Spending Revisions 9-3-19. Nonresidential Increases. Residential Slows.

Census Construction Spending released today revises data back to Jan 2013. 2018 spending was revised up by $13bil or 1% to $1.307 trillion. I expected upward revisions to 2018 residential that did NOT materialize. Almost all revision is to nonresidential.

Sizable upward revisions were posted to nonresidential buildings and non-building infrastructure for 2015, 2016 and 2017. Educational increased by $5.5bil in 2017 and Manufacturing by $4.3bil. Manufacturing also increased in 2015 and 2016. Power increased by 8%-10% in both 2015 and 2016 but decreased by 8% in 2018.

Starts CF 2015-2020 9-10-19

Nonresidential revisions added $15 to $20 billion in 2015, 2016 and 2017. This helps explain what would be excess growth in labor over this period, absorbing about 100,000 jobs.

It is unusual there were no sizable revisions to residential, the first I can ever remember there being no revisions to residential spending totals. It is not uncommon to see $10-$15 billion/year revisions to past years in residential. In this release, there were no annual revisions greater than $1 billion. However, for 2018, renovations was revised down by $4bil and single-family up by the same $4bil. I wouldn’t be surprised if all years 2013-2018 get revised next year. Typical annual revision is about +2.5%.

Biggest 2018 revisions: Commercial +$6bil, +6.6%; Educational +$3.5bil, +3.7%; Amusement/Rec +$1.5bil, +5.3%; Power -$7bil, -7%; Sewage $1.9bil, +8.5%; Water Supply +$1.5bil, +10.8%; Manufacturing +$5.6bil, +8.7%.

Biggest 2017 revisions: Educational +$5bil, +6%; Amusement/Rec +$1.7bil, +6.8%; Manufacturing +$4.3bil, +6.5%. Public Works +$5bil, +13%. 

After revisions, 2018 construction spending growth was up (2.7% to 4.4%) in all sectors but still less than the increase in inflation (4% to 5%), so real market activity declined in all sectors. Average spending for 2018 was up 3.3%, but average construction inflation in 2018 was 4.8%, so real volume decreased by 1.6%.

Real market growth declined in all three major market sectors, Residential, Nonresidential Buildings and Non-building Infrastructure, however, performance varies by market. For example, in the Nonresidential Buildings sector, Educational, Healthcare and Manufacturing markets (almost 50% of the Nonres Bldgs sector) spending increased only 1% or less. With an average Nonres Bldgs Inflation rate of 5.1%, real volume in these three markets declined 4% to 5%. But Lodging, Office and Commercial markets spending increased 8% to 10%. After subtracting 5.1% inflation, real volume in these markets increased 3% to 5%.

For the Nonresidential Buildings sector, spending in 2018 increased by 4.4%, but nonres bldgs average inflation was 5.1% (i.e., Construction Analytics 5.1%, Turner 5.6%, RLB 4.6%, Mortenson 7.4%, PPI Bldgs 4.0% ). On average, nonres bldgs real volume in 2018 declined by 0.7%.

For the Residential Buildings sector, spending in 2018 increased by 2.7%, but res bldgs average inflation was 4.3%. On average, residential bldgs real volume in 2018 declined by 1.6%.

For the Non-building Infrastructure sector, spending in 2018 increased by 2.7%, but non-bldg infra average inflation was 5.6% (i.e., Highway 6.7%. Powerplants 3.2%, Pipelines 2.1%). On average, non-building infrastructure real volume in 2018 declined by 1.6%.

In 5 years from Jan 2011 through Dec 2015, total construction spending increased 40% but after inflation volume increased only 22%. Jobs adjusted for hours worked increased 21%, almost in balance. However, in the following 3 years from Jan 2016 through Dec 2018, spending increased 16%, but after 13% inflation, volume increased only 3%. Jobs adjusted for hours worked increased 12% during that 3-year period. Starting 2011, jobs exceeded work volume. At the end of 2018, the jobs/work volume imbalance was even greater.

Jobs vs Volume 2011-2019 9-5-19

Residential spending 2018 did get some monthly revisions, but the total was NOT revised up and unusual monthly variances were not revised away. This leaves 2018 with four months in which the spending varied from the statistical monthly average by more than 3 Std Dev. There are no other years outside of the 2006-2009 residential recession in which there were ANY monthly variances from statistical average reaching 3 Std Dev. For 60 months 2013-2017 the largest variance was 1.8 Std Dev.

Residential construction spending in 2018 looks more like the 2006-2009 recession than any growth years from 2001 to 2019. After the Feb 2018 high, spending declined in seven of the next ten months, then in 2019 declined in four of the next six months.  

Residential construction spending declined in the last five consecutive quarters. The most recent quarter averaged $510 billion. The post-recession high was reached in Q1 2018 at $575 billion. Q2 2019 is down 10% from Q1 2018. July 2019 is down 12% from the Feb 2018 high.

Residential spending is forecast to increase through the end of 2019 but then is expected to decline in the 1st half 2020. The low by mid 2020 could match the current low of $510 billion. That would result in 7 out of 9 declining quarters.

Census doesn’t show the Renovations line item. Reno = (Total Rsdn minus SF+MF) is where the biggest residential declines occurred in 2018, down -$4bil, -2.3%. Residential Reno is down 13% in 2019 YTD.

 

WHAT IF? Construction Recession 2020

8-15-19

Talk these days isn’t whether or not we may slip into another recession, but when. With 2s/10s rate inversion as one signal, analysts are now watching for other signs. On any given day you can read articles pointing to why we are or why we are not headed into another recession. But, I wrote an article similar to this 3 years ago, so that opinion has been around awhile. I’m not taking a position here. I would just like to get a rough idea of implications, so I tested some data.

What would happen to this current construction recovery if we slip into recession?

If you think of a recession as having an immediate affect on total construction, like a quick drop in materials prices or cost of buildings, think again. Construction is sort of like an aircraft carrier, it takes a long time to turn around.

