Economy Watch: Construction Spending Slumps in January

Construction spending took a dive in January; Geithner outlines a strategy for "winding down" Fannie and Freddie; and the House passes a temporary spending measure to keep the federal government breathing for now.

By Dees Stribling, Contributing Editor

According to the U.S. Department of Commerce on Tuesday, construction spending took a dive in January, with a 0.7 percent decline from December that took the aggregate value of U.S. construction projects down to a $791.8 billion annualized rate. Commercial real estate construction projects led the decline.

Spending on private non-residential construction dropped 6.9 percent month-over-month, the largest drop since January 1994, with a 13.2 percent drop year-over-year. Spending for homebuilding (and home improvement), on the other hand, rose 5.3 percent compared with January 2010. Much of that was in fact home improvement rather than new construction, since single-family construction spending was up only 0.8 percent for the month. The volatile multifamily sector slumped 2.9 percent from December.

The weather in January might have been a factor in the slowdown. But all the snow in Greenland couldn’t hide the fact that low demand for real estate of almost every flavor is still the underlying factor in the construction industry’s woes.

Geithner counsels gradual end to GSEs

Testifying before the House Committee on Financial Services on Tuesday, Treasury Secretary Timothy Geithner outlined a strategy for “winding down” Fannie and Freddie. It would be a gradual approach, if he has his way.

“[Winding down the GSEs] can be accomplished by gradually increasing guarantee pricing at Fannie Mae and Freddie Mac, as if they were held to the same capital standards as private institutions,” Geithner says. “[Also by] reducing conforming loan limits by allowing the temporary increases enacted in 2008 to expire as scheduled on October 1, 2011; and gradually increasing the amount of private capital that risks loss ahead of taxpayers through credit loss protections from private entities and gradually increased down payment requirements.”

Too much haste, the secretary asserts, would “shock an already-fragile housing market, severely constrain mortgage credit for American families, and expose taxpayers to unnecessary losses on loans the institutions already guarantee.”

No shutdown for now

The looming federal government shutdown loomed a little less large on Tuesday as the House of Representatives passed a temporary spending measure to keep the government in the money. “Temporary” is the operative word, since the bill pushes the deadline back only two weeks, to March 18.

The extension comes with $4 billion in cuts, which in federal government terms is like loose change under the sofa cushions. Most of the cuts had already been outlined in President Obama’s proposed budget, so the Senate is expected to go along with it. But two weeks isn’t long, and the divisions in Congress (between parties and intraparty) are still festering, so all bets are still off on a shutdown.

Wall Street took a shellacking on Tuesday, perhaps as investors worried about oil, with the Dow Jones Industrial Average dropping 168.32 points, or 1.38 percent. The S&P 500 lost 1.57 percent, and the Nasdaq shed 1.61 percent.

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