Attached PDF of my Forecasting presentation delivered 5-22-17 at Advancing Building Estimation in Houston
A few bullets from this presentation
- Construction Starts is not construction spending
- Cash flow = Spending = Revenue
- Revenue is not Volume of work
- Spending minus inflation = Volume
- Understand what’s in an Index to avoid misguided inflation adjustments
- We can’t ignore productivity
- Spending activity has just as much influence on inflation as labor and material cost.
Slides in this presentation come from the following articles:
The two plots lined up here represent spending and spending corrected for inflation or real volume growth in the top plot versus construction inflation in the bottom plot. On the Inflation plot, the black line represents final selling price, actual inflation. The red line represents the ENR Building Cost Index which is a fixed market basket of labor and materials, not a complete selling price index. All plots are for nonresidential buildings only.
The index shows how cost inflation climbs in periods when spending is accelerating and the index slows when spending is increasing slowly. Also we can see that the major decline in spending resulted in a major deflation in the index. Note the ENR BCI does not show the major decline in the inflation index. That’s because the ENR BCI is not final selling price. It shows what the cost of labor and materials did during that period, but does not capture how contractors adjusted their margins down so deeply due to loss of volume.
The takeaway from this comparison is this:
- Labor and material indices do not show what real total inflation is doing
- When spending increases rapidly, inflation increases rapidly
- When spending increases slowly, inflation increases slowly
- An understanding of which direction and how much spending is moving is more important to predicting inflation than the change in the cost of labor and materials
Jobs growth slowed in the last two months adding only 6,000 construction jobs since February. However, a longer term look at jobs x hours worked vs volume growth gives better information.
In the following plot Jobs (red line) = # of jobs x hours worked and Construction Volume (blue line) = construction spending in constant $ (adjusted for inflation). Unless we make these two adjustments we cannot compare jobs to construction spending and get any meaningful analysis from the data.
I’ve written about this in-depth in these two articles.
You can see in the plot above from Jan 2011 to Mar 2013 both jobs growth and volume growth balanced. Then again by August 2014 jobs growth caught up to volume growth. It was the period from Aug 2014 to Jul 2015 when volume took off and climbed much faster than jobs growth. But then, since July 2015, jobs have been increasing faster than construction volume growth.
In a plot of this information back to 2005, it would show that by the end of 2010 there were already excess jobs. That is discussed in the attached articles. During the expansion, firms hired more employees than real work volume could support, then during the recession, firms held onto far more staff than was required to perform the available declining work volumes. So the chart above would start 2011 with an excess of jobs and really we needed to see work volume increase faster than jobs starting in 2011.
Long term, having started 2011 with not enough volume to support the remaining staff, we see two periods of growth in which jobs and volume were balanced, only one period where volume exceeded jobs growth and then this latest period, for the last 21 months, in which jobs are growing faster than volume.
There are many reports of job shortages and they appear to be genuinely accurate assessments, primarily regarding some very specific skilled labor positions. However, long term jobs vs volume data shows there is far more in play than not enough workers to hire. In fact, for the last 21 months, hiring has exceeded workload and that simply does not indicate an overall worker shortage.
5-1-17 Updated construction spending forecast for 2017. Actual spending is included through March data, first release 5-1-17. Forecast spending includes predictions based on Dodge Data & Analytics (DDA) construction starts through March, released 4-21-17.
Reference Construction Economic Outlook 2017 posted January 2017
5-1-17 Update Overview
Construction Spending in March posted a seasonally adjusted annual rate (SAAR) of $1,218 billion, down 0.2% from February. February was revised UP by 2.3%, and March data is still subject to revisions, usually upward, the next two months. January was revised UP 1.6% from the initial release.
The 1st release of spending is always being compared to a previous month and a previous year that have already been revised, almost always up. Upward revisions to monthly construction spending in 2016 have been as high as 3.4% and for the year average 1.1%/mo. In the last 48 months, the 1st report of construction spending was down vs the prior month 20 times. The initial value was subsequently revised UP 47 times. After revisions, only nine months were down compared to the prior month.
