US: Construction Spending

Mon Oct 02 09:00:00 CDT 2017

Consensus Consensus Range Actual Previous Revised
Construction Spending - M/M change 0.3% -0.1% to 0.5% 0.5% -0.6% -1.2%
Construction Spending - Y/Y change 2.5% 1.8% 1.9%

The construction spending report is often volatile and today's results are an example. The headline is up a solid 0.5 percent in August but July's decline, initially at 0.6 percent, has been downgraded sharply to minus 1.2 percent.

Spending on residential construction rose 0.4 percent but July's initial increase has been cut in half to 0.2 percent. Yet there is standout August strength in multi-family spending which rose 0.9 percent but is still short of reversing July's 1.2 percent decline. Single-family spending is constructive, at 0.3 and 0.4 percent gains the last 2 months. Home improvements are also positive, with gains of 0.5 and 0.3 percent.

Turning to the nonresidential side, spending rose 0.5 percent but follows declines of 1.4 and 1.2 percent in the prior 2 months. Transportation is leading the way in this group, up 4.4 percent on the month and 17.6 percent on the year. Manufacturing is the laggard, down 4.3 percent in August for a yearly 20.8 percent decline.

Public building has been weak all year though educational building did rise 3.5 percent yet is still down 2.8 percent from a year ago. Federal spending fell 4.7 percent in the month for an 8.3 percent decline.

Overall construction spending shows only a 2.5 percent year-on-year rise despite a very favorable 11.6 percent increase in residential construction. Yet residential starts and permits have been uneven pointing to the risk of slowing in the months ahead.

Market Consensus Before Announcement
Housing starts and completions were held down by the South and the impact from Hurricane Harvey. But forecasters don't see the same for construction spending where the consensus call for August is a 0.3 percent rise which would be the first in 3 months for this series. Residential spending in this report has been the leading component with nonresidential spending holding down results.

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.