Behind The Headlines – Construction Starts is Not Spending

9-13-18

New Construction Starts is powerful data if used properly. Understand how to use the data and you have an excellent forecasting tool.

New Construction Starts is incorrectly used when the data is referred to as construction spending. It cannot be used to look at the year over year (yr/yr) or month over month (mo/mo) trend in values to predict % change in construction spending. This misrepresents how to use New Starts data.

Care must be taken to use Starts properly. It is sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate spending. Also, Starts do not directly indicate changes in spending per month or per year. Projected starts data cannot be used to directly forecast expected construction volume.

Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

Cash flow is the best indicator of how much and when spending will occur. Cash flow from starts gives a prediction over time of how spending from each month of previous starts will change from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.

New Starts for the month or the year is the total value of new project revenues that came under contract in that period. Since the values reported for Starts are a sampling survey of about 60% of the industry totals, the total dollar volume is not comparable to actual spending. However, the percent change in values is very useful.

The entire value of a project enters backlog when the contract is signed and work begins. That’s a new start. Projects booked on or before December 31st, that still have work remaining to be completed, are in backlog at the start of a new year.

Backlog Cashflow Forecast 2017-2021 9-21-18

Simply referencing total new starts or backlog in the year does not give an indication of spending within the year or next calendar year. Projects, from start to completion, can have significantly different duration. Whereas a residential project may have a duration of 6 to 12 months, an office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Total Cash  Flow in the Year, or Spending, could include spending from projects that started years ago.

Backlog at the start of the year could include revenues from projects that started in December or several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of the year is the amount remaining to complete the project or the estimate to complete (ETC). And all that ETC may not be spent in the year following when it started, dependent on the duration remaining to completion.

The only way to know how much of total starts or total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects. The sum of the amounts from all projects ongoing in each month gives total cash flow in that month, or monthly spending in that year. Spending in any given month could have input from projects that started many months ago.  The sum of the cash flow is what shows the expected change in spending.

The following table clearly shows there is not a correlation between starts in any year with spending in the following year. The practice of using construction starts directly to predict spending in the following year can be very misleading in an industry that relies on data for predictive analysis to plan the future. Not only does it not predict the volume of spending in the following year, it does not even consistently predict the direction spending will take, up or down, in the following year. It’s a false indicator and it’s not a good use of data.

Starts vs Spending 2009-2017 9-13-18

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.

Starts vs Spending Nonres Bldgs 9-13-18

Power market starts and spending provides a good example.

Power starts peaked in 2015 at an all-time high, up 140% from 2014 and more than the prior two years combined. Yet Power spending was down 6.5% in 2015 and down 1.5% 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 typical spending growth because it adds more than typical number of months that contribute spending.

Starts vs Spending Power Market 9-13-18

Power starts gained only 1.5% in 2016, dropped 7% in 2017 and are expected to finish 2018 down 12%. The pattern of cash flows from starts is indicating growth in spending for 2018 and 2019. Starts from 2015 and 2016 with longer than average duration contribute spending out to 2020 & 2021, breaking the average balanced cycle of one month of old jobs ending for every new month of jobs starting. That drives the pattern in spending.

The following 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 table presented below, starts grow at 1% per month and have a typical duration of 5 months. But one unique 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.

Starts vs Spending Example 9-13-18

When the large project starts it has no unusual effect on spending. But 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-large job ends, is almost entirely influenced by the long duration project, not by normal monthly starts growth rate. This same example can be over months or over years.

Spending patterns are far more influenced by projects with unusual duration. Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Cash flow is the best indicator of how much and when spending will occur.

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

 

Construction Spending July 2018

9-4-18

U. S. Census posted Construction Spending for July at a seasonally adjusted annual rate (SAAR) of $1,315 billion, up only 0.1% from May.

Year-to-date, July construction spending is up 5.2% from the same period in 2017.

June was revised down slightly, -0.2%, and May was also revised down, -0.6%, but May remains up 1.7% from the 1st May release.

Here’s the link to the Sept. 4 release of July data 

Construction Spending for the 1st 7 months of 2018, in Current $, by Census formulas averages $1,306 billion. By my formulas the 1st 7 months average stands at $1,321 billion. Either way, this is an all-time high, well above the pre-recession high spending of $1,205 billion posted in the 1st quarter of 2006. Spending has been above the 2006 high since the 4th quarter 2016, but since 2006, no other 6-month period has averaged above $1,250 billion.  Spending is expected to total $1,335 billion for 2018.

Constant $ shows volume reached peak during the 2nd half 2005 and 1st half 2006, with  2005 posting the peak year. 2018 constant $ inflation adjusted spending is still 14% below the 2005-2006 peak.

Spend current vs constant 2018 8-2-18

Total spending year to date through June is $740 billion. Historically, 56% of annual spending occurs in the 1st 7 months. Jan, Feb and Mar are the weakest months of the year, while Jul, Aug and Sep are the strongest spending months. This would indicate a 2018 total annual spending of $1,321 billion, 1% less than my forecast.

Top performing construction spending markets 2018 year-to-date through July are Transportation +15.8%,Water Supply +14.1%,  Public Safety +13.1%, Conservation 10.3%, Lodging +10.1%, Sewage and Waste Disposal +9.1%, Residential +7.6% and Office 7.2%.

