Construction spending is the amount of money the government or businesses have spent on construction, labour and materials over a monthly period. This can refer to either residential and non-residential construction and also includes engineering costs.
Residential construction refers to the construction of housing and other forms of accommodation. This is significant to traders as the housing market can often reflect the economic health of a country.
Non-residential construction refers to businesses and corporations spending money on infrastructure like new factories, offices or branches. Non-residential construction has an even stronger correlation with economic performance as gross domestic product (GDP) is derived from the output of these businesses, which is a direct measure of economic strength.
Although construction spending is not the strongest economic indicator, its relation to GDP makes it significant to traders. If construction spending is high, this implies economic growth as new infrastructure is being built – increasing the capacity of an economy.
How do changes in government spending impact construction?
Changes in government spending should indirectly impact construction in an economy. This is because there’s a relation between spending and economic strength.
The purpose of the government increasing spending is often to stimulate demand in the economy. If done successfully, an economy will grow as consumer spending also increases. This rise in demand can cause the need to raise economic capacity. One way this is facilitated is by increases construction. If government spending leads to an increase in wages, people will have more money and might be more likely to spend rather than save. For example, high consumer confidence off the back of an increase in government spending could subsequently increase the demand for housing [PF4].
This is because, in theory, consumers are more financially stable and in a better position to purchase a home. If the demand for housing rises, the construction industry will benefit as more houses will need to be built.
Alternatively, a fall in government spending could have an adverse effect on construction, as the fall in demand would take away the need for new infrastructure. In a weaker economic environment, businesses are less likely to invest in new branches or factories, consumers will be more hesitant with making substantial purchases like buying houses and the construction industry could contract.