Construction spending for July was released yesterday, posted at $1.211 trillion, down 0.6% from an upwardly revised June. This is the sixth time in seven months of 2017 in which the initial release for monthly spending is down from the previous month. This is actually a very normal occurrence.
The 1st release of monthly spending vs the previous month has been down 15 times in the last 21 months. This may be what leads some analysts and pundits to write that construction spending is heading to recession. Nothing could be further from the truth!
For the last 21 months, in which 15 first reports showed a decline vs the previous month, 18 of the monthly values were revised up. After revisions, only five months remain down vs the previous month. Seven months are still pending further revisions, almost always up.
Construction spending is highly prone to revisions. After the 1st release it is revised each of the next two months and once again the following year. Spending has been revised UP 48 of the last 52 months, 92% of the time. The average upward revision for the last five years is +3.2%/month. In the last 52 months the upward revision averaged 3.7%.
Construction spending revisions after first release of data:
- Total Construction UP 48 of last 52 months, avg 3.7%/mo
- Total Construction UP 16 of last 18 months, avg 2.6%/mo
- Residential revised UP 29 of last 30 months, avg 7.0%/mo
- Residential UP 17 of 18 avg 3.8%/mo
- Commercial UP 17 of 18 avg 6.0%
- Educational UP 14 of 18 avg 2.2%
- Power UP 18 of 18 avg 12.0%
- Commercial/Retail May +3.9%, June +2.6%
- Lodging May +3.8%, June +1.1%
- Educational May +2.8%, June +3.6%
- Transportation May +3.6%, June +2.3%
January through May values have already been adjusted twice in these reports. June has one more revision next month and July gets revised twice. It’s quite likely both June and July values go up. All 2017 months still get one more revision next year when the May data is released (July 1). The post-annual total revision for the last 15 mo averages +2%, close to the long term average. First release values are ALWAYS being compared to previous values that have already been revised, 92% of the time UP. So first release values almost always understate performance. Since July 1st 2017, all 2016 monthly values have been revised three times so monthly releases this year starting with May have the most understated initial % comparison year-over-year because an un-adjusted release is being compared to a 3x-adjusted value.
When judging performance of monthly spending, it is reasonable to predict spending will get revised UP from the first release. Therefore, the most immediate monthly analysis you read, if based on initial release, 92% of the time is under-stating the performance of construction spending.
Construction spending forecasting not only must rely on performance year-to-date, but also on predictive analysis of how much revision there may be to current values. As an estimate, if monthly spending is initially posted as 2% down, 18/mo.averages indicate it will end up at least +2.6% higher after revisions, so would be a positive 0.6% growth month.
A few closing points:
Construction Spending 1st release for July is $1.211 trillion. Expect this to be revised up. YTD Jan-Jun revisions are UP 1.8%. Historical revisions last 5 years predict the final July value will be up 3% from the 1st release.
Construction Spending AVG 2017 Jan-Jul YTD ($1.226tr) has reached an all-time high. We’ve now posted three consecutive quarters of spending all averaging above $1.220 trillion. Spending is on track to total $1.250 trillion for 2017, up 5.5% over 2016.
Construction Spending avg YTD = $1.226tr, is up YTD 4.7% with revisions through May. Without revisions, the 1st releases would have averaged only $1.208tr, up only 3%.
Commercial Retail, Office and Residential lead 2017 construction spending gains, all over 10%. Office spending is at a record high.
After 5 months of stalled construction jobs growth, August added 28,000 jobs and put 2017 growth back on track towards 250,000 jobs. YTD is up 135,000. March thru July added only 19,000 construction jobs. Jan+Feb added 88,000, ending a six-month period, Sep16-Feb17, that added 167,000 jobs.
Harvey related jobs will be muted by jobs lost, I suspect for at least two months. There will be a period of slack records that will take some time to see the real effects of Harvey.
Further reading on this topic
From January 2001 to June 2017, jobs growth exceeded construction volume growth by 13%. The attached plots show the imbalances in growth.
