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May Housing Starts Rise Year-over-Year but Dip 11% in April

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Residential construction and steel

As we’ve already seen, steel industry indicators could be bottoming out. In this part of the series, we’ll take a look at recent indicators of the residential construction sector. The sector is a major end steel consumer and accounts for more than a third of total construction spending.

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Housing starts decline in May

The above graph shows the trend in housing starts in the United States. Housing starts are a leading indicator of residential construction activity. The data are released on a monthly basis by the United States Census Bureau. Housing starts in May increased 4.6% on a year-over-year basis. However, compared to April, they dipped 11.1% to a seasonally adjusted annual rate of 1.036 million.

In April, housing starts touched a seasonally adjusted annual rate of 1.135 million, the highest level since November 2007. The decline in May housing starts was more or less expected, given the strong data in April.

The housing starts index represents the construction of the foundation of a residential home. It’s a leading indicator of the residential real estate industry. Higher housing starts bode well for future residential construction spending.

Positive for steel companies

Ternium (TX) and Companhia Siderurgica Nacional (SID) get a major part of their revenue from the construction sector. Higher residential construction spending would be positive for these companies. The Materials Select Sector SPDR ETF (XLB) also benefits from higher construction spending. It has invested in steel as well as building material companies. Vulcan Materials (VMC) and Martin Marietta Materials (MLM) together form 3.5% of XLB.

There are several other indicators of construction activity that steel investors should track. We’ll look at these in detail in the next part.

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