My starting baseline is my current construction spending and backlog forecast for 2019-2020 which includes YTD Spending and Starts through June. All spending and starts are current$, unadjusted for inflation. There is considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

NORMAL FORECAST current to Jul 2019 with no modifications

Spend Forecast 2018-2022 Baseline 8-15-19

NORMAL FORECAST spending plots for the next 18 months.

Spend Sector 2017-2020 8-14-19

Recession What If? Starting Point

The best indicator of future construction activity is the projected cash flow generated by all the construction starts that have been recorded. Construction starts mark the beginning of spending on new projects.  Projects can take many months to reach completion, and the cash flow varies over the project time.

For the 2020 forecast, we can look at new starts and backlog.

Construction Starts YTD total as of June is down 8% from 2018. That’s expected to improve by year end.

Residential construction starts peaked in 2018. Starts have been sideways or in light decline since mid-2018. Year-to-date June 2019 starts are down 9% from 2018. Avg SAAR for 1st 6mo 2019 is $315bil, same 6mo last year was $340bil. Starting backlog is down 5% from 2017 to 2019. Spending is forecast down 5% in 2019 and up only 1% in 2020.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Prior to this recession scenario analysis, nonresidential buildings spending was forecast up 10% in 2020 and 6% in 2021.

Infrastructure starting backlog has increased 15%/year for the 3 years 2018-2020. Prior to this recession scenario analysis, non-building infrastructure spending was forecast up 12% in 2020 and 8% in 2021.

For nonresidential buildings, 80% of all spending in any given year is already in backlog from starts prior to that year. For non-building infrastructure it’s 85%. Starting Jan. 1, 2020, 80% to 85% of all nonresidential spending in 2020 is already on record in backlog. For residential, only 30% of spending in 2020 is in backlog at the start of the year. Due to shorter duration, spending is more dependent on new starts within the year.

Backlog starting 2020 for the following six markets is at the highest starting backlog ever for each of the six markets. Also, these six markets account for 1/3rd of all construction spending. Much of the spending from these starts occurs in 2020.

These markets posted the best construction starts 12-month totals ever (in noted period).

  • Manufacturing from Jun18>May19,  up 36% in two years
  • Office May18>Apr19,  up 8%/yr for the last 4 years
  • Educational Jun18>May19,  monthly rate for 12 of the last 16 months increased by 20%.
  • Public Works May18>Apr19,  increased 30% in the last 24 months.

These very long duration markets posted best new starts ever.

  • Highway Dec 17>Nov18, up 25% compared to prior 12 months, which was the 2nd best 12mo ever, with peak spending from those starts expected in 2020.
  • Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.

Growth in new starts and backlog for the last three years (2017-2018-2019):

  • Manufacturing starts up 44%, backlog up 62%
  • Office starts up 30%, backlog up 62%
  • Highway starts up 45%, backlog up 70%;
  • Transportation starts up 64%, backlog up 138%;
  • Public Works new starts up 45%, backlog up 72%.

In the last two years, Commercial/Retail market starts are down 18% and 2020 starting backlog will be down 11%. The only other declines in 2020 starting backlog are Amusement/Recreation (-1%) and Power (-5%).

So, we are starting 2020 with the highest backlog on record after several years of elevated starts. However residential work is already down slightly while non-building infrastructure work is super-elevated. It is this elevated backlog that will mute the impact of a recessionary downturn.

What If? we reduce new starts

If a recession were to occur, it would substantially reduce future construction starts. Most, if not all, projects already started would move on to completion, but new starts will be cut back. However, the last “construction” recession started in 2006-2007 with declines in residential work. New starts in nonresidential buildings kept increasing into 2008. The “nonresidential” spending recession did not start until 2009, three years after the beginning of the residential decline.

To get an idea how another recession might affect construction spending, I kept all backlog growth predicted through 2019, but I reduced future new construction starts, for two years, starting Jan 2020. I’ve started the reductions for all sectors at Jan. 1, 2020 because residential starts and spending have already been in decline for more than a year.

  • Residential starts reduced by 15% in 2020 and by 5% more in 2021
  • Nonresidential buildings reduced by 20% in 2020 and by 10% more in 2021
  • Infrastructure projects reduced by 10% in 2020 and by 5% more in 2021

This is only about 20% of the residential declines we experienced from 2006 to 2009, but I’m not anticipating another residential massacre. Residential has already been in decline for 12 months. The nonresidential buildings decline now is only half of 2008-2010. I reduced infrastructure by the least since there was only moderate decline in infrastructure work in 2009-2010, yet still I’ve reduced infrastructure twice as much as 2009-1010.  I allowed for a 3% increase in new starts in 2022 across buildings sectors and a 2% increase in infrastructure.

 

The Recession Scenario Results

The recession 2020 scenario keeps 2019 forecast intact and reduces new starts by 15%-20% in 2020 and 5%-10% in 2021, so imparts a two year downturn. It’s effects, begun Jan.1, 2020 could be translated over time, if say the same scenario started but 12 months later. Negative reaction in the market is quickest to happen for residential, delayed a year for nonres buildings and takes longest (2 years) for infrastructure, for reasons of longest duration type work and highest prior rate of backlog growth.

The recession affects are muted by the fortunate starting point of record high backlog. Residential construction spending will experience two to three declining quarters each of the next three years. But beyond Jun 2022, residential stabilizes and resumes growth. Residential is the only sector to post quarterly spending declines in 2020. Nonresidential buildings posts the 1st quarterly decline in Q1 2021 and has at least seven consecutive quarters of declines before flattening out in Q4 2022. Non-building Infrastructure experiences the 1st two consecutive quarters of decline starting Q4 2021 and reaches a low in Q4 2022. Due to the unevenness of growth, Total Construction spending increases through Q1 2020, posts two declining quarters in 2020 and three consecutive quarters of declines in each of 2021 and 2022.  

RECESSION FORECAST spending plots for the next 30 months.

Spend Sector 2017-2021 RECESSION 8-15-19

Here’s a reminder of the amount of reductions in new starts. I kept all backlog growth predicted through 2019, but I reduced future new construction starts, starting Jan 2020. I’ve started the reductions for all sectors at Jan. 1, 2020 because residential starts and spending have already been in decline for more than a year.

