Market Forecast: Construction Spending, ADP Employment Report, and FOMC Meeting

Blog posted On April 30, 2018

Average mortgage rates reached year-long highs last week, ahead of this week’s Federal Open Market Committee (FOMC) meeting.  The Federal Reserve is expected to continue raising rates this year, but not at the upcoming meeting on May 1^st and 2^nd.  The US construction report comes out on Tuesday, followed by the ADP employment report on Wednesday.  Strong jobs reports are supportive of continued rate hikes, but core inflation has yet to break the targeted 3.0% threshold. 

US construction spending tracks total spending on public and private construction projects.  Residential construction spending specifically influences the housing market, but all construction activity triggers economic momentum through the purchase of materials and creation of jobs.  The construction industry has faced some challenges recently, specifically involving tariffs on Canadian lumber and others on steel and aluminum products from China.  In February, construction spending improved 0.1% month-over-month after a flat reading in January.  Year-over-year, however, construction spending is up 3.0%.  Spending on public construction was down 2.1%, but private construction spending was up 0.7%.  Private residential construction spending was up 0.1%, reaching the highest level since January 2007.  As the housing market grapples with limited homes for sale, new home construction is imperative to replenishing diminished inventory. 

The ADP employment report is based on data from approximately 400,000 private businesses employing approximately 23 million workers around the country.  Though this subset is limited to private businesses using the ADP payroll system, it is used to evaluate employment trends.  The job market has been exceptionally strong in recent months with the biggest challenge facing employers being the inability to find skilled workers to fill open positions.  In March, the ADP employment report showed the addition of 241,000 jobs.

The FOMC meets Tuesday and Wednesday for a semiannual monetary policy meeting.  The Fed will not be holding a press conference following its statement at 2 PM ET on Wednesday.   Most market analysts expect at least two more federal interest rate hikes this year, most likely in June and September.  However, as the economy strengthens, the probability of a December rate hike is up from 33% to 40%.  According to the Fed’s Beige Book, released earlier this month, “outlooks remained positive, but contacts in various sectors including manufacturing, agriculture, and transportation expressed concern about newly imposed and/or proposed tariffs.”

Despite expected continued rate hikes, mortgage rates are low by historic standards.  A decade ago, average rates were over 2% higher than they are today.  The biggest concern facing today’s home buyers is not affordability but availability.  If construction spending starts to pick up, buyers may soon have more homes to choose from.  Construction activity has yet to catch up to buyer demand.  Today’s home shoppers should be prepared and plan ahead before their home purchase by taking steps like credit repair and getting prequalified for a home purchase ahead of entering the market. 

Sources: Bloomberg, Bloomberg, CNBC, MarketWatch, MarketWatch, Mortgage News Daily, Reuters