January’s construction spending, February’s CFNAI, et al

It appears that the January report on Construction Spending was the only widely watched economic report released last week, not surprising given the 13 monthly releases over the prior two weeks, and as we are still lagging a normal schedule on about half of the usual monthly releases in the wake of last October’s shutdown…this week also saw the Chicago Fed National Activity Index (CFNAI) for February, a weighted composite index of 85 different economic metrics, which fell to –0.11 in February from +0.20 in January..…even with that February decrease, the more widely watched 3 month average of the CFNAI increased to –0.01 in February from –0.02 in January, which, as a negative figure near zero, indicates that national economic activity has been near the historical trend over the winter months..

The week also saw the results of two more regional Fed manufacturing surveys for March…the Richmond Fed Survey of Manufacturing Activity, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, reported its broadest composite index increased to 0 in March from −10 in February, with that zero reading meaning that the region’s manufacturers were evenly split between those who reported improving conditions and those who saw deteriorating conditions in March, after a modest plurality thought things were getting worse in February….meanwhile, the Kansas City Fed manufacturing survey for March, covering western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, reported its broadest composite index came in at +11 in March, up from +5 in February and up from 0 in January, indicating that a larger plurality of that region’s manufactures saw improving conditions than in the earlier months…

Construction Spending Fell 0.3% in January after December Spending Was Revised 1.3% Higher

The Census Bureau’s report on January construction spending (pdf) estimated that January’s seasonally adjusted construction spending would work out to $2,190.4 billion annually if extrapolated over an entire year, which was 0.3 percent (±0.5 percent)* below the revised annualized estimate of $2,197.6 billion for construction spending in December, but 1.0 percent (±1.0 percent)* above the estimated annualized level of construction spending of January last year…the December spending estimate was revised from the $2,168.8 billion annual rate figure published a month ago to a $2,197.6 billion rate, while November’s annualized construction spending estimate was revised from $2,163.1 billion to $2,181.2 billion…since those figures are already annualized, the combined upward revisions of $46.9 billion to November and December construction spending figures would be averaged over the 3 months of the 4th quarter and therefore raise the quarter’s annualized construction spending rate by about $15.6 billion across the GDP components it is source data for, and would thus imply an upward revision of about 0.29 percentage points to fourth quarter GDP when the third estimate is released at the end of March, assuming there are no major changes to or imbalances in the previously applied inflation adjustments…

A further breakdown of the different subsets of construction spending is provided in a Census summary, which precedes the detailed spreadsheets:

• Private Construction – Spending on private construction was at a seasonally adjusted annual rate of $1,661.2 billion, 0.6 percent (±0.5 percent) below the revised December estimate of $1,671.6 billion. Residential construction was at a seasonally adjusted annual rate of $933.0 billion in January, 0.8 percent (±1.3 percent)* below the revised December estimate of $940.2 billion. Nonresidential construction was at a seasonally adjusted annual rate of $728.2 billion in January, 0.4 percent (±0.5 percent)* below the revised December estimate of $731.4 billion.
• Public Construction - In January, the estimated seasonally adjusted annual rate of public construction spending was $529.2 billion, 0.6 percent (±1.0 percent)* above the revised December estimate of $526.0 billion. Educational construction was at a seasonally adjusted annual rate of $114.1 billion, 0.2 percent (±1.5 percent)* below the revised December estimate of $114.4 billion. Highway construction was at a seasonally adjusted annual rate of $148.5 billion, 3.3 percent (±2.6 percent) above the revised December estimate of $143.8 billion.

As you can tell from that summary, construction spending would input 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…however, getting an accurate read on the impact of January’s construction spending reported in this release on 1st quarter GDP is difficult because all figures given here are in nominal dollars and as you know, data used to compute the change in GDP must be adjusted for changes in price…moreover, there are multiple price indexes for different types of construction listed in the National Income and Product Accounts Handbook, Chapter 6 (pdf), so in lieu of trying to adjust for all of those types of construction separately, we’ve opted to just use the producer price index for final demand construction as an inexact shortcut to make an aggregate price adjustment and come up with an estimate… that index showed that aggregate construction costs were up 1.1% in January, after they had fallen by 0.1% in December but were unchanged in November…

On that basis, we can estimate that January construction costs were roughly 1.0% more than those of November, and also about 1.0% more than October, and of course, 1.1% more than December….we’ll then use those percent increases to inflate the lower priced spending figures for each of the 4th quarter months and compare them to January, which is arithmetically the same as deflating January construction spending, for purposes of comparison.…this report gives annualized construction spending in millions of current dollars for the 4th quarter months as $2,197,580 in December, $2,181,160 in November, and $2,167,944 in October….thus to compare January’s annualized construction spending of $2,190,424 million to ‘inflation adjusted’ figures of the fourth quarter, our calculation is: (2,190,424 / ((( 2,197,580 * 1.011) + (2,181,160 * 1.010) + (2,167,944 *1.010)) / 3) = 0.9934874, hence indicating that adjusted for inflation, construction spending in January was down 0.65% vis a vis that of the 4th quarter, or down at a 2.58% annual rate….to then figure the potential effect of that estimated change on GDP, we take the difference between the 4th quarter “inflation adjusted” spending average and January’s inflation adjusted basis as a fraction of inflation adjusted 4th quarter GDP, and find that January’s construction spending was falling at a rate that would subtract about 0.27percentage points from 1st quarter GDP, if in the unlikely event we see no further change in real construction over the next two months..

(the above is the synopsis that accompanied my regular sunday morning news links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion…if you’d be interested in receiving my weekly emailing of selected links, most of which are chosen from the aforementioned GGO posts, contact me…)