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Overview: Construction spending for May 2014

Part 5
Overview: Construction spending for May 2014 (Part 5 of 5)

Must-know: Can the government do something for the economy?

Can the government help the economy?

Construction spending doesn’t have to be simply residential (or private construction). Public construction also matters. However, it’s less than half of private construction dollars. The use of federal construction dollars to increase demand in the economy has been an issue of tremendous debate. One side believes that a Keynesian pump-priming exercise wouldn’t only alleviate suffering, but also help the economy. The other side argues that Keynesian spending’s track record has been mixed at best. Opponents cite Japan as an example. Japan took its debt-to-gross domestic product (or GDP) ratio to 2.2x and has had little to no economic growth to show for it.

Government SpendingEnlarge Graph

The stimulus plan from early in President Obama’s term has been credited with turning around the economy from its adherents. However, it has been characterized as a waste of money from its detractors. The economy was certainly in a tailspin before the American Recovery and Reinvestment Act (or ARRA) was enacted, but what turned around the economy? Many would say that it was the Troubled Asset Relief Program (or TARP), that rescued the banks, was what did it. Unfortunately, in economics, isolating a single variable and examining it while not changing the other variables is difficult.

There has been a tug-of-war between the left-wing prescription of using the government to cushion the blows of a difficult economy and the right’s version of “let the markets clear.” During the first two years of the Obama administration, the U.S. pursued the left-wing route. Since 2010, when Republicans took over the House of Representatives, we’ve had little further government tinkering with the economy.

President Obama’s latest budget has earmarked just over $300 billion in spending for construction to be paid for with tax increases on business. This budget is essentially a political document that’s meant to help frame the debate for the 2014 mid-term elections. It has a zero chance of being enacted as is. Interestingly, the budget forecasts 2014 GDP growth of 3.1%, which prompts the question of why a big stimulus program would be needed in the first place.

Ultimately, what was needed was the real estate market to bottom out before a recovery. That has happened for the most part, and in some areas of the country, prices are rising rapidly. Prices have begun to rise again. In other areas, particularly the northeast, prices are still stagnating (or rising very slowly). This has to do with the foreclosure laws in these localities and the fact that they’re very creditor-unfriendly. Increasing home prices are helping homebuilders like Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL) increase profits and hiring, which will drive the economy going forward. The S&P SPDR Homebuilder ETF (XHB) is an alternate way to invest in this sector.

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