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Construction Spending Hits the Highest Level since November 2008

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Construction spending

Previously, we discussed how steel demand from the automobile and energy sectors is shaping up. In this part of the series, we’ll analyze the construction industry’s latest indicators. The construction sector accounts for more than 40% of total steel consumption in the US.

In April, construction spending increased 2.2% over the previous month. Construction spending includes expenses incurred on new structures and improvements to existing structures in the public and private sectors.

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Construction spending rises

The above chart shows the trend in total construction spending. As you can see, it has been on an uptrend. In April, construction spending hit the annual rate of $1 trillion. This is the highest level of construction spending since November 2008.

There’s a general sense of optimism in the US (SPY) housing market. Prices have been strong. Also, inventory is tight in the resale market. Another factor that reflects the optimism in the housing market is that construction companies added a healthy 45,000 jobs in April—the highest number in the past 16 months.

Positive for the steel industry

Higher construction spending is positive for the steel industry. The steel industry supplies rebars, joists, and decks to the construction industry. Companies like POSCO (PKX) and Ternium (TX) produce these products.

Interestingly, while construction material companies like Vulcan Materials (VMC) and Martin Marietta Materials (MLM) are trading near their 52-week highs, a lot of steel stocks recently hit their 52-week lows. Why was there a difference between the fortunes of steel and construction material companies? We’ll discuss this in the next part of the series.

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