Spending on Construction Tops Expectations

Construction spending for the month of September grew at a 0.5% pace from August’s revised figures; after revisions, August spending was down. The largest component of construction spending, private construction spending, inched up by 0.2%, driven by growth in residential construction; nonresidential construction has posted three months of negative growth. A recent boost from state and local spending has faded, as revenues slowed at the start of the year.

Private residential construction spending, primarily comprised of new, single-family home construction, remained strong, boosting overall September numbers. The housing market finally thawed late this summer with low mortgage rates giving a boost to new home building and sales. Applications for building permits are up, along with mortgage applications, which will bring continued growth in the housing market through the end of the year. Devastation from the California fires could provide a boost in reconstruction efforts, but rebuilding after natural disasters has been slow to nonexistent in recent years.

Private nonresidential construction spending showed three straight months of negative growth, with commercial, power and lodging construction suffering the largest losses. Commercial construction has been on the decline since a peak in late 2018; September spending came in 20% lower than a year ago.

Public construction spending rose a more robust 1.5% in September, with gains at the state and local levels offsetting a drop in spending at the federal level. That included much-needed repairs to highways, streets and schools. A surprise surge in tax revenues at the state and local levels helped gains, but has since petered out. Federal government spending was down in September but is up more than 5% from a year ago. Those gains will dissipate as we move more into fiscal year 2020, which is currently financed by a continuing resolution that expires on November 21. Another shutdown in the federal government cannot be ruled out.

Separately, the Institute for Supply Management (ISM) manufacturing index held below the 50% threshold in October, signaling another drop in manufacturing activity. The fall was not as large as we saw in September and should improve with the resolution of the GM strike in November. Export orders improved, which is encouraging. Tariffs remained a headwind.

Additionally, the Chicago Purchasing Managers’ Index fell in October to the lowest reading in almost four years, remaining in contractionary territory. New orders are down significantly; over 80% of respondents agree that tariffs have either a slight or even a major negative impact on their business. The Chicago index was hit even harder by the GM strike.

Bottom Line
The GM strike exacerbated the weakness we have seen emerge in response to trade tensions in the manufacturing sector in recent months. Those losses will reverse in the months to come now that GM is back on line. GM’s competitors also seized the opportunity to boost market share when GM was idled. A “phase one” trade deal with China will not fully lift the veil of uncertainty that manufacturers currently face.

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