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Construction spending was reported down in November, falling short of its October comparable and surprising economists as well. However, the factor most likely holding up activity in construction and the economy generally at the close of the year has since been mitigated. After crossing the fiscal cliff, construction activity is likely to pick right back up on the same drivers that have gotten us this far: low borrowing rates, attrition of inventory after a period of construction freeze, increasing demand for rental property, a growing population, and an expanding (albeit slowly) U.S. economy.

The Construction Spending Report for November, reported Wednesday, showed a month-to-month decline of 0.3%. That compared poorly to October's growth of 0.7%, though October was revised lower from the initially reported rate of 1.4%. The lull in spending surprised economists; a survey by Bloomberg shows the consensus expectation at +0.6%. The range of economists' views extended from no change to plus 1.0%, with not one economist expecting a decline, which is what materialized.

Construction spending and projects are slow moving ships with paths not easily altered by day-to-day news. However, the fiscal cliff was long-anticipated, far reaching and widely publicized, so it should have been an issue for the construction sector to some degree. Investors and construction firms expected that it would at least impact public spending on infrastructure projects. Thus, the first decline in eight months was greatly driven by a deep decline in spending for federal projects.

Public construction spending was down 0.4% overall and fell 0.5% in the non-residential sub-segment. Thus, the passing away of fiscal fear allowed the shares of engineering and construction related companies to move sharply higher. Jacobs Engineering (JEC), for one, gained 2.8% on the day despite the construction spending data. Spending on private construction fell by 0.2%, but residential construction spending still managed to grow 0.4% privately.

The shares of homebuilders were decidedly higher on the day. The reasons were all fiscal cliff related and extend beyond the income tax issue. Needless to say but necessary to mention, the mortgage interest deduction was untouched and mortgage debt forgiveness on troubled properties retained its tax break for another year, both of which play well for housing. With industry recovery unencumbered by fiscal policy, the SPDR S&P Homebuilders (XHB) gained 2.7% on the day, and the shares of many of the nation's more important publicly traded builders rose even more.

Homebuilders

Day 1 Post Cliff Performance

PulteGroup (PHM)

+2.4%

D.R. Horton (DHI)

+3.1%

KB Home (KBH)

+3.1%

Toll Brothers (TOL)

+3.6%

Beazer Homes (BZH)

+6.1%

Still, spending on commercial projects was also hampered by the fiscal cliff speed bump. Nonresidential private construction declined by 0.7% while overall nonresidential construction fell 0.6%, with spending on office properties down 2.2%. It's safe to say consumer sensitive construction projects on malls and retail operations were hampered by the fiscal cliff fiasco.

Now that the cliff has been greatly mitigated, capital is freed up again for spending on the expansion of business operations, commercial development and housing projects. That said, overall construction spending remains nearly half of what was once considered a healthy level of activity. Though, our prior health was clearly boosted by the synthetic stimulant provided by wrongly rated MBS and a greed driven mortgage push. For the nation to once again reach its full potential economic metrics including unemployment will need to improve substantially, so fiscal stimulus is still needed. Construction should continue to benefit, now that it has been mostly assured.

Source: Construction Post The Cliff Crossing