Construction spending fell in November for the first time in nearly 18 months, suggesting the economy ended 2015 with less momentum than previously thought.
Our Construction MMI fell 3.2%, correspondingly, to 60, starting the year with yet another all-time low.
The Institute for Supply Management (ISM) said its index of national factory activity fell to 48.2 from 48.6 in November which is now at its lowest level since June 2009. While a reading below 50 indicates a contraction in manufacturing, the index remains above 43.1, which is associated with a recession.
Chinese Demand is Not Coming Back
Construction activity continues to be stagnant in China as well, the major market that drove the construction boom of the early 2000s. The loss of Chinese demand has hampered component products of our construction index such as rebar and steel plate for more than a year. The Dow Jones Industrial Average, as well as stock indexes around the globe, plummeted Monday after poor purchasing managers index numbers out of China.
Oil prices continued to shoulder some of the blame for low, low prices, but that only tells part of the story. Manufacturers in the petroleum and coal products sector said low oil prices were “negatively” impacting oil and gas exploration activities. Their counterparts in the fabricated metal products segment reported that activity was “still very slow due to oil prices.”
Construction had been weathering the storm better than some other market indexes as many general contractors and end users were steadily purchasing and consuming metal while the price was low. With construction spending falling for the first time in a year-and-a-half, that might not be the case anymore. We have, anecdotally, heard that stockpiling of commonly used copper, aluminum and steel products — by residential home builders and nonresidential GCs — has been going on for some time.
A dip in purchasing by these large buyers could mean that construction demand in the US is falling, but also that many bulk buyers have simply exhausted warehouse and surplus stock space.
Commerce’s Big Error
Construction spending in November was held down by a 0.8% drop in nonresidential construction. Outlays on residential construction actually rose a modest 0.2%.
In a separate report, though, the Commerce Department said construction spending slipped 0.4%, the first and also biggest drop since June 2014, after a downwardly revised 0.3% gain in October.
The government revised construction data from January 2005 through October 2015 because of a “processing error in the tabulation of data.”
The revisions, which showed construction spending was not as strong as previously reported for much of 2015, prompted economists to lower their fourth-quarter gross domestic product estimates by as much as three-tenths of a percentage point to as low as a 1.1% annual growth pace. So, not only is construction spending now falling, but it’s actually been steadily sliding for all of last year and Commerce’s “processing error” masked the market weakness all that time.
The bottom line is not only is demand still on life support in China, but the US demand that many had assumed was strong for all of 2015 was actually lower than we’d thought and spending is now in negative territory.
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Follow Jeff Yoders on twitter at @jyoders19.