In today’s construction news, read about how the ISM manufacturing index shows a recession in the industry. Increased loan rates will hurt construction. Services will be important due to student debt repayments. On the other hand, there was a 0.9% increase in housing construction spending in May. At last, Airbnb is not solely responsible for the housing affordability crisis.
Increased Difficulties Confront US Manufacturing, Construction, and Services
Original Source: Challenges mount for US manufacturing, construction and services
According to the ISM manufacturing index, the industry is in recession. Higher lending rates will hurt construction, which is improving. Services will be key as student loan repayments stress the sector.
Manufacturing recession intensifies in US
June’s US ISM manufacturing index was 46.0, below the 47.1 consensus and down from May’s 46.9. This is the poorest reading since May 2020 and the ninth consecutive sub-50 reading (the border between expansion and contraction). Key sub-components, including new orders, production, employment, and client inventories, are also contracting. No growth occurs. The good news is that prices paid also declined to 41.8, the lowest since December. This implies producer price inflation will shortly fall below 1% annually.
All of the key barometers—orders, production, employment, and prices paid—are below their 6M averages, so there is no evidence of a turnaround. The dismal Chinese PMI—which generally leads the US ISMs by three months—confirms this. The ISM (manufacturing and services) reports have historically been excellent lead indicators for GDP growth, as shown in the chart below.
Construction boosted by residential rebound
We also have difficult-to-read May construction statistics. Construction spending grew 0.9% month-on-month, above the 0.6% expectation, although we have seen a series of data revisions, most notably April’s reduction from +1.2% MoM to +0.4%.
Residential building increased 2.1% MoM in May. The lack of existing homes for sale is supporting prices and driving new home sales. Homebuilder sentiment has rebounded, so residential construction should remain strong over the next few months. Non-residential building decreased 0.2%, and outside of chip fabrication and tech, activity is certain to remain subdued, particularly with the manufacturing sector plainly struggling, office demand chronically weak, and high borrowing rates and bad business sentiment deterring activity elsewhere.
Services is affected by the slowness.
As we head into the second half of 2023, construction and manufacturing, two interest rate-sensitive sectors, are likely to struggle, putting even more pressure on the services sector to grow and sustain employment.
The October commencement of student loan repayments for 43 million Americans presents its own issues for this sector. This costs $180bn per year at $350 per person, or 1% of consumer spending. Thus, the leisure and tourism sector faces growing pressures.
Construction Expenditures Soar
Original Source: US factory activity slump deepens; construction spending surges
A Monday poll found that U.S. manufacturing fell further in June, reaching levels last seen during the initial wave of the COVID-19 pandemic.
“To a greater extent than in prior months,” ISM Manufacturing Business Survey Committee Chair Timothy Fiore said factories were laying off workers to control headcounts. He also noted that opinions on when “significant” growth would return were varied.
According to the ISM survey, the economy is in recession. However, nonfarm payrolls, first-time unemployment benefit applications, consumer spending, and housing starts imply the economy is still chugging ahead.
Since March 2022, when the Federal Reserve began its quickest monetary policy tightening campaign in more than 40 years, businesses and consumers have faced 500 basis points of interest rate rises, raising the risk of a slump.
“This provides further reason to suspect that a recession is on the horizon,” said Capital Economics’ deputy chief U.S. economist Andrew Hunter.
The ISM’s manufacturing PMI fell to 46.0 last month from 46.9 in May, the lowest figure since May 2020. The PMI fell below 50 for the eighth straight month, the longest such stretch since the Great Recession.
Reuters polled economists predicted the index rising to 47. Last week, government figures revealed a 5.3% annualized contraction in manufacturing, 11.1% of the economy.
However, demand for transportation, machinery, electrical, and appliance goods remains strong.
The ISM poll found that transportation equipment was the only industry to rise last month. However, transportation equipment manufacturers worried that second-quarter revenues could drop and increase inventory. They expected total end-of-year revenues “to be about where we were last year.”
Manufacturing is also being hurt by spending shifting from commodities to services, which are usually bought on credit.
In expectation of weak demand, companies are carefully controlling inventory. Business inventories expanded at their slowest pace in 1-1/2 years in the first quarter.
After financial market upheaval earlier this year, economists think the sector has yet to experience the credit tightening. Compared to 76% in May, manufacturing GDP decreased 71% in June, according to the ISM. However, additional sectors fell dramatically last month.
Printing, nonmetallic mineral goods, and primary metals grew in June along with transportation equipment. Wood goods, textile mills, electrical equipment, appliances and components, machinery, and computer and electronic items were among the 11 industries that contracted.
Stocks on Wall Street rose. Treasury prices climbed in the US. A basket of currencies held stable against the dollar.
Demand is low
In May, business and consumer hesitancy raised the ISM survey’s forward-looking new orders sub-index to 45.6 from 42.6.
Computer and electronics makers reported that “customers are less inclined to purchase far in advance.” Food, beverage, and tobacco manufacturers stated that “there is an elevated level of capital project review as recession concerns loom.”
Machinery manufacturers said that “orders and business are steady with a healthy backlog, but new prospective orders seem to be getting pushed back into 2024.”
Weak demand is decreasing input prices. As supply chain bottlenecks cleared and rising borrowing costs lowered demand, manufacturers’ prices decreased to 41.8 from 44.2 in the previous month.
