And, as a sign of how widespread the housing meltdown is, turn to page A12 of today’s Wall Street Journal, “Foreclosure Trouble Spreads to Those Who Bet the Farm”. The home foreclosure crisis started in cities and suburbs and has now widened its reach into rural America. According to the WSJ, default rates are soaring across rural America, where homeowners were just as vulnerable to subprime loans and often refinanced existing mortgages to take out cash or pay off debts.

Construction spending came in well above expectations, up 0.3% M/M in March led by a 2.0% M/M gain in non-residential construction. An 8.6% rebound in power facilities and gains in lodging, office and commercial space all boosted the headline – the latter three areas look unlikely to be sustained given rising vacancy rates, tighter credit standards and falling demand. Commercial construction growth, which first turned negative in 4Q08 and posted a 44% annualized decline in 1Q09, is likely to be a significant drag on growth over the balance of the year.

Commercial real estate…
One of the key standouts in the Fed’s Survey is the extent to which demand for commercial real estate loans has collapsed. The net percentage of banks reporting weaker demand for commercial real estate loans jumped to 66% in 2Q from 55% in 1Q in what is the weakest showing on record. Meanwhile, the majority of banks continue to tighten their lending standards on commercial real estate loans. Fully 66% of banks tightened standards and, though that is marginally better than the 79% in 1Q, this tells us is that we can expect continued declines in commercial construction in the quarters ahead.

US construction spending surprises on the upside

Construction spending rose 0.3% m/m in March, above expectations. The upward surprise was in private nonresidential construction spending, which rose 2.7% m/m. Notably, construction of commercial real estate rose 1.5%, marking the first gain in nearly a year. Similarly, construction of office buildings and lodging structures edged higher. We believe this is unsustainable given the distressed CMBS market, depressed hotel industry, and overall contraction in business investment. Looking past this month’s data, we believe that the nonresidential construction sector has begun a protracted downturn likely to persist into next year.