The only markets down year-to-date are Religious -11.8% and Manufacturing -7.5%. Religious building as a percent of total is so small (1/4 of 1%) it has negligible effect on total annual performance. However, Manufacturing is about 5% of total construction.

Residential, Office, Commercial/Retail, Lodging, Highway and Environmental Public Works (Sewage, Water, Conservation) are all ahead of my expectations for the 1st half of 2018.

Last month, June construction spending showed an unusual $9 billion (SAAR) monthly decline (-9.3%) in Educational spending. At that time I said, “This is several billion greater than the largest decline reported during the recession, so this looks like an anomaly in the data. There has never been a monthly decline like this in the Educational market since I’ve been tracking data, back to 2001. It is double the largest non-recession decline. I expect it will be revised up substantially at some point in the future.” That anomaly in the June data was revised up this month, erasing about half of the decline that was first reported.

Transportation is another market that appeared to be unusually low for June. Last month I said this, “Transportation (terminals and rail) new starts in 2016 increased 34% and then in 2017 increased 120%. Even with long duration cash flow spreading out the spending for big projects, my analysis still predicts Transportation spending up 30% in 2018. Year-to-date through June, Transportation spending is up only 14%. I’ve forecast it should be up 18%. That’s a total shortfall of about $1 billion (SAAR ~$12 billion), or about 7%/month, for 3 months. April, May and June spending are all below expectations.” In the July data, both May and June spending were revised UP by a total of $2 billion. With that revision Transportation spending is up 18% YTD through June, as expected. 

Manufacturing spending as of June was reported down 8.7% year-to-date from 2017. Spending through July is now down only 7.5%. I previously reported that I expect the decline to slowly turn positive in the second half of the year to finish up 2%.  Spending is currently at an SAAR just above $66 billion and expected to increase to $70 billion by December. In 2017, spending started the year above $70 billion but decreased to $60 billion by year end. Increasing values in the 2nd half 2018 compared to decreasing values in 2017 will continually increase the year-to-date performance in the 2nd half of 2018.

Power, similar to manufacturing, posted the highest spending for 2017 early in the year, then declined. In 2018, the 1st half posted the lowest spending, so the year-to-date is currently low. Increased spending in the 2nd half 2018, compared to the lowest values of the year in 2017, will boost year-to-date spending every month through year end. Although year-to-date spending through July is up only 0.7%, I expect the total for the year will finish up 8%.

Manufacturing and Power highlight one of the biggest shortfalls of judging expected performance based on year-to-date change. It is important to look at the trend line expected in the current year versus the trend line in the previous year. If they diverge, then year-to-date change will not give a clear indication of expected performance in the current year. Manufacturing data as an example follows. Note, SAAR data shows performance trend but NSA$ is needed to get YTD$.

YOY trend example 9-5-18YOY trend data 9-5-18

Public spending increased 5% in 2015, but has been depressed since since 2009. 2017 finished still 7% lower than 2009. For 2018 we should see a gain of $16 billion, +5.7% over 2017 to $308 billion, the highest finish since 2009. Highway and Street is the largest share of public work, but adds very little to 2018 gains. Educational spending makes up about 25% of all public spending gains. Public Works (Sewage/Waste Water, Water Supply and Conservation), only 14% of all public spending, accounts for about 25% of the gains this year. Public Transportation, at only 12% of public spending, accounts for $8 billion in increases in public spending, half of all the gains in public spending this year. 

Total spending has increased from an average of $1,254 billion in Q4’17 to $1,292 billion in Q1’18 to $1,321 billion in Q2’18, growth of 3.0% and 2.25% the last two quarters. I’m expecting the rate of monthly spending will be above $1,360 billion by year end. The total spending forecast for 2018 is $1,335 billion.

Residential single family spending is up 8.5% YTD. Multifamily is down 0.9%. Total residential spending is forecast to reach $570 billion in 2018, growth of 7.2% over 2017.

Nonresidential Buildings spending YTD totals $246 billion, up only 1.7% from 2017. It is being held down by Manufacturing which is currently down 7.5% from 2017. 2018 forecast is $445 billion, 6.1% growth over 2017, with best growth in Lodging 13%, Office 11% and Amusement/Recreation 9%.

Non-building Infrastructure will post the best year of growth since 2014 to reach a new all-time high at $308 billion. Transportation, by far, will show the best growth, 25% above 2017.

Spend Sector 2015-2019 9-4-18

Cash flow from backlog supports a 2018 spending forecast of $1,335 billion, a spending increase of 7.2% over 2017. The forecast for 2019, based on a modest 3% increase in new starts in 2019 is $1,400 billion, an increase of 5% over 2018. The strongest growth in spending for 2018 and 2019 is forecast to occur in Non-building Infrastructure with Transportation being by far the strongest market.

July Construction Starts Fall but 3moAvg at New High

Construction Spending June 2018

June Construction Starts Reach New Highs

 

July Construction Starts Fall but 3moAvg at New High

8-23-18

New Construction Starts for July in the latest report from Dodge Dodge July 2018 Construction Starts  are down 9% from June, but June starts reached an all-time high Seasonally Adjusted Annual Rate (SAAR) of $899 billion. July posted at $817 billion. May was $804 billion. The May-Jun-Jul three month average SAAR construction starts is $840 billion, all-time high.

