Why We Should Feel Better About Today’s Industry Reports

The long weekend is over — and we’re moving from Labor Day to bad labor news, if you’re a member of the residential building workforce.

The Commerce Department announced today that residential housing spending again declined in July, falling 1.4 percent — the sharpest drop since January.

Residential spending has now fallen 15.6 percent from July 2006 to 2007
— a situation that is even more serious considering that residential spending had actually fallen consistently before that period, for a record 17 consecutive months, according to Forbes.

And … it’s widely expected to decline further before the year ends.

Yet residential sector investors and workers aren’t the only ones grimacing anymore. In July, the intense residential drop caused overall construction spending to fall 0.4 percent.

Non-residential construction had long supported the construction industry, offsetting much of residential’s decline. Today’s released results indicate the residential sector is really starting to bleed into
construction as a whole, and as other sectors start hurting, there’s concern that the
economy may follow.

Whispers about a possible recession have been rampant in the industry for months now –but did today’s announcement indicate that all hope is not lost?

  • The Commerce Department reported that government construction spending actually increased — by 0.7 percent. The Wall Street Journal reported that state and local spending rose 0.8% to $269.6 billion in July. State and local building spending is typically significantly greater than federal construction; to see a positive increase in local spending is a good sign.
  • U.S. manufacturing expanded at a slower pace in July, but activity was still high enough to indicate positive activity in the sector. The index of manufacturing activity, created by the private research study group Institute for Supply
    Management, was 52.9
    in August, compared to 53.8 in July and 56.0 in June, according to the Wall Street Journal. That’s significant, considering the index considers any reading over 50 to show an expansion of activity — indicating this sector is still showing healthy performance.
  • Increased jobs imply a strong, possibly rising, economy. ISM also reported that factory hiring increased in July, with an employment index of 51.3, up from 50.2 in June.

The manufacturing industry’s influence should not be understated. The sector accounts for 10.8 percent of all U.S. employment, according to the U.S. Department of Labor. Manufacturing also employs 61 percent of workers in the good-producing sector — which includes construction.

Manufacturing activity has risen from 34,240 in July 2006 to 36,569 this past July, according to U.S. Census Bureau data. If manufacturing has been able to stay strong despite the continued downward spiral of the residential market — and drops in other construction areas such as private-sector construction, which fell 0.7 percent in July and 0.2 percent in June — it stands to reason the construction industry, and the economy itself, may weather this storm.

It’s not over yet — we’re all still looking for the sun on the horizon. But seeing one part of the economy — one that can really indicate economic growth, or the lack thereof — solidly maintaining itself offers some hope on an otherwise bleak Tuesday. (Makes you wish you were back at last weekend’s BBQ, doesn’t it?)