February 2018 Economic Update

Construction Spending Rises; Economics Panel Predicts Housing Market; Great Lakes Stone Shipments.

The U.S. Census Bureau announced that construction spending was estimated at a seasonally adjusted annual rate of $1,257.0 billion, 0.8 percent (±1.2 percent) above the revised October estimate of $1,247.1 billion. The November figure is 2.4 percent (±1.5 percent) above the November 2016 estimate of $1,227.0 billion. 

During the first 11 months of this year, construction spending amounted to $1,138.3 billion, 4.2 percent (±1.0 percent) above the $1,091.9 billion for the same period in 2016.

Public Construction

In November, the estimated seasonally adjusted annual rate of public construction spending was $292.7 billion, 0.2 percent (±2.0 percent) above the revised October estimate of $292.0 billion. Highway construction was at a seasonally adjusted annual rate of $88.0 billion, 0.8 percent (±4.6 percent) below the revised October estimate of $88.7 billion.

Private Construction

Spending on private construction was at a seasonally adjusted annual rate of $964.3 billion, 1.0 percent (± 1.0 percent) above the revised October estimate of $955.1 billion. 

  • Residential construction was at a seasonally adjusted annual rate of $530.8 billion in November, 1.0 percent (±1.3 percent) above the revised October estimate of $525.3 billion. 
  • Nonresidential construction was at a seasonally adjusted annual rate of $433.5 billion in November, 0.9 percent (± 1.0 percent) above the revised October estimate of $429.7 billion.

“The November report represented a stark reversal of preexisting trends,” said Associated Builders and Contractors (ABC) Chief Economist Anirban Basu. “For much of the past several years, the pattern in nonresidential construction spending has been one in which a number of private categories expanded briskly, including lodging and office, while a host of public construction categories experienced sluggish  spending. That changed in November, with public construction spending rising and private construction spending shrinking on a year-over-year basis. 

“There are several possible explanations, including growing concerns about overbuilding in a number of large metropolitan areas in the lodging, office and commercial categories,” said Basu. “Financiers may also be less willing to supply financing to a variety of private projects given such concerns. At the same time, the U.S. housing market is the strongest it has been in at least a decade, raising sales prices and expanding assessable residential tax bases. That in turn has supplied additional resources for infrastructure. Over the past year, this has been particularly apparent in the educational and public safety categories.”  

Economic Panel Predicts

The newly enacted tax law will create a more favorable tax climate for the business community, which should spur job and economic growth and keep single-family housing production on a gradual upward trajectory in 2018, according to economists speaking at the National Association of Home Builders (NAHB) International Builders’ Show.

“We expect that tax reform will boost GDP growth to 2.6 percent in 2018, and this added economic activity will also bode well for housing, although there will be some transition effects in high-tax jurisdictions,” said NAHB Chief Economist Robert Dietz. “Ongoing job creation, expected wage increases and tight existing home inventory will also boost the housing market in the year ahead.”

However, builders will continue to deal with ongoing supply-side headwinds this year that will dampen more robust growth. These factors include an increasing number of unfilled construction jobs, a shortage of buildable lots, and a slow growth in acquisition, development and construction loan activity that is failing to keep pace with rising demand.

In addition, regulatory costs stemming from building codes, land use, environmental and other rules have jumped 29 percent in the past five years, and this has had a significant impact on housing affordability. The ongoing U.S.-Canada softwood lumber trade dispute is further exacerbating the situation, as the price of softwood lumber has increased 20 percent from a year ago.

The Forecast

As the economy continues to strengthen, NAHB expects 30-year fixed-rate mortgages will average 4.31 percent in 2018 and 4.82 percent in 2019.

NAHB is projecting 1.21 million total housing starts in 2017 and expects overall production to grow an additional 2.7 percent this year to 1.25 million units.

Single-family starts are expected to rise 5 percent in 2018 to 893,000 units and increase an additional 5 percent to 940,000 next year.

