- by New Deal democrat
Before I get to the main object of this post, there was a little kerfluffle in the financial markets this morning about a “hot” producer price index number. Specifically, PPI for final demand increased 0.5% in January. Commodity prices also increased 0.3%. The YoY% changes were 2.8%, although raw commodity prices were only up 1.6%. The below graph also shows CPI, which officially was up 2.4% YoY (although a proper accounting for shelter would probably add at least 0.2% to that number):
The bottom line is that inflation is not cooperating with those who would like to see further Fed rate cuts, since it is likely making little if any progress towards the Fed’s goal of 2.0%. Stagflation, anyone?
But let’s turn to an important manifestation of costs and spending in the real world, by way of this morning’s one- and two-months stale report for construction spending in November and December.
For the month of December, nominally total construction spending (blue, left scale in the graph below) rose 0.3%, although it remains below its recent peak in September, and its post-pandemic peak of May 2024, and is down -0.4% YoY. The long leading sector of residential construction spending (red, right scale) rose a more significant 1.5%, but it also remains significantly below its peak of May 2024, although as I pointed out one month ago, there are certainly signs of “green shoots,” i.e., a bottoming process:
The picture is somewhat different when we account for the costs of construction materials. These rose 1.8% in November and another 0.9% in December to near its all-time highs:
On a YoY basis, they are also up 6.6%.
As a result, in real terms both total and residential construction spending fell, by -1.5% and -0.4% respectively:
The overall trend remains slightly negative for total construction spending, although residential construction spending has been trending sideways. Hence, small signs of “green shoots” by way of forming a bottom.
One big negative is manufacturing construction spending, which declined -2.5% in December, and is down over -15% from its August 2024 peak (recall that the big Boom was a direct result of the Inflation Reduction Act)
So much for tariffs bringing back manufacturing!
What has been powering the positive contributions to total construction spending, as with so much of the economy, is AI data center related spending. Power generation spending rose 0.8% for the month of December and is up 5.8% YoY. Another aspect is the water needed to cool these power plants, which declined -2.5% in December, but is up 8.1% YoY, and made an all-time highs in October:
So once again, we have an economy that is barely holding its head above water, and indeed in real terms the construction sector is declining, with just about the only subsector holding it afloat being AI data center spending, and its stock market-associated wealth effect consumer spending.
