Jul. 1, 2008 (Action Economics delivered by Newstex) -- Action Bullets Construction spending fell 0.4% in May after a revised 0.1% decline in April; March's index was revised sharply higher too, though February was revised lower. On a y/y basis, spending is down 6.0% from a -3.9% previously in April. Residential construction spending remained weak, falling another 1.6% and is down 26.9% y/y (versus -20.8% y/y previously).

Nonresidential construction spending countered the weakness somewhat, rising 0.3% and is up 11.6% y/y (versus 11.6% y/y previously). Private spending fell 0.7%, while public spending rose 0.4%. We have raised our GDP estimates for both Q2 and Q3 to 2.2%, both in response to today's construction figures and continued evidence that the Q2 bounce in GDP is extending into Q3, such as found in today's ISM report.

Market Action
Treasury Action: the whisperers had it right and the rebound in the ISM manufacturing index rose back above 50.0 for the first time since Jan swung sentiment back in favor of stocks and out of safe-haven Treasuries.

Construction spending and its back revisions were also not as weak as expected. The 10-year yield snapped back from lows of 3.90% to 3.94%, while the 2-year yield bounced 7 bp to 2.60%. The curve flattened as the premium was taken out of the front-end more aggressively, narrowing 3 bp to +134 bp.