Setting the 2000-2003 period as a benchmark for normal single-family housing activity when single-family production averaged 1.3 million units annually, single-family starts are expected to gradually rise from 63 percent of what is considered a typical market in the third quarter of 2017 to 73 percent of normal by the fourth quarter of 2019.

On the multifamily side, NAHB is expecting multifamily starts to edge 1.6 percent lower this year to 354,000 units from a projected 360,000 total in 2017. This is a sustainable level due to demographics and the balance between supply and demand.

Meanwhile home remodeling is posting strong market conditions, due in part to strong demand in the wake of the terrible hurricane and wildfire season in 2017. Residential remodeling activity is expected to register a 7 percent gain in 2018 over last year.

Healthy Housing Markets

Delving beneath the national numbers, David Berson, senior vice president and chief economist, Nationwide Insurance, said the vast majority of local housing markets are healthy and faring well.

Berson lists 324 markets as positive, 69 as neutral and just seven as negative. While job gains, household formations and mortgage markets still look good, he noted that rapid price increases are concerning.

Comparing current conditions with the housing boom a decade ago, Berson noted that the market is supply constrained today, but wasn’t during the boom. And mortgage credit, while more readily available than just a few years ago, remains far limited relative to the market peak in 2007.

While he anticipates a slightly more rapid rise in mortgage interest rates this year, Berson said it should not hurt housing activity.

“Mortgage rates are expected to rise from 4 percent to 4.5 percent by the end of year,” he said. “However, housing demand remains strong and wages are solid, and this will more than offset the negative effects from rising rates.”

Home Prices Up

CoreLogic Chief Economist Frank Nothaft also expects mortgage interest rates and home prices to post moderate increases in 2018, which in turn will lessen housing affordability.

Like Berson, Nothaft expects that the benchmark 30-year fixed-rate mortgage will average 4.5 percent by the end of the year.

“Higher rates are not just a gradual erosion of affordability, but also impact owner mobility,” said Nothaft. “That has implications on the overall inventory for sale. Supply has been tight and for-sale inventory will continue to remain tight.”

The ongoing tight inventory in the housing market will cause home and rent price growth to outpace inflation, he added, with nationwide home prices rising an average 5 percent and rental prices posting a 3 percent increase.

The biggest growth for new home sales are occurring in the South and West, where many of these metro areas have good job growth, good affordability and good weather. Nothaft listed Houston, Dallas, San Antonio, Austin, Phoenix, Atlanta and Charlotte as the top seven major markets in terms of new home sales.

Meanwhile, he reported that overall mortgage delinquency and foreclosure rates are at their lowest levels in more than a decade, but that is a different story for markets pummeled by last year’s devastating hurricanes.

“Houston’s delinquencies almost doubled year-over-year and that is due almost entirely to Hurricane Harvey,” said Nothaft.

Great Lakes Limestone Shipments

Shipments of limestone on the Great Lakes totaled 28 million tons in 2017, an increase of 6.4 percent compared to 2016, according to the Lake Carriers’ Association (LCA). The 2017 loadings were also 2.1 percent above the trade’s five-year average.

Loadings from U.S. quarries totaled 23.2 million tons, an increase of 8.4 percent compared to 2016. Shipments from U.S. quarries also inched passed their five-year average.

Shipments from Canadian quarries totaled 4.85 million tons, a decrease of 2.1 percent from 2016, but 10.4 percent better than their five-year average. 

LCA represents the U.S.-flag Great Lakes fleet, which can annually move more than 90 million tons of cargos that are the foundation of American manufacturing, power generation, and construction: iron ore, limestone, coal, cement and other dry bulk materials such as grain and sand. 


Value of Construction Put in Place, Seasonally Adjusted

(Spending on Highways)

Month Millions of Dollars
November 2017 88,223
October 2017 88,911
September 2017 86,516
August 2017 84,753
July 2017 85,570
Source: U.S. Dept. of Commerce