Construction Market Boomed in 2015
We last looked at the construction market for Plastics Technology magazine in June. At that time, housing permits were seeing month-over-month growth and the annual rate of growth looked like it was going to bottom out and start accelerating. Total construction spending was growing at the fastest rate since May 2012 and the second fastest rate since February 2002. And, non-residential construction spending was growing at a faster rate than residential construction spending.
Since June, housing permits grew at an accelerating rate. The annual rate of growth increased to 10.4 percent in August 2015 from the 4.7 percent (since revised) for March 2015. Most of this acceleration was due to the relatively high number of housing permits for buildings with five or more units (read: apartments) in June. In June, housing permits increased 40.1 percent compared with one year ago. Other than that one month, the month-over-month rate of change has been much more modest. The annual rate of growth appears to have peaked in August as it slowed to 9.7 percent in September. Based on the trend in interest rates (see below), it is likely that housing permits have seen their peak rate of growth and will grow at a slower rate in 2016.
While housing permits seem to have peaked, total construction spending is on an absolute tear. In February and March 2015, the one-month rate of change in total construction spending was more than 12.0 percent. But, from April to August, the one-month rate of change has been above 20 percent each month. In August, which is the latest month of data, the month-over-month rate of change was 22.5 percent. This was the fastest rate of growth in the history of this dataset, which goes back to 1970. In fact, the period from April to August are the only months ever where the one-month rate of change has been above 20 percent. So, total construction spending is in an unprecedented boom. This is likely a result of ultra-low interest rates since 2009.
Residential construction spending is growing at an extremely rapid pace too. In fact, it grew even faster than total construction spending from May to August. While these rates of growth in residential construction spending are quite fast, they are not all-time records though.
The annual rates of growth for both total and residential construction spending should see acceleration in the first half of 2016. But, at some point next year, the annual rate of growth in construction spending will peak. That’s because interest rates are already moving in a negative direction for future construction spending.
The real 10-year treasury rate was 1.86 percent in September 2015. The real rate was 15 basis points higher than it was last month. This was the highest the real 10-year treasury rate has been since February 2011. Also, this was the fifth month in a row that the year-over-year change in the real rate was positive and the eight month in a row that it has increased. In September, the change in the real rate was the highest it has been since April 2014.
The nominal rate is still only about a third of its historical average. However, inflation is historically low. The current annual average inflation dipped back into negative territory (-0.04 percent) in September. That's the fifth time in eight months the annual inflation rate has been negative. Therefore, the real rate is about two-thirds of its historical average. Low inflation is keeping real rates relatively higher than in the past (remember, the real rate is the nominal rate minus inflation).
So, plastics production for commercial and residential construction grow faster through much of 2016. But, the leading indicators for the construction market are pointing toward a peak sometime around the summer of 2016.
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