TRG | The Bottom Line – 6/7

April construction put-in-place (PIP) data was released this past week, telling a story of a changing U.S. construction landscape. Non-res construction showed another month of resiliency at a seasonally-adjusted $1.2T, which was up 12% YOY, with public construction up 17% and private construction up 8% YOY. It has been hovering at this level since October of last year, which we view as impressive given the rise in interest rates. Looking into the data, we believe that PIP data reflects the construction phase of the re-industrialization of America, as Manufacturing PIP is growing at a remarkable pace in the past few years. We have stated many times in the past few years that the face of non-res construction is in the midst of change – manufacturing and data centers are defining the construction landscape. We believe stock market participants have recognized this to a large degree, as non-res related stocks have performed very well. We do not believe this real-world phenomenon of increased industrial activity in the U.S. will fizzle in the coming years. Our prediction is that that non-res construction will display modest growth over the next few years. Solid growth categories included Manufacturing (+17%), Highway & Street (+16%), Water Supply (+22%), Sewage & Waste Disposal (+9), and Healthcare (+7). Manufacturing is in expansion mode and it started before federal stimulus, which we attribute to re-shoring activity. Channel checks paint a picture of demand that is similar to what non-res PIP shows. From 2015-2020 manufacturing averaged 9% of non-res PIP. It has gained ground since and as of April 2024 it makes up 19% of non-res PIP. Challenged verticals remain Lodging, Office, and Commercial (+2%), and we view this group together as more pressured, given their rate sensitivity and office being oversupplied as WFH became more common. From a stock perspective, distribution and heavy materials stocks that have been high flyers over the past 12 months, outperforming the S&P 500, but have seen cooled performance over the past 90 days, likely reflecting concerns over the lingering impact of higher interest rates along with profit taking/derisking after an extended period of strong performance. That said, despite high valuations, we still see upside given strong secular tailwinds driving U.S. industrial growth for many years.