Construction Analytics

In What Category is That Construction Cost?

Seldom do two sources present information the same way!

In the construction industry, a disconnect exists in the reporting of construction starts data and spending data.  Problems may arise when data is used to perform comparisons or forecasts. New starts and backlog may be listed in one category and spending for the same markets may be listed in another.

The U.S. Census Construction Put-in-Place (Construction Spending) Release follows these definitions. I adjust all other input/forecasting data that I use to conform to these Put-in-Place definitions. Some pitfalls to be aware of:

Residential spending data is about 35% renovations and improvements that has no units associated with the dollars, so cannot be included in a comparison to housing starts.

Demolition is not included in renovations/improvements. Partial repair of flood damaged homes is NOT included in residential improvements. Full replacement of flood damaged homes is included as improvements, not new single family.

Offices includes pubic buildings such as city halls and courthouses. Also includes data centers and bank buildings but excludes medical office buildings, offices at manufacturing sites and offices at educational facilities.

Commercial includes all retail buildings, warehouses, parking lots and garages. Excludes parking at educational/healthcare facilities. Census DOES separate the costs for buildings that are mixed use retail/office/residential.

Educational, along with K-12, includes administrative offices, health centers, parking, residence halls, classrooms, labs, food service and sports/recreation facilities at colleges and universities and all associated infrastructure and maintenance facilities at the educational site. Also includes public libraries, science centers and museums.

Healthcare includes similar support and infrastructure to educational. Also includes non-manufacturing and non-educational research labs.

Amusement and Recreation includes performing arts centers, civic centers, convention centers, sports and recreation facilities not located at schools or colleges.

Transportation includes air freight and passenger terminals, runways, bus and railroad passenger terminals, light rail and subway facilities,  railroad track, railway structures and bridges, docks and marine terminals and maintenance facilities and infrastructure associated with each.

Some sources of design or new construction starts data carry terminal buildings as institutional buildings or other public nonresidential buildings, but Census caries the building cost of all terminals grouped in with the non-building infrastructure costs of Transportation. Some sources carry public buildings such as city halls and courthouses as Public Safety but Census carries cost data for public buildings such as city halls and courthouses in Offices. Some sources classify laboratories as commercial and warehouses as industrial/manufacturing but Census includes warehouses in Commercial and labs, depending on use, can be either Educational, Healthcare or Manufacturing.

Similar discrepancies may exist when comparing starts or spending to indexes, such as the Architectural Billings Index, which broadly classifies projects as commercial, institutional or residential. Some resources classify Amusement/Recreation as institutional and some as commercial. Labs are sometimes classified as commercial but in many cases are included in educational or healthcare, both institutional.

As you can see, there are several instances where the data are often mixed up. From the point of view of the forecaster, initial input data cannot always be used directly to forecast or match spending output. Some manipulation of the data is required to make input and output match. For example: I move starts for terminals from nonresidential buildings to non-building infrastructure Transportation, so that really changes my totals by sector.

What does your source for data take into consideration? Know your data!

 

 

Backlog Construction Forecast Fall 2017

11-9-17

Total Construction Starting Backlog is at a record high, up 30% from the previous high in 2008.

Infrastructure and Residential sectors dropped to a decade low backlog in 2010. In 2013, nonresidential buildings hit the lowest starting backlog since 2004. Combined, total backlog hit a low-point in 2011, the lowest since 2003. Total Starting Backlog has been increasing since 2011, up 65% in 2018.

Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Residential backlog is at a post-recession high, although as will be explained later, it is new residential starts that are more important and starts have tripled since the 2009 low. 70% of all residential spending in the year comes from new starts. Residential starts are still 20% below the 2004 peak.

Starts Generate Backlog

New Starts increased at an average rate of 11%/year from 2012 to 2016. 2017 starts slowed to less than half that pace.

Nonresidential Buildings starts, even though there was a 1% decline in 2015, averaged 13%/year growth for the last 4 years. 2017 will post an 8% increase. The 6 months from Aug 2016 to Jan 2017 was the highest starts since Jan-Jun 2008, also the year nonresidential buildings spending peaked. The 6 months Apr-Sep 2017 just surpassed both those previous peak highs.

Non-building Infrastructure starts were the highest in the 1st 6 months of 2015 than any 6-month period in history. Total 2015 starts increased 26%. 2016 is down just 2% from the peak 2015 starts and 2016 is the 2nd highest starts on record. Those early 2015 starts will still generate 10% of all spending in 2018. 2017 starts are level with 2016. After revisions, 2017 starts may set a new peak high.

Residential starts in 2016 posted the best year since 2005-2006. New starts in 2016 were revised up to show an increase of 10% over 2015. That follows five years of growth averaging 20%/year. New starts in Q1’17 reached an 11 year high.

Entering Backlog

New Backlog is added every month from New Construction Starts. When projects first enter backlog, the amount counted to backlog is the total value of project revenues under contract that are about to start construction, or the same as the new start values. For purposes of predicting future construction spending, as each month of project construction passes, work that has been put-in-place is subtracted from the total value to get the amount remaining in backlog.

Starting Backlog

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or three years ago. The amount counted in backlog is the value of the project that remains or that has not yet been put-in-place. Backlog is the total amount of future spending that will be generated by the project, commonly referred to as the ETC. The sum of all ETCs represents current backlog.

  • Nonresidential buildings 2018 starting backlog is up 10%
  • Non-building Infrastructure 2018 starting backlog is up 12%
  • Residential buildings 2018 starting backlog is down 3%
  • Starting Backlog is at an all-time high for nonresidential buildings and non-building infrastructure.

Typically, starting backlog is a reference to the amount of work in backlog on January 1st. It is referred to as the Starting Backlog for the coming year. The sum of all ETCs as of December 31st represents Starting Backlog.

