Construction Spending Remains Low: Will It Impact Q1?

Spending on construction projects in the United States inched up marginally in February from the previous month, after a flat January. Does this mean that though the economy is improving, it is failing to provide an impetus toward spending on the construction of highways, schools, hospitals or homes?

Incidentally, U.S. stocks suffered heavy losses on Monday, following new Chinese tariffs on U.S. goods and the growing difficulties among the domestic technology companies. The Dow Jones industrial average lost 1.9%, and the S&P 500 index and Nasdaq sank 2.2% and 2.7%, each. The volatility mainly stemmed from investors’ fear related to the impact of an intensifying trade war between the United States and China. Per Bloomberg, the S&P 500’s fall of 2.2% is the widest decline to begin April 2018 since 1929.

Drab February Construction Spending

In February 2018, construction spending improved 0.1%, falling shy of market expectations. The figure came in at $1.27 trillion (seasonally adjusted), logging an annual growth rate of 3% but depicting month-over-month increase of just 0.1%, as revealed by the Commerce Department on Monday. The solid labor market along with robust consumer confidence has supported an increase in non-residential (lodging and office) construction. However, spending on highways suffered a decline.

Spending on public construction projects tumbled 2.1% last month, marking the widest decline since June 2017 and almost reversing January’s 2.3% rise. Under the public construction umbrella, educational construction was measured at a seasonally adjusted annual rate of $74.6 billion, 0.5% down from the prior month. Highway construction was at a seasonally adjusted annual rate of $88.5 billion, 0.2% down on a monthly basis and 5.1% year over year.

Meanwhile, private outlays grew 0.7% in February, with spending up 0.1% for residential projects and 1.5% for non-residential projects. Of the total private outlay, residential construction inched up 0.1% from January. On the other hand, the non-residential construction for February was up 1.5%, suggesting stronger growth in real investment in non-residential structures in Q1.

Again, private spending on health care facilities dropped 2.2% in February from the preceding month. Spending on the power grid rose 0.9% on a monthly basis but dropped 8.5% year over year. On the positive note, spending on manufacturing jumped 1.2% last month after months of annual declines. However, it plunged 5.6% from February 2017.

Homebuilding Remains Strong

Although public sector outlay took a downturn in February, residential construction was up 0.1% and especially new single-family construction grew 0.9% on a monthly basis. Compared to February 2017, new single-family construction increased 9.5%.

Apart from concerns over chances of a series of interest rate hikes by the Federal Reserve, homebuilders continue to struggle with growing labor shortage, limited land availability, higher material costs and a constrained mortgage environment. These are restricting homebuilders from responding to growing demand.

The implications of the metal tariffs and mortgage hike are yet to be felt in the sector that has been in the top 25% (4 out of 16 sectors) of the Zacks Industry Rank since last week, which hints at further growth. Currently, top-performing construction stocks, i.e. stocks sporting a Zacks Rank #1 (Strong Buy), which are cashing in on positive fundamentals include Boise Cascade Company (NYSE:BCC) , Beazer Homes USA, Inc. (NYSE:BZH) , EMCOR Group, Inc. (NYSE:EME) , Fluor Corporation (NYSE:FLR) , Kb Home (NYSE:KBH) , Louisiana-Pacific Corporation (NYSE:LPX) and Advanced Drainage Systems, Inc. (NYSE:WMS) . You can see the complete list of today’s Zacks #1 Rank stocks here.

Modest Spending & Slow Factory Activity to Play Spoilsport?

February’s marginal growth in construction spending might mar first-quarter GDP growth estimates, which tends to remain weak owing to seasonality.

Meanwhile, the index of national factory activity fell to 59.3 in March from a 14-year high of 60.8 in February.

The slowdown in the monthly manufacturing reading was partly due to lower job growth in the manufacturing sector. Evidently, the employment index slipped to 57.3 in March from 59.7 in February. The new orders index also slid to 61.9 in the month from 64.2 in February, while the production index dipped to 61 from 62.

Prices paid rose 3.9 points to 78.1, the highest since April 2011. The survey pointed out rising commodity prices across industry sectors, particularly in metals, corrugates, and parts made from plastics. Electronics manufacturers are also suffering from component shortages.

Before becoming bearish, investors should note that 17 out of the total 18 industries, including fabricated metal products, computer and electronic products, machinery and chemical products, witnessed growth last month. Apparel, leather and allied products was the only industry that suffered a decline.

Notably, though the figures in March suffered a decline, any reading above 50 indicates growth in the manufacturing sector. Although domestic manufacturers still remained strong in March, several executives have raised concerns about bottlenecks getting supplies or transporting their goods to customers, according to the latest survey by ISM. They are also worried of the recent tariffs on steel and Chinese goods whose long-term implications still remain uncertain.

Despite the skepticism stemming from the impact of tariff and the subsequent trade war, executives showed faith on global demand that can spur growth.

Atlanta Fed Raises Q1 GDP Growth Forecast

Meanwhile following the latest release of construction spending data by the U.S. Census Bureau and the manufacturing ISM report, the Atlanta Federal Reserve’s GDPNow forecast model expects the economy to grow at a 2.8% annualized rate in the first quarter compared with the Mar 29 prediction of 2.4%.

The upbeat outlook mainly reflects improved forecasts for real consumer spending and private fixed-investment growth that increased to 1.6% and 5.6% from 1.3% and 3.9%, respectively.

What’s Ahead?

Although shortage of components and labor have started to create production and shipping delays, the growth forecast and pricing pressure suggest that demand for U.S. manufactured goods remains strong. However, concerns remain regarding the imposition of tariffs by the U.S. administration on steel and aluminum along with aerospace, information and communication and machinery imported from China. These tariffs could deal a blow to business confidence both domestically and abroad. Nevertheless, the tax reform and fiscal stimulus are expected to boost the economy.

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