Construction Spending Rose in June

Construction spending eked out a modest 0.1 percent increase in June, but the previous two months of data were upwardly revised. Private construction spending fell, while public spending increased in June. 

Construction Spending Still Moving Up

Despite a paltry monthly increase in June, total construction spending continues to show consistent gains. Overall outlays rose 0.1 percent in June to a seasonally-adjusted annual rate of $1,064.6 billion, marking the seventh consecutive month of positive spending gains. Total residential construction rose during the month, while nonresidential spending was unchanged.

The closely-watched private residential construction spending figure continued to show improvement, but the gain was concentrated in multifamily and home improvement. Consistent with other generally disappointing housing market data in June, including single-family housing starts, mortgage purchase applications, pending and new home sales activity, single-family outlays fell during the month.

That said, monthly data can be misleading. Based on a three-month moving average, single-family outlays showed modest improvement and the singlefamily construction spending component rose 12.8 percent over the past year. We also find that builder confidence remains positive. Builder sentiment reached its highest level in more than nine years and home builders are reporting stronger sales and larger backlogs. Moreover, the trend in permits and purchase applications suggests there is a bit more upside in residential construction spending.

The volatile multifamily component rose 2.8 percent in June and is up 23.7 percent year over year. Despite still-solid apartment demand, forwardlooking multifamily indicators are suggesting a slower pace of spending is in the offing. The multifamily component of the Architecture Billings Index, which typically leads activity by about one year, has been in negative territory for the past four months, and we suspect the apartment vacancy rate is close to a bottom.

Private Nonresidential Outlays Lower on Noise

Private nonresidential construction outlays fell 1.3 percent ending a ten-month positive streak. Despite the decline, private nonresidential spending is up 14.6 percent from a year earlier. Although weakness in the series was fairly broad based, the decline in chemical manufacturing stands out. Chemical manufacturing has been the stalwart in monthly outlays, but it declined in June, marking the first dip in 2015. Chemical manufacturing, however, is up 124 percent year over year and based on the pipeline of construction projects, we do not expect a slowdown is imminent. We suspect that much of the decline in nonresidential spending is due to monthly noise. Despite the reported weakness, assumptions made by the U.S. Bureau of Economic Analysis to calculate real GDP in the second quarter were lower than actual data, which means that structure investment will be a bit stronger than originally reported.