  • Residential starts reduced by 15% in 2020 and by 5% more in 2021
  • Nonresidential buildings reduced by 20% in 2020 and by 10% more in 2021
  • Infrastructure projects reduced by 10% in 2020 and by 5% more in 2021

We still see an 11% increase in backlog in 2020, because we did not reduce 2019 starts, but spending from reduced new starts in 2020 drops 2020 cash flow within the year to slow growth of 2%. Reference the baseline spending chart to see prior to reducing starts 2020 spending was forecast to increase 7%.  Backlog drops 7% in 2021 and then 11% in 2022. This model predicts a 4% decline in construction spending in 2021 (baseline was +3%) and a 5% drop in 2022 (baseline was -1%), setting us back to the level 2016-2017.

Cashflow Forecast TOTAL RECESSION 8-15-19

Starting Backlog is down 4.4% for 2023, but even modest new starts growth of 3% helps partially offset the decline in spending. Spending never drops below the level posted in 2015-2016.

The last recession started with residential in 2005 and ended with nonresidential in 2011. Total decline during that period set total spending back 12 years, although the setback was 15 years for residential, 7 years for nonresidential buildings and only 4 years for infrastructure. This mild recession causes a setback to 2015-2016 levels, back 6 years, and less for infrastructure.

RECESSION FORECAST current to Jul 2019 with reduced starts 2020-2021

Spend Forecast 2018-2022 RECESSION 8-15-19

 

Residential construction would drop about 6% in 2020 and then drop another 8% in 2021. Residential is far more dependent on new starts within the year for spending than on backlog. That’s why residential spending drops quicker than all other work.

Cashflow Forecast RECESSION Residential 8-15-19

 

Nonresidential buildings gain 5% in 2020 but then drop 6% in 2021 and 12% in 2022. The strength of backlog going into 2020 pushes most of the declines out to 2021 and 2022.

Cashflow Forecast RECESSION NonRes Bldgs 8-15-19

 

Non-building Infrastructure has so much work in backlog that this sector still posts spending gains in 2020 and 2021. It drops 8% in 2022. The strength of backlog going into 2020 pushes much of the declines out 2022.

Cashflow Forecast RECESSION NonBldg Infra 8-15-19

The baseline forecast would have produced spending increases of 9% from 2020-2022. The recession scenario indicates a 7% decline. That magnitude of turn around would impact the jobs situation. We would probably not see any reduction in workforce in 2020 but the spending declines in 2021 and 2022 could lead to a temporary loss of about 200,000 jobs in 2021 and 300,000 jobs in 2022.

Educational 2019 spending is supported by a steady stream of strong starts that began in late 2017 and extended into summer 2018. Jun-Jul-Aug 2018 starts posted the best 3mo total starts ever and peak spending from those starts occurs from April 2019 to Jan 2020. Most spending in 2020 comes from projects that start in the 1st half of 2019. So far in 2019 starts are up 15% ytd over 2018.

Commercial  Both store and warehouse starts dropped in 2018. Commercial starts are seeing strong gains from distribution centers (warehouses, which are in commercial spending). Since 2015 the 10% decline in retail stores is being hidden by the 50% increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are down 5% in 2018 but increased 500% from 2010 to 2017.

Manufacturing Backlog is still very strong, but a drop in peak spending from the schedule of cash flows will lead to a period of moderate spending declines. After that, manufacturing spending increases steadily through the end of 2020. Current expectations are that manufacturing will finish the year up 8%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+. Reductions in starts won’t show up as negative spending until 2022.

Office spending is expected to finish 2019 up 7% or less. New starts in 2018 were up 11% to a new high, but much of the peak spending, from over-sized long-duration projects, will benefit 2020 when I expect to see spending growth of 8%-11%.

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not consider the following: airports include not only land-side terminals but also air-side runway work; rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work. Construction Analytics follows U S Census construction spending reports which include all terminals and rail in Transportation.

Terminals and rail starts reached record highs in 2017 and record backlog in 2019. 2019 starting backlog is four times what it was in 2015.

However, much of that backlog is very long duration project spending that will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. From Oct’16 through Oct’18 there were sixteen $billion+ new project starts and seven $500million+ new starts. Some projects started in this period have peak spending occurring in 2020 and 2021.

Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 70% in the last 3 years leading into 2020. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.

Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed 14% gains in 2018 and the forecast is +15% in new starts in 2019.

 

 

Construction Starts Cash Flow vs Spending

This plot overlays two data sources, starts cash flow and spending. For each of the three major market sectors, Residential, Nonresidential Buildings and Non-building Infrastructure, a light colored line and a dark line are plotted. The light line is the expected direction spending will move estimated from the monthly cash flows from Dodge Data construction starts data. The dark line is the movement in actual spending. All the nonresidential buildings and infrastructure data is the sum of all the markets within the sectors. This plot is not generated for each market.

Starts CF 2015-2020 8-8-19

The actual spending should follow a pattern that is similar to the direction of movement predicted by the estimated spending. If the patterns are similar, it is an indication that the forecasting tools are generally accurate. The thing to watch for is that the direction of movement was predicted accurately. For instance, the Non-building Infrastructure lines show pretty well from Jan 2017 through June 2019 that the starts data estimated the direction spending would move. To a lesser degree, Nonresidential Buildings shows correlation. Residential spending long term agrees with the estimate from starts cash flows, but spending is much more smoothed and actual spending inflection points seem to lag the estimated.

This adjusted plot below shows Residential Estimated from Starts moved out 6 months vs actual spending. The correlation is much better. This may be an indication actual residential work has a longer duration than I use in my model to cash flow the starts data. A test for this adjustment could become clear over the next 6 months. Whereas the original plot predicted the residential bottom in spending for 2019 already occurred and the next 6 months would post an increase in spending, the adjusted cash flow that shows better correlation indicates the bottom is yet to occur before spending starts to increase later in the year.

