In today’s construction news, read about how orders fell and production stalled, resulting in a bigger-than-expected decline of the ISM manufacturing index. Additionally, construction data was lower than anticipated, which further supports the notion that tight monetary policy is impeding economic growth. On the other hand, the latest signs that the economy is gradually slowing down include the fact that U.S. manufacturing activity slowed for a second straight month in May, following an unexpected decline in construction project spending the previous month and a drop in new goods orders that was the largest in almost two years. Finally, according to data from the Census Bureau, spending on building projects fell in April for the second consecutive month, primarily due to a decrease in commercial and healthcare projects.
US Construction and Manufacturing Slow Down More Than Anticipated
Original Source: US manufacturing and construction cool more than expected
Orders and production fell, causing the ISM manufacturing index to decline more than predicted. Construction was also less than projected, indicating that monetary policy is restricting economic growth.
ISM contraction continues.
Monday’s US data shows an unexpected decline in the May ISM manufacturing index to 48.7 from 49.2 (consensus 49.5). Anything below 50 is a contraction. Regional surveys and the Chinese PMI, which we use to predict West Coast events in the absence of regional surveys, projected a slightly different outcome than April. However, the new orders index dropped significantly (from 49.1 to 45.4) to its lowest level since May 2023. The backlog of orders dipped to 42.4, the lowest since November, while production fell to 50.2 from 51.3 in April.
Prices paid fell to 57.0 from 60.9 but remain above the 6M average of 54.1, indicating inflationary pressures in the industry. Employment rose beyond the beak-even 50 level to its highest level since March 2022, but output is stagnating and orders are weak, raising worries about its sustainability. Instead, they may be filling a backlog of openings rather than raising hiring ambitions.
Overall, the data supports the idea that manufacturing will not boost economic activity this year.
Construction affected by high borrowing costs and affordability gap
A second month of falling construction spending suggests a steady slowing in the sector. Housing starts and building permits are falling due to high borrowing rates and tight lending conditions, which should slow development spending in residential areas where affordability is limited. Although strong, non-residential (outside of office) building is likely to diminish as the Inflation Reduction and CHIPS Acts’ initial assistance fades.
US Construction Spending and Manufacturing Activity Both Decline
Original Source: US factory activity, construction spending both fall
U.S. manufacturing output declined for a second straight month in May as new goods orders fell by the most in nearly two years and construction spending fell unexpectedly the month before, the latest signs of an economic downturn.
In May, the Institute for Supply Management’s manufacturing purchasing managers index slipped to 48.7 from 49.2 in April, the research body reported on Monday. Survey respondents mentioned “softening” more. Second straight decline and second month below 50, which distinguishes expansion from contraction. The median estimate from Reuters economists was 49.6.
Construction spending dipped unexpectedly for a second month in April due to non-residential activity, but single-family home building rose.
The two reports showed persistent economic sluggishness in the second quarter. The first quarter GDP climbed 1.3%, and until recently, it was expected to accelerate. After the ISM and construction spending announcements, the Atlanta Fed’s GDP Now estimate dropped to 1.8% from well above 2% through May.
The Federal Reserve’s concern on inflation has kept interest rates high, slowing expenditure on manufactured goods and capital projects. According to data released this week, April consumer spending on commodities decreased as consumers conserved their funds.
ISM survey results “suggest that higher-than-expected rates this year have reduced business investment and made businesses more reticent to increase their levels of inventory,” Oxford Economics U.S. economist Matthew Martin wrote in a research note. “This has led to softer than anticipated demand, with new orders declining and the backlog of orders in contraction.”
SEPT RATE CUT
Recent data has softened, supporting investors’ belief that the Fed will decrease interest rates in three months. After the ISM reading, interest rate futures indicated a 60% chance that the Fed will decrease its benchmark rate in September from its 5.25-to-5.50% range since July.
Since price pressures accelerated in the first quarter, Fed members will focus on returning inflation to 2% during their June 11-12 meeting.
As commodity prices persist, factory input cost rises dropped from their greatest in almost two years but remain above levels recorded during much of that time, according to ISM data.
“With freight costs also moving higher at the start of the peak shipping season, risks are rising that higher production costs could be passed through to consumer prices and complicate the Federal Reserve’s objective to returning inflation to 2% and potentially delay the timing of the first rate cut,” he said.
