Construction spending edged up a modest 0.1% in March, with strong gains in private, residential investment offsetting a 0.2% drop in all non-residential construction. A contraction in public construction activity was fairly broad-based, partly reflecting cuts to infrastructure investments now that state and local governments have tightened their belts, and with much of the activity associated with the 2009 federal fiscal stimulus played out.
Other bright spots appeared in the private sector in the lodging, office and manufacturing areas. Many plants that were idled during the recession are now being expanded, while new investment in the auto industry is coming on line.
This is consistent with the Institute for Supply Management (ISM) index of manufacturing activity, which rose to 54.8 in April from 53.4 in March. Moreover, gains were much more broadly based than we saw in the Chicago ISM, as employment accelerated along with production. The only red flag in the report was inventories, now being drawn down, and the backlog of orders, which appears to be dissipating.
Bottom Line: The business sector is still extremely cautious in its willingness to make big bets on the future – understandable, given the uncertainty over orders. This likely reflects a slowdown in global demand and will be watched closely, especially by the Federal Reserve, to determine the underlying resilience of the expansion.