Total Construction Spending for Q1’17 is 3.5% higher than I predicted in my initial 2017 forecast posted 1-7-17. Construction spending growth from Q4’16 to Q1’17 gives 2017 the 2nd best quarter to quarter start in 10 years, just shy of 2014 which posted the best spending growth since 2005. Nearly all the greater volume in spending over my original 2017 forecast is in residential construction, which, for the last four months, has posted much stronger new starts and spending than anticipated based on DDA projections.
Year over year total spending:
- Jan17r/Jan16 = 4.7%
- Feb17r/Feb16 = 5.5%
- Mar17/Mar16 = 3.6%
Based on history, it is likely that Mar17 will get revised UP. (note: with the 2nd release of March spending, the Mar17 year-over-year value was revised up from yoy 3.6% to 5.0%. The initial Apr17 yoy value was posted as up 6.7% from Apr16. Year-to-date total through April is up 5.8% over 2016, and that will most likely be revised higher.)
Total construction spending in 2017 is now forecast to finish at $1,263 billion, an 8.5% increase vs 2016, supported by a 4th consecutive year of strong performance in nonresidential buildings and a very strong start in residential spending. The SAAR of spending will range from near $1.2 trillion in January to $1.3 trillion in the 4th quarter.
A significant indicator for 2017 construction spending performance is that 2017 year-to-date (YTD) spending is up 4.9% compared to a very strong 1st quarter 2016. In the 2nd quarter 2016 spending dropped and did not return to the Feb-Mar 2016 level until Sept-Oct 2016. In 2017, although growth will slow (but still remain positive) in the 2nd quarter, by Sept-Oct spending will be 5% higher than March. The six months Apr-Sept 2017 compared to the same period 2016 will show growth of more than 8%.
The SAAR of spending on a “current dollar” basis (before adjusting for inflation) is now at an all-time high, just barely eclipsing the highs of early 2006. By the 4th quarter of 2017 spending will be 5% above the previous 2006 highs on a “current dollar” basis. However, on a “constant dollar” basis (adjusted for inflation) we are still 13%-14% below peak spending, perhaps five more years away from the real inflation adjusted 2006 peak.
The SAAR of Residential construction spending increased 6% in the last 3 months. It is up 5.3% from Q4’16 to Q1’17. March YTD (=Q1 2017 total) is up only 8.5% from Q1 2016, because Q1 2016 was exceptionally strong. I’m forecasting residential construction 2017 growth of 8% to 10%. Residential spending in 2017 is forecast at $512 billion, 10.2% higher than 2016.
Total Nonresidential construction spending is up 2% Q1’17 vs Q4’16 and up 2.5% vs Q1’16. Predicted cash flows indicate a strong growth pattern for 2017. I expect total nonresidential spending to finish the year up 7%. Nonresidential construction is better understood by looking at the parts, buildings and infrastructure.
Construction spending for Nonresidential Buildings in Q1’17 is up 1.6% vs Q4’16 and up 6.6% vs Q1’16. The most recent 3-month average seasonally adjusted annual rate (SAAR) is $427 billion, now less than 4% below the previous peak of $444 billion in 2008. By midyear 2017 the SAAR will reach a new all-time high and at year-end it will be near $460 billion.
Nonresidential buildings 2017 starting backlog on January 1, 2017 was 47% higher than at the start of 2014, the beginning of the current growth cycle. Spending within the year has two sources; that generated from new starts within the year and that generated from starting backlog. For nonresidential buildings, spending within the year from starting backlog has increased every year since 2014 and in 2017 it will be 42% higher than 2014.
Nonresidential Buildings spending in 2017 is forecast at $447 billion, 9.0% above 2016. Office spending will lead 2017 with 25%+ growth. Commercial, Lodging and Educational markets are all expected to post strong gains over 10%.
