3-23-16

New construction starts drive construction spending.  For all the discussion regarding the monthly rise and fall of spending, most of the spending in any given month is already predetermined since two thirds of all construction spending in the next 12 months comes from projects that were started prior to today. This is commonly referred to as backlog.

The pattern of spending does not follow the pattern of new starts which can fluctuate dramatically.  It follows the pattern developed by the cashflow from all previous starts. Data for new construction starts is sourced from Dodge Data & Analytics. Cash flow is developed independently.  Here’s a much simplified example of cashflow: a new $20 million project start is to be completed in 20 months, therefore we expect this project to generate $1 million of spending every month for the next 20 months.

This plot is an Index, so the ratios of starts and actual spending show the relative volume of each of these three major sectors as compared to each other.

Nonresidential buildings new construction starts were elevated for 16 out of the last 24 months. Starts were strong from February through July of 2015. A slowdown occurred in the second half of 2015 but the last four months have been gaining slowly. It looks like the backlog of elevated starts will keep spending rising at least until the end of 2016 before we see a slight dip in spending.

75% of all nonresidential building spending in 2016 comes from projects that were started between early 2014 and the end of 2015. Each month, new starts generate only 4%-5% of monthly spending. As we start the new year, backlog accounts for 95% of January spending. We know a lot about spending within the next few months, but what we have in backlog for December at the beginning of the year from previous starts accounts for only 50% of December activity. We will add about 4-5% more to December backlog from new starts each month this year.

Five out of six times in the last 18 months that nonbuilding infrastructure new construction starts jumped 25% to 50% above the running average it was due to massive new starts in the power sector. Some of these projects are worth several billions of dollars.  While this causes new starts to fluctuate wildly, these projects sometimes take four to five years from beginning to completion, so the cash flow is spread out over a very long period, therefore spending does not experience the same magnitude of monthly change as starts.

80% of all nonbuilding spending in 2016 comes from projects that started from mid-2013 through the end of 2015. New starts each month generate only about 3% of monthly spending.

The average of residential starts for the last three months is higher than any time since 2007 when residential starts were already on the decline by 24% from the previous year. The volume of residential starts predicts that spending should be higher than it is currently. This could mean that some starts have been delayed. Or, it could be because residential starts have the shortest duration, they may be the most difficult to predict spending from starts.

55% of all residential building spending in 2016 comes from projects that started between late 2014 and the end of 2015. New starts each month generate almost 10% of monthly spending.

(6-5-16) RE: a discussion related to a decline in nonresidential permits suggests nonresidential spending will decline. Yes, but at what rate? Permits are directly related to new construction starts. Since every month of new starts has an impact of only 4-5% on nonres spending in every following month for the next 20-25 months, then a 10% drop in permits in a single month would cause only a 0.4% to 0.5% reduction in spending in each of the following 20-25 months. It would take a prolonged trend of declining permits and therefore declining new starts to really see a dramatic decline in spending, and then the greatest effect would be well out into the future.