Construction Spending Hits 8-Year High

US News reports US Construction Spending Jumps to 8-Year High, Lifted by Home Building, Federal Government.

The construction of single-family homes and apartments climbed 1 percent in October, also reaching their highest level since December 2007. Manufacturers boosted their construction spending by 3 percent. And federal government building soared 19.2 percent, the biggest increase since October 2006.

Americans are staying in rental apartments for longer, rather than buying a home. That spurred a nearly 28 percent jump in apartment and condo construction in October from a year earlier. Nearly a third of buildings completed so far this year were apartments and condos, compared to just 27 percent before the recession began in late 2007.

Public construction of schools, highways and other infrastructure rose 1.4 percent in October to its highest level in five years. It has risen 6.6 percent in the last 12 months

Construction Spending Beats Estimates

The consensus estimate for construction spending was +0.6% but the actual month-over-month reading was +1.0%.

Construction is one of the highlights of the 2015 economy with spending up a solid 1.0 percent in October for the best rate since May. Despite mixed signals from the housing sector, spending on residential construction is very solid, up 1.0 percent in October for a seventh straight gain and all of them convincing. Year-on-year, residential construction is up 16.6 percent vs 13.0 percent for total spending.

The monthly gain in the residential component is led by the key subcomponent of single-family homes, up a very strong 1.6 percent for a seventh straight gain. New multi-family homes, which have been leading the residential component all year, rose 1.4 percent. And these gains are not tied to remodeling which dipped slightly in the month.

Private non-residential spending rose 0.6 percent in October with the year-on-year rate at plus 15.3 percent. Strength here is led by outsized gains for manufacturing that are offset in part by weakness in the power and especially the commercial subcomponents.

Public spending is holding down totals with educational construction unchanged in the month though Federal spending did jump, up 19.2 percent for the largest gain in nine years that takes the year-on-year rate to plus 10.7 percent. This is the best rate among the public subcomponents. The highway & street subcomponent was also very strong in the month, up 1.1 percent for what is still a comparatively soft year-on-year gain of 6.0 percent.

The housing data in this report are not only favorable but the pop higher in related permits, in data previously released with the housing starts & permits report, hints at further gains ahead. This report points to a solid fourth-quarter contribution from construction.

Construction Contribution to GDP

As noted earlier today, this morning's ISM report was a disaster. (See Manufacturing ISM Contracts; Lowest Reading Since June 2009; Glimmers of Hope Extinguished). But the construction report looked good.

Like Bloomberg, I would have expected construction to add to GDP, in isolation.

Combined with ISM spending, I would have expected the net result of today's reports to be an overall small minus.

Actual GDPNow Forecast Results were dramatically different.

GDPNow Forecast Sinks 0.4 Percentage Points to 1.4 Percent

Construction Subtracts From GDP vs. Prior Estimate

Compared to the November 27 report that included new home sales, construction appears to have subtracted approximately 0.09 percentage points and ISM roughly another 0.31 percentage points. Other reports in between may have contributed but those should be the main factors.

I have a question into the Atlanta Fed regarding construction contribution to GDP.