For details on Nonresidential Buildings, See Behind The Headlines – Nonres Bldgs Construction Spending and Nonresidential Bldgs 2017 Forecasts Comparisons
Construction spending for Nonbuilding Infrastructure Q1’17 is up 3.8% vs Q4’16, but down 1.8% vs Q1’16. Nonbuilding infrastructure 2017 growth is expected at about 4%-5%.
Non-building Infrastructure, following two down years, will increase by 4.8% to $305 billion. Infrastructure growth is being led by a very high volume of power generation and pipeline work, up only slightly from Q1’16, but up 10% from Q4’16. Although new infrastructure starts were down in 2016 and are expected to decline again in 2017, the amount of work in backlog at the start of 2017 is the highest its ever been and spending in 2017 is forecast at an all-time high.
For Non-building Infrastructure details see Infrastructure Outlook 2017
Private spending is the highest since Q1 2006. Public spending YTD 2017 vs 2016 is down 7% ONLY because the 1st quarter of 2016 was the highest quarter since 2010, elevated due to highway and bridge spending. Educational and Highway/Bridge, the largest two components, make up almost 60% of public spending. The quarterly average of Public spending has been increasing since Q2’16. By the end of Q2’17 YTD public spending will be up 2.5%.
For all of 2017 Private spending will increase 9%. Public spending could increase 7%, with half the gains coming from educational spending.
Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of the period. The sum of all ETC represents current backlog. While continued growth in backlog is most important, the predicted cash flow from backlog and new starts is necessary for predicting future spending.
Revenues from starting backlog account for 75%-80% of all nonresidential construction spending within the year. Not only was nonresidential starting backlog at the highest ever coming into 2017, but also spending from backlog is predicted up by 5% and 2017 new starts are predicted up 8%.
Due to the shorter duration of residential projects, nearly 70% of spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much spending within the current year. If no new work started within the year, within a matter of a few months there would be no backlog ETC left to support the industry.
Construction starts, which generate construction spending (cash flow) over the next several years, were originally reported in 2016 as up only 1% from a remarkably strong 2015. However, Jan-Feb-Mar 2016 starts have recently been revised up by a whopping 16%, and the historical trend is that every monthly value in the previous year for the last eight years has been revised up. This adds to predicted cash flow, so has an immediate affect of raising predicted 2017 spending. 2016 revisions-to-date and expected revisions are on track to raise 2016 starts up to 6% growth over 2015.
Starts that are being reported for the current year are always being compared to a previous year that has been revised up, so starts growth is always understated. So far, starts for the 1st quarter of 2017 have been much stronger than expected. Starts year-to-date are down 1.5% from the upward revised 2016 totals, however the historical revision has been in the range of 3.5% to 5%. So, the actual growth in new starts has been remarkably strong, better than forecast in October, and is adding to the basis for increased forecast in future 2017 and 2018 spending.
Headlines of construction spending declines are almost always premature.
April construction spending 1st release was issued on 6-1-17 by U. S. Census. The initial release shows April DOWN 1.4% from March, a value many news sources have reported as “construction spending is slowing”, “one of the largest drops in six years”, “an unexpected slump”, “spending continued to demonstrate substantial weakness.” I’ve written about this numerous times but it’s worth repeating again. Construction spending almost always gets revised UP in the following month after 1st release. Average revision so far in 2017 is +1.8% and for the last 18 months +1.3%. Monthly construction spending has now been revised UP every one of the last 43 consecutive months.
Headlines of construction spending declines are almost always premature.
Construction spending is almost always a miss when first posted, until it gets revised up in the following monthly report to show is it almost never a miss.
The 1st release of March construction spending came out May 1. This initial release indicates a decline of 0.2% from February. Keep in mind, all 12 monthly reports in 2016 were subsequently revised up. Nine times in the previous 14 months, the 1st report of spending was down vs the prior month. After revisions, only three months were down compared to the prior month.