ISM’s headline indicator of industrial activity has contracted for 18 of the past 19 months due to high borrowing rates.
New orders for manufacturers fell 3.7 points to 45.4, a one-year low, the most since June 2022.
Factory employment, which had been stagnant for two years, rose for the first time since September. The Labor Department is likely to report 5,000 manufacturing jobs generated last month amid 185,000 job gains this Friday.
The Commerce Department’s Census Bureau reported 0.1% construction spending decline on Monday after 0.2% in March. Construction spending was projected to rise 0.2% by Reuters economists. April construction spending rose 10% year-over-year.
Commercial projects drove 0.1% reductions in private construction spending in April. Both educational and roadway building spending declined 0.2%.
The report contained several bright areas.
Single-family residential building rose 0.1% to its highest level since August 2022, driven by low housing inventory despite high borrowing rates. Factory building spending rose 0.9% to a new high due to Biden administration investments in computer chip and green energy production.
Increased Homebuilding Didn’t Boost April Construction Spending
Original Source: US Economy News Today: Increased Home Building Couldn’t Lift Construction Spending in April
Welcome to Investopedia’s economics live blog, where we discuss the day’s U.S. economic news and how it may influence you. Data releases, economic studies, expert quotations, and anything else that helps explain economic challenges and why they matter are here.
Overall construction investment decreased in April despite rising home building, while manufacturers faced price pressure in May.
Commercial and health care projects slowed construction spending for the second month in April, according to Census Bureau data.
Construction spending would reach $2,099.0 billion if April levels held. That’s a 0.1% drop from the month before and below economists’ 0.2% forecast.
Residential construction was 0.1% higher in April than in March, whereas nonresidential spending fell 0.3% and public spending fell 0.2%.
Residential construction investment rose 20% last year, driven by single-family home development. Increasing for 12 months, wrote Wells Fargo economists Charlie Dougherty, Jackie Benson, and Patrick Barley. Low existing housing inventory is typically blamed for real estate affordability troubles.
In the high-interest rate market, builders have used price and rate incentives to attract buyers, improving single-family building this year. Wells Fargo noted that rising apartment vacancies and stricter financing make multifamily building less advantageous.
Oxford Economics predicted a second-quarter fall in residential building investment because lower spending could hurt economic growth.
“Weaker home sales are weighing on residential investment via brokers’ commissions and offsetting gains in single-family construction and home improvements,” noted Oxford head U.S. economist Bernard Yaros.
A pair of carefully monitored manufacturing surveys showed dropping activity and rising inflation, confusing market watchers.
In May, the Institute of Supply Management (ISM) manufacturing Purchasing Managers’ Index (PMI) dropped half a percentage point from April and almost a full percentage point below experts’ expectations to 48.7%.New orders and production fell, lowering the ISM.
“Demand remains elusive as companies are reticent to invest owing to present monetary policy and other factors,” said ISM Manufacturing Business Survey Committee head Timothy Fiore.
ISM’s data and S&P Global Market Intelligence’s manufacturing PMI today indicated sustained price pressures. Manufacturing managers are surveyed monthly to measure both indicators. The ISM Prices Index shows raw material prices rising for the fifth month.
The S&P report showed worse prices.2 Manufacturing input prices climbed at their fastest rate since April 2023, for the third month in a row. Firms hiked prices in response, although inflation slowed from April to a five-month low.
While production prices climbed slower in May, this is unlikely to be sustainable if cost pressures rise further in the months ahead, said S&P’s Economics Director Andrew Harker.
Summary of today’s construction news
To sum it up, for the second consecutive month, construction spending declined, and we anticipate that the industry will continue to gradually moderate. Excessive borrowing rates and stringent lending requirements continue to be limitations. In the residential sector, where affordability is particularly challenged, this is leading to a decline in building permits and house starts, which should translate into more softening in construction spending.
On the other hand, following a 0.2% decline in March, the Census Bureau of the Commerce Department released additional statistics on Monday that indicated a 0.1% decline in construction spending. According to Reuters polled economists, construction spending would increase by 0.2%. In April, the annual rise in construction spending was 10%.
Finally, Oxford Economics projected a decrease in residential construction investment during the second quarter, citing concerns about potential risks to economic growth associated with reduced construction spending.
