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Fall in construction – another trigger for rate cut?

In a further sign of the end of the mining boom, the value of engineering construction has fallen 1.3% to $31.8 billion in the December 2012 quarter, according to the Australian Bureau of Statistics.

Previously, engineering work had posted solid gains in the previous three quarters.

Overall, total construction value is down 0.1%, with building, residential and non-residential showing rises of 1.8%, 1.7% and 2% respectively, suggesting that cuts to official cash rates over the past 18 months are starting to work their magic. Economists had predicted a 1.5% rise in total construction.

Engineering, mainly driven by the resources industry and includes mines, roads and bridges, still represents a significant portion of the total construction, but despite the decline, construction in other sectors may be picking up the slack. That gives some support to hopes that the economy will be partially protected from a downturn in mining investment and the associated construction required.

The Reserve Bank of Australia (RBA), in particular, has high hopes that a recovery in housing construction will offset the fall in mining investment, which is expected to peak this year.

Building materials group, James Hardie (ASX: JHX) today reported that conditions in Australia remained subdued and the company did not expect a substantial pickup anytime soon. Likewise, Boral Limited (ASX: BLD) expects difficult conditions to remain in the near-term, and likely signals tough times ahead for others in the industry like GWA International (ASX: GWA) and Reece Australia (ASX: REH), both of whom supply building fixtures and fittings.

For the building and construction industry, mixed economic results in recent times don’t provide a clear picture of what’s happening in the industry. Land sales are falling, while new home sales are rising, and the Master Builders of Australia survey released in late January, suggests that conditions in the building and construction industry have worsened since 2011.

Foolish takeaway

It appears that the RBA’s recent run of rate cuts is having less of an impact on the economy than may have been hoped. Falling construction activity may give the central bank more ammunition to pull out the rate cut card.

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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