How 3M, PPG Will Be Impacted by US Construction Pullback

Construction spending in the U.S. has now declined for the second consecutive month, according to the U.S. Census Bureau of the Department of Commerce, and with that news, Jefferies analysts are concerned certain chemicals companies exposed to the sector could be negatively affected. 

Jefferies points to GCP Applied Technologies (GCP) , PPG Industries (PPG)  and Omnova Solutions (OMN) , as the three companies in the chemicals space most heavily exposed to construction spending. 

The firm said in a Tuesday note that GCP, PPG and Omnova are 75%, 40% and 35% exposed to construction, respectively. 

While the Architecture Billings Index, or ABI index, remains solid, according to Jefferies' Laurence Alexander, the decline in U.S. construction spending both month-over-month in May and year-over-year "suggests further softness in the data could motive a rotation in [the third quarter]" away from construction exposed entities and possibly toward industrial- and durable goods-exposed companies. The ABI iidex is a a diffusion index that serves as an economic indicator that leads nonresidential construction activity by approximately 11 months.

The Department of Commerce said July 1 that construction spending during May 2016 was estimated at a seasonally adjusted annual rate of $1,143.3 billion, 0.8%  below the revised April estimate of $1,152.4 billion.

May's data marks the second straight monthly decline after a 2.0% decline in April, which was revised down from -1.8%, according to Jefferies.

"We believe another month or two of soft data could trigger a rotation debate between cyclical end-markets," Alexander wrote.

If you liked this article you might like

Crazy Weak U.S. Dollar Will Make These 10 Companies Huge Winners

Dow, S&P 500 Set New Records as Fed Moves to Unwind Balance Sheet

Stocks In Negative Territory as Chances for December Hike Surge

The Wait for 'Milestone' Fed Meeting Keeps Stocks in Flux

Stock Futures Trade Flat as Balance Sheet Decision From Fed Is Awaited