Total construction spending in April rose by 2.7% in April from March, far exceeding the 0.1% gain that was expected. This was the second month in a row that total construction spending has been up, and the March gain was revised up to an increase of 0.4% from the original report of a 0.2% gain.
However, if one steps back a bit, it is still clear that the construction industry is still in a world of hurt. Relative to a year ago, total construction spending is down 10.5%, and has been a major drag on the overall economy.
The monthly rebound was bigger for private construction spending, rising 2.9% versus only a 2.4% rise for public construction spending (mostly done by state and local governments on things like roads and sewer projects). However, in part that is because public spending has not dropped as much. On a year-over-year basis, private spending is down 13.5% while public spending is down 4.4% from last year. The ARRA (the Stimulus Act) is largely responsible for public spending being able to hold up relatively well, even in the face of massive budget deficits at the state and local level (and the inability to run deficits on an operating basis).
Even with the large gain in April, on a year-to-date basis, total construction spending in the first four months of the year was 13.2% below the first four months of 2009. Private spending is down by 16.4% on a year-to-date basis, while public spending is down 5.7%.
A relative bright spot in construction spending is the residential side, where spending rose by 4.5% from March and is 4.6% above year-ago levels — although is still very far below the peaks of the bubble years. As the graph below (from http://www.calculatedriskblog.com/, and note that the graph only shows private spending) shows, residential construction spending started to fall long before non residential spending did, and is much farther below its peak.
However, that has made for easier comparisons. While a 4.6% increase year over year in residential spending is nice to see, it looks much more like a stabilization at a very low level than a real rebound, and even that rebound is at least partially due to extraordinary levels of government support to the housing industry. With the end of the homebuyer tax credit there is a very real possibility that it will turn down again in the months to come. On a year-to-date basis, residential construction spending is off 1.6% from a year ago.
The non residential side posted a 2.0% gain for the month, but is down 16.1% from April 2009 and the first four months of the year have seen 17.4% less spending on non-residential construction projects than in the first four months of 2009. Construction spending is a direct input into GDP, and thus month-to-month changes in construction spending have a direct impact on GDP growth.
The construction industry, both residential and non residential, has been a very significant drag on the overall economy. In the first quarter, the decline in residential investment, of which construction spending is by far the largest part, subtracted 0.28 points from GDP growth, while investment in non-residential structures subtracted 0.49 points from GDP growth. This happened even though both were already very small shares of the overall economy. In the first quarter, residential investment accounted for just 2.43% of GDP while non-residential investment in structures represented just 2.85% of the overall economy.
The bigger-than-expected rebound in April is welcome news and should support GDP growth in the second quarter. However, don’t be surprised if the strength is transitory.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
