Construction Spending Unexpectedly Falls

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U.S. builders and contractors trimmed spending on construction projects in August for a second straight month with housing, non-residential and government activity all seeing declines.

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Construction spending dropped 0.7% in August after a 0.3% slip in July, the Commerce Department reported Monday. It was the third decline in the past five months. Our Construction MMI fell 3% from 70 to 68 as well.

Construction_Chart_October_2016_FNL

The unexpected drop hit all sectors of U.S. construction. Residential construction decreased 0.3%, while non-residential activity was down 0.4%. Spending on government projects fell 2%, dragged down by a sharp drop in activity at the state and local level, which has fallen to the lowest point since March 2014.

Infrastructure spending continues to be a key issue in the presidential campaign and these numbers back up arguments, from both candidates, that our roads and bridges are crumbling while governments at all levels turn a blind eye to the problem. The question the democrats and the republicans disagree on, and Hillary Clinton and Donald Trump are no different in this regard, is where will the money for a federal construction spending plan come from?

The Construction MMI saw prices drop nearly across the board. A week-long National Day holiday in China crimped copper prices as demand wasn’t even that strong in the world’s largest consumer before the shutdown. The cities of Guangzhou and Shenzhen are the latest to impose new measures to cool overheated real estate markets in China, including higher mortgage down payments and home purchase restrictions.

The Slowdown Lowdown

While U.S. prices weren’t expected to drop as much as they did, a slowdown was certainly expected at the end of the summer construction season and during China’s shutdown. As winter arrives in the U.S., a traditional slowdown in purchasing usually takes place. Ultra-low interest rates and a growing economy are what many economists say will keep the slowdown a short one. If that was the case, though, why wasn’t spending more robust in the summer months? The Construction MMI, like the overall U.S. economy, has been mired in slow-to-no-growth for most of the year with only a few strong months keeping it net positive (especially May).

That the “natural rate” of interest has fallen to low levels could mean the economy is stuck in a low-growth rut that could be hard to escape, Federal Reserve Vice Chair Stanley Fischer said on Wednesday. It’s hard to expect builders and contractors to buy more steel I-beams and copper wiring when they, themselves, are not increasing the number of projects they’re billing clients for.

What Growth?

Private construction is barely making up for public shortfalls. The strongest sector over the past year has been non-residential activity, which is up 4.2% from a year ago, followed by residential construction, which has risen 1.4%. Total public construction, however, is actually down 8.8% from last October, reflecting a squeeze on spending from efforts to control budget deficits at all levels of government.

This is where economists such as the Associated General Contractors of America‘s Chief Economist, Ken Simonson, say a federal infrastructure spending plan would help.

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“While demand for construction remains robust, it is no longer growing like it was earlier this year,” Simonson said. He also said the building industry could get a welcome boost if government policymakers moved to upgrade “our aging infrastructure.”

Actual Construction Metal Prices

Chinese H-beam steel fell to $338.88 a metric ton, down from $408.77/mt in September, a mammoth drop of 17%. Chinese rebar fell to $400.67/mt, down from $404.27/mt in September, a .9% drop. U.S. shredded scrap steel fell to $219 per short ton from $238/st in September, a drop of 8%.

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