Why construction spending affects companies like Boston Properties
The U.S. Census Bureau of the Department of Commerce will release the construction spending figures for March on Thursday, May 1. This report has important economic implications not only for construction sector companies like Quanta Services (PWR) and Vulcan Materials (VMC), but also other sectors because of the multiplier effect construction has throughout the economy. The construction value chain impacts several industries—like manufacturing, real estate, transport, planning, and survey services, spreading a ripple effect over the wider economy. The residential construction spending figures are particularly important for assessing the health of the housing sector, a leading indicator for the economy.
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Highlights from February’s report
- Total construction spending in February 2014 came in at a seasonally adjusted annual rate (or SAAR) of $945.7 billion, up 0.1% over January’s revised figure of $944.6 billion and up 8.7% over February 2013.
- Private construction spending in February was up 0.1% month-on-month to a SAAR of $680.0 billion over January’s revised estimate of $679.1 billion.
- Residential construction fell 0.8% month-on-month to a SAAR of $360.4 billion, while non-residential construction increased by 1.2% to a SAAR of $319.6 billion in February.
- Public construction was estimated at ~$265.7 billion, up 0.1% over January. Highway construction rose 1.4% month-on-month to a SAAR of ~$85 billion.
An increase or decrease in construction spending directly translates to increases or decreases in GDP and economic activity. With non-residential construction on the up, investors can gain exposure to the sector by investing in the PowerShares Dynamic Build and Construction ETF (PKB). PKB tracks the Dynamic Building and Construction Intellidex Index. The Index provides exposure to U.S.-based construction and building materials companies like Quanta Services (PWR) and Vulcan Materials (VMC). With an expense ratio of 0.6% and assets under management (or AUM) of $123 million. The top holdings in PKB include companies involved in residential construction like PulteGroup (PHM) and non-residential construction like Quanta Services (PWR).
Increases or decreases in construction spending are also driven by Real Estate Investment Trusts (or REITS) like Boston Properties (BXP), which develops, manages, and owns office properties in the U.S. Boston Properties (BXP) will declare Q1 2014 results on April 29.
In the next part of this series, we’ll preview the auto sales figures report for April, which will be released by the Bureau of Economic Analysis on Thursday.