For any project that has a remaining duration going out past year end, backlog at the start of year does not represent the amount that will be spent within the year. Some of that project backlog will be spent in future years. For this reason, backlog is not representative of spending within the year and the change in Starting Backlog from year to year is not an indication of a change in spending from year to year.

Values and duration of projects that make up backlog help to better predict spending activity over time, particularly in the coming year.

A cash flow schedule of all ETC backlog and predicted new starts provides a tool to predict future spending. It is not enough to look at just the change in backlog to get an indication of the strength of the market. While continued growth in backlog is important, the predicted cash flow from backlog and cash flow from new starts is necessary for predicting spending.

Construction spending is strongly influenced by long duration projects in backlog, more-so than normal monthly starts growth rate. The pattern of continuing or ending cash flows from the long duration backlog projects causes fluctuations in spending that supersede the balance cycle of one month of old jobs ending for every new month of jobs starting. This often can be responsible for some of the monthly fluctuations of construction spending.

The following table shows predicted cash flow from backlog on record as of October 1, 2017 and predicted starts that will generate future backlog in 2018.

Backlog Cashflow 2018 and 2017 11-10-17

Look Ahead to 2018

Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2018.  For four years, from 2010 to 2013, all nonresidential backlog remained nearly constant. Since then, growth has been similar to the pre-recession construction boom of the early 2000s.

Nonresidential buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle. Starting backlog has increased for 5 years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for 5 years at an average 9%/year. Buildings will reach a new high for spending in 2018.

Non-building Infrastructure 2018 starting backlog is up 35% since 2014 but spending from backlog is up only 10%. Infrastructure starting backlog has been increasing for more than 10 years, sometimes only a fraction of a percent per year. Since 2010, backlog increased only 3%/year for the first 5 years then it jumped 35% in the last 3 years. Spending within the year from starting backlog is up 8% in 2018. Infrastructure spending will hit a new high in 2018.

Backlog incld Res Starts 2005-2018 11-8-17

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much residential spending within the year. New residential starts in Q1’17 reached an 11 year high.

  • Cash flow models of construction projects in backlog is indicating substantial acceleration in nonresidential spending over next year, perhaps most notable in infrastructure.
  • 75% to 80% of nonresidential spending within the year comes from Starting Backlog.
  • 70% of residential spending within the years comes from New Starts. Residential starts are at a post-recession high.
  • Share of spending within the current year from backlog is at an all-time high for nonresidential buildings and non-building infrastructure.

Nonresidential Buildings

Nonresidential buildings experienced a decline in starting backlog as recently as 2013. Since 2013, nonresidential buildings starting backlog is up 60%. Backlog will hit a new all-time high for 2018, 5% over the previous high in 2009 . Not only is starting backlog higher coming into 2018, but also spending from backlog is predicted up by 10%. This will produce a new high in current dollar spending.

Revenues from starting backlog account for 75% of all nonresidential buildings construction spending within the year.

Backlog for Nonres Bldgs 2014-2019 11-12-17

Educational starts, backlog and spending has been increasing for 5 years or longer. 2018 starting backlog is up 16% from 2017. Starts for 2018 are predicted to go up 13% and this will push 2019 starting backlog even higher. This should produce good spending growth for the next few years.

Office construction starting backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018 it’s up 27%. Office starting backlog increased an average of 28%/year for the last 5 years. Actual spending increased an average of 17%/year. Backlog growth looks like it will support very strong spending increases into 2019.

Commercial Retail backlog will hold steady from 2017 into 2018. This should level off spending growth after 7 years of strong growth. 2018 backlog still produces a spending increase but current projections show a slight drop in 2019.

Lodging backlog increases slightly for 2018. Past 2018, spending will decline, but this is after 6 years of growth totaling 300%.

Manufacturing posted a 100% increase in new starts in 2014 that drove starting backlog to new highs for the next two years. With new starts slowing back to normal by 2016, starting backlog dropped 20% in 2017 and spending dropped 12%. That was expected. What was unexpected, 2017 posted another very strong year of new starts and that pushed 2018 starting backlog to a new high. This will support a spending rebound in 2018-2019 after a drop of 18% in the last two years.

Non-building Infrastructure

Non-building infrastructure backlog stood at $180 billion in 2008, the last pre-recession year. At the beginning of 2017, non- building infrastructure backlog hit an all-time high, $260 billion, up 45% from 2008. For the last three years, starting backlog is up 40%. In 2018, it’s up 13%, another new high.

Revenues from starting backlog account for 80% of all non-building infrastructure construction spending within the year.

Backlog for Nonbldg Infra 2014-2019 11-12-17

Power backlog has doubled since 2014. It’s up 11% for 2018. Starts are down 14% from the 2015 peak, but spending from backlog is increasing. Most relevant is that backlog increased much stronger than spending. Backlog is being driven higher by very long duration projects that started in 2015, 2016 and 2017.

Highway starts declined the last two years from the peak in 2015, but starting backlog increased the last 3 years and is now 25% higher than 2015.  The last three years of highway starts are still feeding spending in 2018. There is very little change in the amount of spending from backlog, so 2018 spending won’t change very much from 2017.

Transportation new starts shot up by 70% in 2017, pushing 2018 starting backlog to a new high, up 75% from 2017. That will help increase 2018 spending by more than 15%, but a larger spending increase could come in 2019.

Environmental Public Works, Sewer/water/Conservation is experiencing declining starts, declining backlog and declining spending from backlog. All are at the lowest since 2014. We may not see any increase in construction spending until 2019.