The Dodge July construction starts report posted $78 billion of new starts and highlights 19 projects valued over $200 million, one of those at $2.4 billion and 17 projects valued between $100-$200 million. The Dodge June construction starts report posted $98 billion of new starts and highlighted 7 projects over $1 billion (totaling $16.5 billion), 17 more projects over $200 billion and 15 projects between $100-$200 billion. The starts report is a sampling of about 2/3rds of all projects.

New construction starts in the 1st half 2018 reached an all-time high.

The new high in construction starts is measured in current $. When adjusted for inflation (constant $), total starts are still about 20% below 2003-2004, when all sectors reached their previous highs. A closer look at constant $ starts adjusted for inflation shows nonresidential buildings about 8-10% below the previous high, non-building infrastructure about 6-8% above the previous high, but residential is still 40% below the previous high.

Residential starts average for the 6 months Jan-Jun 2018 is the highest since 2006. The 1st 6 months of 2018 is up 8% from the prior 6 months.

Dodge Outlook Midyear Update is forecasting 2018 single family starts to gain 6% and multifamily to gain 3%. Year-to-date through July, single family starts are up 7% and multifamily up 6%.

Starts 2011-2018 Res bldgs 8-24-18

Non-building infrastructure starts for July are level with June and level with the average of the 1st six months. Starts may finish the year slightly down from 2017. However, 2017 was the best year of starts on record. The growth in Infrastructure starts will drive Non-building spending to record highs in 2018 through 2020.

Transportation, in Census spending reports, includes all airport work, air-side and terminals. It also includes rail work, track and terminals and dock work. In Dodge Data starts data, terminals are included in Other Institutional and rail work is included in Other Public Works. Terminals and rail work are included in this analysis in Transportation Infrastructure so that starts can be compared with Census spending data..

Terminal starts are down YTD, 50% lower than 2017. But 2017, which included the start of six major airport terminals, was so high, up 120% over 2016, that even though 2018 is down it will be the 2nd strongest year of starts on record. Rail work also doubled in 2017 and will remain close to even for 2018. Starting backlog for transportation projects doubled from the start of 2017 to the start of 2018. Backlog is on track to increase another 25% to start 2019. No other market will realize the gains in construction spending that we will see from transportation for 2018 and 2019.

Power generation plant starts cause erratic bumps in Power work. In the last year there have been a dozen or more project starts valued over $500 million each, six of those over $1 billion. Also included in Power, Pipeline starts represent half of all Power work started YTD. Cash flow may be adversely impacted by the delay of large projects that started previously. A multi-billion dollar nuclear power plant stopped work and large pipeline project delays have reduced the previous forecast for cash flow.

Highway starts hit an all-time high in 2017 and are forecast to surpass that by a few percent in 2018. Highway starting backlog increased 30% in the last 3 years and will increase 6% leading into 2019.

Starts 2011-2018 nonbldg 8-24-18

Nonresidential buildings starts in July reached $318 billion, down 22% from June, but June reached $402 billion, nudging up against the all-time high from 2008. 

Manufacturing starts are down 60% from June, but June was the highest month ever recorded, three to four times the average monthly starts. July is the 4th best month in the last 3 years, going back to April 2015, the 2nd highest month ever. The decline of manufacturing starts from the June high to a normal amount in July accounts for more than half of the total Nonres Bldgs decline in July. The news is not the decline in July, a return to normal, but the abnormally high starts in June.

Office and Warehouse starts, both up from a strong 2017, are seeing gains from data centers (in office) and distribution centers (in warehouse which is in commercial spending). Amusement/Recreation starts YTD are triple last year. The only nonresidential markets lower year-to-date are retail stores and healthcare. The decline in retail stores, which is also in commercial spending, is being hidden by the increase in warehouses, which are at an all-time high.

Adjusted for inflation, Jan 2008, by a few percent, is still the best ever for nonresidential buildings starts and spending.

Starts 2011-2018 nonres bldgs 8-24-18

The plots above show the 3mo moving average and trend line of starts for Residential, Non-building Infrastructure and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending.

The plot below is an index. The plot shows greater accuracy in the forecast when the predicted cash flow and actual spending plot lines move in the same direction. If the slope of the lines is the same, then the cash flow accurately predicted the spending.

The light green line, spending estimated from starts cash flow, shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows pretty close to the pattern as that estimated from cash flows.

Starts CF 2015-2018 8-23-18

Year-to-date (YTD) 2018 starts are up 2% from 2017, but 2017 starts through July have already been revised up by 12%, up 16% in nonresidential buildings, 22% in non-building  and 4% in residential. 2018 starts will be revised next year and revisions have always been up. Revisions in previous years have averaged more than +7%/yr. for the last 5 years, with most of the upward revision in nonresidential.

Dodge reported this headline on Nov. 2, 2017 “New Construction Starts in 2018 to Increase 3% to $765 Billion According to Dodge Data & Analytics.” At the time, Dodge predicted construction starts for 2017 on track to finish at $745 billion. However, as each new month of starts is reported in 2018, the comparable month in 2017 is revised up to the latest data. Currently through July 2018, total starts in 2017 have already been revised up to $795 billion. 2017 starts, once all revisions are posted, could reach close to $800 billion.