Jobs growth is # of jobs x hours worked.
Volume is construction spending adjusted for inflation, or constant $.
Sometimes rapid spending growth is accompanied by higher than average inflation. This occurred in the 1990’s and again in 2005-2006. While spending seems to indicate rapid growth, much of the growth in cost is inflation and volume growth can be significantly lower, even sometimes negative, as occurred in 2005-2006. However, jobs growth during these rapid spending growth periods appears to track much more in line with spending growth. This leads to over-hiring and a loss of productivity occurs.
There are two distinct periods when jobs growth advanced more rapidly than real construction volume, 2005-2006 and mid-2015 to mid-2017. In the eight year period in between, either jobs fell faster or, after January 2011, volume increased faster. If spending growth is used to compare, then jobs growth falls far short of construction spending. But, due to inflation, spending is not the correct parameter to compare to jobs. Jobs must be compared to volume. Since 2001, the imbalance shows jobs growth has exceeded volume growth.
2001 through mid-year 2017, jobs exceeded volume growth by 13%.
2001-2004 jobs and volume growth were nearly equal.
2005-2006 jobs growth exceeded volume growth by 20%. During this period, construction spending and volume reached a peak. From late 2004 into early 2006, we experienced 20% growth in spending, the most rapid growth period on record. But that was also the period of the most rapid inflation growth on record. Residential volume peaked in early 2006 but then dropped 20% by the end of 2006. Nonresidential spending was increasing, but almost all of the growth was inflation. Nonresidential volume remained flat through 2006. Inflation was greater than spending growth, so volume declined. Although volume declined, hiring continued and jobs increased by 15%.
2007-2010 volume exceeded jobs growth by 4%. Spending decreased by 30%. Both volume and jobs were in steep decline. More jobs declined than volume, however, this period started with nearly 20% excess jobs. For January 2010 to January 2011, jobs bounced around near bottom, but volume dropped 8% more. 2010 ended with an excess of 15% jobs. January 2011 was the low-point for jobs.
2011-June 2015 volume exceeded jobs growth by 10%. Spending increased by almost 40% and inflation was relatively low at only 3%/yr. This period helped absorb more than half of the excess jobs that were created in 2005-2006 and remained after 2010. By mid-2015, jobs exceeded volume by only 7%.
June 2015-June 2017 jobs growth exceeded volume by 7%. Spending increased by 7%, but inflation was 7% over the same period. Although volume was up and down, over this two-year period through June 2017 we posted zero growth in volume. All of the increase in spending was inflation. Jobs increased 7% in two years.
For the last 5 years, 2012-2016, jobs averaged 4.5%/yr. growth Construction spending averaged 8.5%/yr. growth. Inflation, currently hovering around 4.5%, averaged about 3.5%/yr. during this period. So real volume growth was only 4% to 5%. In the first few years of the recovery, 2011-2014, the gap narrowed and volume improved over jobs, but for the last two years, jobs have been increasing faster than volume.
I do expect spending to continue at a 6% to 7% growth rate at least through 2018. But also, I expect inflation at 4% to 4.5%. If the spending forecast holds, and if jobs growth comes into balance, then that would indicate only a 2% to 3% jobs growth rate from now through 2018.
10-24-16 original posted
1-27-17 updated index tables and plots
8-6-17 archived this for 1-27-17 2016 content – Linked Master Index Tables has updated data
8-6-17 SEE Construction Inflation Index Tables For Updated 2017 Indices
Construction Cost Indices come in many types: Final cost by specific building type; Final cost composite of buildings but still all within one major building sector; Final cost but across several major building sectors (ex., residential and nonresidential buildings); Input prices to subcontractors; Producer prices and Select market basket indices.
