Construction Spending increases 0.3% in July

Construction Spending Rose 0.8% in July after 2nd Quarter Spending was Revised Higher, RJS, MarketWatch 666

The Census Bureau report on construction spending for July (pdf) estimated that the month’s seasonally adjusted construction spending would work out to $1,568.8 billion annually if extrapolated over an entire year, which was 0.3 percent (±1.2 percent)* above the revised annualized estimate of $1,563.4 billion of construction spending in June and 9.0 percent (±1.5 percent)* above the estimated annualized level of construction spending in July of last year . . . the June construction spending estimate was revised more than 0.7% higher, from $1,552.2 billion to $1,563.4 billion, while the annual rate of construction spending for May was revised more than 0.8% higher, from $1,551.2 billion to $1,564.153 billion . . . on net, those revisions mean that construction during the 2nd quarter was more than 0.5% higher than the figures used in last week’s GDP estimate, which would generate an increase at greater than a 2.0% annual rate, and which would suggest an upward revision of about 0.23 percentage points to 2nd quarter GDP when the third estimate is released at the end of September, assuming the net impacts from the inflation adjustments on the revisions are similar to those we saw in the 2nd estimate . . .

A further breakdown of the different subsets of construction spending is provided in a Census summary, which precedes the detailed spreadsheets:

• Private Construction; Spending on private construction was at a seasonally adjusted annual rate of $1,231.0 billion, 0.3 percent (±0.7 percent)* above the revised June estimate of $1,227.8 billion. Residential construction was at a seasonally adjusted annual rate of $773.0 billion in July, 0.5 percent (±1.3 percent)* above the revised June estimate of $768.9 billion. Nonresidential construction was at a seasonally adjusted annual rate of $458.0 billion in July, 0.2 percent (±0.7 percent)* below the revised June estimate of $458.9 billion.
• Public Construction; In July, the estimated seasonally adjusted annual rate of public construction spending was $337.8 billion, 0.7 percent (±2.1 percent)* above the revised June estimate of $335.6 billion. Educational construction was at a seasonally adjusted annual rate of $79.7 billion, 0.5 percent (±2.3 percent)* below the revised June estimate of $80.1 billion. Highway construction was at a seasonally adjusted annual rate of $94.5 billion, 1.9 percent (±6.4 percent)* above the revised June estimate of $92.7 billion.

Construction spending inputs into 3 subcomponents of GDP; investment in private non-residential structures, investment in residential structures, and into government investment outlays, for both state and local and Federal governments . . . however, getting an accurate read on the impact of July spending reported in this release on 3rd quarter GDP is difficult because all figures given here are in nominal dollars and as you know, data used to compute the change in GDP must be adjusted for changes in price . . . the National Income and Product Accounts Handbook,  Chapter 6 (pdf), lists a multitude of privately published deflators that are used by the BEA for each of the various components of non-residential investment, so in lieu of trying to adjust for all of those different price indices, we’ve opted to just use the producer price index for final demand construction as an inexact shortcut to make the price adjustment needed for an approximate estimate…

That price index showed that aggregate construction costs were up 1.5% in July, after rising 0.7% in June and rising 0.6% from April to May . . . on that basis, we can estimate that July construction costs were roughly 2.2% more than those of May and more than 2.8% more than those of April, and obviously 1.5% more than those of June . . . we then use those percentages to inflate the lower priced spending figures for each of those months, which is arithmetically the same as deflating higher priced July construction spending, for comparison purposes . . . annualized construction spending in millions of dollars for the second quarter months is given as 1,563,463 for June, 1,564,153 for May, and 1,553,547 for April, while it was at 1,568,834 million in July . . . thus to compare July’s inflation adjusted construction spending to that of the first quarter, our arithmetic formula becomes: 1,568,834 / (((1,563,463 * 1.015) + (1,564,153 *1.022) + 1,553,547 * 1.028) / 3) = 0.98410, meaning real construction spending in July was down 1.59% vis a vis the 2nd quarter, or down at a 6.4% annual rate . . . to figure the effect of that change on GDP, we take the difference between the inflation adjusted second quarter spending average and that of July and take that result as a fraction of 2nd quarter GDP, and find that aggregate July construction spending is falling at a rate that would subtract approximately 0.62 percentage points from 3rd quarter GDP should we see no improvement from July’s adjusted figures in August or September . . .