Construction spending, depressed by continued weakness in apartment and office building, fell 1.1 percent in June, the second consecutive monthly decline and the largest setback since March, the government reported yesterday.
The Commerce Department said construction spending totaled a seasonally adjusted $390.1 billion in June following a revised 0.7 percent decline in May.
The weakness was led by large declines in multifamily construction and nonresidential building, including decreases in spending for office buildings, hotels, shopping centers and factories.
Analysts predicted much of this weakness would persist for some time, given widespread overbuilding of apartment and office buildings and the adverse impact of the new tax law on construction projects.
The overall decline of 1.1 percent was the largest drop since a 3.3 percent lunge in March.
A separate report issued yesterday noted that construction contracting rose 9 percent in June after two months of decline. The F.W. Dodge division of McGraw-Hill Information Systems Co. called its figure a "leading indicator" that reflects the value of construction work that will get under way in the next 30 days.
During June, the total of signed contracts was valued at an annualized rate of $253.6 billion. A McGraw-Hill spokesman said the company could not estimate how soon actual spending on the contracts would begin.
Robert Ortner, commerce undersecretary for economic affairs, noted that apartment construction is now 23 percent below where it was a year ago and predicted this weakness will continue.
"The change in the tax law has reduced incentives to build in an area that doesn't need new buildings anyway because of the high vacancy rates," he said.
Analysts said the old tax law had spurred widespread overbuilding because investors were seeking tax shelters and were not as concerned about whether the space could be rented. Now that those tax benefits have been eliminated, the country is left with a lot of unused space.
"The overbuilding is widespread in at least 70 percent of the major cities. There are only a few areas where there is some kind of balance between supply and demand for office space," said Michael Sumichrast, an economist and publisher of Commercial Construction Report, an industry newsletter. "I believe it will take from two to four years for nonresidential construction to turn around."
Residential construction rose 1.2 percent to a seasonally adjusted annual rate of $195.5 billion in June, but most of this strength came in additions and renovations to existing structures.
The category, which includes new housing, fell by 0.3 percent to an annual rate of $138.9 billion as a 0.7 percent increase in single-family construction was offset by a 5.2 percent drop in multifamily units.
Construction of nonresidential buildings fell 4.7 percent to a seasonally adjusted annual rate of $84.3 billion. The decline was widespread among the major categories with industrial, office, hotel and shopping center construction all posting declines. Office building fell 2.0 percent in June when compared with May and is 12 percent below the level of a year ago.
Construction of government building projects fell 3.2 percent to an annual rate of $72.2 billion with the largest single government category, highway construction, falling 5.3 percent, to $21.3 billion. The May decline had originally been reported as a 0.3 percent increase.