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Construction Spending May Raise Question About Housing Market Strength

 April 03, 2012 09:54 AM

Construction spending dropped more than expected in the U.S. for February on top of a downward revision for January. The latest data from the U.S. Commerce Department comes on the heels of unimpressive housing stats last week; although it did offer signs of optimism. This will raise the question of the strength of the housing market revival.

One thing seems clear from the data, the numbers don't suggest a ton of upside or offer any significant downside. The housing data might have come below estimates, but nothing to indicate anything drastic.

Construction spending data is one such an example. February data provided a contraction of 1.1 percent after January's revised 0.8 percent drop. Significantly, non-residential was the largest drag on February's results. A Bloomberg survey estimated that construction spending would increase by 0.6 percent for February.

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Residential construction spending witnessed a flat reading for February, following a modest fall of 0.1 percent in January. However, nonresidential spending dropped 1.6 percent in February as it continued to soften.

Home improvements rebounded in February following two months of dropping. In a research note to clients, Wells Fargo believes that the unseasonably warm weather may have driven remodeling activity earlier than expected in the year.

In the last week's data, pending home sales slipped in February, but remained near a one-year high suggesting that the housing market is showing improvement, but still below their earlier peak.

Although the S&P Case-Shiller Home Price Index index touched a new cyclical low in January, it was the smallest decline since last July.

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After a 0.1 percent rise in January, public construction slowed and offered 1.7 percent downside in February. This is due to ongoing local budget pressures continuing to limit spending in this space.

Moving ahead, Wells Faro sees further cuts in spending for local municipalities as a result of local governments remaining under budgetary pressure, whereas the Federal government plans to rein in spending during the next couple of years. While spending from Federal government increased 1.9 percent, state and local governments construction spending fell 2.1 percent.

Housing prices are witnessing downside pressure as more foreclosures compete for home buyers. This could potentially disallow builders from initiating fresh projects.

According to a report published by Bloomberg, there is an exaggerated logic suggesting that housing may see recovery. This is because people still lack the confidence to buy houses and are renting instead. This could benefit home construction firms, but does not indicate consumer enthusiasm.

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