Strong construction and housing data help build confidence in economy

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Two economic indicators released Monday signal an ongoing U.S. economic recovery. First, construction spending rose 0.8 percent in September, the U.S. Commerce Department announced, well above the 0.2 percent decline expected by economists surveyed by Bloomberg News. Also, pending homes sales rose 6.1 percent in September, the National Association of Realtors said; it was the index's eighth straight monthly rise.

The September rise in construction was boosted by spending on private residential building, which rose 3.9 percent, the Commerce Department said. Further, although August's construction spending total was revised lower to a 0.1 percent decline from the previously released 0.8 percent, U.S. stock markets will probably look past the August data and emphasize the more recent September increase. Also in September, non-residential construction rose 1.8 percent.During the first nine months of 2009, construction spending has declined 12.1 percent. On a year-over-year basis, construction spending is down 13.0 percent.

Meanwhile, the NAR's Pending Home Sales Index, a forward looking indicator, increased to 110.1 in September from 103.8 in August, and is now 21.2 percent higher than a year ago. The index is based on sales contracts signed for existing homes, in this case, contracts signed in September. Most homes sales close within six weeks of signing, and at that point the government counts them as existing home sales.

In general, economists view existing home sales as a more accurate indicator of housing sector activity than pending home sales, as mortgage problems, title issues, liens, and other complications sometimes prevent signed housing contracts from being finalized.

Even so, Lawrence Yun, chief economist for the NAR, said positive momentum in the housing sector as evidenced by pending sales is unmistakable and understandable.

"What we're witnessing is a rush of first-time buyers trying to beat the expiration of the tax credit at the end of this month," Yun said in a statement. "Home values will stabilize sooner rather than over-correcting. That, in turn, will mean wealth stabilization for the vast number of middle-class families and lay the foundation for a durable economic recovery."

Analysis: Of the two positive data points, the market will allocate more weight to construction spending. Construction spending may not be a major growth catalyst for the U.S. economy right now, but as long as it stays out of negative territory, that eliminates a major economic drag. The market will interpret this as a plus for the economy: the construction sector's slow recovery is continuing and it won't subtract substantially from GDP. Second, the pending home sales data, while also positive, is not as telling as the finalized new home sales and existing home sales data -- which measure housing transactions that have closed or been finalized. Even so, the eight-month rise in pending homes sales does provide further evidence of increasing home buyer interest and a housing sector on the mend.
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