Construction Activity Declines

Construction spending fell 0.1% in October for the third month in a row. Data for September were revised slightly lower. Weakness was concentrated in the private sector. Losses were broad-based with the exception of office and lodging construction.

Residential construction contracted as a drop in single-family construction more than offset a gain in multifamily. Demand in the market for both new and existing homes has softened in response to rising prices and rates in the last year. Price hikes in some of what had been the hottest urban markets are finally slowing in response to affordability issues. High-end foreign buyers have pulled back in places like New York and San Francisco as the dollar has strengthened. Chinese investment in the U.S. has slipped the most over the last year.

Public sector construction held up much better in October with a gain of 0.8%. The strongest gains were in hospital and offices. The largest drop in construction spending hit conservation and development. Year-over-year gains remained strong in public safety, amusement and transportation. The deterioration in our transportation infrastructure has reached critical mass, affecting everything from roads and airports to trains. The trains I take to work have had more equipment problems in the last six months than I have seen during my 25 years commuting.

Separately, manufacturing activity improved in October according to the Institute for Supply Management (ISM) index, which rose to 59.3 from 57.7 for November. Gains were broad-based but so were complaints about tariffs. Price increases slowed a bit, mostly in response to lower oil prices. Supply deliveries faced hurdles as bottlenecks remain a problem. The backlog of orders is holding up well, which bodes well for the holiday season.

Many producers had ordered ahead of the threat of higher tariffs slated for January. We will be watching closely to see if they pull back on those hedges now that the immediate threat of higher tariffs on food from China looks to be delayed. The U.S. and China declared a temporary truce on additional tariffs at the G20 meetings in Argentina. The U.S. will keep all tariffs to date, however, in place. Most trade experts are skeptical that the U.S. and China will resolve the much larger issues between them in the 90 days allotted.

Bottom Line
Construction activity, which is among the most sensitive industries to higher interest rates, is slowing. This is worrisome as it could point to a further slowdown in 2019 and 2020. For now, it looks modest. Unemployment is expected to continue to fall as we move into 2019.

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