US: Construction Spending

Mon Jun 01 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Construction Spending - M/M change 0.7% 0.3% to 1.6% 2.2% -0.6% 0.5%
Construction Spending - Y/Y change 4.8%

Construction spending is showing life, up 2.2 percent in April which is well above Econoday's consensus for plus 0.7 percent and Econoday's high-end forecast of 1.6 percent. Spending on residential construction rose 0.6 percent with strong gains posted for both single-family and multi-family homes. The gain here is no surprise and follows April's big surge in housing starts & permits.

Private non-residential spending looks very strong in this report, up 3.1 percent and led by gains out of the power and office sectors. Pubic spending is also strong led by an outsized gain for highways & streets and including a large gain for educational building. The gain in public spending came entirely from the state and local governments as federal construction spending declined for a second straight month.

Adding to the positive news are big upward revisions, to plus 0.5 percent from an initial reading of minus 0.6 percent for March and no change from minus 0.6 percent in February. This will help boost the next revision to first-quarter GDP. And construction should give a badly needed lift to second-quarter growth which isn't getting much help from the consumer, evidenced by this morning's personal income & outlays report, nor from manufacturing, underscored by mostly soft readings in both this morning's PMI index and ISM index.

Market Consensus Before Announcement
Construction spending has been very weak but life is expected to appear in the April report with the consensus calling for a strong 0.7 percent gain. Expectations are tied to strength for private residential construction given the huge surge in April housing starts and permits. There is some uncertainty, however, as the range is wide at plus 0.3 percent to plus 1.6 percent.

The dollar value of new construction activity on residential, non-residential, and public projects. Data are available in nominal and real (inflation-adjusted) dollars.

Construction spending has a direct bearing on stocks, bonds and commodities because it is a part of the economy that is affected by interest rates, business cash flow and even federal fiscal policy. In a more specific sense, trends in the construction data carry valuable clues for the stocks of home builders and large-scale construction contractors. Commodity prices such as lumber are also very sensitive to housing industry trends.

Businesses only put money into the construction of new factories or offices when they are confident that demand is strong enough to justify the expansion. The same goes for individuals making the investment in a home.

A portion of construction spending is related to government projects such as education buildings as well a highways and streets. While investors are more concerned with private construction spending, the government projects put money in the hands of laborers who then have more money to spend on goods and services.

On a technical note, construction outlays for private residential, private nonresidential, and government are key inputs into three components of GDP--residential investment, nonresidential structures investment, and the structures portion of government expenditures.

That is why construction spending is a good indicator of the economy's momentum.