked the 22nd consecutive monthly decline in such spending, underscoring the problems builders are facing.

The housing bust has led to sagging sales and weak home prices. Harder-to-get credit has thwarted some would-be home buyers, adding to a pileup of unsold homes. Builders have cut back on new building projects as they try to get rid of the backlog. They also have sweetened the pot, offering various incentives to lure buyers.

Government reduced spending on a range of building projects in December, slicing spending on public works projects by 1.5% in December. That compared with a 1.3 % rise in November.

There was a bit of a bright spot in the December report: Spending by private builders on commercial projects, such as office buildings, rose 1.3% after a 1.8% increase in November.