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Construction and Manufacturing Showing Signs of Weakness

RFP
Construction spending in July came in at 1.289 trillion dollars on seasonally adjusted, annual rate, only slightly above June’s figures. The seasonally adjusted construction data have now been revised back to January 2008. The downward revisions to June were large, which suggest an even weaker start to the third quarter. Total construction is now down 2.7% from a year ago, with most of the losses occurring in the private sector. Residential construction alone is off 6.6% from a year ago.

Private sector construction was hit hardest in July, with residential construction posting only small gains. Single-family construction picked up slightly, but was still in the red relative to a year ago. Multifamily construction has held up better relative to a year ago as builders are shifting to more affordable second-tier markets, but demand continues to outstrip supply. Restrictive zoning, labor shortages and higher tariffs have all increased the costs of construction, while making it more difficult for builders to move downstream where demand is the strongest. Even low mortgage rates have disappointed as they are not enough to offset the rise in prices in recent years. Residential construction is critical as it is a lead indicator when it comes to recession. It also accounts for almost half of private construction spending, which makes it one of the largest single drivers of overall construction activity.

The silver lining was public sector construction, which saw a slight boost during the month. The largest year-over-year gains were in commercial construction spending by the public sector. Next up was spending on sewage and waste disposal. Federal spending on highways and roads fell sharply in July, but is up more than 60% from a year ago. Even those gains, however, are not enough to keep up with repairs, let alone make major improvements in basic infrastructure.

The damages and rebuilding associated with Hurricane Dorian have yet to be felt. However, we no longer get as large of a boost from reconstruction activity following hurricanes as we once did. Flooding is the largest problem, as many lack the flood insurance needed to cover reconstruction costs. Parts of Houston, which were ravaged by Hurricane Harvey in 2017, are still in shambles.

Separately, the Institute for Supply Management (ISM) index, dipped to below 50 (the threshold for positive industry measures) in August, the first dip below 50 since 2016. New export orders dropped to their lowest level since 2009, when trade contracted in response to the global financial crisis. The trade war with China and rising tariffs topped the list of current concerns. Employment also contracted, which marks the second shoe to drop for manufacturing. Hours worked had already fallen in recent months, as the slowdown in exports and tariffs took a bite out of manufacturing activity. This could portend a weak August employment report.

Bottom Line
Construction and manufacturing activity are beginning to flash red signals. Either we see a cessation in the trade war with China and rebound in growth abroad, or the worries that have plagued business will seep into consumer spending. The manufacturing sector is already in a recession. The risks that losses become more broad-based are rising.

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