Suppliers to manufacturing companies have delivered faster for nine months, according to the ISM. Goods deflation has occurred in the economy. Services inflation, which is currently the main emphasis, has remained sticky due to faster wage growth from a tight labor market and rising housing rentals.
Factory employment fell from 51.4 in May to 48.1 in the poll.
Though the government’s nonfarm payrolls figure has not been a good predictor of manufacturing employment, it corresponds with projections of reduced job growth by year end.
Only three of the large six industry groupings added jobs: machinery, transportation equipment, and food, beverage, and tobacco goods. ISM’s Fiore states that “labor management sentiment at panelists’ companies indicate a slowdown in hiring, with layoffs slightly more prevalent.”
Due to a shortage of homes for sale, housing appears to have steadied and may possibly be recovering while manufacturing is declining.
On Monday, the Commerce Department reported that residential construction spending rose 2.2% in May after falling 0.9% the month before, with single-family home investment rising 1.7%.
That increased construction spending by 0.9% in May after 0.4% in April.
Airbnb’s Demise Won’t Solve America’s Housing Crisis
Original Source: An Airbnb collapse won’t fix America’s housing shortage
Americans are looking for indications of help in the gloomy US home market.
A popular message claimed Airbnb host revenue had plummeted this week. The response to a potentially misleading tweet is more intriguing. Many believed the tax shortage would increase housing supply and lower exorbitant costs. Airbnbs and private equity investment in rental units are merely a minor portion of a larger problem.
Airbnb and another dataset contradict the viral tweet. “The data is not consistent with our own data,” an Airbnb spokeswoman stated, adding that their previous financial report showed more Airbnb travelers than ever before. AirDNA, which scrapes Airbnb data and has direct data from around a million short-term rental units, reported revenue per listing was down 3% after a strong year. Vox asked AllTheRooms, whose data is quoted in the tweet, if the tweet represented their data and how they got it, but they didn’t respond in time.
The main point is that Airbnb’s collapse would not fix America’s housing market. Short-term rentals are only a small part of the US’s out-of-control housing prices.
Even after a tiny dip from a year ago, home prices are near their most expensive on record, with median home payments totaling 41% of median income, according to Federal Reserve Bank of Atlanta data. The Mortgage Bankers Association said homebuying has never been so unaffordable. Housing prices and mortgage rates are to blame.
“It’s a one-two punch of needing to pay a high purchase price and finance it with this very expensive debt,” Zillow senior economist Jeff Tucker told Vox.
Interest rates aside, housing supply is the main cause of rising house prices.
Since the Great Recession, home builders haven’t built enough new homes to meet the expanding population and millennials starting families in their 30s. The pandemic, supply chain challenges, and high borrowing costs have slowed new home construction in the last few years.
“You can’t change the housing stock much in a year. Tucker described it as a gradual process. “We accumulated this deficit acutely over about 10 years, say from 2008 to 2018, and so it would take several years of builders firing on all cylinders to offset that.”
Homeowners not selling their homes also reduces supply. Zillow data reveals a 50% drop in existing house inventory since the epidemic. New listings are down considerably this year.
Housing prices and mortgage rates may explain that fall. Every home has appreciated, even theirs. Current homeowners don’t want to pay higher mortgage rates.
“More mortgage holders have record-low interest rates. “So if you have a mortgage with an interest rate in threes or low fours, you’re less inclined to take on mortgages with rates in the sixes today,” said Harvard’s Joint Center for Housing Studies research associate Alexander Hermann, who recently released a report on the nation’s housing.
Demand has driven housing costs. During the epidemic, many people decided they no longer wanted roommates and needed more space since they worked remotely. According to a recent Economic Innovation Group analysis, that spurred new household forms.
Neither is blaming short-term rentals.
Hermann said short-term rentals will not cause supply issues in most places. “They could worsen them.”
AirDNA analysis of Census data found 144 million US dwelling units and 1.2 million Airbnbs in the first quarter of 2023. The AirDNA chief economist and SVP of analytics, Jamie Lane, deems them a “rounding error” at 0.8 percent of the housing supply.
AirDNA predicts that short-term rentals caused 1–4% of house price increases in recent research.
Even if Airbnb revenue drops, people won’t sell their properties, lowering housing values.
Lane suggested people keep their second residences. “Let’s say they have a ski house in Breckenridge, but instead of using it four weeks a year, they’re putting it into the short-term rental inventory for those other 48 weeks.”
What may boost housing supply and slow price growth?
Hermann advised building more. “How you get that is probably a combination.” Lowering interest rates, construction supply costs, and labor shortages are examples. Additional flexible zoning that allows additional auxiliary housing units on smaller pieces of land would also help.
An Airbnb collapse and a short-term rental market collapse? That won’t solve the housing problem anytime soon.
Summary of today’s construction news
To sum it up, the May data showed that home building was up 2.1% over the previous month. This reflects the lack of available existing homes, which is sustaining prices and has spurred a substantial increase in sales of newly constructed homes.
On the other hand, Investment in single-family home projects increased by 1.7%, contributing to a 2.2% increase in residential construction spending in May, according to a separate report released by the Commerce Department.
At last, an Airbnb collapse and the demise of the short-term rental industry The housing deficit won’t be resolved anytime soon.