Public Work

Public vs Private starts are not tracked separately, but the public share of markets is known. Therefore a projection of public backlog is possible. Highway and Environmental Public Works are 100% public.  Educational is 80% public, Transportation is 70%, Amusement/Rec is 50%, Health is 20% and Power is 10% public, along with few other smaller shares,. Starting backlog for 2018 is up 40% from 2014 due to the predominantly long duration projects that make up public work. This is a post-recession high and is nearing the all-time high of 2008. Increased backlog is indicating the best construction spending increases since 2008 for the next two years.

Residential Buildings

Residential new starts hit bottom in 2009 and starting backlog hit bottom in 2010. Residential on average has the shortest duration and new starts has a dramatic impact on the amount of available work. Both new starts and backlog are now 3x higher than the lows. New residential starts have increased every year since the 2009 bottom, but are still 25% lower than 2004-2005. Residential spending reached its peak of $630 billion in 2005. Current spending is still 15% below that peak. In constant $, spending is 30% below that peak.

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike longer duration nonresidential projects, backlog does not contribute nearly as much. 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 residential construction industry.

New starts slowed in 2017 to only 4% growth and the similar growth of 6% is expected for 2018. This is not unexpected after 5 years (2012-2016) of new starts growth at an average 20%/year. This leads to a prediction of 2018 spending up only 6%.

All construction starts data in this report references Dodge Data & Analytics starts data.

See this companion post for  Starts Trends Construction Forecast Fall 2017

Starts Trends Construction Forecast Fall 2017

11-8-17

It all starts here! Construction Starts Generate Construction Spending.

2017 construction starts through September total $557 billion Year-to-date (YTD), even with 2016. If/when 2017 gets revised as expected it will then show +3% to +4% growth over 2016, but we won’t see that growth in the revision data until next year.

  • Previous year starts always later get revised upwards. Therefore, current year starts ytd growth is always understated.
  • Revisions for the period 2012-2015 averaged +4%.
  • Revisions to 2016 year-to-date through September are +10%.
  • Starts have been increasing at an average rate of 11%/year for the last 5 years.
  • Nonresidential Buildings and Nonbuilding Infrastructure are at or near all-time highs.
  • Residential starts are at a post-recession high.
  • New starts will generate record high 2018 starting backlog for every sector.

Nonresidential Buildings starts, averaged 13%/year growth for the last 4 years, even though there was a 1% decline in 2015. 2017 will post an 8% increase. The 6 months from Aug 2016 to Jan 2017 was the highest period of starts since Jan-Jun 2008, the year nonresidential buildings spending peaked. The 6 months Apr-Sep 2017 just surpassed both those previous peak highs. This will support strong increases in nonresidential buildings spending for the next two years.

Infrastructure starts posted a higher value of new construction projects in the 1st 6 months of 2015 than any 6-month period in history. 2016 is down just 2% from the peak 2015 starts and 2016 is the 2nd highest starts on record. Those early 2015 starts will still generate 10% of all spending in 2018. After revisions, 2017 starts may set a new peak high. This would set up infrastructure as the strongest growth sector for the next two years.

Residential starts in 2016 posted the best year since 2005-2006. New starts in 2016 were revised up by 5% to show an increase of 10% growth over 2015. That follows five years of growth averaging 20%/year. Initial values posted for 2017 show starts up by only 3.5%, however, the average revision for the past few years has been +2% to +4%, so 2017 will get revised higher. New starts in Q1 2017 reached an 11 year high.

All construction starts data in this report references Dodge Data & Analytics Starts data.

Starts CF 11-7-17

Nonresidential Buildings

Retail/Commercial starts may finish flat for 2017 but that is compared to peak starts in 2016. Starts for the 12 months Aug 2016 – June 2017 posted 10% growth over the previous 12 months. Commercial starts have been increasing every year since 2010.

Office construction starts have been increasing since 2010 with the strongest growth period of new starts in the 12 months July 2016 – June 2017, the highest 12 months on record, 60% higher than the previous 12 months. That high-volume period of starts is going to elevate spending in 2018 and 2019. Office starts averaged year-over-year (YOY) growth of 20%/year for the last five years. Data centers are included in Office.

Educational starts are up 15% in 2017. Starts have averaged YOY growth of 8%/year for the last two years and have had slow but steady growth since 2012.

Office, Retail and Educational markets comprise 60% of all nonresidential buildings. They are collectively responsible for 70% of the increase in 2017 nonresidential buildings starts.

Healthcare starts have quietly increased to a record high over the last 12 months, up 30% for the 12 months through August vs the previous 12 months.

Lodging starts will be down ~10% in 2017, but from 2013 to 2016 averaged over 25%/year for 4 years.

Manufacturing is the only nonresidential building market that will NOT finish 2017 with new starts totals at or near post-recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. However, 2017 will post new starts 50% higher than initially predicted by Dodge.

Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Based on cash flows from starts, spending was expected to decline in 14 of the last 18 months. It did decline in 11 of those months. We are at the point of turn-around with only 1 monthly decline predicted in the next 3 months and no spending declines expected next year.

Non-building Infrastructure

Sewer/Water/Conservation, the three Environmental Public Works markets, posted declines in new project starts in 3 (sewer) or 4 of the last 4 years. Collectively, new starts in 2017 are the lowest in 5 years. Cash flow predicted from starts has been indicating spending declines since Q2-2016. In fact, spending has declined in 12 of the last 18 months. Cash flow still predicts more spending declines over the next 8 months.

Highway/Bridge/Street starts in the 2nd half of 2014 recorded the slowest rate of growth in the last 6 years. Starts that would normally be contributing spending through 2017 and into 2018 contributed a lower than normal volume of spending which will end in 2017. Had it not been for the extremely high volume of starts in the 1st 4 months of 2014, the most ever recorded in 4 consecutive months, 2017 spending would have dropped more than double the 4% spending decline now forecast.

