Construction Spending (January) Morgan Stanley Research

* Weaker than expected report. Overall construction fell 0.6% in January but a larger 1.5% excluding the volatile home improvements
component. Homebuilding activity was weaker than expected, with a near record drop in apartment construction, government spending
remained surprisingly weak, and private nonresidential activity resumed sinking hard. We now see Q1 GDP growth tracking at +2.0% instead
of +2.3% on a weaker outlook for residential investment, business investment in structures, and state and local government spending. Prior
months were also revised lower, and we see Q4 growth being revised back down to +5.7% from +5.9%, mostly as a result of weaker business
investment.

* Residential spending rose 1.3% in January but only because of a 4.7% spike in the unreliable home improvements component. BEA does not
use these figures in estimating the home improvements component of GDP (which was down 7% in Q4 in contrast to a 30% surge in the
figures in this report). Underlying homebuilding activity was down 1.8%, with single-family construction dipping 0.2% and multi-family
plunging 11.1%. This was the biggest drop in multi-family construction since 1993 and left it at its lowest level in 15 years. The weather will
likely put some additional pressure on homebuilding in February, leading to a weak trajectory for all of Q1. We now see residential investment
falling 12% in Q1 instead of 10%.

* Private nonresidential spending plunged 2.1% in January on top of big downward revisions to November (-2.7% v. -0.9%) and December (-
0.7% v. +0.2%). The 20% annualized drop over the past three months now seems to make a lot more sense after the initially reported numbers
for late last year were surprisingly suggesting that business construction activity might have already been bottoming out. There has still been a
flattening out in office and commercial construction in recent months, but major declines have continued in factories and hotels. We now see
business investment in structures falling 9% in Q1 instead of 2%, and we expect Q4 to be revised down to -19% from -14%.

* Government spending fell 0.7% in January, a sixth straight decline for an 11% annualized drop over this period. Over the prior six month
period through July spending grew at an 18% annual rate, but this modest initial boost from the fiscal stimulus bill quickly faded. We now see
state and local government spending falling another 1% in Q1 instead of flattening out, with S&L government construction spending on pace
for a 5% drop in Q1 on top of a 14% decline in Q4. A significant renewed boost from the federal stimulus bill is still expected to come
through over the first half of this year, but the weather is likely to prevent any renewed upside in activity in February.

ECONOMIC DATA BULLETIN Construction Spending (January)