Construction spending rose 0.5% in August after being revised even lower for the month of July. Gains at the state and local levels, however, more than offset another downdraft in federal spending. That was before any federal funds were allocated to aid with the cleanup and rebuilding needed following hurricanes Harvey and Irma. The imprint of Harvey, however, is in the data. There was a 25.4% monthly increase in spending on police and sheriff facilities, which no doubt included some temporary shelters and coordination facilities to help with rescue efforts surrounding Harvey.
Private sector construction rose 0.4% in August after plummeting in July. Gains were uneven. The housing market suffered some losses from flooding. The market for single-family homes posted anemic gains during the month, while apartments did a little better. The larger trend for the housing market will be contingent on two factors: 1) shortages of labor and materials prior to hurricanes, and 2) the extent to which migration increases from the U.S. Virgin Islands and Puerto Rico, much of which has become uninhabitable. Builders across the country have reported a worsening of labor shortages and rapidly escalating materials costs. The price of lumber rose on a 20% tariff for lumber from Canada before the disasters and has moved even higher afterward.
Look for rising construction costs to raise private sector construction measures. Shortages of labor and materials could siphon off resources from elsewhere and exacerbate the shortages in housing. This is a key issue for millennials, who are already struggling to buy homes as prices escalate.
The construction data, with the downward revisions to July, does not change our forecast for the second quarter, which is currently tracking slightly above 2%. We may see a temporary loss in construction activity for September as the third quarter closes. The damage created by Maria, which devastated Puerto Rico, will not show up in the national data unless it spurs a larger migration from the island to the mainland. Puerto Ricans are U.S. citizens but do not show up in the national statistics unless they migrate to the mainland.
Separately, the Institute for Supply Management (ISM) manufacturing index for September rose to 60.8, the strongest pace in more than a decade. Much of the increase was due to hurricane-related price increases, which underscores how tight inventories of construction materials were even before the storms. Concerns about hurricane related price increases were a recurring theme among the survey responses. Orders picked up along with a slight increase in employment. One sector that will benefit from hurricane damage is the auto sector. The vehicle sector was peaking, but replacement demand has surged in the wake of the storms.