Construction and Manufacturing Showing Signs of Weakness

Total construction spending edged up a modest 0.1% in August after flatlining in July. June and July figures were both revised lower. Construction spending is now down more than 2% during the first eight months of the year despite a recent spurt in multifamily construction activity.

Private construction, which makes up three-quarters of total construction spending, was largely unchanged from last month. A jump in residential construction was almost entirely offset by a drop in nonresidential construction. Losses in commercial construction, power and health care sectors were the largest. A monthly indicator provided by the American Institute of Architects fell into negative territory, with architecture firm billings and design contracts both declining in August. The institute said the losses centered on commercial and industrial facilities.

Note: The Federal Reserve has been watching the commercial real estate market closely. Many are concerned it is a bubble, which puts an even greater weight on the drop in commercial real estate construction activity in August.

Public construction gained 0.4% in August, driven by increased state and local spending. State and local construction spending rose 0.6% due to increased spending on health care, education, highway and street, conservation and development. Federal spending, a smaller component of public spending, was down 2.2% in August. What has been surprising is the late, but still welcome, start to road repairs at the state and local levels. Repairs that usually start in April or May did not get up and running until September in some parts of the country.

More broadly, the South and Northeast have so far been spared from major hurricanes making landfall this year, so rebuilding activity has been muted. Previous hurricane damage, such as Hurricane Michael in 2017, has yet to be repaired in many parts of the country due to significant flooding and lack of flood insurance in those regions.

Separately, the manufacturing sector continued to show signs of weakness in September. The Institute for Supply Management (ISM) index hit the lowest reading since June 2009 during the month. Production, employment, inventories and export orders all contracted. The GM strike exacerbated losses, but concerns about weakness abroad and tariffs topped the list of complaints by manufacturers. There were also some signs of layoffs, which bodes poorly for the employment report for September, due to be released on October 4.

Note: The GM strike, now in its third week, will not show up as a loss in payrolls for September because it occurred after the September payroll survey was taken, but will show up as a loss in production. The Federal Reserve’s report on industrial production has shown a year-over-year drop in manufacturing activity in three of the last six months. The ISM survey for September suggests yet another drop month-to-month and year-over-year in manufacturing activity.

Bottom Line
Today’s data suggest that businesses remain hesitant to invest in the face of escalating trade tensions. The blow to the manufacturing sector has been largest, but appears to be showing up in construction as well. Foreign investors, notably from China, have pulled back in recent quarters in response to weaker growth and escalating trade tensions. The Fed remains reluctant to cut again at the end of October, but the news is starting to stack up against maintaining that stance.

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