In the last 48 months, the 1st report of spending was down vs the prior month 20 times. 47 times the initial value was revised UP. After revisions, only nine months were down compared to the prior month.
Monthly construction spending has been revised UP every one of the last 42 consecutive months.
The 1st release of spending is almost always being compared to a previous month and a previous year that have been revised up. Upward revisions to monthly construction spending in 2016 have been as high as 3.4% and for the year average 1.1%/mo. So, a 0.2% mo/mo decline s probably not a decline at all after revision, and there will be a revision, most likely UP.
After spending is first published it is revised in each of the two following months. Then all the values for the entire year are revised with the May data release the following year.
Some specific markets construction spending revised after 1st release (2016 data). These markets represent almost 50% of nonresidential data.
- Office revised UP 8 of 12 months (average of all 12 +1.1%)
- Commercial UP 9 of 12 avg 1.8%
- Educational UP 10 of 12 avg 1.8%
- Power UP 12 of 12 avg 3.6%
At age 30, I couldn’t run a 7 minute mile.
I was a pretty good runner in high school and college, but really didn’t come into my own until later in life. It wasn’t until I practiced proper nutrition and learned how to train that things really came together. All of my best post high school times were in my 40s. In fact, age adjusted, all the best times of my life were in my 40s. This should give you some perspective. You are not on the downhill when you hit 40. You have years of potential in front of you. I’d like to set a challenge for some of my younger friends. You can do what ever you want. Set goals. Break your own records.
41 – 1 mile 4:41.7 2nd 40-49 Boston, Northeastern Track USATF NE
43 – 3000m 9:24.2 Boston, Northeastern Track USATFNE 5:02 mile
41 – 4 mile 21:20 2nd 40-49 Arnold Mills July4 Cumberland RI 5:20 mile
41 – 8k (4.97mi) 27:40 3rd team 40-49 National XC Champ Franklin Park 5:34
43 – 8.1 mile 45:08 1st master 40-49 Harvey’s Lake PA 5:34
40 – 10mi 55:13 11th, 1st 40-49 Narragansett RI Blessing of the Fleet 5:31
42 – 13.1mi 72:53 11th 40-49 New Bedford MA Half Marathon NE Champ. 5:34
45 – 20mi mark in marathon 2:00:08 at Burlington Vermont marathon 6:00 mile
45 – 26.2mi marathon 2:41:17 2nd master Burlington Vermont marathon 6:07
I’ve been saying for a long time the data doesn’t show a construction jobs shortage.
In total, construction jobs have been increasing faster than construction volume (spending minus inflation). But, to get a better picture we need to look at jobs vs volume by sector, Residential and Nonresidential. Then we need to look at history.
Since 2009, RESIDENTIAL volume has increased 49%, jobs increased 22%. This is partly explained by absorption of excess staff retained during recession.
From 2006 to 2009 volume decreased 53% but jobs decreased only 36%, leaving a significant amount of excess jobs.
It looks like from 2009 to 2016 there has not been enough jobs growth to support the volume growth, BUT…
Residential net changes just since 2006, volume is down 29% while jobs are down 22%. We are not nearly back to pre-recession productivity.
Since 2009, NONRESIDENTIAL BUILDINGS volume is down by 10% but jobs are up 13%. By no means, if we look at just these 7 years, does this look like a jobs shortage.
Even previous years imbalance would not account for a need to add that many jobs. From 2006 to 2009 volume increased 2% but jobs decreased 15%. In a previous report Is There a Construction Jobs Shortage? I explained why this may occur following a prior top-heavy jobs expansion during a period of high inflation.
Nonresidential net changes just since 2006, volume is down 8% but jobs are down only 3%. Again, we are not nearly back to pre-recession productivity.
