May 1, 2008 (Action Economics delivered by Newstex) - Action Bullets U.S. March construction spending dropped 1.1% (median -1.0%). Back data for both February and January were revised notably higher, with February revised to +0.4% from -0.3%, and January revised to -0.4% from -1.0%.

On a y/y basis, spending declined 4.0% from -0.8%. As for the components, private residential spending dropped 4.6%, led by a 5.3% decline in single-family construction and a 4.8% decrease in home improvement. Multi-family construction dipped 0.5%. Private nonresidential construction jumped 1.9%, while public construction increased 0.6%. The significant upward revisions to both January and February imply similar upward revision risk for Q1 GDP.

We now expect the 0.6% Q1 GDP gain to be boosted to 0.9%, while our -0.5% estimate for Q2 has been raised to a flat figure. Overall, today's construction figures have reversed the pessimistic signal for nonresidential construction implied by prior reports, with gains now evident in February of 0.6% and March of 1.9% following only modest drops of 0.2% in December and 0.1% in January.

This dramatic change in direction has trimmed recession risk. Market Action Treasury Action: yields searched for a floor following a steady reading on ISM and a sharp drop in construction spending being neutralized somewhat by a big upward revision the month prior, along with the rally in stocks. The 10-year yield recovered to 3.72% after fumbling below 3.70% earlier following the large jump in jobless claims. The 2s-10s spread has narrowed slightly inside +145 bp.