Quick Thoughts – Construction Spending
Some interesting data on construction spending emerged from this morning’s release from the Census Bureau;
- We focus on private construction spending, rather than total (obviously, total less public = private) as private tends to be more volatile and more revealing from a broader macro perspective, as well as the fact that private construction spending represents the bulk of the total;
- For the first time since April 2012, spending on improvements (essentially larger projects – finishing a basement, new kitchen, etc.) declined on a year over year basis – (2.4%) (Exhibit 1), still up slightly on a two-year basis. Now, one data point does not a trend a make, but it still is worth pointing out;
- Similarly worth noting, non-residential construction has picked its head up a bit (+10.7%), against admittedly easy comparisons, as the two-year trend remains lackluster (+3.7%).
- While negative for the month of May, improvement spending does appear to be contained within the broader, positive trend highlighted in Exhibit 2.
- The NAHB Remodel Index is still in expansion mode (Exhibit 3), but the direction of the “swirlogram” isn’t particularly constructive.
The underlying driver of home improvement spending that we have discussed in the past remains directionally positive – home prices (Exhibit 4):
- This morning’s CoreLogic Home Price Index indicated an 8.8% national increase in home prices year over year in May (+1.4% sequentially);
- This is a moderation from April, where prices increased 10.5% year over year;
- Similarly, prices are expected to moderate further in June, with preliminary CoreLogic data indicating a 6% rise.
We see this moderation in the rate of increase of home prices as consistent with our housing thesis outlined in our prior work, where we indicated that we thought much of the froth was out of the housing market, and home prices were in a position to increase more in line with historical drivers – employment, household formation, and disposable income (Exhibit 5).
For the moment, we remain constructive on both LOW and HD; both have been solid, low volatility names, particular when cast in comparison to the balance of consumer discretionary. Business momentum has been good to very good and well-supported by the underlying trends that we have discussed – the data point on improvement spending highlighted above bears watching, however as both names are likely widely held.