Starts CF 2015-2020 8-10-19

Reliability of Predicted Construction Forecast Data is always foremost in the thoughts of an analyst. Cash flow models provide for approximately 75% to 80% actual jobs data in the predicted spending for the forecast 12 months out. For next month’s forecast we have 96%-97% actual jobs data in the forecast, only missing jobs that start within the next 30 days. Reliability trails off each month. So, this is useful as a way to check the forecasting model. Essentially, this provides a check on the method I use for forecasting spending. It lends credence to the validity of the future forecast.

The forecast monthly changes in cash flow generated by the starts data are used to predict future spending in all Construction Analytics spending forecasts.

Spend Forecast 2017-2018-2019-2020-2021 8-1-19

Next Level of Tariffs Will Be Unknowns

Assessing the impact of this next level tariffs on the cost of construction has now become a nearly impossible task. Tariffs are on PARTS use in manufacture of goods. Who (architect? engineer?) will identify what parts are included in which products used in the building?

For example, look at something simple like light fixtures. The shell, the ballast, the reflector, the shade, the lamps or the wiring could be made in China. Who identifies where parts are made? Who now estimates the share of tariff increase on those parts to determine tariff impact on cost of manufacturing the entire light fixture?

Expand that issue to a pump assembly with valves and pressure gauges. Who identifies which parts in the pump assembly come from what country? How does an estimator determine the cost of manufacturing the pumps, valves and gauges and determine what fraction of total cost has a tariff?

This will inevitably lead to inflation, but it will be hidden inflation, hard to determine if a manufacturer’s price increase for a product is substantiated. This is not like the tariff on mill steel, a 25% tariff on mill steel which represents 25% of final structural steel bid, which represents 10% of the building cost.

At the conceptual or schematic design phase of construction, all the products are not even identified. And the project start date might be two years out. It can’t possibly be determined with certainty what factor should be carried to cover cost increases due to tariffs.

Inflation factors and contingency factors will need to increase to cover unknown costs. This increases the share of the budget that is unidentified, always a contentious issues with owners. Frankly with the margins general contractors or construction managers get for services on a large construction project, these unknown factors, if understated in cost factors, could wipe out the total fee or profit for the job.

This is not a good position to be in, but I don’t yet see how it would be any different.

Midyear 2019 Construction Spending Forecasts Compared

8-1-19

Construction Analytics compares midyear construction spending forecast to other industry resources

The following comparison data is compiled from data published in several other reports, by FMI 2nd Qtr 2019 Construction Outlook,   ConstructConnect Summer 2019 PIP Construction Forecast and  AIA July 2019 Midyear Consensus Forecast. Data is all midyear forecast for 2019 and look ahead to 2020.

There are some significant differences in the forecasts, especially in the Non-building Infrastructure forecasts, but also in the Nonresidential buildings 2020 Forecast. I am substantially higher than my peers. Only time will tell who has the closest forecast.

All EdZarenski.com (Construction Analytics) forecasts are based on predicted cash flow from modeling Dodge Data construction starts and include ytd data through June. All other reports were published prior to Aug 1st so would not include the June spending.

How can we assess if forecasts are on track to finish as predicted? Well, for the 2019 forecast, as of August 1, we have actual spending and starts data through June.

Spending year-to-date (ytd) gives some clues:

  • Amusement/Rec is up ytd 8.8%
  • Commercial is down ytd 8.6%
  • Lodging is up ytd 8.2%
  • Highway Bridge is up ytd 14.6%
  • Sewer/Water/Conserv is up ytd 16.2%
  • Communication is down ytd 7.4%

For the remainder of 2019 and 2020 forecast, we can look at new starts and backlog.

Construction Starts YTD total as of June is down 8% from 2018. That’s expected to improve by year end.

Residential construction starts peaked in 2018. Starts have been sideways or in light decline since mid-2018. Year-to-date June 2019 starts are down 9% from 2018. Avg SAAR for 1st 6mo 2019 is $315bil, same 6mo last year was $340bil. Starting backlog is down 5% from 2017 to 2019. Spending is forecast down 5% in 2019 and up only 1% in 2020.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Nonresidential buildings spending is forecast up 10% in 2020 and 6% in 2021.

Infrastructure starting backlog has increased 15%/year for the 3 years 2018-2020. Non-building infrastructure spending is forecast up 12% in 2020 and 8% in 2021.

Spending Forecast Comp 2019 Midyear 2019

For the 2020 forecast, we can take a look at new starts and backlog.

These markets recently posted the best construction starts 12 month totals ever over the noted period. Much of the spending from these starts occurs in 2020.

  • Manufacturing from Jun18>May19,  up 36% in two years
  • Office May18>Apr19,  up 8%/yr for the last 4 years
  • Educational Jun18>May19,  monthly rate for 12 of last 16 months increased by 20%.
  • Public Works May18>Apr19,  increased 30% in the last 24 months.

Manufacturing new starts jumped substantially in 2018 and so far in 2019 have remained higher. Growth in Manufacturing starts jumped 36% in two years. Office starts have increased on average 8%/yr for the last 4 years. Educational starts monthly rate for 12 of the last 16 months increased by 20%. Public Works starts combined (sewer, water supply, conservation) began to increase in 2017, then took off in 2018-2019 increasing 30% in the last 24 months.

These very long duration markets posted best new starts ever.

  • Highway Dec 17>Nov18, up 25% compared to prior 12 months, which was the 2nd best 12mo ever, with peak spending from those starts expected in 2020.
  • Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.

Backlog starting 2020 for these six markets is up an average of 25%, at the highest starting backlog ever for each of the six markets. Also, these six markets account for 1/3rd of all construction spending. 

Growth in new starts and backlog for the last three years (2017-2018-2019):

  • Manufacturing starts up 44%, backlog up 62%
  • Office starts up 30%, backlog up 62%
  • Highway starts up 45%, backlog up 70%;
  • Transportation starts up 64%, backlog up 138%;
  • Public Works new starts up 45%, backlog up 72%.

In the last two years, Commercial/Retail market starts are down 18% and 2020 starting backlog will be down 11%. The only other declines in 2020 starting backlog are Amusement/Recreation (-1%) and Power (-5%).

So, we are starting 2020 with the highest backlog on record after several years of elevated starts. However residential work is already down slightly while non-building infrastructure work is super-elevated.

