Some analysts tracking construction spending make note of how close we are to previous highs. Are we really that close? Let’s have a look.
Back in early 2006 residential spending peaked and nonresidential buildings had yet to reach its peak, 25% higher in 2008. Non-building Infrastructure also peaked in 2008 and stayed near that peak through 2009. In the 1st quarter of 2006 total spending peaked at a annual rate of $1.2 billion. We are within a stone’s throw of reaching that level and probably will within the next few months. But all of that is measured in current dollars, dollars at the value there were worth within that year, ignoring inflation. Adjusting for inflation gives us a much different value, constant dollars or dollars all compared or measured in value in terms of the year to which we choose to compare. To be fair, we must now compare all backdated years of construction to constant dollars in 2016. What would those previous years be worth if they were valued in 2016 dollars? Residential construction added 20% inflation in just the previous 3 years and nonresidential buildings 13%.
Inflation in construction acts differently than consumer inflation. When there is more work available, inflation increases. When work is declining, inflation declines. When nonresidential construction was booming from 2004 through 2008, inflation averaged almost 8%/year. When residential construction boomed from 2003 to 2005, inflation in that sector was 10%/year. But from 2009 through 2012 we experienced deflation, the worst year being 2009. Residential construction experienced deflation from 2007 through 2011.
This graphic uses inflation relative to each sector to adjust construction spending into 2016 dollars. Now we can see how far we really dropped, how far off the bottom we have come and how far we have to go to get back to peak spending. That previous peak of $1.2 trillion in early 2006 would be worth $1.4 trillion today.
In the past 4 years we have had inflation adjusted spending annual increases ranging from 3% to 7%. Fair enough to say we are averaging about a 5% per year increase in inflation adjusted spending. That can also be referred to as volume. At that rate, still down 18% from the previous peak, we may not see a return to previous peak levels of construction spending for at least 3 or 4 more years.