U.S. Construction Spending Decline Fifth in Six Months

During October, the value of construction put in place fell 1.0% after a downwardly revised 0.8% drop in September. It was the fifth decline in the last six months. Consensus expectations had been for a 0.2% dip during October.

Residential building cratered 1.9%. This seventh consecutive monthly decline lowered the level of construction activity 10.2% below last December's peak. The 3.9% (-17.2% y/y) slide in new single family building was the largest, but only by a little, m/m drop during the last fifteen years. Spending on improvements made up for some that lost work and rose 1.5% (4.9% y/y).

During the last twenty years there has been an 84% correlation between the q/q change in the value of residential building and its contribution to growth in real GDP.

Nonresidential building slipped for the second consecutive month after a downwardly revised 0.6% September decline. The 0.7% October dip was notable for a 3.1% (+13.5% y/y) drop in manufacturing. Office construction also fell 1.6% (+26.7% y/y) but construction in the lodging sector continued to barrel ahead, by 9.0% (68.1% y/y). Multi-retail building also remained firm and posted a 1.3% (35.8% y/y) gain.

Public construction spending increased 0.8% led by a 4.0% (11.3% y/y) jump in transportation spending. Highways & streets, nearly one third of the value of public construction spending, ticked up 0.3% (15.7% y/y).

These more detailed categories represent the Census Bureau’s reclassification of construction activity into end-use groups. Finer detail is available for many of the categories; for instance, commercial construction is shown for Automotive sales and parking facilities, drugstores, building supply stores, and both commercial warehouses and mini-storage facilities. Note that start dates vary for some seasonally adjusted line items in 2000 and 2002 and that constant-dollar data are no longer computed.

The November composite index of manufacturing activity from the Institute for Supply Management fell to 49.5 from 51.2 the prior month. The decline plopped the index below the break even level of 50 for the first month since April 2003. Consensus expectations had been for stability at 52.0 but the market's expectation was altered by yesterday's weak Chicago PMI report.

During the last ten years there has been a 67% correlation between the level of the ISM index and three month growth in factory sector industrial production.

The new orders component at 48.7 and production at 48.5 led the m/m declines. The new export orders index also fell moderately to 56.9. The series peak was in early 2004 near 60. During the last ten years there has been a 69% correlation between the level of the export order index and the q/q growth in goods exports from the GDP accounts. The imports index also fell slightly.

Employment also dropped below the break-even level to 49.2. During the last ten years there has been a 77% correlation between the level of the ISM employment Index and the three month growth in factory sector employment.

A higher vendor deliveries index (52.8) and a higher inventories series (49.7) dampened the decline in the Composite index.

The price index, which is not included in the composite, rose for the first month in the last four.

During the last ten years there has been an 89% correlation between the level of the price index and the three month change in the PPI for intermediate goods less food & energy.

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A rebound in capital outlays boosted Poland's GDP in Q3, pushing it ahead 2.8% (quarterly rate) for the quarter and 5.9% from a year ago. GDP had contracted by 1.5% in Q2. Both major sectors, consumption and capital spending, contributed to the Q3 gain.

Final consumption picked up from a modest 0.7% gain in Q2 to 1.5% in Q3. The year-on-year increase was 4.6%, in between Q2's 4.3% and Q1's 5.0%. This puts consumption for the year on a path to show the strongest growth since 1999.

Gross capital formation had declined in Q1 and Q2, but rebounded sharply in Q3. This may be due in part to some recovery in inventory positions; accompanying data we carry from Eurostat indicate these were liquidated in both Q1 and Q2. Even so, this would not likely account for the entire surge in capital outlays, which amounted to PLN5.6 billion, so fixed investment must also be expanding.

The Polish economy, as seen in the first graph, is growing with some vigor, particularly compared with its big neighbor Germany. The expansion in capital investment is a good sign that business is betting that these gains will continue.