Construction spending still on course to regaining its momentum

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Apr. 9 2014, Published 4:00 p.m. ET

Construction spending

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. Such data is made available in nominal and real (inflation-adjusted) dollars.

The construction spending for February edged up 0.1%, following a decline of 0.2% in January. The strength was largely driven by private non-residential spending which rebounded 1.2% after a 1.0% decrease in January. Private residential outlays decreased 0.8% in February, following a 1.3% boost in January. Public outlays nudged up 0.1%, following a drop of 1.3% in January.

On a year-ago basis, total construction spending was up 8.7%, after a 9.4% boost the prior month.

Investor’s takeaway

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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. Hence, construction spending is a good indicator of the economy’s momentum.

An increase in construction spending is an indication 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 the stock investors and a cautionary trigger for the bond investors to check for inflationary pressures.

Moreover, construction spending has a direct bearing on stocks, bonds and commodities because it is a part of the economy that is affected by interest rates, business cash flow and even the Federal fiscal policy. In a more specific sense, trends in the construction data carry valuable clues for the stocks of home builders 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 are reflected in the performance of these ETFs.

Can improving construction spending aid in bringing back consumer confidence in the national economic conditions of U.S.? The next part of this series gives some insight into the American consumer’s mindset.

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