Residential, Nonresidential Buildings and Non-building Infrastructure Indices developed by Construction Analytics, (in BOLD CAPS), are sector specific selling price composite indices. These three indices represent whole building final cost and are plotted in Building Cost Index – Construction Inflation below and also plotted in the attached Midyear report link. They represent average or weighted average of what is considered the most representative cost indicators in each major building sector. For Non-building Infrastructure, however, in most instances it is better to use a specific index to the type of work.
All actual index values have been recorded from the source and then converted to current year 2016 = 100. That puts all the indices on the same baseline and measures everything to a recent point in time.
Not all indices cover all years. For instance the PPI nonresidential buildings indices only go back to years 2004-2007, the years in which they were created.
SEE Construction Inflation Index Tables For 2017 Tables
SEE BELOW FOR LARGER IMAGE
When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. When construction activity is declining, construction cost increases slow or may even turn to negative, due to reductions in overhead and profit margins, even though labor and material costs may still be increasing.
Selling Price, by definition whole building actual final cost tracks the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor overhead and profit. Selling price indices should be used to adjust project costs over time.
quoted from that article,
R S Means Index and ENR Building Cost Index (BCI) are examples of input indices. They do not measure the output price of the final cost of buildings. They measure the input prices paid by subcontractors for a fixed market basket of labor and materials used in constructing the building. These indices do not represent final cost so won’t be as accurate as selling price indices.
Turner Actual Cost Index nonresidential buildings only, final cost of building
IHS Power Plant Cost Indices specific infrastructure only, final cost indices
- IHS UCCI tracks construction of onshore, offshore, pipeline and LNG projects
- IHS DCCI tracks construction of refining and petrochemical construction projects
- IHS PCCI tracks construction of coal, gas, wind and nuclear power generation plants
Bureau of Labor Statistics Producer Price Index only specific PPI building indices reflect final cost of building. PPI cost of materials is price at producer level. The PPIs that constitute Table 9 measure changes in net selling prices for materials and supplies typically sold to the construction sector. Specific Building PPI Indices are Final Demand or Selling Price indices.
PPI BONS Other Nonresidential Structures includes water and sewer lines and structures; oil and gas pipelines; power and communication lines and structures; highway, street, and bridge construction; and airport runway, dam, dock, tunnel, and flood control construction.
National Highway Construction Cost Index (NHCCI) final cost index, specific to highway and road work only.
S&P/Case-Shiller National Home Price Index history final cost as-sold index but includes sale of both new and existing homes, so is an indicator of price movement but should not be used solely to adjust cost of new residential construction
US Census Constant Quality (Laspeyres) Price Index SF Houses Under Construction final cost index, this index adjusts to hold the build component quality and size of a new home constant from year to year to give a more accurate comparison of real cost inflation
Beck Biannual Cost Report develops indices for only five major cities and average. The indices may be a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost but should not be used to adjust the cost in either of these two sectors.
Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in six major cities and average.
Other Indices not included here:
Consumer Price Index (CPI) issued by U.S. Gov. Bureau of Labor Statistics. Monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should never be used to adjust construction pricing.
Leland Saylor Cost Index Clear definition of this index could not be found, however detailed input appears to represent buildings and does reference subcontractor pricing. But it could not be determined if this is a selling price index.
Sierra West Construction Cost Index is identified as a selling price index but may be specific to California. This index may be a composite of several sectors. No online source of the index could be found, but it is published in Engineering News Record magazine in the quarterly cost report update.
Vermeulens Construction Cost Index can be found here. It is described as a bid price index, which is a selling price index, for Institutional/Commercial/Industrial projects. That would be a nonresidential buildings sector index. No data table is available, but a plot of the VCCI is available on the website. Some interpolation would be required to capture precise annual values from the plot. The site provides good information.
The Bureau of Reclamation Construction Cost Trends comprehensive indexes for about 30 different types of infrastructure work including dams, pipelines, transmission lines, tunnels, roads and bridges. 1984 to present.