2018 starts, based on initial data this year, could reach $800 billion, at first appearing to show no gain from 2017. Historically, revisions increase the initial total. After revisions posted next year, 2018 starts could reach $830-$840 billion.

Starts in both 2017 and 2018 are stronger than expected just 6 months ago. The current SAAR monthly $ of starts is 10% higher than anticipated just 6 months ago.

Construction spending is up year-to-date through May in every sector. Only Manufacturing and Power markets are down YTD, but not enough to drag the sectors negative. Both markets are expected to finish the year up. (Religious market is down, but represents only 0.2% of spending).

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,336 billion, a spending increase of 7% over 2017. The forecast for 2019, based on a 3% increase in starts, is $1,398 billion, an increase of 4.6% over 2018. The strongest growth in spending for 2018 and 2019 is forecast in Non-building Infrastructure.

Construction Spending June 2018

8-1-18

U. S. Census posted Construction Spending for June at a seasonally adjusted annual rate (SAAR) of $1,317 billion, down 1.1% from an upwardly revised May.  Year-to-date, June spending is up 5.1% from 2017.

May was revised UP 1.7% from the 1st release posted 7-2-18. April was revised UP 0.8%.

https://www.census.gov/construction/c30/pdf/release.pdf

Construction Spending for the 1st half 2018, in Current $, averages $1,307 billion. This is an all-time high, well above the pre-recession high spending of $1,205 billion posted in the 1st quarter of 2006. Spending has been above the 2006 high since the 4th quarter 2016. Spending total is expected to average $1,330 billion for 2018.

Constant $ shows volume reached peak during the 2nd half 2005 and 1st half 2006, with  2005 posting the peak year. 2018 constant $ inflation adjusted spending is still 14% below the 2005-2006 peak.

Spend current vs constant 2018 8-2-18

Total spending year to date through June is $620 billion. Historically, only 47% of annual spending occurs in the 1st 6 months. Jan, Feb and Mar are the weakest months of the year, while Jul, Aug and Sep are the strongest spending months. Therefore, this indicates a 2018 total annual spending of $1,328 billion. This agrees very close to my total 2018 spending forecast.

The headline from the St Louis Fed > Total construction spending fell 1.1% in June, the largest monthly drop in more than a year. Just remember, spending subsequently gets revised 3x and final vs 1st release has been revised UP 79 times in the last 84 months.

Top performing construction spending markets 2018 year-to-date through June are Transportation +14.3%, Public Safety +12.1%, Lodging +10.7%,  Water Supply +9.7%, Sewage and Waste Disposal +9.2%, Residential +8.1% and Office 6.8%.

The only markets down year-to-date are Religious -9.1%, Manufacturing -8.7% and Power -0.4%. Religious building as a percent of total is so small (1/4 of 1%) it has negligible effect on total annual performance. However, Manufacturing and Power make up about 15% of total construction.

Residential, Office, Commercial/Retail, Lodging, Highway and Environmental Public Works (Sewage, Water, Conservation) are all ahead of expectations for the 1st half of 2018.

June construction spending data shows an unusual $9 billion (SAAR) monthly decline (-9.3%) in Educational spending. This is several billion greater than the largest decline reported during the recession, so this looks like an anomaly in the data. There has never been a monthly decline like this in the Educational market since I’ve been tracking data, back to 2001. It is double the largest non-recession decline. I expect it will be revised up substantially at some point in the future.

Transportation is another market that appears to be unusually low for June. Because the monthly variance is not wildly out of balance it passes in obscurity. But here’s what we should see. Transportation (terminals and rail) new starts in 2016 increased 34% and then in 2017 increased 120%. Most of those projects will be completed in 3 years or less, but a number of the huge projects (no less than 15 projects ranging from $1 billion to $4 billion each) have a duration of 4 to 8 years. Even with long duration cash flow spreading out the spending for all those big projects, my analysis still predicts Transportation spending up 30% in 2018. Year-to-date through June, Transportation spending is up only 14%. I’ve forecast it should be up 18%. That’s a total shortfall of about $1 billion (SAAR ~$12 billion), or about 7%/month, for 3 months. April, May and June spending are all below expectations. I expect future revisions will increase current values. Also, we will see a big jump in year-to-date over the next three months since we are currently at an SAAR above $50 billion (and increasing) and Jul-Aug-Sep were the three lowest months in 2017, below $43 billion. Also, 2017 values were revised up 4%/month after the close of the year.

Manufacturing spending as of June is reported down 8.7% year-to-date from 2017.  That decline will slowly turn positive in the second half of the year to finish up 2%. Spending is currently at an SAAR above $65 billion and expected to increase through December. In 2017, spending started the year above $70 billion but decreased to $60 billion by year end. Increasing values in the 2nd half 2018 compared to decreasing values in 2017 will continually increase the year-to-date performance in the 2nd half of 2018.

Power, similar to manufacturing, posted the highest spending for 2017 early in the year, then declined. In 2018, the 1st half posted the lowest spending, so the year-to-date is currently low. Increased spending in the 2nd half 2018, compared to the lowest values of the year in 2017, will boost year-to-date spending every month through year end. Although year-to-date spending through June is down 0.4%, the total for the year could finish up 9%.