Spending Forecast Comp 2020 Midyear 2019

The baseline forecast produces spending increases of only 3% in 2021-2022, so is not aggressive in predicting future starts. Here’s some drivers of starts:

Educational 2019 spending is supported by a steady stream of strong starts that began in late 2017 and extended into summer 2018. Jun-Jul-Aug 2018 starts posted the best 3mo total starts ever and peak spending from those starts occurs from April 2019 to Jan 2020. Most spending in 2020 comes from projects that start in the 1st half of 2019. So far in 2019 starts are up 15% ytd over 2018.

Commercial  Both store and warehouse starts dropped in 2018. Commercial starts are seeing strong gains from distribution centers (warehouses, which are in commercial spending). Since 2015 the 10% decline in retail stores is being hidden by the 50% increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are down 5% in 2018 but increased 500% from 2010 to 2017.

Manufacturing Backlog is still very strong, but a drop in peak spending from the schedule of cash flows will lead to a period of moderate spending declines. After that, manufacturing spending increases steadily through the end of 2020. Current expectations are that manufacturing will finish the year up 8%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+.

Office spending is expected to finish 2019 up 7% or less. New starts in 2018 were up 11% to a new high, but much of the peak spending, from over-sized long-duration projects, will benefit 2020 when I expect to see spending growth of 8%-11%.

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not consider the following: airports include not only land-side terminals but also air-side runway work; rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work. Construction Analytics follows U S Census construction spending reports which include all terminals and rail in Transportation.

Terminals and rail starts reached record highs in 2017 and record backlog in 2019. 2019 starting backlog is four times what it was in 2015.

However, much of that backlog is very long duration project spending that will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. From Oct’16 through Oct’18 there were sixteen $billion+ new project starts and seven $500million+ new starts. Some projects started in this period have peak spending occurring in 2020 and 2021.

Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 70% in the last 3 years leading into 2020. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.

Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed 14% gains in 2018 and the forecast is +15% in new starts in 2019.

 

PPI Materials Prices YTD June 2019

Price changes listed here are year-to-date 2019 through June. Change is for 6 months YTD, not annualized. As a reminder, the Producer Price Index (PPI) DOES NOT include imports (imports are not produced in the US) or tariffs. Only pricing for domestically produced materials is included. That would include any decisions domestic producers make influenced by tariffs on imported products.

Prices for years prior can be found PPI Construction Materials Inputs Index

PPI Tables Update to June 2019

July 2019 Construction Briefs

7-26-19

Total all construction jobs including supervisory jobs is now only 3% below pre-recession high. However, volume of work adjusted for inflation is still 18% lower than pre-recession high. From the 2006-2007 pre-recession peak until now, non-supervisory jobs have recovered to within 6% of the previous high and supervisory jobs are now 7% higher than pre-recession high. 

Residential Construction jobs are up 78,000 in the past year, ~3% growth in jobs, but residential construction volume in the same period dropped 8%. Considering residential construction spending is down 8% ytd, residential construction inflation is up minimum 2-3%, so volume is down 10%-11%, and residential jobs are up 3%, 2019 will be the worst year for residential productivity declines since the period 2006-2009.

Rider Levett Bucknall national average construction cost inflation is currently up 2.6% for the 1st 6 months 2019, 5.2% annualized. It’s up 5.7% year over year. This is in line with Turner Construction’s quarterly Building Cost Index, also up 2.6% year-to-date, annualized 5.2%, and up 5.5% year over year. These are both nonresidential building final cost inflation indices.

The PPI average Final Cost of 4 Nonresidential Trades for the 1st 6 months is up 2.9%, annualized at 5.8%. The PPI average Final Cost of 5 Nonresidential Buildings for the 1st 6 months is up 2.6%, annualized at 5.2%.

Construction Analytics current nonresidential building cost index for 2019 is 5.0%.

Forecasting construction spending in 2019 up less than 2%, and composite construction inflation of 4.2%, real volume for 2019 will be down about 2.5%.

The share of total residential construction spending on renovations remained fairly stable from 2013 thru 2018 between 34% and 37% at an average rate of 36%, substantially lower than 2009-2012 when it ranged between 42%-48% and averaged 45%. The 2019 share of residential spending on renovations is forecast to reach 40%. Only 50% of all spending is single-family residential. Keep that in mind when referencing residential jobs to housing units.

With the release of data for July 2019 on September 3, 2019, un-adjusted construction spending data will be revised back to January 2013. Expect revisions to 2018 construction spending, in particular, I expect significant revisions to RESIDENTIAL spending in 2018. Residential construction spending in 2018 recorded 5 individual months in which the spending reported by Census varied from the statistical monthly avg by greater than 3 standard deviations. In 19 years, the only time reported spending has ever exceeded 3 standard deviations from the normal statistical monthly average was during the 2006-2009 recession. I expect all of these to be revised away.

Due to the delay in release of construction spending revisions, which would normally have been published July 1st, my midyear construction forecast will be delayed. There’s more to it than just updating 2018 spending. The spending data helps prove the new starts data, which then supports the forecast. Preparation of the midyear forecast begins after the release of the data update September 3rd.

What’s Happening In Construction Starts? YTD total is down 8% from 2018, BUT

These markets recently posted the best construction starts 12 month totals ever over the noted period. Much of the spending from these starts occurs in 2020.

  • Manufacturing from Jun18>May19
  • Office May18>Apr19
  • Educational Jun18>May19
  • Public Works May18>Apr19

These very long duration markets posted best new starts ever; Highway Dec 17>Nov18, up 25% compared to the prior 12 months which was the the 2nd best 12mo ever, with peak spending from those starts expected in 2020, and Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.

2020 Starting Backlog for these six markets will be up an average of 25%, at the highest starting backlog ever for each of the six markets.

Non-building Infrastructure construction starts increased 46% over the last 5 years (since lowpoint Q2 2014). Non-building Infrastructure spending increased 7% in 2018 and is forecast to increase 13%/yr for both 2019 and 2020. Big increases in Highway, Transportation and Public Works.