1-27-17 – Index updated to Dec. 2016 data
8-6-17 SEE Construction Inflation Index Tables For Updated 2017 Indices
Here’s some headlines this month on the June Construction Spending release: Plummets in June; Largest one month drop in 15 years; Clearly Decelerating; US Construction Spending Just Collapsed; and my personal favorite, Construction Spending Plummets to Economic Crisis Levels.
Frankly, I have much more trust in my data than to suggest we are at crisis levels.
In the latest Census construction spending report, June spending dropped 1.3% from May, but May was revised down -0.7%. The consensus of economists predicted spending would be up +0.5% (from the original May value), so the data posted is actually 2.5% below consensus estimates.
I expected May to get revised up 0.6% and the initial June release would be flat vs the revised May value. So the actual came in 2.6% below my expectation.
June construction spending was posted at $1.205 trillion, down 1.3% from May and down 2.7% from March. With the revised data, the May Year-to-date (YTD) vs 2016 was only +5.5% (not +6.1% as initially reported) and for June it’s now +4.8%.
My opinion is this preliminary June value appears suspect. This is sort of like driving a well maintained car that gets 30 mpg and all of a sudden the gauges indicate 20 mpg for the latest tankful of gas. Although the road may be a little bumpy, there does not seem to be any serious mechanical problems, so we have to ask, why did gas mileage drop so much?
The April decline and the Apr-May-June decline are the single largest monthly and 3-month total non-recessionary declines on record. We would need to look at recession data to find similar declines. Spending drops like this just don’t normally occur, especially when cash flow patterns from starts predict 4% growth during the 3-month period. That’s a 6.7% miss over 3 months.
The largest declines in the June Seasonally Adjusted Annual Rate (SAAR) construction spending were Highway and Educational, together 60% of the total monthly decline. (There are other markets with greater mo/mo% declines, however most of those markets have a very small share of the total spending so don’t amount to much). Almost all of the largest declines are public work. In fact, the initial June release shows every public market declined. However, all ten other public markets together don’t equal half of the declines generated by these two major markets. Furthermore, for the past 3 months Highway spending shows a decline of 12.5%, and Educational spending is down 7.6% in 4 months. A review of data back to 2005 shows neither of these markets have ever had any periods where they’ve experienced declines of this magnitude. These would be record declines if they stick. Market trend data simply is not indicating to expect record declines at this time. So I consider these data suspect.
Construction spending initial release is always preliminary data. The June value, released August 1st, will be revised in each of the next two reports and then once again next year when all 2017 data is reviewed. The average revision to June spending data over the last 4 years (similar growth years to current expectations) is +4.8%.
There are three more opportunities for revision to the June data and two more to the May data. We will have a much better idea what really happened on October 1st, but we won’t know the final outcome until the final 2017 revision on July 1, 2018.
So, what data seems to indicate a trend contrary to current declines? The last 12 months of Dodge Data new starts for nonresidential buildings are the highest since 2008 and they peaked from August to October. Residential starts, at their highest since 2006, peaked from December’16 to March’17. Backlog is at an all-time high. There is no indication here that spending will plummet.
Also, one month of Educational or Highway new starts each generate about $250 to $300 million per month in spending, for the next 24 to 36 months. Normally, with some variation, we have the current month of new starts coming into backlog and one month of old starts ending. Since starts have been normal or high recently, the spending declines posted in June would imply that we’ve lost two to three months of backlog from current spending. Again, there are no indications that we have an extreme imbalance or a canceling of backlog.
Most of the nonresidential spending occurring right now is from projects that started between mid 2015 and the end of 2016. Nonresidential buildings projects that started in 2015 or earlier still make up one third of the spending in the 1st half of 2017. Non-building infrastructure projects that started in 2015 and earlier contributed 50% of spending in the 1st half of 2017. Residential projects have shorter duration so most spending is from more recent jobs, but we hit a 10 year peak in new residential starts just a few months ago. All sectors have fluctuations in spending and have down months but the index of long term cash flows out to completion shows normal backlog and spending growth across every sector.
I’m inclined to expect substantial upward revisions to June construction spending in the next two releases. No other data supports a big June drop.