Manufacturing and Power highlight one of the biggest shortfalls of judging expected performance based on year-to-date change. It is important to look at the trend line expected in the current year versus the trend line in the previous year. If they diverge, then year-to-date change will not give a clear indication of expected performance in the current year.

Total spending has increased from an average of $1,254 billion in Q4’17 to $1,292 billion in Q1’18 to $1,321 billion in Q2’18, growth of 3.0% and 2.25% the last two quarters. I’m expecting the rate of monthly spending will be above $1,360 billion by year end. The total spending forecast for 2018 is $1,330 billion.

Residential single family spending is up 9% YTD. Multifamily is down ~1%. Total residential spending is forecast to reach $566 billion in 2018, growth of 6.4% over 2017.

Nonresidential Buildings spending YTD totals $207 billion, up only 1.9% from 2017. It is being held down by Manufacturing which is currently down 8.7% from 2017. Also, the anomaly in Educational spending, explained above, contributes to the current low performance. 2018 forecast is $445 billion, 6.2% growth over 2017, with best growth in Lodging 13%, Office 11% and Amusement/Recreation 9%.

Non-building Infrastructure will post the best year of growth since 2014 to reach a new all-time high at $319 billion. Transportation, by far, will show the best growth, nearly 30% above 2017.

Spend Sector 2015-2019 8-9-18

 

June Construction Starts Reach New Highs 7-25-18

 

 

June Construction Starts Reach New Highs

7-25-18

New construction starts, posted today by Dodge Data & Analytics, measured in current dollars, came in at a seasonally adjusted annual rate of $896,000 million, up 11% from May. May, originally posted at +15% over April, was revised up 3.5%.

2nd qtr increased 7.5% from 1st qtr., and 1st half increased 4.5% from the previous 6 months.

The June SAAR (seasonally adjusted) amount of $896,000 million is the highest on record. However, in constant $, adjusted for inflation, there were a few months from 2004 through 2006 that would still be slightly higher. After revisions, it will likely be higher.

Year-to-date starts through June total $396,000 million, 1% higher than the same six months of 2017, but that amount is not as low as first comparison would indicate. 2017 starts through June have already been revised up by 14%, up about 20% in nonresidential and 5% in residential. 2018 starts will be revised again next year and revisions have always been up. Revisions in previous years have averaged more than +7%/yr. for the last 5 years, with most of the upward revision in nonresidential. Therefore, the potential that 2018 YTD gains at a later date will increase vs 2017 is expected.

2017 starts final, once all revisions are posted, could reach close to $800 billion.

New starts data is a sampling of project starts, representing about 60% of total work volume. Actual starts dollars cannot be used directly to represent spending. However, tracking the rate of change in predicted cash flow from starts allows to predict the rate of change in spending.

From Sept’17 through Jun’18 new construction starts reached the highest monthly average since 2004 and are now just below the all-time high.

Residential starts average for the 6 months Jan-Jun 2018 is the highest since 2006. The 1st 6 months of 2018 is up 10% from the prior 6 months.

Non-building infrastructure starts for June are down 28% from May, but that is not particularly newsworthy, because May had an unusually high amount of starts. May included almost $8 billion of pipeline, rail and sewerage projects starts, 3x normal, while June settled back to normal.  June Infrastructure starts are still higher than the average of the previous 6 months. The average Infrastructure starts for Apr-May-Jun is the highest since Q1 2015 when massive new starts for energy plants drove Infrastructure starts to all-time highs. Starts may finish the year close to the same as 2017, but, if slightly higher, could still be the best year of starts on record. The growth in Infrastructure starts will drive Non-building spending to record highs in 2018 through 2020.

Starts 2008-2018 nonbldg 7-26-18

Nonresidential buildings starts in June reached $402 billion, nudging up against the all-time constant $ high from 2008. In fact, in un-adjusted dollars current $, June 2018 starts reached a new high. Manufacturing starts are double the amount from same period in 2017 and Amusement/Recreation starts are triple last year. The only nonresidential market that is lower year-to-date is retail stores. Adjusted for inflation, Jan 2008, by a few percent, is still the best ever for nonresidential buildings starts and spending.

Starts 2011-2018 nonres bldgs 7-25-18

The plot above shows 3mo moving average and trend line for Nonresidential Buildings Starts. Starts can be erratic from month to month. The trend line gives a better impression of how starts will impact spending.

The plot below is an index. The plot shows accuracy when the predicted cash flow and actual spending plot lines move in the same direction.

The light green line, spending estimated from starts cash flow, shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows pretty close to the pattern as that estimated from cash flows.

Starts CF 2015-2018 7-25-18

It’s notable that new construction starts through June are up 1% from 2017. When the 2018 forecast was first issued last November, 2017 starts were predicted to finish the year at $742 billion. The original forecast for 2018 starts growth predicted starts would increase 3% over 2017 to a 2018 total of $765 billion. Well, the current total for 2017 is now $780 billion. Since November, the 2017 base has been revised up by  almost $40 billion. 2017 starts could finish close to $800 billion, more than double the original forecast % growth. And yet, the YTD total for 2018 is still 1% above that revised value.