The markets dragging on construction spending are Commercial/Retail, Power and Residential. My forecast shows Commercial Retail declining from now through 2020, but hidden in that is the fact that Stores are down but Warehouses are up; Power which slows to finish flat next year; Residential construction starts peaked in Q1 2018. Year-to-date 2019 starts are down 9% from 2018. Although YTD spending is down 8%, we will see some improvement in the 2nd half 2019. Residential spending should finish down 5% in 2019 and shows very little improvement in 2020.

Spend Sector 2015-2019 8-5-19

Keep in mind the affect if inflation. If spending in a particular market drops 5% AND there is 5% inflation, the real market volume is down 10%. All nonresidential inflation indices are currently between 4% and 5% and are expected to remain near 4% in 2020. Residential inflation is currently near 3.5%.

Construction volume (spending inflation adjusted) hit a 3-year low in Nov-Dec-Jan. Annual volume since Dec 2015 increased 8% but then dropped 7%. Volume for the last 2 years increased less than 1%. Most of the decline to the low was residential. Nonresidential buildings and Non-building Infrastructure were flat.  All three sectors are expected to improve slightly in the 2nd half 2019, although real residential volume will still be down 9% in 2019 and 2% in 2020. Nonresidential Buildings and Non-building Infrastructure will post 6% and 9% increases in volume for 2020.

Construction Markets 2019 YTD Volume +/-   (Volume = Spending – Inflation)

  • TOTAL ALL -5%
  • Residential -12%
  • Manufacturing +5%
  • Office +4%
  • Lodging +3%
  • Amusement/Rec +4%
  • Public Safety +4%
  • Highway +8%
  • Transportation +3%
  • Public Works +12%
  • Commercial -13%
  • Educational -3%
  • Healthcare -5%
  • Power -4%
  • Communication -13%

ALSO SEE

May Construction Spending Report -Changes Since Dec 2019 Forecast

Notes on April 2019 Construction Spending Report

May Construction Spending Report -Changes Since Dec 2019 Forecast

7-1-19

May construction spending was posted by U.S. Census today at an annual rate of $1.294 trillion. Construction spending has averaged $1.296 trillion for the 1st five months of 2019. Year-to-date (ytd) spending is down 0.2% from the 1st five months of 2018.

Residential spending is down 8% ytd from 2019. Two thirds of that decline is in renovations which is down 15%. Single family (SF) is down 8% but multifamily (MF) is up 9%.  SF is 51% of all residential spending, MF is 15%, Reno is 34%.

Nonresidential buildings spending is up 3% ytd. Best performers ytd in nonres bldgs are Manufacturing +11%; Office +9%; Amusement/Recreation +9% and  Lodging +8%; (Public Safety is up +10% ytd, but represents less than 1% of nonres bldgs, so has little impact). Commercial is down -8%.

Non-building infrastructure is up 7% ytd. Best performers ytd in nonbldg infra are Highway +18%; Environmental Public Works (combined) +16%; Transportation +9%. Communication is down -7%.

Construction Analytics 2019 forecast for total construction spending for 2019 is now $1.330 trillion compared to $1.341 trillion forecast in December. The changes in the forecast by sector since December are: residential spending was forecast to reach $564 billion but is now projected to hit only $526 billion. Nonresidential buildings spending is now forecast to reach $454 billion, up $10 billion since December supported by increases in Educational and Manufacturing. Non-building Infrastructure spending is forecast to finish at $350 billion up $16 billion since the initial forecast. Most of the infrastructure increase is in Highway.  

Current forecast shows all three sectors improving by year end. Forecast spending for 2019 shows residential finishing down 5%, nonres bldgs up 4% and nonbldg infrastructure up 13%.

Inflation is expected between 4% and 5% in 2019. Volume is spending minus inflation. After adjusting for inflation, residential volume is expected to finish 2019 down 9%, nonres bldgs down 1% but nonbldg infrastructure up 8%.

This is the third year in which construction volume will post no significant gain. Spending in 2017 was up 4.5% and in 2018 up 5%, but after inflation, volume was up only 0.1% in 2017 and 0.2% in 2018.  Overall, total 2019 spending will finish up 1.7%, but volume after inflation will be down 2.7%.

While volume is now in the third year of no gains, jobs have increased, so far since Jan 2017 by 8%. This does not support the ongoing discussions of a labor shortage. In fact, jobs growth is exceeding construction volume.

Biggest upward revisions to my forecast since December: Educational from -4% to +5%, +$7bil; Manufacturing from -2% to +9%, +$7bil; Highway from +1% to +21%, +$18bil; Environmental Public Works from +7% to +24%, +$7bil.

Biggest downward revisions to my forecast since December: Residential from +0.5% to -5%, -$38bil; Commercial from -1% to -8%, -$8bil; Transportation from +14% to +7%, -$5bil.

Spend Forecast 2017-2018-2019-2020-2021 8-1-19

See also Notes on April 2019 Construction Spending Report which includes greater explanation of major market activity.

Bullet Points for May

Construction is cyclical in periods, not so much month over month. The 1st 5 months 2019 averaged slightly higher than the last 6 months of 2018.

Residential construction is the biggest drag on total spending right now. The current 3mo average spending is the lowest in 27 months. That will improve some over the next 12 months, but then, if the forecast for new construction starts does not improve, will head even lower for 2020.

All sectors will improve in the 2nd half of 2019 vs 1st half. Residential +3%, Nonresidential buildings +3%, Non-building Infrastructure +9%. These improvements are only enough to bring total 2019 spending to +2.3% over 2018.

Nonresidential new construction starts through 2018 are at all-time highs and are expected to set new highs again in 2019.

Although ytd spending is down 0.2% from the 1st five months of 2018, by year end ytd will climb to 2.3%. The 2nd half of 2018 was in decline while the 2nd half of 2019 is on the rise.

Non-building Infrastructure spending is the strongest it has been in many years. Indications are for a steady increase in spending completely through 2020. Highway, Transportation and Public Works are all contributing to increases.

