Latest Construction Data Points to Boost for 4 Holdings

*The final June manufacturing PMIs from ISM and S&P Global show differing views on that part of the economy

*Both June PMI manufacturing reports show continued progress on inflation but offer conflicting views on job creation

*May construction spending continued to grow compared to year-ago levels, supporting our thesis for four holdings

The week’s data deluge has begun with the back-to-back takes on the manufacturing economy in June, and a report on construction spending in May.

While S&P Global's final May manufacturing PMI showed that part of the economy continued to expand during the month, ISM’s finding showed further deceleration. Because ISM’s figures are used in GDP forecasts, the 48.5 headline figure that missed the 49.1 market consensus means we should see some modest downward revisions to rolling GDP forecasts. However, the services sector has been the one carrying the economy and we’ll want to see if that remains the case on Wednesday when the June service PMI reports are published.

June Manufacturing PMIs Give Conflicting Views on Job Creation

The two sources also conflicted in their view of job creation during June.

ISM saw a slower rate of employment gains in the manufacturing sector, while S&P Global said that, “The most positive aspect of the latest survey was the fastest increase in employment since September 2022.”

We’ll look to the upcoming June ADP employment change report as well as insights found in the June challenger job cuts to help balance those conflicting reports as we dig into the June Service PMIs reports. Triangulating those reports will give us a much clearer picture of what Friday’s June employment report is likely to show.

Both June Manufacturing PMI Reports Show Further Inflation Progress

Digging into the June manufacturing PMIs, both showed prices increasing at much slower rates compared to recent months. ISM’s prices sub-index came in at 52.1 in June, down from 57 in May and April’s reading of 60. Per S&P Global, the pace of output price inflation in the manufacturing sector slowed for the third consecutive month as well. That is rather Fed-friendly and suggests further progress should be seen in the June CPI and PPI data. If we see similar progress in the prices component in the June service PMI reports, it will be more of that good data the Fed is hoping to see. Still, we are mindful that the Fed does not want to be head faked, and that likely means Fed Chair Powell will note the recent progress but will stick to the party line of “wanting to see more good data” before embarking on a rate-cutting cycle.

We’ve pointed out that we have data for June, July and August ahead of the Fed’s September meeting. We would not be shocked to see the Fed first take a more dovish stance with its language before starting to bring monetary policy back to a less restrictive stance. Today, however, we are not there yet and only more “good data” will get us there.

May Construction Spending Continued to Grow Compared to Year-Ago Levels

Rounding out Monday's economic data, total May construction spending rose 6.4% year over year to $2.140 trillion, slightly below the upwardly-revised April construction spending of $2.142 trillion. Looking at the seasonally-adjusted data, year-over-year gains were made in both residential as well as nonresidential spending, which is positive for our positions in United Rentals URI, Vulcan Materials VMC and Waste Management WM. Yet those shares are trading off today, likely due to the modest sequential decline in the headline figures. We recognize that month-to-month figures can be volatile, and it's the year-over-year ones that show the impact of stimulus spending.

When we look at the non-seasonally adjusted data, something we’ve done for recent housing starts and existing home sales reports, it shows an even stronger picture. On that basis, total construction spending rose 8.8% in May with residential construction spending continuing to rise, hitting the highest level so far this year. That matches with recent delivery comments from homebuilders and supports our thesis on the shares of Builders FirstSource BLDR. We recently added to our BLDR position, and we have room to grow the portfolio’s position size.

Total nonresidential construction spending on the same non-seasonally adjusted basis also hit the highest level so far this year, continuing the year-to-date trend of sequentially-higher spending levels. This makes sense to as we move past lingering winter weather and the benefit of infrastructure spending is felt. The continued month-over-month increases in this data bode well for our VMC and URI shares.

We think that as more good inflation data is had and the market becomes increasingly comfortable with the Fed progressing toward rate cuts, the market will revisit the construction-related companies we have in the portfolio.

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At the time of publication, TheStreet Pro Portfolio was long URI, VMC, WM and BLDR.