Real Construction on Track to Add 1.24 Percentage Points to 2nd Quarter GDP

In the report on May construction spending (pdf), the Census Bureau estimated that our seasonally adjusted construction spending would work out to $1,035.8 billion annually if extrapolated over an entire year, which was 0.8 percent (±1.5%)* above the revised estimate of a $1,027.0 billion annual rate in April and 8.2 percent (±2.0%) above the estimated adjusted and annualized level of construction spending of May last year, and the highest rate since October 2008.  The April construction spending estimate was revised from $967.9 billion annually to $1,027.0 billion, the March estimate was revised from $984.0 billion to $1,006.35 billion annually, and the February estimate was revised up to $993.465 billion, which together imply a large enough revision to first quarter GDP to turn the quarter positive when the annual revisions are released onJuly 30th.  Private construction spending was at a seasonally adjusted annual rate of $752.4 billion in May, 0.9 percent (±0.8%) above the revised April estimate, with residential spending rising to a seasonally adjusted annual rate of $359.5 billion in May, 0.3 percent (±1.3%)* above the revised April estimate of $358.5 billion, while private non-residential construction spending rose 1.5 percent (±0.8%) to $392.8 billion.  Meanwhile, public construction spending was estimated at a rate of $283.4 billion annually, 0.7 percent (±2.5%)* above the revised April estimated rate of $281.5 billion, with highway and street spending up 2.1% (±6.9%)* while construction spending for public safety was off 7.6% for the month and down 12.9% since last year...

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.  To see how this report of two month's spending might impact 2nd quarter GDP, we must first adjust those varied categories of spending for inflation to give us the quantity of construction in real terms. The National Income and Product Accounts Handbook, Chapter 6 (pdf), lists a multitude of privately published deflators for the various components of non-residential investment, such as the Turner Construction building-cost indices for several types of buildings and the Engineering News Record construction cost index for utilities construction, while they use the Census Bureau construction price indexes for new one-family houses under construction and for new multi-family homes under construction for residential investment.  The later indicates that prices for residential construction fell by 0.1% in April and rose by 0.1% in May, but more appropriately for our purposes, their average is down by 0.8% from the first quarter average; for the other types of construction, we'll simplify our computation and just use the producer price index for final demand for construction, which showed 0.1% increases in both April and May, as well as in each of the preceding months, giving us a quarter over quarter increase of 0.3%.  Note that because the GDP categories for construction spending include brokers’ commissions, title insurance, state and local taxes, attorney fees, title escrow fees, fees for surveys and engineering services, and remodeling not captured by this report, our estimate is limited to the data included in this report.

Using the revised monthly annualized construction spending data for January, February and March from Table 1 of this report, we find that 1st quarter private residential construction spending was at a seasonally adjusted annual rate of $359,009 million, and that comparable inflation adjusted value of April and May residential spending adjusted for inflation would be at a $387,700 million rate, which would mean that real residential construction rose at a 36.0% annual rate so far in this quarter, vis a vis the 1st quarter.  For private non-residential construction, we find that 1st quarter non-residential construction was at a $363,230 million annual rate, while April and May non-residential spending adjusted for 0.1% monthly inflation would give us a rate of $388,821 in chained first quarter dollars, an increase in real non-residential construction at a 31.3% annual rate. Lastly, using just the monthly data in this report, we find that public construction averaged at a $274,383 million annual rate over the 1st quarter, while public construction for April and May adjusted for inflation works out to a $282,431 million annual rate.  Hence, real government investment spending for construction was up at a 12.3% annual rate in April and May over the first quarter.  Finally, for the rate of construction growth we have for these two months, we find that real residential construction would add 0.42 percentage points to 2nd quarter GDP growth, real private non-residential would add .63 percentage points to 2nd quarter growth, and real public construction would add .19 percentage points to 2nd quarter GDP growth in the various government investment components...

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bold claims

We're holding ya to 'em when the report comes out July 30th. ;)

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i showed my work

it's just math, and i have a google calculator link to show how results were arrived at in each case...the caveat, of course, is the complicated inflation adjustments that i took a shortcut estimate on...but the nominal 2.0% increase in April and another 0.8% in May construction spending after a weak first quarter fairly obviously indicate growth at a double digit rate..

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rjs

construction results

while i've got these pdfs open, i'd add how 2nd quarter construction played out...first, real investment in non-residential structures fell at a 1.6% rate and subtracted 0.04 percentage points from the 2nd quarterGDP growth rate; then, real residential investment, growing at a 6.6% rate, added 0.21 percentage points to the the 2nd quarter's GDP, finally, real state and local investment rose at a 10.2% rate and accounted for 0.18 percentage points of growth, while real federal investment ex defense added 0.04 percentage points to GDP..

so, it looks like i was close on real government investment spending for construction, while i was far short on real residential construction and completely missed real investment in non-residential structures...it wasnt a problem with my deflators; residential construction prices fell at a 1.5% rate, while non-residential construction prices fell at a 2.5% rate, so if anything the latter should be higher than what's reported in the construction report...the only thing i can think of that would have caused that much of a difference would be that if this census construction report doesn't include oil & gas rigs, which are included under investment in non-residential structures in the GDP report...rig counts were down by about 18% over the quarter, which doesnt seem to be indicated by energy construction spending here..

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rjs

real investment in non-residential structures

Bill Mcbride on Q2 2015 GDP Details on Residential and Commercial Real Estate The BEA released the underlying details for the Q2 advance GDP report today. Last Thursday, the BEA reported that investment in non-residential structures decreased slightly in Q2. The decline was due to less investment in petroleum exploration. Investment in petroleum and natural gas exploration declined from a $112.5 billion annual rate in Q1 to a $81.1 billion annual rate in Q2. Excluding petroleum, non-residential investment in structures increased at a 6.8% annual rate in Q2 (solid growth).

the construction report shows a small QoQ increase in "power construction", which i had been misled to believe included that oil & gas drilling, which Bill reports down over 20%...that covers a large part of the discrepancy in my estimates...not all of it, but a big part...

 

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rjs

u stand corrected

Mcbride also does his own calculations and he's almost always right.

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