Highway starts in the 1st 6 months of 2015 posted the next highest growth to early 2014. Spending in 2018 will benefit from those projects that started in 2015 but that have unusually long duration. They will contribute a higher rate of spending in 2018 beyond the duration that typical projects would have ended. It is not recent new starts but old backlog that is influencing 2017 and 2018 highway spending.

Transportation Terminal starts in the first three months of 2017 were more than three times higher than any three-month period in the previous five years. While this helped turn 2017 spending positive, 2017 is still affected by uneven starts from two to three years ago holding down gains in the 2nd half. Transportation will show only a 1% gain in 2017 spending but will post double digits gains in 2018. The high volume of 2017 starts has the most effect on 2019 spending. Terminal buildings is reported in Dodge Starts in Other Institutional Bldgs. However Census reports terminal spending in Transportation along with rail and Dock spending. I adjust the starts data in my reports conform to Census organization.

Power market starts peaked in 2015 at an all-time high, up 142% from 2014 and more than the prior two years combined. The Power market was the prime contributor to the abnormally high 1st 6 months in 2015. Power spending was down 6% in 2015 and up only 3% in 2016 because Power starts were also at an all-time high in 2012, just below the 2015 level, and those starts drove 2014 spending to an all-time high, but then spending from those old jobs tapered off in 2015.

Power starts dropped 11% in 2016 and are down slightly in 2017. There has been an unexpected large volume of power plant and pipeline starts that are driving 2017 power starts to come in about 40% higher than initially expected.

Even though Power starts have been declining since the 2015 high point, Power had several periods with an exceptionally high value of new starts, some of these periods 2x to 3x the normal rate of growth and a year or two longer duration than typical; late 2014, Jan-May 2015, Feb-Jun 2016 and again in Feb-Jul 2017. A large share of the cash flow, or monthly spending, from all those exceptional starts will occur in 2018 and 2019.

Although starts are not tracked for Public vs Private, Highway, Educational, Environmental Public Works and Transportation make up more than 80% of all Public construction. Only Environmental Public Works starts are down. Educational, Transportation and Highway all have a positive outlook in new starts and predicted spending for 2018.

Here’s how to use the Starts data and how it affects spending Construction Starts and Spending Patterns 9-26-17

Also after New Starts, dollars are tracked in Backlog, Backlog Construction Forecast Fall 2017  11-10-17

Watch for Spending Forecast SOON!

 

Construction Jobs / Workload Balance

11-7-17

The last time construction jobs and workload were balanced was 2005. From 2006 through early 2011, workload dropped 15% more than the decline in jobs. In other words, contractors came into the post-recession period in 2011 with 15% excess staff and the period 2006-2011 posted the largest productivity decline ever recorded.

Jobs vs Volume 2011-2017 11-7-17

For the matching left side plot 2001 to 2011, see this post Jobs vs Construction Volume – Imbalances   Included is the left side matching plot that shows Jan 2011 back to Jan 2001, the zero baseline for the 2011-2017 plot shown here. The left plot shows all of 2001 through 2004 that jobs/workload was balanced. The gap between the red and the blue lines above is the variance from zero change in Jobs/Workload balance.

From Sept 2011 to Sept 2015, construction volume increased 24% in 4 years. Staffing output increased 19% in the same 4-year period. Contractors may still feel the effects from not being able to grow staff at that same pace as volume during that period. However, we did see the larger volume increases absorb 5% of the 15% remaining staff from the previous period 2006-2011. But it loses sight of the fact that they should be recouping the lost work output from all the other 10% staff that still remain.

Work output is defined as jobs x hours worked. Construction volume is defined as spending minus inflation.

From Jul-Sept 2015 to Jul-Sept 2017, volume increased less than 2% but work output grew by 6%. For that two years, new jobs created plus the change in hours worked by the entire workforce grew 6%, three times faster than construction volume increased.

In the six-year post-recession period Sept 2011 to Sept 2017, volume increased 26% and jobs/work output increased 25%. There seems very little room to be calling this a jobs shortage.

So here we are most of the way through 2017 and if we look back at the last 11 years, not only are jobs once again increasing faster than workload, but also in total since 2005 we still have 14% staff that would need to be absorbed by new workload to return to the previous jobs/workload balance.

Maybe it’s time we stop calling this a jobs shortage and start referring to it as a productivity challenge that needs to be turned around.

For an expansion of more information on this topic see Jobs vs Construction Volume – Imbalances    Included is the left side matching plot that shows Jan 2011 back to Jan 2001, the zero baseline for the 2011-2017 plot shown here. The left plot shows all of 2001 through 2004 that jobs/workload was balanced.

Constant Dollar Construction Growth

11-2-17

Construction spending had been chugging along very nicely from 2012 through 2016 with annual growth ranging between +6.5% and +11.0%. The average spending growth for those 5 years is 8.5%/yr. For 2017, spending growth will come in at only just over 5%.

Perhaps what may be more important is the inflation adjusted growth or constant dollar growth. Constant dollar growth measures volume. Volume growth ranged from +3.0% to +8.0% in the 5 years from 2012 through 2016. The average constant$ growth for those 5 years is 5.4%/yr. The rest of the spending growth was inflation dollars. For example: a year in which spending growth is 7% but that has 4% inflation ends up with only 3% constant$ volume growth.

From 2005 peak volume ($1,448 bil in 2017$) to the lows reached in 2011 ($954 bil), constant dollar volume dropped 34%. Since the 2011 low, volume has increased 31%. In rapid growth years volume increases between 6% to 8%/yr. In average or low growth years, constant dollar volume growth ranges closer to 2% to 3%/yr.