Growth in new starts and backlog last three years: Highway starts up 33%, backlog up 42%; Transportation (since 2015) starts up 60%, backlog  up 100%; Public Works new starts up 38%, backlog up 33%. Backlog growth for these three markets all expected to increase ~25% for start of 2020.

Growth in annual spending in data going back to 2001: Highway spending for 2019-2021 best 3 yrs ever; Transportation 2018-2021 best 4 yrs ever; Public Works 2019-2020 best 2 yrs ever.

For nonresidential buildings, almost 80% of all spending in any given year is already in backlog from starts prior to that year. For non-building infrastructure it’s 85%. So come Jan. 1 2020, 80% to 85% of all nonresidential spending in 2020 is already on record in backlog. For residential it’s only 70% due to shorter duration and the dependence on more starts within the year.

Inflation has been increasing 4% to 5% per year since 2012. Construction spending needs to increase greater than inflation to add volume within the year. Total construction volume has not increased in over two years and will drop 2% in 2019.

Jobs are increasing while volume is decreasing. That’s like a factory putting on more workers to make fewer widgets.

I wouldn’t be surprised to see, within the next few jobs reports, a slowdown in total construction jobs growth but a pick up in heavy engineering jobs. If the last 5 months are an indicator, the decline may have already begun. We’ve just posted the lowest 5 months jobs growth (52k jobs) in the last 7 years.

For more on Jobs see Construction Jobs and JOLTS

My forecast output is dependent on all monthly cash flows from scheduled new construction starts. I rely on Dodge Data & Analytics for starts data.

This forecast does not predict a recession, however does reduce growth in new starts over the next three years. If a recession were to occur, it would substantially reduce future starts. However, the last “construction” recession started in 2006-2007 with declines in residential work. New starts in nonresidential buildings kept increasing into 2008. The “nonresidential” spending recession did not start until 2009, three years after the beginning of the residential decline.

 

What If No Future Starts?

6-27-19

What if there were no new construction starts beyond today?

What if the last new construction starts recorded for May (released by Dodge June 21) were the last to be posted and once those projects reached completion there would be no more work?

Of course this is a totally unlikely scenario, but deleting all future predicted starts allows to perform an important test. All the construction starts recorded as of today make up the backlog, and eventually that backlog will run out. So, if the new starts spigot was turned off today, how much spending would remain for 2019, 2020 and beyond? (For use later, new construction starts recorded through May generally equal an average of 40% of all starts expected each year).

The questions then are: How dependent is the spending forecast on construction backlog? How dependent is the construction spending forecast on new construction starts? What magnitude of miscalculation in the new starts forecast would be imparted to the spending forecast?

Single-family residential projects can take as little as 6 to 9 months to reach completion, multi-family perhaps twice as long. For the average nonresidential building, completion would be reached in about 24 months, but some large industrial projects will take three years or more. For some of the airport, highway and rail expansion mega-projects, the cash flow schedule of spending will take four to eight years to reach completion.

An average of ten years of monthly cash flows produces an average spending schedule for the various construction market sectors. Recognize that starts are posted every month, so January starts have twelve months of spending in the 1st year while projects that start in December have only one month of spending in the 1st year.

Residential project starts net about 65% of money spent in the 1st year, the year started, 30% spent in the following year and 5% spent in the third year, or 65-30-5. Although each type of nonresidential work has a more specific cash flow schedule, the average for nonresidential buildings is 20% spent in the year started, 50% in the second year and 30% in the third year, or 20-50-30. Very long duration infrastructure projects have a spending distribution on average that looks like 15-30-30-15-10.

Residential projects have the shortest schedule to completion. Work flow needs continual replenishment from new starts to support spending. The amount of work in backlog today would support only two thirds of anticipated 2019 spending and less than 10% of 2020 spending.

All Nonresidential buildings type currently have enough work in backlog to support 90%-93% of the total forecast spending in 2019. Current backlog would support only 50% of the total spending forecast for 2020. There’s only enough to support 10%-20% in 2021.

Power and Highway backlog as of today would support 95% of the total forecast spending in 2019 and 70%+ in 2020. Because these are long duration projects, there is enough in backlog today to support 40% of spending in 2021.

That’s a lot of good facts, but how can we use that information to perform an important test?

Let’s use the average nonresidential building for an example. For this example, let’s try to determine the validity of our 2019 forecast based on what we have in backlog today. New starts through May is about 40% of total starts expected in the year. Backlog through May supports 92% of spending in the current year. Spending in any given month has cash flow from an average of the previous 24 months of project starts, so the average of large numbers reduces potential error from backlog. The validity of our annual spending forecast is dependent on whether or not we correctly predicted the remaining 60% of starts for the year, and those starts support 8% of the spending forecast.

Therefore if we incorrectly forecast the remaining 60% of starts by 25%, then we incorrectly forecast total annual spending by 25% x 8% = 2%.

For the 2020 forecast, the math gets just a little more complicated. Remember we stated earlier that the typical spending schedule for nonresidential buildings is 20-50-30. So 20% of 2020 spending comes from new starts in 2020. Only 80% of 2020 spending comes from work in backlog at the start of the year. Based on what we have in backlog today, new starts through May 2019 supports 50% of 2020 spending. We are dependent on the expected new starts in 2019 to get us up to 80% of the expected spending in 2020.

We are expecting 60% more in starts in 2019 and that will support the currently missing 30% of 2020 spending. If we incorrectly forecast the remaining 60% of starts by 25%, then we incorrectly forecast total annual spending for 2020 by 25% x 30% = 7.5%.

Also for 2020, since 20% of all spending within the year comes from new starts within the year, if we incorrectly forecast 2020 new starts by 25%, then we incorrectly forecast total annual spending for 2020 by 25% x 20% = 5%.

I’ve posed this scenario by asking what would happen if we incorrectly forecast the remaining starts by an error of 25%. That would be a huge error, not very likely to occur. I’ve been tracking Dodge Data & Analytics construction starts for more than 10 years and have seen enough data to expect that by mid-year the unanticipated error in forecast starts for the end of the year might be more on the order of 5% to 10%, not 25%. And in fact, historically, revisions to year end starts data is usually UP, not down.

