The Wall Street Journal is reporting Building Slowdown Goes Commercial.

Cracks are starting to show in commercial construction.

For the second month in a row, the Commerce Department reported a decline in spending on nonresidential construction — which includes everything from hospitals to office parks to shopping malls. The report yesterday showed construction spending fell 1.7% in January from December, the steepest drop in 14 years. While residential construction accounted for a big part of the decline, spending on nonresidential construction slid 0.8%.

Meanwhile, there may be an oversupply of shopping malls and office buildings after a period of intensive construction. It adds up to bad news for employment, the economy and investors.

My Comment: There is no “may” about it. A massive oversupply of shopping mall space already exists. Meanwhile more mall space is still being added.

As home construction got caught in a downward spiral last year, nonresidential construction continued to expand at a healthy clip. Spending on nonresidential structures rose 16% in 2007, the biggest four-quarter increase since 1984, according to Morgan Stanley.

Signs of trouble cropped up at the end of the year. As credit markets tightened, office space sold in the fourth quarter dropped 42% from a year earlier, and sales of large retail properties declined 31%, says Real Capital Analytics, a New York real-estate research group.

My Comment: The party is clearly over.

If spending continues to slow, construction workers, who are reeling from the housing slowdown, face more layoffs. Construction jobs made up 5.4% of nonfarm payrolls in January. While that’s down from a peak of 5.7% in April 2006, it’s still above the long-term average of 4.9%, say economists at Payden & Rygel in Los Angeles, leaving room for more job losses.

My Comment: What’s with this “If” and “May” stuff? More job losses are coming.

Nonresidential construction payrolls, down 2.7% in January from their recent peak in March, posted year-over-year declines in December and January, the first such drops since August 2004. A construction slowdown will be especially tough on specialty-trade contractors, such as plumbers, painters and electricians, who account for about two-thirds of overall construction payrolls. This could spell trouble for consumer spending, which accounts for two-thirds of the U.S. economy.

Last year, developers built 144 million square feet of retail projects in the top 54 U.S. markets and are slated to build another 131 million square feet this year, according to Property & Portfolio Research Inc., a Boston research company. Property & Portfolio Research calculates that demand justified 36% of the new space built last year and will support 15.7% of the space slated to be completed this year.

My Comment: This is an out and out disaster for store owners. Lease rates are going to plunge and commercial real estate bankruptcies are going to soar along with vacancies. Capital impaired banks are going to be the proud owners of strip malls and nail salons. Won’t that be fun?

As building slows, demand for construction materials such as lumber, concrete and heavy machinery, which has been hit by the weak housing market, will slacken further. It will hurt sales of medium and heavy trucks — which, largely because of the housing turmoil, fell 23% in 2007, according to trade publication Ward’s Automotive. Sales of light trucks, often used by construction workers, also will suffer, another headache for auto makers General Motors Corp (GM) and Ford (F).

My Comment: The latest reports from GM and Ford were a horror story. I will have more on Truck sales below.

The outlook is souring. Retailers have reported a slowdown in sales. Wal-Mart Stores Inc. and J.C. Penney Co., among others, have pared expansion plans. Electronics seller Best Buy Co. has reined in its quarterly earnings forecast. Talbots Inc., Movie Gallery Inc.’s Hollywood Video and numerous home-furnishings retailers have announced store closings. Others, including Bombay Co., have liquidated under bankruptcy protection.

Auto Sales

CNNMoney is reporting Ford, GM And Toyota All Sell Fewer Cars In February.

  • Ford Motor Co., General Motors Corp. and Toyota Motor Corp. on Monday all reported declines in February U.S. sales, reflecting the tough climate for consumers during the persistent housing slump and credit crunch.
  • Dearborn, Mich.-based Ford (F) said that it sold 196,681 cars and trucks last month, down 6.9% from 211,150 a year earlier.
  • Ford’s longtime best-selling F-Series pickup saw a 4.9% drop to 52,548 trucks, with demand stung by the decline in construction. Overall, trucks fell 5.6% while cars declined 9.3%.
  • General Motors (GM) reported a 12.9% decline in light vehicle sales to 308,411 cars and trucks. The car side fell 1.2% while light trucks dropped 19.2%.
  • Cadillac, boosted by its car lineup, was the only GM brand to show a year- over-year improvement. Saturn took the biggest hit, down 33.4%.
  • Chevy, GM’s flagship brand, saw sales drop 11.2% to 166,166 cars and trucks.
  • Toyota (TM) reported that February U.S. sales fell 2.8% to 182,169 vehicles, down from 187,330 last year.

The Big Picture

That was an interesting piece by Scott Patterson and Kris Hudson on construction jobs. There were lots of pertinent facts to consider even if they were more than a bit overly cautious on what’s coming down the pike. However, it’s not so much the loss of trade jobs that is important, but the 10’s of thousands of jobs to fill those stores that will also soon to be gone. If you are not building stores, you are not going to be hiring employees to work in them.

The current wave of commercial real estate overexpansion will end in 2008. There is nothing to take the place of that service sector hiring, either to build the stores or work in them..

This is a stunning figure: “Property & Portfolio Research calculates that demand justified 36% of the new space built last year and will support 15.7% of the space slated to be completed this year.

That overhang of excess mall capacity is going to last a long time, perhaps a decade.

What’s Kaput

  • Residential real estate is kaput
  • Commercial real estate is kaput
  • Auto and Truck manufacturing is kaput
  • Financial services other than bankruptcy specialists are kaput
  • State and municipal hiring is kaput

Where is the source of jobs to drive the economy going to come from?

I suggest nowhere. Oh sure, there will be government work programs at the federal level, but not enough to matter. Unemployment is going to soar, not just from construction trade workers losing their jobs but because there is no source of hiring anywhere.

Expect to see one grim jobs report after another for the rest of the year.

Mike “Mish” Shedlock
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