Construction Spending Continues Housing-Induced Rally

source: http://www.flickr.com/photos/68751915@N05/

Source: http://www.flickr.com/photos/68751915@N05/

The U.S. Census Bureau announced on Thursday that the seasonally adjusted rate, or SAAR, of construction spending in November increased 1 percent on the month and 5.9 percent on the year to $934.4 billion. For the first 11 months of the year, total construction spending is up 5 percent, at $828.4 billion.

The construction spending report can be cut into two segments in two ways: between residential and nonresidential construction spending, and between public and private construction spending. The split and relative growth rates of these components can help shed some light on the strength of various parts of the market and the economy.

The SAAR of residential spending in November increased 1.7 percent on the month and 16 percent on the year to $351 billion, or about 37.5 percent of total construction spending. SAAR non-residential spending increased 0.6 percent both on the month and on the year to $583.4 billion, accounting for the remaining 62.5 percent of spending.

The SAAR of private construction spending increased 2.2 percent on the month and 8.6 percent on the year to $659.4 billion, or about 70.5 percent of total spending. Of this, $345.5 billion, or about 52.4 percent, was residential spending. The SAAR of public construction spending fell 1.8 percent on the month and 0.2 percent on the year, accounting for the remaining 29.5 percent of spending.

Construction is an interest-rate sensitive sector, which means that it is sensitive to the U.S. Federal Reserve’s accommodative monetary strategy. With the target federal funds rate at the zero bound and longer-term interest rates suppressed thanks to quantitative easing, builders have access to cheaper credit than they would otherwise. Residential construction spending in particular has been affected because low mortgage rates can increase demand for new homes.

The rate of residential construction spending may moderate in the coming months, though, as new home sales data for November, released early in December, indicate that sales are slowing. Sales of new single-family homes fell 2.1 percent on the month, although November’s rate is still up 16.6 percent on the year, a figure that is consistent with the year-over-year increase in residential construction spending.

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