Public Construction Spending Falls
The Keynesian debate
While private construction is the lion’s share of construction spending, public construction also matters. Historically, the use of public construction dollars has been the big lever that the government uses to stimulate the economy. This dates back to the New Deal. It was used as recently as 2009 in the American Recovery and Reinvestment Act.
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The use of federal construction dollars to raise demand in the economy has been an issue of tremendous debate. Generally, the left seems to believe that a Keynesian pump-priming exercise would alleviate suffering and help the economy. On the other hand, the right tends to argue that Keynesian spending’s track record has been mixed at best.
Opponents cite Japan as an example. The country took its debt-to-GDP ratio to 2.2x. It pursued public construction to stimulate the economy. It had little to no economic growth to show for it. Now, it’s issuing bonds at negative interest rates. Japan may have reached the point where public debt has become so large that it acts as an economic anchor.
The stimulus plan from early in President Obama’s term has been credited by its adherents for turning around the economy. However, it has been characterized as a waste of money by its detractors. Did the spending boost in the American Recovery and Reinvestment Act stop the tailspin? Or was it the tax cuts? Or was it the Troubled Asset Relief Program? It isn’t possible to prove these arguments one way or another. The explanation tends to fall along ideological lines.
Crumbling infrastructure argument
Democratic presidential candidate Hillary Clinton is arguing for a big public spending program—often referred to as “infrastructure investment”—to create jobs and address infrastructure issues. Clinton proposed spending $275 billion on infrastructure. Sanders wanted to spend $1 trillion. Supposedly, Donald Trump wants to increase infrastructure spending. The underlying premise is that US infrastructure has been allowed to fall into disrepair due to limited government spending. Is that true?
As you can see from the above chart, public construction as a percentage of GDP was pretty constant for almost 30 years until President Obama’s stimulus measures pushed it up to highs not seen since the Carter administration. In the quarter ending June 30, 2016, public construction spending fell to 1.5% on a month-over-month basis. It fell on an annual basis, as well.
As we discussed in the previous part of this series, home price appreciation indicates that we have a tight housing market in general. As the Millennials get jobs and work off some of their student loans, they could start looking to buy.
Rising home prices are helping homebuilders such as Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL) raise profits and hire. This trend could drive the economy going forward. The SPDR S&P Homebuilders ETF (XHB) is an alternate way to invest in the housing sector.