5 Nov

Construction spending is very important for the economy

WRITTEN BY Brent Nyitray, CFA, MBA

The U.S. economy continues to punch below its weight

Each month, the U.S. Census Bureau releases its “Value of Construction Put in Place” survey. It measures the total dollar value of construction work in the United States.

The survey covers both the public and private sectors. It includes new structures as well as improvements to existing structures. The data include the cost of labor, materials, architectural work, engineering work, overhead, interest, taxes, and contractor profits.

Construction spending is very important for the economy

Historically, construction spending has led economies out of recessions. However, this didn’t happen in the most recent recession because of the overhang from the real estate bubble. Historical housing starts data have averaged ~1.5 million units per year since the 1950s. Prior to the bubble, this metric ranged between 850,000 during the depths of a recession and more than 2 million units during booms. Since the real estate bubble burst, housing starts have averaged ~687,000 units per year, with a low below 500,000.

Construction spending has been falling as a percentage of gross domestic product (or GDP). The last few years have been absolutely terrible, as construction spending peaked around 9% of GDP during the bubble. It’s down to ~5.5% today. Economists believe the multiplier from construction is quite high because it’s a labor-intensive industry that can put a lot of people to work.

Homebuilder outlook

We’ve seen big increases in average selling prices out of homebuilders such as Lennar (LEN), Toll Brothers (TOL), D.R. Horton (DHI), and Pulte Homes (PHM). This has allowed them to drive the top line.

If residential home prices begin to level off, then the builders will have to increase units to drive the top line. This will be bullish for the economy because it will put a lot of people to work.

Investors who want to bet on the sector as a whole should look at Standard and Poor’s depositary receipt (or SPDR) Homebuilders exchange-traded fund (or ETF) (XHB).

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