Starts in both 2017 and 2018 are stronger than expected just 6 months ago. The current SAAR monthly $ of starts is 10% higher than anticipated just 6 months ago.

Construction spending is up year-to-date through May in every sector. Only Manufacturing and Power markets are down YTD, but not enough to drag the sectors negative. Both markets are expected to finish the year up. (Religious market is down, but represents only 0.2% of spending).

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,330 billion, a spending increase of 6.6% over 2017.

Construction JOLTS – What’s wrong with this picture?

7-10-18

In the 24 months from May 2016 to May 2018, Construction Volume went up 3.0%. Jobs went UP by 8%, 500,000 jobs. Spending in that 24 month span increased by just over 12%, but inflation for that period across all construction averaged 9%, hence real volume increased only 3%. That’s a $35 billion increase in volume, enough new work to support 175,000 to 210,000 new construction jobs.

JOLTS (Job Openings and Labor Turnover Survey) job openings went up from 2.4% to 3.0%, up 50,000 openings. Jobs growth exceeded volume growth by more than double and yet job openings went up!

Not only did jobs growth of near 8% far exceed that needed to support the growth in new work, but also, because jobs growth was so strong, it should have reduced job openings.

What’s wrong with this picture?

Jobs vs Volume 2011-JUN2018 7-6-18

Pretty obvious the numbers just don’t add up. First, since construction spending is always later revised up, in recent years by 2%, let’s be generous and assume spending will get revised up by 2%, and let’s keep inflation the same. That would result in a 5% increase in volume or closer to $60 billion in volume. That would support 300,000 to 360,000 new jobs, a need still well below the actual growth in jobs of 500,000.

No matter how we look at it, even generously supposing spending will later increase by 2%, jobs have increased greater than volume of work.

Companies predict job openings based on positions they need to fill within 30 days. But, what if their judgement of positions they need to fill is determined based on what they anticipate from increases in revenue, without taking inflation into consideration. Since revenue also includes inflation, which adds nothing to business volume, that would overestimate the need for new jobs.  We’ve seen this before, in the last expansion.

2003-2006 construction spending increased by 35%, the most rapid increase in spending in over 30 years. But construction inflation during that four year period totaled over 30%, the most for four consecutive years dating back to 1978-1981. After adjusting for inflation real volume in 2003-2006 was up by less than 5%. Considering how high spending was and how much it felt like growth, there was surprisingly little. That did not hold back jobs expansion.

Construction firms added 15% to jobs, or 1,000,000 jobs during this period, more than 3x the actual need.  Job Openings in the JOLTS report increased 100%+, from 100,000 to over 200,000. Firms hired far more than needed and kept increasing the report of job openings, even though they had already hired far more than required. In 2006, housing starts dropped 15%, residential spending dropped 25%, but residential jobs still increased by 6%. From 2003 to 2006, spending on nonresidential buildings increased by 20%, all of it inflation. Volume remained stagnant these four years, however jobs increased by 10%.

Clearly the increases in jobs during this period correlate more with spending than real inflation adjusted volume growth. This four-year period registered the largest productivity decline in over 30 years because the rate of jobs growth was much faster than volume growth.

For 2018-2019-2020, construction spending is currently forecast to increase 6.7%, 3.0% and 4.2%. But after adjusting for inflation, real construction volume is predicted to increase only in 2018 by about 2%. For 2019-2020 volume declines or remains flat.

An argument could be made that JOLTS openings is dependent on firms outlook for growth in the near future. For that, let’s look at predicted volume growth in 2nd half 2018 and in 1st half 2019. It is predicted spending will increase 1.5% in the 2nd half vs 1st half 2018. But adjusted for inflation, volume will decline by 1%. Likewise, for the 1st half 2019, although spending will increase, inflation will outpace spending and real volume will decline 1%. There is nothing in past data or forecast that would support an increase in forecast job openings.

See also What Jobs Shortage? 7-6-18 for related info.

Could it be that some firms are anticipating job needs based on spending, not on volume? Could it be that these firms are not adjusting revenues for inflation to get volume before using the data to prepare a business plan? This is not entirely anecdotal. In several presentations I’ve given over the years I’ve asked the audience, How many of you plan your business needs on your revenue? In a show of hands at a  presentation to NHAGC, a large portion of the audience raised their hand.

If your construction company revenues are up 6% in a year when inflation is 5%, then your net volume is up only 1%. Your company jobs growth required is only 1%.

You cannot ignore the impact of inflation when forecasting jobs need.

What Jobs Shortage?

7-6-18

Jobs report for June issued this morning. Construction Jobs are up slightly.  But the real story is in the last year of growth. Jobs are up 282,000 since June 2017. All across the industry, pundits are screaming jobs shortage. But is there one?

The current spending growth has 2018 on a path to reach an increase of near 8% in spending. But that is not volume. Most of that is INFLATION and that ADDS NO VOLUME. Inflation in 2018 is predicted (already in the spending numbers) to come in about 5% to 6%. Volume is spending minus inflation. Volume in 2018 forecast 2%-3%. Jobs are up 4% since June 2017.