Keep in mind, current construction spending is always being compared to previous months revised spending and growth is almost always being understated. Monthly spending has been revised UP 45 times in the last 48 months. All previous months and all 2016 data have been revised several times. The average revision to ALL spending data over the last 4 years is +3.9%/month. Since January 2016, the average revision is +3.0%/month. The average revision to June spending data over the last 4 years is +4.8%.
June data is un-adjusted preliminary data. Many of the news articles declaring construction spending was a miss are based on this preliminary data which very often gets revised away in following months. For example, The 1st 6 months of 2016 have already been revised up, three times each, by a total of 2.5%. All the months YTD in 2017 still have pending revisions. June 2017 vs June 2016 shows a percent growth of only +1.6%, but June 2016 has already been revised up by 4.7% and June 2017 has not yet been revised at all. June 2017 has a 90% chance of being revised up.
I predict after all the revision are in we will see that June spending did not drop to a low of $1.205 trillion, but that it was closer to $1.250 trillion.
The AIA recently published the Nonresidential Buildings Consensus Forecast Midyear 2017 report. The consensus of seven firms projects spending growth for nonresidential buildings at 3.8% for 2017 and 3.6% for 2018. The largest growth in the AIA forecast for any building type for both years is 10% for 2017 Retail & Other Commercial. The highest reported total annual prediction from any firm is 4.4% for 2017 and 5.5% for 2018. AIA Midyear Consensus Report July 2017
Construction Analytics forecast for nonresidential buildings construction spending growth is +7.3% for 2017 and +10.7% for 2018. Growth in 2016 was 7.5%.
Year-to-date (YTD) spending for the 1st 5 months of 2017 is up +5.2%, led by Office and commercial, both near 15%. Estimate-to-complete (ETC) for the final 7 months is forecast at +8.1%. Total spending for Nonresidential Buildings in 2017 is forecast to increase 7.3% = $438 billion.
If spending were to slow to 3.8% growth for 2017, since YTD growth is already 5.2%, the rate of growth in the final 7 months would need to fall to only 2.4%. However, the predicted cash flow from construction starts shows very strong spending growth in the 2nd half 2017 and into 2018. Nonresidential Buildings construction starts for the last 12 months posted the highest average since 2007-2008. This is helping boost spending.
Outside of recession years, nonresidential buildings construction spending for the year dropped below 4% annual growth only twice in 24 years, since data has been tracked. In fact, right now spending needs to grow at 4.5% just to stay ahead of construction inflation. So any forecast of spending growth below 4.5% actually might suggest that construction is not expanding, but is contracting. All indications are that there are no recessionary effects right now and economic activity does not suggest we are headed for a non-recession low spending for nonresidential building construction. I don’t expect spending to drop to 4% growth for the next three years.
The pattern of nonresidential buildings construction starts for the last 30 months is indicating spending increases in the 2nd half of 2017 and is setting up 2018 for the highest ever starting backlog and record spending. Even if starts crash to zero growth for the remainder of the year, 2017 spending would drop by less than 1% and we still begin 2018 with record backlog.
New Office construction starts for the last 12 months are the best ever recorded, on track to reach a total 50% growth over two years. Retail/Commercial starts have averaged year-over-year (YOY) growth of greater than 10%/year for the last three years. Educational starts averaged YOY growth of 8%/year for the last two years. These three markets comprise 60% of all nonresidential buildings. Healthcare starts have quietly increased to a record high over the last 12 months. Every market except manufacturing will finish 2017 with new starts totals near or at post recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. All construction starts $ data in this report references Dodge Data & Analytics starts data.
Construction spending for Commercial/Retail, Lodging and Office construction all remain very strong with 2017 total growth near 15%. Educational (+9%) and healthcare (+4%) both show sizable gains after years of little to no growth.
92% of all construction spending in 2017 is already in backlog projects.
