Construction activity dropped 1.8% in April after rising an upwardly revised 1.5% in March. Losses were broad-based with a downdraft in public construction outpacing the decline in the private sector. The fall in state and local construction was particularly large and marked the second month of declines. Federal spending has held up better this year, especially now that funding for highway projects passed.
Losses in the private sector were smaller but also broad-based and included a dip in housing activity; apartment construction, which had been on a tear is starting to slow as many of the largest markets, including Chicago, now show signs of being overbuilt. (Millennials hoping for a break in rents may finally be able to afford to buy in some markets.) Retail construction also declined. Real estate is not as important as it once was in a world where a retailer is judged by how fast it can complete its online deliveries. This is happening at the same time that auto dealers are pulling back.
Separately, the manufacturing sector continued to firm in May. The Institute for Supply Management (ISM) index moved further into positive territory on improving new orders, production and firming prices. A rise in energy prices and a new round of steel tariffs contributed to the upward move in prices; that is good news for steel producers, but hard on margins for steel and energy consumers. Employment was the laggard, which will show up in what is already expected to be a subdued report for payrolls in May. Job creation remained tepid, which is factored into our subdued forecast for employment gains.
Bottom Line: Today’s construction data will add a bit to first quarter revisions, while shaving some from second quarter estimates. Those shifts will not change the narrative for a rebound in growth in the second quarter. The Fed is still on course to raise rates in June or July.