Why construction spending matters to the economy
Critical highlights of August 2014's construction spending (Part 1 of 5)
The U.S. economy continues to punch below its weight
The Census Bureau releases its “Value of Construction Put in Place” survey every month. It measures the total dollar value of construction work in the U.S.
The survey covers both the public and private sectors. It includes new structures as well as improvements to existing structures. The data includes the cost of labor, materials, architectural work, engineering work, overhead, interest, taxes, and contractor profits.
Historically, construction spending has led economies out of recessions. However, this didn’t happen in the most recent recession because of the overhang from the real estate bubble. Historical housing starts data averaged ~1.5 million units per year since the 1950s. Prior to the bubble, this metric would range between 850,000 during the depths of a recession and over 2 million units during booms. Since the real estate bubble burst, housing starts have averaged ~687,000 units per year, with a low of below 500,000.
Construction spending has been falling as a percent of gross domestic product (or GDP). The last few years have been absolutely terrible, as construction spending peaked around 9% of GDP during the bubble. It’s down to ~5.5% today. Economists believe the multiplier from construction is quite high because it’s a labor-intensive industry that can put a lot of people to work.
Homebuilder outlook
We’ve seen big increases in average selling prices out of the homebuilders like Lennar (LEN), Toll Brothers (TOL), D.R. Horton (DHI), and PulteGroup (PHM). This has allowed them to drive the top line.
If residential home prices begin to level off, then the builders will have to increase units to drive the top line. This will be bullish for the economy because it will put a lot of people to work.
Investors who want to bet on the sector as a whole should look at Standard and Poor’s SPDR Homebuilder ETF (XHB).
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