Spend current vs constant 2017 11-8-17

2017 will post the highest composite construction inflation in 11 years, 4.5%. Residential inflation has averaged 6%/yr for the last 5 years. With 2017 at 5% construction spending growth, the lowest in six years, and at the highest inflation in years, 2017 volume growth will fall to only +0.6%.

Residential, with nearly 12% spending growth in 2017, still holds onto the best volume growth in 2017 at slightly over 5%. Residential has recorded the highest volume growth in 5 of the last 6 years, the lowest coming in at +5%, averaging 8%/yr for 6 years.

Nonresidential Buildings constant dollars is down slightly for 2017, posting a volume decline of -0.2%. This was predictable since Manufacturing, after recording 90% growth from 2011 to 2015, has worked off a big backlog and dropped 15% (from an all-time high) in the last two years, most of that drop in 2017. For 2017 that drop offset $8 billion of growth from other markets. Nonresidential Buildings volume increased 20% in the previous 3 years.

Non-building Infrastructure volume is down 6% in 2017 after growing only 5% in the previous 2 years. However, the non-building infrastructure sector led all growth in 2014 at +8.5%. It should be noted that 2015 posted the all-time high for Infrastructure spending. The largest declines since then are in Environmental Public Works projects, Sewer/Water/Conservation. All three markets posted declines in new project starts in 3 or 4 of the last 4 years. Spending in 2017 is down 17% from the most recent high in 2015.

Public works spending is responsible for 80% of the dollar decline in non-building infrastructure spending since the high in 2015.

In 2018, Nonresidential Buildings and Non-building Infrastructure lead spending growth.  Residential spending will slow considerably after six years of solid growth. Constant$ volume growth after inflation will climb back to +2.3% with the two nonresidential sectors over 5% and residential dropping to a volume decline.

Spend Sector Constant 2006-2018 11-2-17

 

 

Ahead of the Sept Construction Spending Forecast

10-25-17

On November 1, September construction spending will be released. The September spending release is always a solid turning point for the 2017 forecast. Here’s a few facts leading into the forecast which will incorporate this data and be posted soon after the 11-1-17 spending release.

2017 construction spending will come in at $1,250 billion, up 5.5% from 2016.

Largest $ contributors to growth in 2017 spending: Residential $56b, Commercial Retail $12b, Office $6b.

Largest $ declines in 2017 spending: Manufacturing -$8b, Public Works -$6b.

Total construction spending averaged 8%/yr growth last 6 yrs (2014 & 2015 at 11%). Expect 6% in 2018, 5% in 2019

Construction spending on Infrastructure leads growth for the next 3 years and it has nothing to do with an infrastructure spending bill.

Infrastructure spending in 2018 is led by Power and Transportation markets.

Most of the 2018 spending in the Power market will be generated from starts in 2016. Equally strong 2017 starts will generate most of the Power spending in 2019.

Public construction spending in 2018 will reach highest yr/yr growth rate in over 10 years powered by Educational spending.

Commercial/Retail spending in 2018 slows but most other nonresidential buildings still show strong growth, especially Office and Educational.

Residential spending slows to a crawl after more than 100% growth in last 6 years. Currently predicting only 5% to 6% growth over next 2 years.

Residential spending may change during the year because, while spending in all other markets is dependent on starting backlog, residential spending is primarily dependent on new starts within the year

Largest $ contributors to growth in 2018 spending: Power $22b, Office $15b, Educational $10b, Transportation $5b.

Largest $ declines in 2018 spending: none greater than -$2b.

 

Nonresidential Buildings and Infrastructure construction will both hit new all-time highs for starting backlog in 2017 and 2018. Both will see a 9% increase in spending in 2018.

Backlog incld Res Starts 2005-2018 10-26-17

Infrastructure construction spending never dropped due to the recession as much as Nonresidential Buildings or Residential.

Nonres Bldgs dropped 35% from $438bil in 2008 to $284bil in 2011.

Residential dropped 60% from $630bil in 2005 to $252bil in both 2010 and 2011.

Infrastructure declined only 8% from $274bil in 2009 to $251bil in 2011. It rebounded to $305bil in 2015, a new high.

Nonres Bldgs spending is just 3% below the previous high but residential is still 16% below 2005.

 

In constant$, adjusted for inflation, Nonres Bldgs peaked at $537bil in 2000 and Residential peaked at $755bil in 2005.

Nonres Bldgs is still 21% below the inflation adjusted peak. Residential is still 30% below.

Infrastructure reached an inflation adjusted peak in 2009 at $300bil. It hit a new high in 2016 at $313bil and in currently down 6% from that high. It will set a another new high in 2018.

Spend current vs constant INFRA 1993-2018 plot 10-25-17

Watch for the new 2017-2018 Spending Forecast to be posted within the week after the September data is released 11-1-17.

These other recently posted articles also have information relative to the 2017-18 forecast

Is Infrastructure Construction Spending Near All-Time Lows?

Construction Starts and Spending Trends 2017-2018

 

Is Infrastructure Construction Spending Near All-Time Lows?

10-10-17

Is Infrastructure construction spending near all-time lows? This question is raised because I saw comments to this affect recently posted on a major national construction professional organization twitter feed.

First, this raises several other questions:

  • Exactly what construction markets are being referenced as infrastructure?
  • Does this reference include public work only, or both public and private?
  • Are educational and health care being included as infrastructure?
  • Does this reference constant inflation adjusted spending?

The construction markets typically referred to as infrastructure, in order of largest to least volume, include;  Power, Highway, Transportation, Sewage/Waste Water, Communications, Water Supply and Conservation. Sometimes also considered are Educational (3rd after Highway), Healthcare (after Transportation) and Public Safety (2nd smallest).

