Why a fall in public outlays lowered June’s construction spending

Market Realist

Must-read: Consider the FOMC meeting and recent macro indicators (Part 3 of 8)

(Continued from Part 2)

Construction spending

The Construction Put in Place Survey is released monthly. The construction spending figure, as released monthly by the Census Bureau, U.S. Department of Commerce, is the dollar value of new construction activity on residential, non-residential, and public projects.

The survey covers both the public and private sectors and 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.

 

Construction spending fell unexpectedly in June

Construction spending for June fell unexpectedly to -1.8%, following a 0.08% gain in May. The weakening of construction spending was largely driven by a 4.0% decrease in public outlays in June after a 1.6% gain in May. Private residential outlays dipped 0.3% after falling 1.1% in May.

Compared to a year ago, total construction spending was up 5.5%, after a 7.9% boost in the prior month.

Investor’s takeaway

Construction spending for private residential, private non-residential, and government are key inputs into three components of GDP, residential investment, non-residential structures investment, and the structures portion of government expenditures. So construction spending is a good indicator of the economy’s momentum.

An increase in construction spending shows you that business confidence in the economy is increasing. Business confidence tends to increase when the economy is doing well and businesses perceive it to be on its growth trajectory. A growing economy is a positive sign for stock investors. It’s a cautionary trigger for bond investors to check for inflationary pressures.

Moreover, trends in construction data carry valuable clues for the stocks of homebuilders and large-scale construction contractors.

The SPDR S&P Homebuilders ETF (XHB), the PowerShares Dynamic Building & Construction Portfolio (PKB), and the iShares Dow Jones U.S. Home Construction Index Fund (ITB), which includes companies like Home Depot, Inc. (HD) and PulteGroup (PHM) in its portfolio, are popular ETFs in the building and construction ETFs category. Changes in construction spending reflect in the performance of these ETFs.

Manufacturing indicators

Let’s move on to analyze the manufacturing indicators that came out last week.

Continue to Part 4

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