Each month, the United States Census Bureau releases its “Value of Construction Put in Place” survey. It measures the total dollar value of construction work in the United States.
In the quarter ending June 30, construction spending as a percentage of GDP slipped to 6.1%. This was a small increase from a year ago. Over the past 50 years, the average has been closer to 8.4%. Thus, we’re still well below historical averages. In the above chart, note the fall in construction spending as a percentage of GDP. You can clearly see the drop-off after the housing bubble burst.
In many ways, this represents pent-up demand. It isn’t just from the private sector through commercial and residential construction. It’s also public construction. You’ll hear the “crumbling infrastructure” argument a lot from politicians, especially Democrats such as Hillary Clinton. Private construction spending provides a healthy stimulus to the economy. The lack of private construction spending has been a weak spot in the economy.
Public construction spending has been declining as a percentage of GDP ever since the stimulus plan in 2009 slowed down. That said, public construction spending as a percentage of GDP was at a 30-year high not too long ago.
The other issue that politicians are discussing is the need for affordable housing. Tight inventory makes it difficult for people to afford rentals. Rental inflation has been moving up steadily, especially in urban areas. The government just informed landlords that they aren’t allowed to deny apartments to convicted felons.
While there’s debate over whether the multiplier for public construction spending really exists, there isn’t any debate that private construction spending is a big boost for the economy.
Homebuilders are changing their demographic focus
Homebuilders like Lennar (LEN) and CalAtlantic Group (CAA) didn’t build enough after the housing bubble burst. Many were afraid of being caught with inventory and land, so they held back. They only build what they’re reasonably confident they can sell. We haven’t seen builders take more risk yet, but the inventory problem is becoming so acute that the risk-to-reward ratio may be too good to ignore. In some hot markets such as San Diego, there’s less than two months’ worth of inventory.
Given the well-known problems with the first-time homebuyer—student loan debt and a tight job market—builders focused more on move-up and luxury buyers. Toll Brothers (TOL) has been focusing more on luxury urban apartments. The Millennial generation avoids single-family residences in the suburbs for upscale urban locations.
Builders with more of an entry-level focus, such as PulteGroup (PHM) and D.R. Horton (DHI), are beginning to focus more on the lower price points in anticipation of the return of the first-time homebuyer. Investors who want to bet on the sector as a whole can look at the SPDR S&P Homebuilders ETF (XHB).
In June, the share of existing home sales attributable to the first-time homebuyer was 33%—up 3 percentage points from May.
Broadcom (AVGO) stock fell ~8.5% after markets closed yesterday following the semiconductor giant's fiscal 2019 second-quarter earnings release. It missed analysts' revenue estimate and cut its fiscal 2019 revenue guidance by $2 billion to $22.5 billion due to sluggishness in its semiconductor solutions business.
The SPDR Gold Shares ETF (GLD), which tracks physical gold prices, has underperformed the broader markets year-to-date, rising just 4.4% compared to the S&P 500’s (SPY) gain of 15.9% as of June 14. The sentiment for gold, however, has been turning around.
Safe havens such as Treasuries and gold were back in favor on June 14 as stocks fell due to rising tensions in the Middle East, concerns over growth, and the looming threat of the US-China trade war. The tech-heavy Nasdaq Composite Index fell 0.67% in the first hour of trading.
Lululemon (LULU) stock rose 2.1% on June 13 in reaction to better-than-expected first-quarter results and an upgraded outlook for fiscal 2019 overall. The company's first-quarter adjusted EPS grew 34.5% to $0.74 on revenue growth of 20.4% to $782.32 million. Analysts had expected EPS of $0.70 and revenue of $755.31 million. Here's why the outlook got an upgrade.
As of 4:40 AM Eastern Time today, US crude oil active futures were at $51.83, ~4% below their closing level in the previous week. If US crude oil prices stay at those levels today, they'll mark their third week of decline in five weeks.
Amazon is discontinuing its Amazon Restaurants service, which has been delivering food for restaurants in parts of the United States. Amazon Restaurants launched in the United States in 2015 and entered the British market the following year. However, it met strong opposition in the British market.