If only public work is included, everything changes. Most (90%+) of Power spending is private, so it represents less than 3% of public work. The largest contributors in this case are: Highway (32% of public work), Educational (25%), Transportation (11%), Sewage (8%) and Water Supply (4%). No other market is greater than 3% of public work.

And finally, is the reference to current dollars as originally spent within each year, or to constant inflation adjusted dollars, adjusting all historical expenditures to constant 2017 dollars? Any comparison to determine if real growth has occurred should be in constant dollars, in this case all adjusted to 2017.

Typical infrastructure, not including educational, healthcare or public safety, but including all public and private sector work produces this result:

Spend current vs constant INFRA 1993-2018 plot Sep 2017

However, the most likely reference is to typical public infrastructure, not including educational, healthcare or public safety. This scenario includes only the public sector work of typical infrastructure and eliminates private spending. This eliminates 90%+ of all power work and 100% of communications. So, for this scenario I’ve removed all power work and communications work. This is the result:

Spend current vs constant INFRA PUBLIC 1993-2018 plot Sep 2017

In both instances, the lows, whether using current or constant dollars, occurred between 1993 and 2004. The highs are recent, all occurring from 2007 to 2016. 2017 spending dropped somewhat from 2016.

To answer the question, Is Infrastructure construction spending near all-time lows? NO! Infrastructure construction spending is not at or even near all-time lows. In fact, if we extend our timeline back more than three years, it’s not even near recent lows. It is near all-time highs!

Infrastructure construction spending in August dropped to the lowest since November 2014. However, this was not unexpected. Cash flow models of infrastructure starts from the last several years show monthly spending dips and peaks. Current dips in spending are being caused by uneven project closeouts from several years ago. The actual current backlog is at an all-time high and spending will follow the expected cash flow.

Spend Infra Jan15 to Jul18 10-10-17

Infrastructure starting backlog hit a new all-time high in 2017 and will again in 2018.  Public Infrastructure new starts reached all-time highs in 2013 and 2015 and are on track to go higher in 2017.  80% of infrastructure spending within the year comes from backlog at the start of the year and that backlog may be comprised of jobs one, two, three and even four years old.

Infrastructure spending in 2017, although down slightly from the all-time high reached in 2015 and nearly equaled in 2016, will reach a new high in 2018.

(This analysis does not include any spending projections from an infrastructure investment bill).

Highway spending is currently benefiting from projects that started in 2015 but that have unusually high value and long duration. They contribute spending well into 2018 beyond the duration that typical projects have ended.

Transportation Terminal starts in the first three months of 2017 were more than three times higher than any three-month period in the previous five years. However, 2017 spending is still affected by uneven starts from two to three years ago, holding down gains in the 2nd half. Transportation will show only a 1% gain in 2017 but produces double digit gains in 2018.

Infrastructure construction spending is near all-time HIGHS and has been for the last several years. That is not meant to indicate there is no need for infrastructure investment. I think the need is well established. However, I’ve been writing about infrastructure for more than a year, pointing out the level of activity in this sector and the difficulty that will arise when we try to increase work volumes. The approach to adding new work and the discussions surrounding this approach should reference accurate data, and that should include an accurate representation of current workload and future ability to absorb more work.

For much more in-depth related to infrastructure construction see this post Infrastructure Spending & Jobs

 

So, About Those Posts “construction spending declines…”

You know those articles you’ve been seeing, “Worst year for construction spending since 2010″, well there’s some truth to that, BUT

2017 is the 6th year of the expansion. It has slowed, but… Here comes the BUT!

10-4-17 – Construction numbers are at all-time highs! Slowing or not, activity is very strong. Looking behind the headlines, here’s what we see;

Residential construction spending is slowing the most, from +11% in 2017 to only +2% in 2018 after six years averaging 13%/yr. Nonresidential buildings spending this year just kept up with the rate of inflation (4%), none-the-less, it’s at record highs. It doubles that rate of growth to 8% in 2018. Non-building infrastructure, down 2% in 2017, next year expect growth of 10%+, coming from long duration jobs.

The real performance numbers in Infrastructure are completely hidden. Spending was near flat for three years. But during that time, contrary to every other sector which experienced inflation of 15%, Non-building Infrastructure experienced deflation of 7%. (Gee, didn’t I read somewhere that activity within a sector is a primary driver of inflation?) Anyway, flat spending means volume really increased by 7% during that time. Spending by itself never tells the whole story!

There were some expected dips in spending recently, Manufacturing, Power, Highway, and there will be more in early 2018. BUT, there are also expected boosts in spending, Office, Commercial/Retail. Some of these already have matched up with the forecast, and there are more to come in 2018, Power, Transportation.

All Nonresidential Backlog is at record highs.

Backlog incld Res Starts 2007-2018 10-2-17

Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2017 and again in 2018.  For four years, from 2010 to 2013, all nonresidential backlog remained fairly constant. Since then, backlog for infrastructure is up 30% and for buildings it’s up 60%. (75% to 80% of nonresidential spending within the year comes from backlog at the start of the year. For residential, 70% of spending comes from new starts within the year.) Buildings will hit spending records in both 2017 and 2018. Infrastructure spending will hit a new high in 2018.

Ignoring for the moment that comparing any month to the same month last year can be grossly misleading as to the direction the markets are headed (for reasons explained in other recent posts on this blog), 2017 total spending growth is the lowest % yr/yr growth since 2011 (not 2010). Does that make it “worst”?

Spending will gain +5.6% in 2017, the least gain in six years. Last year was +6.5%, 2013 was +6.6%. The average for the last six years is +8%. So 2017 is the worst. Pretty damn good worst!

