US construction on solid ground; manufacturing under pressure

[January 03, 2024]  By Lucia Mutikani

WASHINGTON (Reuters) -U.S. construction spending rose less than expected in November amid a decline in outlays on public projects, but data for the prior month was revised sharply higher suggesting underlying strength in the sector.

Despite coming below expectations, the report from the Commerce Department on Tuesday added to a recent raft of data on the labor market, consumer spending and confidence in suggesting that the economy regained its poise after appearing to stumble at the start of the fourth quarter.

Construction activity is being underpinned by the new single-family housing segment, thanks to an acute shortage of previously owned homes on the market. A policy by President Joe Biden's administration to bring semiconductor manufacturing back to the United States is also boosting the construction of factories, helping the keep the economy afloat.

"Construction activity is one reason the Federal Reserve rate hikes have not brought the economy to its knees like the economic models from other business cycles had forecasted," said Christopher Rupkey, chief economist at FWDBONDS in New York.

"There's money for new industrial building projects with the only risk being there is a severe nationwide shortage of construction workers."

Construction spending increased 0.4%. Data for October was revised up to show construction spending surging 1.2% instead of gaining 0.6% as previously reported. Economists polled by Reuters had forecast construction spending rising 0.6%.

Construction spending shot up 11.3% on a year-on-year basis in November. Spending on private construction projects increased 0.7% in November after rising 1.2% in October.

Investment in residential construction advanced 1.1% after rising 2.0% in the prior month. Outlays on new single-family construction projects jumped 2.9%. With the rate on the popular 30-year fixed mortgage falling further below 7%, single-family homebuilding could surge in 2024.

Strong activity in this housing market segment helped to end nine straight quarters of decline in residential investment in the third quarter. Economists expect housing to have contributed to gross domestic product in the fourth quarter.

The Atlanta Federal Reserve is currently estimating GDP growth rising at a 2.3% annualized rate in the last quarter of 2023. The economy grew at a 4.9% pace in the third quarter.

ECONOMY EXPANDING

The government is scheduled to publish its advance estimate of fourth-quarter GDP later this month. The economy has continued to expand despite 525 basis points worth of interest rate hikes from the Federal Reserve since March 2022.

The U.S. central bank last month held its policy rate steady at the current 5.25-5.50% range and policymakers signaled in new economic projections that the historic monetary policy tightening engineered over the last two years is at an end and lower borrowing costs are coming in 2024.

New contemporary attached residential homes are shown under construction by Beazer Homes USA Inc. in Vista, California, U.S., October 24, 2023. REUTERS/Mike Blake/File Photo

Stocks on Wall Street were mostly lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

"Investors should expect homebuilders to grow their business this year as the residential real estate market benefits from lower rates in the upcoming months," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. "Given the construction activity, we expect residential investment contributed to economic growth in the fourth quarter."

Outlays on multi-family housing projects edged up 0.1% in November. Momentum is fading amid a large stock of multi-family housing under construction. The rental vacancy rate also jumped to its highest level in 2-1/2 years in the third quarter.

Outlays on private non-residential structures like factories rose 0.2% in November. Spending on manufacturing construction projects increased 0.5% after accelerating 2.7% in October.

Bernard Yaros, lead U.S. economist at Oxford Economics, said while this segment of private fixed investment was cooling, he did not "anticipate an outright contraction in 2024, as federal tax credits aimed at expanding the nation's domestic productive capacity in semiconductor manufacturing and green energy production are set to ramp up."

Spending on public construction projects fell 0.7% after increasing 1.3% in October. State and local government spending declined 0.5% while outlays on federal government projects tumbled 3.1%.

While construction spending is holding its own despite the higher borrowing costs, manufacturing continues to struggle.

S&P Global said on Tuesday that its manufacturing PMI fell to a reading of 47.9 in December amid a steep decline in new orders. That was revised down from the preliminary reading of 48.2 and lower than 49.4 in November.

A reading below 50 indicates contraction in manufacturing, which accounts for 10.3% of the economy.

The decline in factory activity was mirrored across the globe, with manufacturing in the euro area contracting for an 18th straight month and Asia's manufacturing powerhouses taking a hit due to China's patchy economic recovery.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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