Fed Fuels Ongoing Recovery of U.S. Construction

source: http://www.flickr.com/photos/wwworks/

Source: http://www.flickr.com/photos/wwworks/

On Monday, following a shutdown-induced delay in reporting, the U.S. Census Bureau released construction spending data for both September and October. Following a 0.3 percent sequential contraction in September, the seasonally adjusted value of construction put in place increased 0.8 percent on the month and 5.3 percent on the year to an annual rate of $908.4 billion. Construction spending this year to date is up 5 percent compared to 2012, at $747 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.

Total residential spending declined 0.5 percent on the month but increased 17.4 percent on the year to $283.5 billion and accounted for about 32.8 percent of total construction spending. Nonresidential spending increased 1.6 percent on the month but declined 0.7 percent on the year to $579.6 billion and accounted for about 67.2 percent of total construction spending.

Private construction spending declined 0.5 percent on the year but increased 6.6 percent on the year to $586.8 billion and accounted for about 70 percent of total construction spending. Public spending increased 3.9 percent on the month and 2.3 percent on the year to $276.3 billion and accounted for about 30 percent of total 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 Census Bureau reported in September that new sales of single-family homes in August increased 7.6 percent on the month and 12.6 percent on the year to a seasonally adjusted annual rate of 421,000.

Strong construction spending — spurred by accommodative Fed policy — could help increase fourth-quarter gross domestic product growth. JPMorgan economist Daniel Silver told USA Today that strong construction spending in October was a factor in his decision to increase his fourth-quarter GDP growth forecast from to 3.3 percent from 3.2 percent.

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