USA Construction Spending 2018095 – looking back in time to the 2008 GFC

USA Construction Spending for July recorded +5.8% yr-on-yr growth, which is quite strong growth, and consistent with rates over the past 3-4 months. This is reflecting current ongoing steady and strong economic growth in USA, accelerated somewhat by stimuli from Washington, which have been described by some economists as unnecessary.

What is interesting however is looking back in time and noting that Residential Construction Spending peaked and decisively turned down in February 2006, well ahead of the sharp decline of the global financial crisis (12 September 2008 when short term US interest rates also recorded a dive).  Non-Residential Construction Spending did not peak till November 2008 (roughly when 10 yr bond yields reduced).

Those involved in new house construction had clearly decided to pull back on spending in that segment approximately 18-24 months prior to the financial crisis actually being recognised and hitting the wider markets.  … Surprisingly, much of the market had expressed no great sense of alarm at the time until the September quarter of 2008.

The financial mess that was the loans approval systems, and other financial instruments, related to the USA housing construction sector was truly only a ‘financial’ crisis, (similar in a sense to the 1987 financial crisis, related to over-valuation of shares).

What changed the level of the crisis was when banks no longer had confidence in lending to each other, and for example, stopped issuing letters-of-credit.  The ‘financial‘ crisis then morphed into an ‘economic‘ crisis, as the inability to obtain letters of credit meant that, among other impacts, producers selling mineral concentrates, or other products, who normally obtained a letter of credit to ensure payment upon arrival and receipt of goods, and ship owners who would obtain a letter of credit to ensure payment upon discharge of cargo at destinations, could not get those (bank-backed) letters assuring payments.

The 2008-9 crisis actually stopped trade!  That is where the comparison with the 1987 crash differs; the 1987 trade in products, minerals and metals barely missed a beat, with ‘industry not suffering greatly.  Consequently the somewhat bruised share markets were able to recover in a relatively short few years.

Fortunately the current levels and trends of US housing construction are not suggesting that any crisis is looming

There have been some mutterings about the finance approvals for US vehicle sales, which had recovered faster and further than housing in the USA.   Residential Construction peaked at USD 683,903m in January 2006, and has recovered so far to USD 566,595m as at July 2018.  Housing Starts peaked at 2.3 million units in January 2006, and by May 2018 had recovered to 1.8 million units while Orders-to-Vehicles had peaked in July 2007 at USD 44,810m and as at July 2018 was well past this at USD 60,117m.   (I do not expect that orders to vehicles (part of the Durable Goods manufacture grouping, will include imports).  However I have no further particular insights into vehicle finance approvals in the USA at present.

USA Construction Spending – Residential & Non-Residential. Source: USA Bureau of Census, Matau Advisory