August Construction Spending 10-2-17

Data released 10-2-17

Preliminary Report August Construction Spending

August construction spending was posted today at $1.218 trillion, up 0.5% from the 1st revision to July.

  • Residential spending is up 0.5% from July, up 12.3% YTD.
  • Nonresidential Buildings spending is up 1.8% from July, up 4.5% YTD.
  • Non-building Infrastructure is down 0.5% from July, down 3.4% YTD.

Year-to-date through August posted at $806 billion, up 4.7% from same period 2016.

What you should know – Revisions:

Since the bottom of the recession in January 2011, through June 2017 (78 months), spending vs the prior month was 1st reported down 42 times. Values were revised up 64 times, but not all months turned positive. After revisions, spending was down vs the prior month fewer than 20 times.

Monthly values are revised the next two months after initial release. Spending has been revised UP 15x in last 18 months. The average revision in following two months is +1.0%. This table shows the growth before and after revisions this year. Notice, spending was 1st reported down vs the prior month 5 times through June. After revisions spending is down only twice.

Spend Revs small table August 10-2-17

All values for the year are revised again in following May data report. The final revision has been UP 49 of the last 53 months. Average post-annual revision 2016 +2.2%; 2015 +4.3%; 2014 +4.4%. The average post-annual revision for the last 4 years is just over 3%.

Year-over-year and year-to-date comparisons of construction spending are generally understated by about 2% to 3% until the final revision of spending data is posted in May the following year.

Year-to-date construction spending through August is posted at $806 billion, up 4.7% from same period 2016. However, the post-annual revision has already been applied to all months in 2016. The same revision will not be applied to 2017 data until May 2018 data is published next year, so current YTD is always understated. Based on post-annual revisions for the last 4 years, adjustments range between +2% and +4%. The most recent six months has averaged +2.4%. So YTD 2017 spending will very likely increase and could be in the range of 6% to 8%.

Market Specific Revisions

Specific markets vary both higher and lower than the average revision. For example Power has been revised on average +10%, while Educational was revised less than 2%. Highway and Transportation revisions have averaged less than 1% over the last 18 months.

Construction Spending Revisions After 1st Release Through August Data:

Every month this year except April has been revised UP. The April data looks like such an anomaly (largest monthly decline since the recession) that I expect next May we will see April get revised up by +1% to +1.5%. July data gets revised next month and I expect to see an additional +1% to +1.5%.

  • Total Construction UP 49 of last 53 months, avg 3.7%/mo.
  • Total Construction UP 17 of last 19 months, avg 2.5%/mo.
  • Residential revised UP 30 of last 31 months, avg 6.8%/mo.
  • Residential UP 18 of 19 avg 3.6%/mo.
  • Commercial UP 18 of 19 avg 5.7%
  • Educational UP 13 of 19 avg 1.7%
  • Power UP 19 of 19 avg 10.7%
  • Commercial/Retail May +6.7%, June +3.8%, July +3.7%
  • Lodging May +4.3%, June +0.2%, July +1.4%
  • Educational May -0.7%, June +3.4%, July -1.8%
  • Transportation May +3.5%, June +2.1%, July -1.8%

Spending Forecast

2017 construction spending is expected to reach $1,252 billion, up 5.6% from 2016. Average annual rate of spending will increase to $1,300 at year end. I wouldn’t be surprised to see future revisions to Mar-Apr-May spending smooth out that erratic period and add to total $ 2017.

In my forecast, I rely on the revision data by market to add a conservative adjustment for expected normal revisions.

My current Forecast has spending year-to-date through August  up nearly 6% over 2016. Spending in the 2nd half 2017 will increase 1.5% to 2% over the 1st half 2017 and will increase more than 5% over the 2nd half 2016.

  • All sectors have already hit spending lows for the year and will increase 4% to 8% over the next six months.
  • Infrastructure will finish the year with totals down 2%, but the annual rate of spending could potentially increase 8% from July to year end. 2018 shows 11% growth.
  • Nonresidential Buildings may finish up 5% in 2017, the sixth consecutive year of growth. For 2018 expect 8% growth.
  • Residential spending will be up nearly 12% for 2017, the sixth year over 9%. Spending growth in 2018 slows to 2%.
  • Backlog and the share of spending within the current year from that backlog is at an all-time high for nonresidential buildings and non-building infrastructure.
  • Public work for 2017 will finish down 1.5%. By far the largest public spending declines are in Environmental Public Works, especially Sewer and Waste Disposal.
  • Public spending is headed for a sizable rebound in 2018, up 9%.
  • Every large Public category is forecast to show solid growth from the 4th qtr 2017 through all of 2018.
  • This analysis does not include any spending projections from an infrastructure investment bill.
  • Largest declines 2017; Manufacturing -11% ytd; Environmental Public Works -16% ytd.
  • Largest increases 2017; Office +10% ytd; Commercial +16% ytd; Residential +13% ytd.

Spend Sector 2015-2018 10-3-17

See this article Construction Starts and Spending Trends 2017-2018 for more on spending trends

 

 

Construction Starts and Spending Patterns

9-26-17

Construction Starts and Spending trends may not be apparent unless you look deep into the last few years of data.

Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts.

Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.

Power market starts and spending provides a good example. Power starts peaked in 2015 at an all-time high, up 142% from 2014 and more than the prior two years combined. Yet Power spending was down 6% in 2015 and up only 3% in 2016. This happened because Power starts were also at an all-time high in 2012, just below the 2015 level, and those starts drove 2014 spending to an all-time high, but then tapered off in 2015. Those peak starts from 2015 will still be contributing spending for several years to come, long beyond typical jobs, and that drives up typical spending growth because it adds more than typical number of months that contribute spending.

