Is residential construction enough to fuel construction spending?



Construction spending

Construction spending figures for February will be released on Tuesday, April 1. The U.S. Census Bureau of the Department of Commerce estimated construction spending in January 2014 at a seasonally adjusted annual rate of $943.1 billion, just 0.1% above the revised December estimate of $941.9 billion. January’s figure is, however, 9.2% above the January 2013 estimate of $863.1 billion.

Part 4

Residential construction makes up for non-residential and public construction declines in January

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The value of private construction on a seasonally adjusted annual basis (or SAAR) was estimated at $670.8 billion in January, 0.5% above the $667.5 billion spent in December. Residential construction came in at a SAAR of $359.9 billion in January, 1.1% above December’s estimate of $356 billion, and non-residential construction was at a SAAR of $310.9 billion, 0.2% below December’s estimate of $311.5 billion.

How do construction spending increases impact investors?

An increase in construction spending would imply an increase in economic activity. Besides, construction also has multiplier effects throughout the economy and impacts multiple sectors through its impact on the value chain—including manufacturing, real estate, transport, planning, and survey services, among several other factors. Through these channels, the wider economy feels a ripple effect.

Looking at the construction spending report for January, residential construction is responsible for most of the spike in data. ETFs with exposure to the home construction sector include the iShares US Home Construction ETF (ITB) and the State Street SPDR Homebuilders ETF (XHB). The top holdings in ITB include Lennar Corp. (LEN) and PulteGroup (PHM). An increase in residential construction spending will also positively impact ETFs with exposure to mortgage financing. One of these ETFs is the iShares Barclays MBS Fixed-Rate Bond Fund (MBB), which tracks the Barclays Capital U.S. MBS Index that measures the performance of investment-grade fixed-rate mortgage-backed pass-through securities of GNMA, FNMA, and FHLMC.

To read about an economic release that gives important feedback about consumer confidence, read on to Part 5 of this series.


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