For both residential and nonresidential buildings, comparing post-recession growth to pre-recession 1996-2006 $ Put-In-Place per Job, productivity is down 21%, or we currently have 100/(100-21) = 27% more jobs now than it took before to get the same amount of work done.
If the current construction expansion period is viewed as having a jobs shortage, that claim demands that we must accept, since pre-recession, productivity has declined by 21% and the reason there is now a jobs shortage is that it takes 27% more jobs to put in place construction than it did on average from 1996 to 2006.
In my opinion, that’s a harder pill to swallow than a jobs shortage.
For more related to this discussion see Is There a Construction Jobs Shortage?
Don’t like the year-over-year (yoy) Construction Spending percent change? Just wait until next month. It’s going to be worse!
The latest year over year construction spending through February is up 3.0% compared to Feb 2016.
March data yoy comparison is going to come in at or under 2%. But construction spending is increasing!
It just so happens March 2016 was an outstanding month. That lowers the yoy percent change, but March 2016 is the anomaly.
Yoy doesn’t indicate if this year is doing poorly or if that month last year was a great month.
Yoy doesn’t indicate what direction current spending is taking.
Yoy compares an unadjusted 2017 value to an upwardly adjusted 2016 value.
For the last 40 consecutive months the construction spending value has been revise UP. But not until after major news media gets to report that yoy construction spending did not meet expectations.
For the last 18 months the average adjustment to construction spending after the 1st release of data +2%.
The yoy and mo/mo percentage change in the 1st release was understated every time.
For Q1 2017, yoy values are expected to range between 1.5% and 3.5%. 2017 is expected to finish the year up 6% over 2016.
This is a summary of the main points on Infrastructure from several recent articles. Those articles detail current market conditions, growth already in backlog and future growth potential. The articles (linked here) are:
- Calls for Infrastructure Problematic
- Infrastructure & Public Construction Spending
- Infrastructure – Ramping Up to Add $1 trillion
- Infrastructure Outlook 2017 – Construction Spending
Non-building Infrastructure spending in 2016 will finish at $290 billion, down 1% from 2015. Negative drivers were Transportation, Sewage/Waste Disposal, Communications and Water Supply. However, Power and Highway/Bridge, 57% of all infrastructure, were both up. Spending based on projected cash flow from Dodge Data Starts predicted this drop.
- In 2017, Non-building Infrastructure, following two slightly down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets.
- Headlines point to a 6% decline in new infrastructure starts in 2017
- Starting backlog for 2017 increased 6% over 2016.
- The cash flow in 2017 from starting backlog will be up 10%.
Infrastructure currently has the highest amount of work in backlog in history. Starting backlog accounts for 80% of all spending within the year. Even with an anticipated decline in new starts in 2017, starting backlog for 2018 will still be at another new high. Spending from starting backlog is predicted to reach record levels in both 2017 and 2018.
- Total Construction spending for 2017 is more than $1.200 trillion.
- Infrastructure, public and private, is $300 billion, only 25% of total construction spending.
- Public is only 60% of all infrastructure, $180 billion, so 15% of total construction.
- Public Nonresidential Institutional Buildings referred to as infrastructure (Educ, HlthCr, Safety) adds another $95 billion, 8% of total construction.
The two largest markets contributing to public spending are highway/bridge (32%) and educational (25%), together accounting for 57% of all public spending. The next largest market, transportation, is only about 10% of public spending.
- Total Construction spending average constant $ growth post-recession is $50 billion/year. It exceeded $75 billion/year only once.
- Infrastructure, only 25% of total construction spending, increased by more than $25 billion in a single year only once. The average annual growth for the past 20 years (excluding recession yrs) is less than $10 billion/year.
- Public Infrastructure annual growth averages only $6 billion/year, has never exceeded $16 billion in a single year.
- Public Institutional Buildings annual growth averages only $6 billion/year, has never reached $20 billion.