A scenario that would have Office spending drop down to 8.9% annual growth from the track it is on today (+15.4% YTD) would require a highly improbable and unprecedented non-recessionary decline in spending in the remaining months of 2017. To grasp the enormity of the decline needed, it would take canceling 8% of all ongoing office projects or new starts for the remainder of the year would need to drop by 50%.
Educational will show an increase in YTD gains in the 3rd quarter because increasing spending in 2017 will be measured against the lowest quarter (3rdqtr) in 2016. Healthcare may not show sizable YTD gains until 4th quarter, for which 2016 reached lowest spending of the year and 2017 will reach highest.
Total nonresidential buildings spending growth accelerates to 10+% in 2018, led by institutional and office spending.
Nearly all nonresidential buildings construction starts in 2016 are still contributing to spending. Since originally posted they have been revised up by 16%. Since most spending from new starts (approximately 50%) occurs in the year following the start, early spending projections based on original posted starts $ may understate 2017 spending.
Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure spending is quite erratic, while nonresidential buildings spending, with only slight variation, has been climbing at a strong steady pace for more than 4 years. Some analysts track nonresidential total spending, but these two sectors perform so differently it is important to break them apart to track trends. Buildings spending is up 2% from Q2’16 and up 5% YOY. In the 2nd half 2017 YOY spending is expected to reach 8% over the same months from 2016. Worthy of note is that non-building infrastructure spending, even though down slightly, just experienced two years of record highs. It will hold down the overall nonresidential total performance, but still finish 2017 near record highs.
See this article from February comparing my starting forecast compared to the Jan 2017 AIA Consensus Nonresidential Bldgs 2017 Forecasts Vary
Construction Spending Summary 7-11-17 for May Spending
Year-to-date % growth in construction spending for 1st five months and expected estimate-to-complete (ETC) % growth for remaining seven months 2017. Total % growth vs 2016 and 2017 total $.
Total All Construction
YTD = +6.1%, ETC = +7.0%, 2017vs/2016 = 6.7%, 2017 total = $1.266 trillion
Particular strength is evident in the long term trend for Nonresidential Buildings for which spending growth is increasing and continues into 2018. Recently, all of 2016 spending was revised, in total up by 2%. Current 2017 values are being compared to revised 2016 values. History shows revisions have been up 45 of last 48 months. In the future, 2017 spending will most likely be revised higher. Even without that, at 6.7% total growth expected, 2017 will come in stronger than 2016. All sectors show some improvement over 2016. For 2018, Nonresidential Buildings and Infrastructure both contribute to an 7.8% forecast spending increase.
YTD = +12.2%, ETC = +9.3%, 2017vs2016 = +10.5%, 2017 total = $523 billion
Residential spending YTD has been above 12% each of the 1st 5 months of 2017. It is expected to dip between May and October due to a low volume of work contributed from starts during the period Q4’15 to Q1’16. This results in a temporary dip in spending. We could see annual spending averaging only $515b to $525b from April through September. New starts in Q1’17 reached an 11 year high, so spending increases later in the year. Residential work will finish the year with 10% growth, the 5th consecutive year over 10%. Average growth the last 5 years is 14%. Spending slows to 5% growth in 2018 .
YTD = +5.2%, ETC = +7.5%, 2017vs2016 = +7.4%, 2017 total = $438 billion
Nonresidential Buildings spending is expected to increase slightly from May through September due to an above average volume of work contributed from starts during the period Q1’15 to Q2’15. The only major nonresidential building in decline this year is manufacturing. That’s not unexpected since manufacturing spending reached an all-time high in 2015 and stayed close to that level in 2016. Commercial/Retail, Lodging and Office construction all remain very strong with growth near 15%. Educational (+9%) and healthcare (+6%) both show sizable gains after years of little to no growth. Growth accelerates to 10+% in 2018, led by institutional spending.
