Construction Spending Signals Weakening Construction Sector
Construction spending tracks the level of both residential and non-residential construction activity in the United States. The headline figure measures the percentage change from the prior month.
This indicator is important because the construction industry makes up a large portion to the United States' GDP in the form of investment spending as well as gauges the economic health of industries related to building.
According to the U.S. Census Bureau of the Department of Commerce, construction spending in March increased 0.1 percent, worse than the expected increase of 0.5 percent. Construction spending was revised lower in February to a decline of 1.4 percent from the initial decline of 1.1 percent.
This is essentially bearish for the health of the construction sector and negative for general economic growth in the United States. Builders are not spending because they feel the current economic conditions are unfavorable for their investments.
According to the U.S. Census Bureau of the Department of Commerce's report, construction spending during March 2012 was estimated at a seasonally adjusted annual rate of $808.1 billion, 0.1 percent above the revised February estimate of $807.3 billion. The March figure is 6.0 percent above the March 2011 estimate of $762.6 billion.
In March, the estimated seasonally adjusted annual rate of public construction spending was $276.2 billion, 1.1 percent below the revised February estimate of $279.1 billion. Educational construction was at a seasonally adjusted annual rate of $69.1 billion, 1.2 percent below the revised February estimate of $70.0 billion. Highway construction was at a seasonally adjusted annual rate of $77.0 billion, 0.8 percent below the revised February estimate of $77.6 billion.
Traders who believe that Construction Spending is a leading indicator for the US economy, you might want to consider the following trades:
- If the indicator comes in better than expected, long general industrial companies like Illinois Tool Works (NYSE: ITW) or Caterpillar (NYSE: CAT) as these companies will benefit for increasing construction spending.
- Also, long building material companies like Louisiana-Pacific (NYSE: LPX).
Traders who do not believe that Construction Spending is a leading indicator for the general US economy, you may consider alternative positions:
- If the indicator comes is worse than expected, long Consumer Staple companies like Procter & Gamble (NYSE: PG) and Colgate (NYSE: CL) because even if the economy is struggling, people still need to buy staple products like shampoo and toothpaste.
- Also, short building companies like Toll Brothers (NYSE: TOL) if the manufacturing trend is worse-than-expected.
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