Power starts dropped 11% in 2016 and continue to drop in 2017. Year-to-date and year over year comparisons to 2016 show Power starts down in all respects. For the 1st six months of 2017, Power starts are down four out of six months compared to same month in 2016 and year-to-date through June is down a total 20%.

Even though Power starts have been declining since the 2015 high point, Power had several periods with an exceptionally high value of new starts, some of these periods 2x to 3x the normal rate of growth and a year or two longer duration than typical; late 2014, Jan-May 2015, Feb-Jun 2016 and again in Feb-Jul 2017. When we have old, long duration jobs that are still contributing to monthly spending, spending goes up. A large share of the cash flow or monthly spending from all those exceptional starts will occur in 2018 and 2019. Those jobs will elevate Power spending 15% to 20% in 2018 and also in 2019.

  • Pattern of cash flows from construction starts is indicating substantial acceleration in spending over next six months in all sectors, perhaps most notable in infrastructure.
  • Infrastructure jobs from 2014 with longer than average duration will continue into 2018. These break the average balanced cycle of one month of old jobs ending for every new month of jobs starting. That will increase spending in 2018.

This simplified example shows what happens to monthly spending growth when a long duration job first influences spending past the typical duration and then when it ends. In the example here, starts grow at 1% per month and have a typical duration of 5 months. One month has an unusually large project start that will last for 10 months. A typical month of spending has cash flow from 5 months of starts, but the long duration project creates 6 months of cash flows for the period beyond typical duration.

Notice what happens and when it occurs. When the large project starts it has no unusual affect on spending. When it first extends beyond typical duration, it has a massive +20% growth effect on spending, even though starts had only been increasing at 1%/month for the previous 5 months. When it ends it has a similar downward effect, again, even though starts had been increasing at 1%/month.

Spending growth (or declines), both when an extra large job causes it to increase and then when the extra job ends, is almost entirely influenced by the long duration project, not by normal monthly starts growth rate.

Starts vs Spending Example 9-27-17

2017 construction spending is expected to approach $1,250 billion, up 6% from 2016. Average annual rate of spending is going to increase 5% from $1,240 to $1,300 at year end. I wouldn’t be surprised to see future revisions to Mar-Apr-May spending smooth out that erratic period and add to total $ 2017.

  • All sectors have already hit spending lows for the year and will increase 4% to 8% over the next six months.
  • Infrastructure will finish the year with totals down 2% to 3%, but the annual rate of spending could potentially increase 8% from July to year end. 2018 shows 11% growth.
  • Nonresidential Buildings are up 5% in 2017, the sixth consecutive year of growth. For 2018 expect 8% growth.
  • Residential spending will be up nearly 12% for 2017, the sixth year over 9%. Spending growth in 2018 slows to 2%.

Starts CF 9-27-17

2017 construction starts through August total $482 billion, down 1% compared to revised 2016. If 2017 gets revised as expected, even by only 4%, it will show +3% growth over 2016, but we won’t see that growth in the data until next year.

  • Starts revisions for the period 2008-2015 averaged +5.8%/yr. For the period 2012-2015 revisions averaged +4.0%.
  • The smallest revision to starts data since 2008 was +3.5%/yr. 2016 year-to-date through August revisions are +11%.
  • Previous year starts are always revised upwards. Therefore, current year starts year-to-date growth is always understated.
  • Starts have been increasing at an average rate of 11%/year for the last 5 years.
  • After revisions, I expect 2017 will be the highest amount of new construction starts in 13 years.

Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. However, a few months of exceptional 2015 starts will elevate 2018 spending and late 2016 starts will elevate 2019 spending.

Office spending, down slightly (temporarily) due to timing of completions from old jobs, is on track to reach 12% growth in 2017. Starts have been increasing since 2010 with the strongest growth period of new starts from Sept 2016 through June 2017. So, for the next 10 months we may see year/year comparisons negative, but that high volume of starts from Sept 2016 to June 2017 is going to elevate spending in 2018 and 2019.

Commercial spending early reports for June and July are both well below that predicted by starts cash flows and may be prone to substantial revisions. Commercial spending revisions have been up 17 of last 18 months an average of 6.0%/month. (10-2-17 Commercial spending was revised up by 4% for both June and July) Commercial starts have been increasing every year since 2010.

Educational has seen a slow but steady growth in new starts since 2012. Current dip in spending are not expected to continue. Cash flow from starts is indicating a steady climb in spending from now through the end of 2018.

Healthcare starts from 2015 are ending unevenly, rather than smoothly, causing temporary dips in spending. Growth resumes by Sept-Oct.

Transportation Terminal starts in the first three months of 2017 were more than three times higher than any three-month period in the previous five years. While this helped turn 2017 spending positive, 2017 is still affected by uneven starts from two to three years ago holding down gains in the 2nd half. Transportation will show only a 1% gain in 2017 but  double digits gains in 2018. The high volume of 2017 starts has the most affect on 2019 spending.

Highway spending in 2018 will benefit from a scenario exactly as described above in the cash flow chart. Projects that started in 2015 but that have unusually long duration will contribute spending in 2018 beyond the duration that typical projects have ended. It is not recent new starts but old ongoing projects that will increase 2018 spending by 6%.

Public Works cash flow from starts has been indicating declines in spending since last summer. In fact, declines in public works spending (down 20% YTD in Sewage Waste Disposal) is the biggest drag on Infrastructure spending in 2017. However, now spending declines are expected to turn to growth in the 2nd half 2017 and continue growth through 2018.

(This analysis does not include any spending projections from an infrastructure investment bill).

See August Construction Spending 10-2-17 for more trends in spending.

See Starts Trends Construction Forecast Fall 2017 11-8-17 for updated trends in new starts.

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