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MARKET TRENDS: U.S. Construction Spending Falls Unexpectedly

January 20, 2016

While spending on U.S. construction unexpectedly declined in November, mortgage application volume for the week ended January 8, 2016 showed a 21.3% rise (compared to the preceding week on a seasonally adjusted basis).

On January 4, the Commerce Department reported that U.S. construction spending in November last year sank 0.4% to a seasonally adjusted annual rate of $1.12 tn. The dip, which followed a 0.3% increase in October, was the first decline in 17 months and reflected weakness in spending on hotel and other private non-residential construction and government projects. Economists had expected spending to rise by 0.6%.

The unexpected decline was partly attributed to a sharp fall in spending on public construction, which slumped 1.0% to an annual rate of $294.3 bn. Spending on state and local construction decreased by 0.4%, while spending on federal construction tumbled by as much as 7.2% to $24.0 bn. Spending on private construction edged down 0.2% to an annual rate of $828.2 bn. Although expenditure on residential construction rose 0.3% to $ 427.9 bn, it was offset by a fall in non-residential construction which decreased 0.7% to a rate of $400.3 bn. Compared to the same month a year ago, total construction spending in November was up by 10.7%.

On the other hand, the mortgage application volume data released by the Mortgage Bankers Association (MBA) was clearly upbeat. Mortgage application volume for the week ended January 8, 2016 increased 21.3% versus the previous week on a seasonally adjusted basis. Mortgage applications to purchase a home increased 18% from the previous week, seasonally adjusted, and were 19% higher than the same week one year ago, signalling an increase in potential home buying at the start of the year. According to Lynn Fisher, MBA’s vice president of research and economics, “MBA’s purchase mortgage application index reached its second highest level since May 2010 on a seasonally adjusted basis last week, second only to the week prior to the implementation of the Know Before You Owe rules.”

On January 12, the National Federation of Independent Business (NFIB) released the latest figures of its Small Business Optimism Index. By and large, small business owners were divided on sales outlook and business conditions. Following a decline in November, the Index rose by 0.4 points to 95.2 in December. This was a bit less than economists’ forecast of an increase to 95.4. While the December level was below the 42-year average of 98, it remained consistent with economic growth of 2.5%.

The components of the Index showed mixed results. The net percentage of firms expecting higher real sales in six months improved to 8, the most since April. The percentage of firms expecting the economy to improve, however, fell to -14, the lowest since March 2014. Although 15% of the small businesses surveyed planned to increase employment, finding skilled labor remained one of the top problems faced by small companies in December. Earning trends improved one point to negative 18.0%, as companies reported improvements in their quarter-over-quarter profits.

Given such low returns, only 26% of business owners planned to make capital outlays – one point more than the previous month. Only 9% of firms surveyed reported that now was a good time to expand the business – this response was at the low end of the range of the last 18 months. That said, 4% of firms lowered prices in December, down from July 2014, when 14% of firms surveyed had raised prices. Nevertheless, 20% of firms said that they were planning to increase prices – this was the highest level since December 2014.

Bill Dunkelberg, Chief Economist at NFIB said, “The President appears to be shifting his attention away from the economy and toward foreign policy and guns, so it’s no surprise that few small business owners expect the business climate to be better in the next six months.”

“In December, Congress made expensing permanent and passed other favorable tax changes that had an immediate impact on bottom lines,” he continued. “However, prospects for any other substantive policy changes in 2016 are not good. Congress has a lot of economic growth supporting legislation under consideration, but most is politically difficult to pass or unlikely to receive Presidential approval.”

Ari Page Ari Page is the CEO of Fund&Grow. He resides in Spring Hill, Florida with his wife and two children.

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