As a new month begins, economic data on every aspect of the U.S. and world economy keeps pouring in. After a couple of weeks of looking at everything from gross domestic product to the index of leading economic indicators, you've covered a lot of ground. You may have noticed that although various releases of data have different names, many of them share common attributes and subject matter. In order to synthesize all the information you read into a coherent whole, you have to see the subtle differences among the various reporting agencies and groups, along with the slight variations in coverage area that different sets of data provide. By looking at the economy from every angle, you may pick up nuances that you'd miss if you restricted your analysis to a single set of data.
For example, you've already seen a couple of articles dealing with the cooling real estate sector. Data on new-home construction and sales of existing homes focus primarily on elements of the market for single-family residential housing, with some additional information on other types of dwellings like multi-family condominium and co-op buildings. However, residential construction is only part of the overall construction industry. Relying only on housing data would leave you with only half of the big picture.
The Census Bureau fills in some of the blanks in the overall construction picture by providing its monthly report on overall construction spending. As this article discusses in more detail, the construction spending report takes a much broader look at the construction industry, examining overall trends that go beyond residential housing. Although the housing industry is particularly interesting to American homeowners, and therefore gets a lot of attention, other aspects of construction activity can confirm or contradict inferences drawn from specific data on housing.
The basic concept
The Census Bureau presents a broad picture of the overall construction industry, providing data on how much money private companies and certain government bodies spend on various types of projects. The survey includes spending information not only on single-family residences, but also on other projects that span the spectrum of construction: hotels and other lodging facilities, office space and commercial buildings, health-care and educational facilities, buildings used for religious purposes, recreational projects, transportation and power projects, manufacturing facilities, and construction related to providing public services like water and sewers. These categories are further broken down according to whether the project has been commissioned by a private owner, by the federal government, or by a state or local government entity.
To gather this information, the Census Bureau follows a similar methodology to the way it collects data on new home construction. For the portion of the construction spending data dealing specifically with residential construction, the Census Bureau essentially borrows the data it already collected to come up with its new-home construction numbers. Information on multi-family residential construction is obtained in much the same way. Surveys are conducted to gather data on improvements to existing structures. For private non-residential construction, the Census Bureau relies on information gathered by McGraw Hill (NYSE:MHP), a private information-services company, and conducts a limited amount of independent analysis and surveying to fill in gaps in the data. Information on farm-related construction and utility projects is drawn from the Department of Agriculture and other state and federal agencies that have oversight responsibility for those areas.
Economic implications
The first thing that stands out in the latest release of construction spending data: While residential construction has slowed noticeably in the past year, nonresidential construction has only recently started to top out. Even though residential construction spending has decreased significantly from year-ago levels, nonresidential construction has risen more than 17% from last year. As a result, overall spending on construction projects has stayed relatively flat over the past several months, and it's up between 4% and 5% from last year's levels.
Note also that growth in nonresidential construction is broad-based, not centered in one or two specific industries. While lodging-related construction has exploded in the past year, several other categories, such as office buildings, recreational facilities, highway and street construction, power projects, and manufacturing facilities all show strong gains as well.
In addition, the breakdown of spending between the private and public sectors gives some insight on where money is coming from for these projects. Many economists believe that while public spending can temporarily improve economic conditions, the private sector must eventually follow suit in order to sustain any lasting recovery. Although the current report shows growth in spending on public projects rising at a faster rate than spending on private projects, both have seen strong growth in the past year, and both have slowed down at similar rates.
For investors, information on overall construction spending can open up a world of potential ideas for investment. Construction engineering firms like Tetra Tech (NASDAQ:TTEK) and Washington Group (NASDAQ:WGII) benefit from high levels of construction spending. Sellers of construction materials, such as Texas Industries (NYSE:TXI) and Vulcan Materials (NYSE:VMC), also stand to gain when spending levels rise.
In summary, there is much more to the construction industry than just single-family residential housing. By using the Census Bureau's construction spending report, you can identify trends and countertrends in construction and use your conclusions to improve your understanding of the overall economy and to inform your personal investment decisions.
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Fool contributor Dan Caplinger's experience with construction ended when his Legos went into the closet for good. He doesn't hold positions in any of the companies mentioned in this article. The Fool's disclosure policy helps build your confidence.