YTD = -3.0%, ETC = +1.4%, 2017vs/2016 = 0.0%, 2017 total = $304 billion
Non-building Infrastructure spending, always the most volatile sector, is expected to increase slightly in the 2nd half 2017. An above average volume of work in early 2015 contributed very long duration jobs that will still contribute spending in late 2017, adding to normal average duration spending. Environmental Public Works (Sewer, Water Supply and Dams & Rivers) is holding back infrastructure from gains in 2017. Declines in that group are offsetting gains in Power, Highway and Transportation. No future growth is included from infrastructure stimulus and yet 2018 is projected to increase by 7%.
7-6-17 Construction Spending May 2017 – Behind The Headlines
Headline – Construction Spending for May came in flat compared to April, up 4.5% vs May 2016.
In this latest May report, April spending was revised up by 1% and May 2016 was revised up by 3%. The average revision since Jan 2016 is 3%/month. May 2017 will be revised in each of the next two reports and again with the May report issued in July 2018.
Current unadjusted construction spending is always being compared to previous months revised spending and growth is almost always being understated. Spending has been revised UP 45 times in the last 4 years.
In 2016, the 1st report indicated monthly spending declined 8 times from the previous month. After revisions, spending declined only twice from the previous month. Most MSM articles declaring construction spending was a miss are revised away in following months.
Nonresidential Construction Spending Remains Stagnant in May.
I’ve said this before many times, spending predictions are best tracked based on cash flows from all projects that have started. This is not simply tracking total backlog, nor is it tracking new construction starts. New starts (new backlog) represent only 20% to 25% of total spending within the year. Most spending comes from projects that started in previous years.
Big monthly changes in spending come from unusual fluctuations in starts. Very large projects ending (spending ending), compared to new projects starting, would cause a monthly drop in spending. The reverse would cause an increase. If a record volume month of construction projects that started two or three years ago are now reaching completion, and new starts today are experiencing normal growth not at record levels, then spending will most likely decline temporarily. Most monthly construction spending predictions are predetermined months ago.
Also, Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure is quite erratic while buildings spending has been climbing at a steady strong rate for several years. Buildings spending is up 2% from Q2’16 and up 6% YOY. In the 2nd half 2017 YOY spending is expected to reach 8%.
Most infrastructure projects that started in 2015 and 2016 are still ongoing so do not effect much change in current monthly spending. It is projects from late 2014/early 2015 that are finishing that are resulting in the largest share of current spending drops. Worthy of note is that non-building infrastructure spending just experienced two years of record highs, so even though spending is down slightly we will still see 2017 finish near record highs.
Construction Companies Continue to Face Labor Shortage Challenges
Construction Spending for the last 24 months increased +13%, but after inflation actual volume during that period increased only +5.5%. Construction output, (jobs x hours worked) for that same period increased +7.6%.
Why is it that jobs output is growing faster than construction volume? Could it be that shortages are localized, not as widespread as thought? Or perhaps it’s that contractors can’t get skilled workers, so they are hiring more workers with less skill? Maybe contractors anticipate growth, so they are hiring more now to prepare for the future? Whatever the case, jobs are growing faster than construction volume and that is not what should be expected in a labor shortage.
Are contractor’s responses to survey questions about filling job positions based on an anticipated need to staff up to meet revenue growth? If so, that is a major miscalculation to determine staffing needs. This is not as far-fetched as you might think. I’ve talked with numerous contractors in the past who were doing this. As I tried to explain in several previous articles, growth in revenue (or construction spending) doesn’t address how much of the growth is due to inflation. Right now, in fact for the last 24 months, the largest portion of spending growth is inflation, not real volume growth.
If you are hiring to match your revenue growth, you are part of the reason jobs are growing faster than volume. INFLATION!
Is there a Residential Construction Spending slowdown? If so, how significant?
YTD Residential Construction spending for the 1st 5 months 2017 is up 12.2% from 1st 5 months 2016. YTD has been above 12% since January.
Average spending for the last three months is up 4.0% from the average in Q4 2016. That’s a ~10% annual rate of growth. Starts cash flows are indicting flat spending for the next few months but then accelerated spending from late Q3 into the end of the year. Current projected spending for 2017 is $523 billion, +10.5% higher than 2016.
