US: Construction Spending

Thu Mar 01 09:00:00 CST 2018

Consensus Consensus Range Actual Previous Revised
Construction Spending - M/M change 0.3% -0.8% to 1.2% 0.0% 0.7% 0.8%
Construction Spending - Y/Y change 3.2% 2.6% 3.4%

Capital goods readings in Tuesday's durable goods report were weak as is nonresidential spending in today's construction spending report for January, weakness that held total spending unchanged in the month. Private nonresidential spending fell 1.5 percent pulled down by the power, commercial, and office components. Year-on-year, nonresidential spending is down 1.1 percent and focuses attention on whether business confidence is as strong as advertised in reports like this morning's ISM manufacturing.

Housing continues to grow with residential spending up 0.3 percent in the month for a year-on-year gain of 4.2 percent. Single-family homes are holding up this component, up 0.6 percent in the month and 8.8 percent on the year, and offsetting a 1.3 percent decline for multi-family units where the yearly rate is minus 2.4 percent. Home improvements, like single-family homes and a reflection of consumer strength, are a plus, up 0.2 percent in the month with annual growth at 6.6 percent.

Housing is a larger category than nonresidential spending reflected in the total year-on-year rate which is at plus 3.2 percent, moderate but respectable. And public spending, which is a separate category concentrated in educational building and roads, is also contributing, up 1.8 percent on the month and 8.2 percent on the year. And spending here, given the outlook for new deficit spending, could prove to be an accelerating plus for the construction outlook.

Market Consensus Before Announcement
Construction spending ended last year on a strong note with a 0.7 percent December gain that showed strength on both the residential and non-residential sides of the report. Yet year-on-year rates in this report, stuck in the low single digits, have been subdued. Econoday's consensus for January is a rise of 0.3 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.