Jobs growth of 4% when net volume is increasing only 2%-3% shows jobs growth in excess of volume. In 2017, jobs increased 3.4% against spending growth of 4.5%. But ALL of the spending growth was inflation, so net volume was 0%. So jobs growth has outpaced volume growth for the last two years by 5%.

See also Construction JOLTS – What’s wrong with this picture? 7-10-18 for related info.

This plot sets the plot lines to zero starting at Jan 1, 2011 so the growth from the bottom of the recession can be visualized. We started Jan 2011 with an excess of jobs.

Jobs vs Volume 2011-JUN2018 7-6-18.JPG

The plot below shows from Jan 2005 through Dec 2010, volume had dropped 15% more than jobs. So we started the recovery in 2011 with excess jobs compared to 2005.

Jobs vs Volume 2001-2010 8-8-17

 

When we look into the three major sectors, the numbers show shortages in residential and job excesses in nonresidential building and nonresidential infrastructure.

You can read much more detail on this in several other articles I’ve written. See this link Construction Jobs 3-8-18  for an article that includes all links to previous articles on the Jobs/Workload imbalance, has an explanation of how some residential jobs are counted in nonresidential and shows the volume/jobs plots for residential and nonresidential.

Residential construction jobs currently total 2,817,000. That’s 83% of the peak jobs year, 2006, which averaged 3,405,000 jobs. Volume of residential work, after adjusting spending for inflation, peaked in Q1 2006 at $780 billion. Volume in the 1st five months of 2018 averaged only $540 billion, only 69% of peak volume. Since the peak in 2006, residential jobs are at 83% of peak, but volume is only at 69% of peak. If we look only at growth since the bottom in Q1 2011, residential jobs have not kept up with volume growth. However, jobs have increase far more than volume compared to the previous peak.

Nonresidential building construction jobs currently total 3,388,000. That’s 99.7% of the peak jobs year, 2007, which averaged 3,397,000 jobs. Volume of nonresidential buildings work, after adjusting spending for inflation, peaked around Q42007-Q12008 at $530 billion. Volume in the 1st five months of 2018 averaged only $420 billion, only 79% of peak volume. Since the peak, non residential buildings jobs have returned to previous levels, but volume is only at 79% of peak. Nonresidential buildings jobs, whether we look at just from the 2011 bottom or we compare since the 2007-2008 peak have increased far more than volume.

The following link shows the jobs vs volume plots for residential and nonresidential.

Much more on this topic Construction Jobs

 

The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from June 2012 through June 2018 construction has added 1.5 million jobs, the 2nd strongest jobs growth ever recorded. It is 2nd to 1994-1999, the strongest construction expansion on record. We are currently in the 2nd strongest expansion, about equal to 1994-1999, but substantially stronger than 2000-2005.

AGC Aug 2018 survey >Eighty percent of contractors report difficulty finding qualified craft workers in latest AGC workforce survey:

Construction Spending 2016-2017 Revisions 7-1-18

While everyone else is talking about May construction spending versus April, the most important change taking place in the spending report every July 1st is the fact that, every year, with the release of May construction spending data on July 1, Census revises the data for all months going back the previous two years. Rarely have revisions been lower.

Census Construction Spending July 1, 2018 data revisions:

2017 increased by $12bil, +1.0%. Most notable was a +2.5% increase to unusually low April 2017.  2017 revisions were mostly residential, up $7.5bil, +1.5%

2016 also revised up, by $6bil, +0.5%, mostly in Nonresidential Bldgs.

Nonresidential Bldgs were revised up in both 2016 & 2017. Healthcare up by ~4%/yr both years. Power revised down by ~4% both years.

Jan, Feb & Apr 2018 spending were reduced, Mar was revised up. Jan-Apr 2018 total was reduced by $2.6bil, -0.7%. Biggest move was -5% to Nonresidential Bldgs. Commercial -15%, Mnfg -5%, Office -4%, Public Safety -18%, Communication +6%

Primary reason YTD dropped from 7.6% last month to 4.3% this month is because $6bil was added to JFMA 2017. Happens every year with this Revs issue.

More to come.

Spend Summary 2014-2020 May 2018 7-3-18

 

Starts CF 2015-2018 7-3-18.JPG

 

New Construction Starts May 2018 Near All-Time High

6-20-18

Dodge reported May new construction starts at a seasonally adjusted annual rate of $778,000 million, up 15% from April. Also, year-to-date starts total $294,000 million, 3% lower than the same 5 months of 2017.

However, 2018 numbers will not be revised until next year and 2017 numbers through May have already been revised up 13%, up about 18% in nonresidential and 6% in residential. So the potential that YTD numbers remain 3% below 2017 is very small.  Revisions to previous year’s numbers have averaged more than +7% for the last 5 years with most of the upward revision in nonresidential.

Revisions to 2017 year-to-date have already resulted in a 4% increase in both 2018 and 2019 starting backlog.

Although Dodge, in its midyear report, is predicting 2017 starts at a total of $763,000 million, the current rate of revision seems to indicate 2017 starts could reach closer to $800,000 million. Forecast 2018 total starts will increase only slightly over 2017.

