Construction Market Still Going Strong

Growth in spending bodes well for processors serving the housing market.

When we last looked at the construction market in December, housing permits were growing rapidly, jumping to a 10.4% growth rate in August from 4.7% in March 2015. Both residential and total construction spending were growing even more rapidly. Where is the construction market headed now? Let’s take a look at the key indicators.

Real 10-Yr Treasury Rate. The real (inflation-adjusted) 10-yr Treasury bond rate was 1.49% in March 2016. This was the second-lowest level for the real rate since May 2015, and it was the second month in a row that the real rate was below 1.5%. Since the Federal Reserve announced it was raising its overnight rate late last year, the real 10-yr Treasury rate actually dropped in each of the next four months. Apparently, the market does not see things the same way as the Fed. The year-over-year change in the real 10-yr Treasury rate decreased for the third consecutive month, indicating the rate of increase in interest rates is slowing down. In fact, the year-over-year change in the 10-yr Treasury rate was at its slowest rate of increase since June 2015. This trend in the 10-yr Treasury tends to be a positive sign for the construction market.

Housing Permits. There were 97,700 housing permits filed in March 2016. Compared with one year ago, housing permits increased 7%. This was the fifth month in a row that housing permits increased month over month, but it was virtually the slowest rate of growth for those five months. The annual rate of growth has continued to accelerate since we last looked at housing permits; the rate of growth increased to 11.7% in March 2016 from 10.4% in August 2015. While the monthly rate of growth has clearly slowed, if the year-over-year change in interest rates continues to slow, then it’s possible that there could be some further acceleration in housing permits.

Total Construction Spending. Unlike housing permits, which appear to have hit their peak rate of growth, total construction spending continues to grow faster and faster each month. The month-over-month rate of change has grown at least 17% for 12 consecutive months, which is an unprecedented run of growth for records going back to at least 1970. While the month-over-month rate of growth has slowed somewhat in recent months, the growth rate was still incredibly fast historically. The annual rate of growth has accelerated every month since February 2015. In February 2016, the annual rate of growth was 19.7%, which was easily the fastest rate of growth in total construction spending on record. Residential construction spending was growing at an even faster annual rate, although the rate of growth does appear to have peaked in December 2015.

Bottom line? Plastics production for the commercial and residential construction markets should continue to be quite strong.

ABOUT THE AUTHOR

Steven Kline Jr. is part of the fourth-generation ownership team of Cincinnati-based Gardner Business Media, which is the publisher of Plastics Technology. He is currently the company’s director of market intelligence. Contact: (513) 527-8800  email:skline2@gardnerweb.com 
blog: gardnerweb.com/economics/blog