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Economist: Construction equipment sales bode well for nonresidential market

Sources: Associated Builders & Contractors, Washington, D.C.; CP staff

Weighing new Bureau of Economic Analysis (BEA) data, ABC reports that nonresidential fixed investment—a gross domestic product category embodying nonresidential construction activity—expanded at a seasonally adjusted rate of 5.2 percent in the second quarter, following a 7.2 percent jump in Q1. The expansion contributed more than 0.6 percentage point to GDP growth, due in large measure to increased construction equipment investment. The other two nonresidential fixed investment components—structures and intellectual property—also expanded, but at a slower pace.

“This was a good report from the perspective of nonresidential construction firms, particularly those engaged in private as opposed to public construction,” says ABC Chief Economist Anirban Basu. “The uptick in investment in construction equipment is particularly noteworthy because it signals a general belief that construction activity will continue to recover. Backlog among many nonresidential construction firms is already healthy. [The BEA data-backed] report suggests that backlog is not set to decline in any meaningful way anytime soon.”

“One might wonder why construction firms remain so busy in an economic environment still characterized by roughly 2 percent growth,” he adds. “There are many factors at work, including the ongoing boom of the e-commerce economy, which has continued to trigger demand for massive fulfillment and distribution centers even as stores close in massive numbers at America’s malls. The influx of global investment to a number of segments, including hotel and office construction, also helps explain disproportionate growth in certain private categories.”

“With global fixed-income yields remaining so low, investors from around the world are likely to continue to seek out opportunities for higher rates of return in commercial real estate, which thus far has had the impact of increasing property values and triggering construction,” Basu explains. “For the broader economy to accelerate, policymakers in Washington, D.C., will need to begin to make progress on corporate tax relief and infrastructure.”