So, by deleting all remaining forecast starts data, we see the spending forecast based on cash flow of new starts would require a very large error in the starts forecast to translate into a large error in the spending forecast. If we apply a more reasonable and yet still conservative error of 10% in all projections of future starts, the forecast for 2019 spending would be off by less than 1% and the forecast for 2020 off by a total of 5%.

 

Construction Jobs and JOLTS

6-16-19

8-15-19 edits – added plots

In early 2007, residential construction volume had already dropped 20% and total construction volume was down 10%, (the annual averages would not show this dramatic drop but a monthly plot would), yet construction job openings and labor turnover survey (JOLTS) was peaking at a 6 year high. From Jan 2007 to Jan 2008, construction had already lost 250,000 jobs. All of that was in residential construction. At the time, nonresidential construction was still growing.

Nonresidential buildings volume would peak in late 2008 and non-building infrastructure peaked in early 2009. By that time, in Q1 2009, residential volume was down 60%. Even though nonresidential construction was peaking, total construction was down 25%.

In 2008 construction jobs declined by another 500,000, about 90% residential jobs. JOLTS dropped to half of the 2007 peak high. It was over the next year or so that all construction began to decline, jobs would drop in all sectors and JOLTS would plummet to an all-time low.

The point is this: The construction recession began with the decline of residential construction in 2006-2007, at a time when JOLTS was at a 6-year high. Jobs declines lagged the decline in real construction volume (the annual average plot shows this well).

Jobs vs Volume 2001- 2010 6-16-19

It is remarkable how residential construction volume from the Q1 2006 peak to Q1 2007 had dropped 20% but residential jobs increased by 6%. JOLTS was peaking at a 6 year high. Although total construction jobs increased in 2006, jobs started to decline in the 2nd half 2006 and would drop 200,000 in 2007. JOLTS continued to show job openings increasing from mid-2006 to mid-2007. Neither jobs growth nor JOLTS reflected what was occurring in real construction volume and certainly did not give any leading indication of what was on the horizon.

The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from May 2012 through May 2019, construction added 1,870,000 jobs, an increase of 33%, the 2nd strongest jobs growth period ever recorded, not far behind 1993-99 when jobs and volume grew equally (JOLTS was not tracked before 2000). In the four years 2003-2006, just prior to the great recession we added 1 million jobs and volume growth kept up with jobs for the first three years, but then the residential recession started and volume began to plunge. However, JOLTS increased from 2003-2007. These three periods mark the best periods of jobs growth in the last 30 years.

During the last seven years, unlike 1993-99 or 2003-05, when jobs and volume grew equally, construction volume (spending minus inflation) increased by only 22%, far less than the 33% jobs growth. While contractors continue to report difficulty filling jobs, the pace of jobs growth is near an all-time high and is out-pacing the growth in volume of work to support those jobs. JOLTS increased every year during this period.

Now fast forward to 2019. Construction spending growth for the previous two years, 2017 + 2018, increased 4.5% + 5.0%. But inflation during this period was 4.4% + 4.8%. Real construction volume for the last two years increased less than 1%. But jobs increased by nearly 8% and JOLTS more than doubled from 2016 to the end of 2018.

This is a real head-scratcher. Volume has not increased for two years, yet jobs are up 8% and the indicator for job openings is increasing. This is not at all what the data should be showing.

In fact, from the 2006-2007 pre-recession peak until now, non-supervisory jobs have recovered to within 7% of the previous high, but construction volume is still 18% below the previous peak. Total all construction jobs is only 3% lower than the pre-recession high.

Jobs vs Volume 2011- Dec2018 7-9-19 fixed15

Just as the data showed in 2007, the data at the start of 2019 shows that we are top-heavy construction jobs that are not supported by real growth in construction volume.

8-3-19 > added plot > Plot below shows the same data as the above two plots, only plotted monthly, with all data from 2001 thru 2019 on one plot. From 1991 to 2000, jobs vs volume disparity was only 1%. This plot sets Jan 2001 to zero baseline for both jobs and volume. By Dec 2006 the disparity was 20%. This plot shows construction jobs growth vs volume growth now has a wider disparity than Jan 2007 when we were leading into the Great Recession. By far, the largest portion of this growing disparity is residential. In the last 24 months residential volume has decreased by 12% but residential jobs have increased by 7%. To be fair, that doesn’t include some nonresidential jobs that were actually doing residential work.

Jobs vs Volume 2001-Jun2019 8-2-19

Construction volume, (spending inflation adjusted to constant $ volume) hit a 3-year low in Dec-Jan.

8-3-19 > added 12 month trailing jobs plot. Jobs growth rate, although showing some minor up months, has been declining since Q3 2018. As of July 2019, the 12 month trailing total of new construction jobs has dropped almost 50% in 9 months. If we maintain the current rate of jobs growth (avg 15k/mo in 2019), within the next three months we will hit a six-year low. I’m expecting growth to slow, so we may hit that six-year low next month, in the August data.

Jobs trailing 12mo growth 2013-2019 8-2-19
With construction spending in 2019 predicted up only 2%, and forecasting 4.5% construction inflation for 2019, real volume for 2019 will be down 2.5%. Jobs thru April are already up 1.2% year-to-date. So the gap is widening.

We are in the third year of no increase in construction volume. But jobs have continued to grow and JOLTS is at an all-time high. These data sets should not occur at the same time. But this is exactly what occurred prior to the great recession after which we experienced a devastating drop in jobs. However, compared to the construction volume measured by inflation adjusted spending, both the changes in jobs and the JOLTS indicator of job openings seemed to lag real activity by about a year.

Even if we do not experience a construction recession similar to 2008-2011, the current situation may be signaling that we could experience a jobs correction with the slightest downturn. If a jobs correction does not materialize then we are headed for a period in which we will solidify the highest ratio of jobs per volume of work put-in-place as measured in the last 50 years.

Jobs per billion 1970-2018 6-16-19

See also these articles:

Construction Volume vs Jobs 2017-2018

Construction JOLTS – What’s wrong with this picture?

What Jobs Shortage?

A Harder Pill To Swallow!

Residential Construction Jobs Shortages

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