Stock Market Today: Declines for U.S. Construction and ISM

Today’s late-morning U.S. reports revealed a big undershoot for construction spending through May, with annual revisions that raised recent levels but that weakened the trajectory into Q2, alongside a small June ISM drop to what is still a solid 60.6 level. For construction, we now expect growth at just a 1% rate in Q2, after a 16.0% (was 9.1%) pace in Q1.

For the ISM, the index is oscillating just below the 37-year high of 64.7 in March, while the jobs index fell below 50, to a 7-month low of 49.9.

Prices paid surged to a 42-year high of 92.1 from 88.0 however, leaving the index just below the 93.1 reading in July of 1979, though well below the record high of 100.0 in June of 1950. Because of the weak construction data, we lowered our Q2 GDP estimate to 7.6% from 7.8% and left our Q3 GDP estimate at 7.0%, after the 6.4% Q1 rate.

  • Construction spending fell -0.3% in May after upward revisions.
  • Private residential “new” construction rose 0.6% after upward revisions.
  • Private residential home improvement fell -0.6%, after big upward revisions.
  • Private nonresidential construction fell -1.1% after upward revisions.
  • Public construction fell -0.2% after downward revisions.
  • The ISM slipped to 60.6 in June from 61.2, versus a 37-year high of 64.7 in March that was last seen in 1983.
  • The ISM jobs index fell to a 7-month low of 49.9 from 50.9 in May, versus a 3-year high of 59.6 in March.
  • ISM Prices paid surged to a 42-year high of 92.1 from 88.0 in May and a prior 13-year high of 89.6 in April.
  • New orders fell to 66.0 from 67.0, versus a 17-year high of 68.0 in March.
  • New export orders rose to 56.2 from 55.4, while imports rose to 61.0 from 54.0.
  • The weekly Langer consumer comfort index fell to 55.1 from a cycle-high 56.9, versus a 54.8 average in May.

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Construction Spending

Construction spending undershot estimates with a -0.3% May drop, after upward revisions in the levels for all the major components except public construction. We now have gains of 0.1% (was 0.2%) in April and 1.0% in March. The revisions leave reported upward adjustments in six of the last seven reports. Yet, revisions extended back to 2014, and though the recent levels of construction were raised, the trajectory into Q2 is now weaker.

Today’s -0.3% construction spending rise tracked a -0.5% May construction hours-worked drop with a -20k payroll decline, after respective April swings of 0.1% (was 0.2%), -0.9%, and -5k, and March gains of 1.0%, 4.4%, and 93k.

All of the housing sector data have proven disappointing since pull-backs for most measures in February. Capacity constraints seen via shortages of labor, construction materials, and buildable land have capped new and existing home sales, alongside a restrained path for housing starts and permits. Heightened mortgage rates have restrained demand, alongside a reluctance of households to put homes on the market despite soaring home prices.

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Construction spending is poised for a 1% growth rate in Q2, after rates of 16.0% (was 9.1%) in Q1, 10.4% (was 20.1%) in Q4, and 2.7% (was 10.9%) in Q3. We expect an 6% 2021 rise, after growth of 5.8% (was 4.7%) in 2020.

We expect a 14% growth rate for new home construction in Q2, after rates of 41.5% (was 44.9%) in Q1, 74.4% (was 78.8%) in Q4 and 34.9% (was 36.0%) in Q3. We expect a 29% 2021 rise, after growth of 9.3% (was 7.9%) in 2020.

The private residential home improvement residual is poised for a 4% growth pace in Q2, after rates of 18.4% (was -7.9%) in Q1, -5.2% (was 22.9%) in Q4 and 20.8% (was 57.0%) in Q3. We expect an 10% 2021 rise, after growth of 26.5% (was 18.0%) in 2020. The residual is an erratic and unreliable measure, as is clearly evident with the massive quarterly revisions. The figures aren’t used for GDP calculations.

Nonresidential construction is poised for a -6% growth pace in Q2, after rates of 10.8% (was -0.6%) in Q1, -14.7% (was -11.2%) in Q4 and -12.7% (was -4.9%) in Q3. We expect a -5% 2021 drop, after a -4.0% (was -2.9%) decline in 2020.

ABS REPORT

Public construction is poised for a -7% growth pace in Q2, after rates of -6.8% (was -5.0%) in Q1, zero (was 10.9%) in Q4 and -13.9% (was -10.7%) in Q3. We expect a -5% 2021 drop, after a 5.2% rise in 2020.

We now expect GDP growth of 7.6% (was 7.8%) in Q2 and 7.0% in Q3, with a -6% contraction rate for residential investment in Q2 before a 1% bounce in Q3. We expect nonresidential construction to fall -7% in Q2 before a -1% Q3 decline. We expect government purchases to fall at rates of -0.8% in Q2 and -1.1% in Q3.

ISM

The ISM slipped -0.6 points to 60.6 from 61.2 in May but a similar 60.7 in April, versus a 37-year high of 64.7 in March that was last seen in 1983. We saw a 17-year high of a similar 60.8 in February that was last seen in February of 2018.

Prices paid surged to a 42-year high of 92.1 from 88.0, but the jobs index fell below 50, to a 7-month low of 49.9. The ISM is posting small oscillations around historically robust levels, as vaccines and two massive Q1 stimulus distributions fueled a steep retail sales climb to an April peak, and businesses still face the need to rebuild inventories.

The 42-year high ISM price reading of 92.1 is near the 93.1 reading in July of 1979, during the oil market crisis, and below the record high for prices of 100.0 in June of 1950.

The ISM-adjusted average of the major sentiment surveys is slipping to 60 in June from a 61 all-time high over the three months through May, versus a record before that of 59 in three months of 2018 for a series we’ve calculated back to 2004. We expect a 61 average in Q2, after averages of 59 in Q1, 57 in Q4, and 55 in Q3.

We expect industrial production growth of 6.7% in Q2 and 7.4% in Q3, alongside GDP growth of an estimated 7.8% in Q2 and 7.0% Q3. We saw respective rates of 3.6% and 6.4% in Q4, and 8.2% and 4.3% in Q4 of last year. We saw respective 2020 record gains of 44.5% and 33.4% in Q3, and record declines of -42.% and -31.4% in Q2.

Our June nonfarm payroll forecast sits at 550k, following a 478k average gain thus far in 2021, leaving a rise that is consistent with an 7.8% GDP growth rate. Our forecast tracks solid 2021 production and retail sales gains, a firm ADP path, a continuing claims down-tilt, a housing boom, and robust sentiment. Vehicle sales remain inventory constrained, as assemblies struggle to rise with ongoing semiconductor shortages.

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