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Construction Spending Dips in October, Housing Woes Linger

Spending on U.S. construction projects in the United States fell 0.1% in October, marking the third consecutive monthly decline, due to the ongoing softness in homebuilding and non-residential construction. The October decline followed a 0.1% fall in September and a 0.4% drop in August.

The U.S. Census Bureau of the Department of Commerce said on Tuesday that construction spending for October was estimated at a seasonally adjusted annual rate of $1,308.8 billion, 0.1% below the revised September estimate of $1,310.8 billion. Nonetheless, the October figure is 4.9% higher than the October 2017 estimate of $1,247.5 billion.

Meanwhile, during the first 10 months of this year, construction spending grew 5.1% above the the same period in 2017.

Residential & Non-Residential Sectors Remain Weak

Private outlays dipped 0.4% month over month in October, with spending down 0.5% for residential projects and 0.3% for non-residential projects. However, on a year-over-year basis, private outlay grew 3.9%.

Meanwhile, spending on public construction projects rose 0.8% in October, after taking a 0.9% hit in September. Under the public construction umbrella, although educational construction jumped 2.6%, highway construction was down 0.1%.

Housing Market Headwinds Linger

Of late, there have been indications of the housing market losing steam. Factors like increasing construction costs, dearth of skilled labor, rising prices of homes and higher mortgage rates continue to make things difficult. This, coupled with increased lumber prices owing to an import tariff, is eating into builders’ margins.

Meanwhile, the National Association for Business Economics or NABE released a new economic outlook on Dec 3, in which its forecasting panel lowered their construction starts projection. Currently, the panel expects builders to start construction on 1.26 million homes in 2018, down from the October projection of 1.28 million housing starts this year. For 2019, the panel expects starts to rise to 1.3 million units, a reduction of 50,000 units from NABE's October survey. That said, the revised 2018 forecast still represents a 5% increase from 1.2 million housing starts in 2017.

Due to the ongoing housing market headwinds, the Zacks Homebuilding industry has collectively lost 33.8% since the beginning of 2018. Big names in the industry such as D.R. Horton Inc. DHI, Toll Brothers, Inc. TOL, KB Home KBH, Lennar Corp. LEN and PulteGroup Inc. (PHM) have plunged 29%, 31.3%, 37.4%, 35% and 22.9%, respectively, this year so far. All these stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nonetheless, homebuilders are optimistic about the sector’s recovery, given a robust economy and a solid job market. They believe that the industry’s fundamentals remain solid, the economy remains strong and consumer confidence is near record levels that are likely to drive growth in the future.

Additionally, the latest trade truce between the United States and China brings hope. The countries agreed to a temporary truce to reduce trade tensions, following a working dinner at the G20 Summit in Buenos Aires on Dec 1. According to the agreement, both the nations will refrain from increasing tariffs or imposing new tariffs for 90 days (until Mar 1, 2019) as the two sides work toward a larger trade deal.

Meanwhile, the Federal Reserve is expected to raise interest rates in December. However, in order to address affordability issues, the Federal Reserve is required to re-evaluate its monetary policy of tightening credit to avoid any further damage to the already disturbed sector.

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