Fiscal Stimulus Will be Starting From Less Than Zero

By Jeffrey Snider of Alhambra

For a “reflation” regime predicated as much on government spending, it was an inauspicious start. Construction spending fell sharply in January, as lackluster growth in the private sector could not offset sharp declines in government activity. At the state and local level, construction spending fell nearly 5% from December (seasonally-adjusted), while at the federal level spending dropped more than 7%.

There isn’t any great mystery here as to why that was, since particularly federal activity was accelerated to as much before the Presidential election as possible. Public spending has been declining since November, after rising August to October (even though, as a whole, government construction had been weak and falling since the middle of 2015). From CNBC:

U.S. construction spending unexpectedly fell in January as the biggest drop in public outlays since 2002 offset gains in investment in private projects, pointing to moderate economic growth in the first quarter.

In addition to concerning real PCE growth also for January in figures also released yesterday, it was this drop in construction that led to a sharply lower prediction for Q1 GDP from the Atlanta Fed as well as throughout what is left of research on Wall Street. But it is not really the government end of things that is of concern.

Total private construction was up 7.2% year-over-year, which while sounding adequate is actually a little more than half the rate from earlier in 2016. In the middle of 2015, just as “global turmoil” was to hit, private construction spending had gained 18% Y/Y that August (after growing at 20+% rates in early 2014). While the nadir of that downward trend for construction spending seems to have occurred around September, as with so many other economic accounts the lack of determined acceleration stands out.

On the private side, this is primarily attributable to the residential segment. Residential construction grew by just 5.3% in January after rising 6.4% in December. As late as August 2015, activity on the housing side was growing by more than 20%.

Is that difference attributable to interest rates, where consumers might be further payment constrained by costlier mortgages? Or are macro factors including price sensitivity creating pause? It will be several months, of course, before any conclusions can be drawn. For now, however, the residential construction data traces a familiar macro pattern.

By all accounts, however, there should be far more robust and sustained growth in residential construction (which includes both multi-family units as well as single family houses). Again, this speaks to the wide disparity between the unemployment rate and the rest of the economic outlook that is nowhere near so optimistic. It is the combination of conspicuous absence of wage and earnings growth together with interest rates that suggests “headwinds.”

Though construction in total may have for January at least put a dent in GDP, in terms of the overall economy it has been surpassed as a primary element of structural growth (it is the lack of construction in capex capacity, compared to the prior peak, that is holding the economy so far back on a continuing basis). Unlike the housing bubble period, the amount of construction spending higher or lower isn’t likely to make a whole lot of difference either way (unless for some reason it were all to crash again).

Instead, the impact of residential construction on total construction is merely indicative of those possible “headwinds”, as noted yesterday. In big picture terms, like the rest of the economy construction is about a decade behind.

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