May vs April residential construction spending shows a 0.5% decline. However, April has been revised up once and May has not yet been revised. All months are revised twice after the first release of data. The average revision (to residential data) for the last 16 months is up 4%, the average revision for the last 28 months is up 7%. All revisions for the last 28 months were up. After revisions, there were only two monthly declines in the last 28 months, and both of those were slight.
If new starts collapse to show no gains for the remainder of the year, then based on starts already in backlog and reduced starts for the remainder of the year, spending would be reduced to $513 billion. That’s still 8.5% higher than 2016. Of course, this would be an extremely unlikely scenario. The last time residential construction starts declined for three or more consecutive months was 2010, and the last time there were no gains for six or more months was 2008.
Attached PDF of my Forecasting presentation delivered 5-22-17 at Advancing Building Estimation in Houston
A few bullets from this presentation
- Construction Starts is not construction spending
- Cash flow = Spending = Revenue
- Revenue is not Volume of work
- Spending minus inflation = Volume
- Understand what’s in an Index to avoid misguided inflation adjustments
- We can’t ignore productivity
- Spending activity has just as much influence on inflation as labor and material cost.
Slides in this presentation come from the following articles:
The two plots lined up here represent spending and spending corrected for inflation or real volume growth in the top plot versus construction inflation in the bottom plot. On the Inflation plot, the black line represents final selling price, actual inflation. The red line represents the ENR Building Cost Index which is a fixed market basket of labor and materials, not a complete selling price index. All plots are for nonresidential buildings only.
The index shows how cost inflation climbs in periods when spending is accelerating and the index slows when spending is increasing slowly. Also we can see that the major decline in spending resulted in a major deflation in the index. Note the ENR BCI does not show the major decline in the inflation index. That’s because the ENR BCI is not final selling price. It shows what the cost of labor and materials did during that period, but does not capture how contractors adjusted their margins down so deeply due to loss of volume.
The takeaway from this comparison is this:
- Labor and material indices do not show what real total inflation is doing
- When spending increases rapidly, inflation increases rapidly
- When spending increases slowly, inflation increases slowly
- An understanding of which direction and how much spending is moving is more important to predicting inflation than the change in the cost of labor and materials
Jobs growth slowed in the last two months adding only 6,000 construction jobs since February. However, a longer term look at jobs x hours worked vs volume growth gives better information.
In the following plot Jobs (red line) = # of jobs x hours worked and Construction Volume (blue line) = construction spending in constant $ (adjusted for inflation). Unless we make these two adjustments we cannot compare jobs to construction spending and get any meaningful analysis from the data.
I’ve written about this in-depth in these two articles.
You can see in the plot above from Jan 2011 to Mar 2013 both jobs growth and volume growth balanced. Then again by August 2014 jobs growth caught up to volume growth. It was the period from Aug 2014 to Jul 2015 when volume took off and climbed much faster than jobs growth. But then, since July 2015, jobs have been increasing faster than construction volume growth.
In a plot of this information back to 2005, it would show that by the end of 2010 there were already excess jobs. That is discussed in the attached articles. During the expansion, firms hired more employees than real work volume could support, then during the recession, firms held onto far more staff than was required to perform the available declining work volumes. So the chart above would start 2011 with an excess of jobs and really we needed to see work volume increase faster than jobs starting in 2011.
Long term, having started 2011 with not enough volume to support the remaining staff, we see two periods of growth in which jobs and volume were balanced, only one period where volume exceeded jobs growth and then this latest period, for the last 21 months, in which jobs are growing faster than volume.
There are many reports of job shortages and they appear to be genuinely accurate assessments, primarily regarding some very specific skilled labor positions. However, long term jobs vs volume data shows there is far more in play than not enough workers to hire. In fact, for the last 21 months, hiring has exceeded workload and that simply does not indicate an overall worker shortage.