Housing Companies Stand Strong Despite Big Construction Spending Disappointment

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The U.S. Department of Commerce reported that construction spending was down 1.3% in June from May, and May’s report was revised to a gain of 0.3% from a flat 0.0% estimate reported a month ago. Bloomberg had a consensus estimate of a gain of 0.5% in June, and Reuters was calling for a gain of 0.4%. What was surprising was that the key exchange traded funds tracking homebuilders reacted favorably to the report, even if the home improvement retailers were weak following this report.

Where things looked a tad better in the Commerce Department’s construction spending report was in the annual number. This was up by 1.6% in June of 2017 from June of 2016. That being said, the larger preliminary report of 4.5% growth in construction spending from May was revised lower to a gain of 3.8%.

To put this in context of real world dollars, June’s construction spending was estimated at a seasonally adjusted annual rate of $1.2058 trillion.

Construction spending can be altered by many issues, and the report can be volatile to the point that it can look great in bad times or awful in good times. That being said, this was expected to be the first preliminary report of growth in construction spending since March. Residential spending is the drag and may actually lower the revision for second quarter GDP.

Spending on private construction was down 0.1% at a seasonally adjusted annual rate of $940.7 billion. The private sector reading was as follows:

  • Residential construction was at a seasonally adjusted annual rate of $502.9 billion in June (−0.2%).
  • Nonresidential construction was at a seasonally adjusted annual rate of $437.8 billion (+0.1%).

Public construction spending was down by 5.3% at a seasonally adjusted rate of $265.1 billion. This was broken down as follows:

  • Educational construction was at a seasonally adjusted annual rate of $67.5 billion (−5.5%).
  • Highway construction was at a seasonally adjusted annual rate of $82.4 billion (−6.6%).

Investors do not always hone in on the construction spending reports because they have a one-month look-back and because some of the data is already seen from the public homebuilders. And about two-thirds of the weighting of gross domestic product comes from consumer spending.

The iShares U.S. Home Construction ETF (NYSEMKT: ITB) actually rose after this economic number. It was last seen up by 1% at $34.20, in a 52-week range of $25.16 to $34.88. The iShares U.S. Home Construction ETF has top holdings that are not entirely made of homebuilders, but they are all tied directly to housing: D.R. Horton, Lennar, NVR, PulteGroup, Toll Brothers, Home Depot, Lowe’s, CalAtlantic, Sherwin-Williams and TRI Pointe.

The SPDR S&P Homebuilders ETF (NYSE: XHB) was also up after the report, but only by 0.4% at $38.50. The SPDR S&P Homebuilders has a 52-week range of $30.92 to $39.22. Its top holdings also are not entirely just homebuilders and its holdings are less concentrated by weight. They are PulteGroup, Toll Brothers, Fortune Brands Home & Security, Johnson Controls, D.R. Horton, Lennar, Masco, Mohawk Industries, Home Depot and Whirlpool.

Shares of Home Depot Inc. (NYSE: HD) were last seen down five cents at $149.53, in a 52-week range of $119.20 to $160.86. Home Depot’s market cap of $178 billion comes with a 2.4% dividend yield and is larger than many other home-building and construction-related companies combined. Lowe’s Companies Inc. (NYSE: LOW) was last seen trading down 0.4% at $77.07, versus a 52-week range of $64.87 to $86.25. Its market cap of $65 billion is less than 40% of rival Home Depot.

Toll Brothers Inc. (NYSE: TOL) is a top 10 holding in both of the ETFs, and its shares were last seen up 0.7% at $38.87. The 52-week range is $26.65 to $41.07, and it has a $6.4 billion market cap.

D.R. Horton, Inc. (NYSE: DHI) was last seen up 0.5% at $35.87, in a 52-week range of $26.69 to $37.44. Its market cap is almost $13.5 billion.

Lennar Corp. (NYSE: LEN) was last seen up 0.3% at $52.59, and it has a $12 billion market cap. The 52-week range is $39.68 to $55.75.