Current backlog already accounts for 80% of all spending. Current spending growth from backlog (Public infrastructure + Institutional) is predicted to add $20 billion/year in work over the next two years. This will absorb some current jobs and create 100,000 to 150,000 new heavy engineering and nonresidential jobs.
For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 new construction jobs per year.
Any infrastructure plan added, for the most part, needs to be considered as added on top of the current spending plan, $20bil/yr next two yrs, already at all time highs.
- Average growth in total construction jobs is about 270,000 jobs per year. The largest growth was 400,000 in 1999.
- Average post-recession growth in public infrastructure + institutional jobs is about 35,000 jobs per year. The best growth was 50,000 jobs/year.
Current data predicts public institutional and infrastructure spending and jobs growth, already above the long term average, is expected to increase by $20 billion/year for the next several years.
Adding $20 billion/year more in spending for an infrastructure expansion plan would push total public work to double record levels. It’s doable, but would be difficult to achieve and is probably not sustainable at that rate.
One limiting factor will be jobs growth. Also, the supply chain may not have the capacity to increase so rapidly, especially to think the industry could continue to expand at a historical rate of growth for years to come. In years past, expansion like this has led to rampant inflation within the industry.
Adding $100 billion in a single year to public infrastructure and institutional work is unrealistic. That is greater than the maximum level of growth for the entire construction industry. The portion of the industry we are dealing with here is less than 25% of the entire industry.
Adding $100 billion, a one third increase in annual spending for this sector, would require the distribution network surrounding the industry to expand equally as fast. It would need 300,000 to 400,000 new jobs filled in a year, in a sector that has at maximum grown 50,000 jobs in a year. That’s unrealistic.
The public infrastructure subset of the construction industry appears too small to accommodate an increase of $10 billion/year and 40,000 new jobs/year over current growth. When the potential projects pool is expanded to include public institutional buildings, that total pool may then accommodate an increase of $10 to $15 billion/year over normal growth.
Excessively rapid growth will only take volume and jobs away from normal growth, generally leads to rapid inflation and has a devastating effect when a massive program ends and all those jobs disappear.
Dodge released the Feb 2017 construction starts today. For the Jan and Feb reports, I think the most relevant piece of information in this report is that Jan and Feb 2016 values were revised up, in total by 15%. That alone has added 2% to total 2016 starts.
In the Dodge October Construction Outlook report, construction starts total for 2016 were predicted at $676 billion, and 2017 at +5%, or $713 billion. Revisions so far have increased 2016 actual to $692 billion. 2016 is on track to go above $700 billion, and at +5%, 2017 could reach $735 billion.
New 2017 starts are being compared to upwardly revised 2016 values. That understates 2017 performance. Dodge Data provides revised starts a month later and 12 months later. In every monthly release, the previous month is revised AND the last year’s year-to-date is revised. Dodge does incorporate other (minor) revisions at a later date, but the “12 month” revision to the previous year-to-date values captures the largest part of all revisions.
This February report includes revisions to the total 2016 YTD, Jan+Feb 2016. The 2017 values won’t get that equivalent “12 month” revision until next year. Therefore, Current year YTD values (not-yet-revised) are being compared to the previous year YTD revised values which has the affect of making current YTD growth appear lower than it should.
In the last 10 years the YTD revisions have always been up. Usually, most of the revisions occur to nonresidential buildings, about 5% to 6% per year, with only a 3% to 4% revision to infrastructure and only 2% to residential.
So far in 2017, year-to-date 2016 values for Jan+Feb have been revise up by 15%. That’s a 2% revision to the 2016 annual total. Already in just the first two months, on an annual basis, nonresidential buildings have been revised up 2%, non-building infrastructure up 4% and residential up 1.3%.
While the 2017 YTD value this month is noted as down 4% compared to last year, keep in mind last year’s value was just revised up by 15%. So, much of the reason 2017 is down is because 2016 values have had revisions applied and 2017 have not. To me, this latest report looks up.