U.S. construction spending drops unexpectedly in August, residential investment may resume growth in H2

Construction spending in the U.S. dropped surprisingly in August, against the consensus forecasts. Spending fell 0.7 percent in the month, as compared with consensus expectations of a rise of 0.3 percent. Moreover, previous months’ data were downwardly revised, leaving construction spending in decline for the initial two months of the third quarter, said Barclays in a research note. Construction spending in July was downwardly revised to a drop of 0.3 percent sequentially from the initial estimate of 0 percent. This was mainly due to subdued private non-residential spending and overall government construction spending.

Delving in August report details, single family construction spending dropped 0.9 percent sequentially, as compared with earlier drop of 0.3 percent, whereas home improvement declined 0.3 percent after rising 1.9 percent in the prior month.  This countered a strong rise of 2.4 percent month-on-month in multi-family construction spending. Private non-residential construction also declined in the month, falling 0.4 percent sequentially after rising 1 percent earlier. Private non-residential construction for July was downwardly revised, implying a more subdued picture than reported earlier, noted Barclays.

Public sector construction continued to be subdued in August, declining 2 percent month-on-month. It declined strongly at the state and local level. Non-residential spending was mainly responsible for the weakness in the public sector, declining 2.1 percent month-on-month.

In all, the August report implies that private investment made a soft start to the third quarter, predominantly due to the disappointing non residential construction spending both at the private and government levels.

“We expect residential investment to resume its expansion in H2 as the drag from single family and multifamily home construction fades, but today’s data imply downside risks to our expectations”, added Barclays.

The August data indicates less private non-residential structures investment and government spending in the third quarter. Residential private investment came in slightly above Barclays’ projections as multifamily and home improvement data were more robust in August and were upwardly revised for June and July.

“On net, our Q3 GDP tracking estimate moved lower to 2.5 percent from 2.6 percent, after rounding”, said Barclays.