Construction spending rose a tepid 0.1% in December after being revised down sharply for November. Private sector gains were carried almost entirely by strength in the residential sector. Multifamily construction continued to outpace single-family by a substantial margin, something that is beginning to cause concern for builders.
Apartment rents, which have been surging, are expected to slow and could even fall in some markets as supply is finally poised to outstrip demand in 2016. The Chicago market, in particular, has been flagged by Zillow as a market to watch for weakness this year. A slowdown in rent increases would be welcomed by millennials who are attempting to leave their parents’ nests. It could also get builders to focus more closely on construction for single-family homes; that market is facing acute supply shortages, especially for first-time buyers.
Public sector gains in construction were driven by some improvements at the state and local levels. Federal construction continued to contract, despite renewed funding for the Highway Trust Fund and the release of more dollars to make improvements on highways and streets. We have yet to make a much of a dent in repairing and upgrading bridges and roads, which have suffered from years of neglect and two unusually bad winters in 2013 and 2014. Nothing like a lot of salt to create potholes.
Separately, the Institute for Supply Management (ISM) index came in at 48.2 in January, up slightly from the depressed December level of 48 but still below the threshold of 50 that signals expansion. Weakness was concentrated in employment. Combined with an expected weather-related giveback in construction, that suggests some caution regarding the January employment report. The trade situation also deteriorated, while inventories continued to be drained. However, new orders and production showed some signs of life; that portends well for months to come. Indeed, Some manufacturers are finally seeing a plus to falling oil prices; lower energy prices are boosting their margins in the face of a strong dollar. This marks a shift from the bad news we have seen emanating from the oil industry.
Bottom Line: Today’s construction and manufacturing reports confirm the weakness we have seen, but not all of the data was bad news. Manufacturing activity many finally be bottoming out. The key will be if we can get the dollar to stabilize and ease the pressure on margins.