Keep in mind, unlike the Census spending data which captures 100% of all spending, the new starts data is a sampling of project starts, representing about 60% of total work volume. For this reason, the actual starts dollars cannot be used directly to represent spending. However, the change in predicted cash flow from starts can be used to predict the change in spending.

From Sept’17 through May’18 new construction starts reached the highest average since 2004 and are just below an all-time high. Residential starts posted the best 6 months average since 2006, up 8% from the prior 6 months. Both nonresidential buildings and non-building infrastructure are lower than recent highs. Both could finish the year with starts at a decline of 4% to 5% below 2017 totals, but they are both still near the best year of starts on record.

Starts totals near new highs is in current $. If  2004$ were represented in constant 2018$, the total would be 40% higher due to inflation. So, after adjusting for inflation, today we are still 40% below that 2004 high point.

  • TOTAL All Construction Starting Backlog for 2018 reached an all-time high, increased 35% in the last three years, 14% in the last year.
  • Nonresidential Buildings 2018 starting backlog is the highest ever, up 50% in four years, up 17% from 2017.
  • Non-building Infrastructure 2018 starting backlog is the highest ever, up 45% in three years, up 16% from 2017.
  • Residential work within the year comes mostly from new starts within the year, only 30% from starting backlog.

The erratic nature of new construction starts belies how smoothly those projects feed into backlog and monthly spending.

Starts 2011-2018 nonbldg 6-23-18 Starts 2011-2018 nonres bldgs 6-23-18

Backlog shows fairly constant growth for the last 5 or 6 years. Spending in any given month includes projects started and entered into backlog from 1 month ago to 3 or 4 years ago. In some non-building cases, projects are in backlog for 6 to 8 years, so project starts that appear as a high spike enter backlog and spending and produce a constant upward slope. Most spending within the year in nonresidential work comes from backlog. Most spending in residential work comes from new starts.

Backlog incld Res Starts 2005-2019 6-23-18

The cash flow model of all previous jobs underway already in backlog and all new starts shows the current predicted spending. Starting backlog for 2018 plus new starts in 2018 minus all spending in 2018 generates the forecast work remaining in backlog for the start of 2019.

The predicted spending plot will be added here after July 1 Census spending release.

Much more to come in next few days. edz

Construction Spending April 2018 – 6-1-18

6-1-18

Construction Spending for April is up 1.8% from March and up 6.6% Year-to-date (YTD) from 2017. Both Feb. and Mar. were revised up slightly.

YTD$ Jan-Apr 2018 vs 2017 > Residential +8.7%, Nonresidential Buildings +6.0%, Nonbuilding Infrastructure +3.7%. Public +7.6%, Private +6.3%.

Spending in current $ has reached a new high of $1,310 billion surpassing the previous high spending from 2006. But after adjusting for inflation, constant $ shows volume is still 13% below the 2005 peak.

Spend current vs constant 2018 6-1-18

Census is reporting a 1.8% mo/mo gain from March. I am not seeing such a huge jump in April construction spending over March. My data shows very slight growth from Mar to Apr, possibly because my SAAR factor produces a much higher SAAR for March than the Census factor. The Census factor, which appears unusually low in March, lowers March (to a decline) and increases April growth.

Year-to-date indicators are often a better indicator of a growth trend than mo/mo comparisons. But, YTD can be deceiving. When both years being compared have similar slope to spending growth, YTD works well. But if one year has a declining slope and the other year an increasing slope, YTD values can vary widely from expected annual total yr/yr growth.

For example, Manufacturing shows YTD growth from 2017 is down 4.1% through April.  Monthly spending in 2017 trended down most of the year starting at the highest, $74bil in Q1 2017, dipping as low as $61bil in Dec. For 2018, just the opposite trend is taking place. 2018 started in Jan at a rate of $65bil and is projected to finish the year at $72bil.

This means YTD comparisons for 2018 vs 2017 will start out at the lowest percent change for the year (-4.1%) and finish with 2018 values increasing and 2017 values decreasing. By the 4th quarter the mo$2018/mo$2017 could reach +20%. That diverging trend will continually move the average YTD up such that, for the first half of the year, YTD gives no clear indication of the expected annual performance.

Similar patterns, or at least partially similar patterns, can be found in Office, Educational, Power and Amusement/Recreation.

Overall, this indicates construction spending will experience an improving picture through the year. I’m predicting total YTD performance will increase every month into the 4th quarter. From April to September 2017, total monthly spending was declining. In 2018, for this same period, spending is predicted to increase every month. This will result in rapidly increasing YTD percents during this period. YTD will increase from 6.6% in April to 9% in the 3rd quarter. Even if spending were to realize no additional gains in 2018, the YTD% would still increase from now into the 4th quarter, because 2017 values declined.

The latest data comes in as expected, so does not appreciably change my outlook. I’m still forecasting 8% to 10% growth across all sectors and I expect 2018 will reach a total $1,350 billion in spending.

The outlook is particularly strong for Residential, Educational, Amusement, Office and Transportation. Transportation may exceeding 25% growth. Highway/Bridge and Healthcare growth will be limited.

MORE TO COME

Notes on March 2018 Construction Spending 5-2-18

Construction Economic Activity Notes 4-25-18

Construction Economics Brief Notes 3-10-18

2018 Construction Spending Forecast – Mar 2018

 

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