11-5-16

I publish a lot of analysis for various construction data. I also read many other articles posted by other pundits in the industry, including MSM news sources. What I would say regarding construction data is this; an informed knowledge of construction data and how it’s used helps you understand if some article you are reading is accurate or relevant.

What I try to do here is not only report on the latest significant construction data, but also explain how the data must be used to make accurate and valuable analysis.

Here’s just three examples of how news analysts get it wrong:

> Post new construction starts as if those numbers represent construction spending.

A new start this month worth $10 billion adds a huge amount to the starts this month and will most certainly drive up the mo/mo and yr/yr starts numbers. But that new project could take 24 or 36 or 48 months to complete, so we can’t discern the impact on spending until we cash flow the value of the project which gives us the spending over its complete life span. In any given month the total amount of all spending is the summation of the spending this month from all the projects still ongoing that have started in previous months. Spending next month is 95% dependent on the flow of projects that started over the last 24 or 36 months.

> Suggest that two to three months of declines in spending indicates a downturn.

One of the biggest factors that determines spending this month is the values contributed this month from all the previous starts not yet completed. In a sector such as nonresidential buildings, in which the average duration of a project might be 24 months, the amount of spending this month gets some contribution from projects that started in each of the previous 24 months. One of the greatest influences on spending in any given month is the fluctuation (which could have occurred many months ago) in the amount of starts. So sometimes when we see a monthly spending dip it has nothing to do with a current declining trend in overall spending, but might have more to do with erratic new starts up to 18-24 months ago.

Starts can be quite erratic. Although we might see annual starts climbing at a modest rate of 6% or 7% per year, within that year we might see starts increase or decline by 50% or 100% from month to month. This is normal. But what it does to spending, particularly when a very large volume of project spending (from some month in the past that had huge new starts) finishes and drops out of the current spending, it causes dramatic fluctuations from month to month. Much of what we see in month to month changes in spending was predetermined months ago by the pattern of starts.

Normal rates of new starts, if always constant in growth rate, would create a constant rate of growth in spending. Erratic rates of change in starts create erratic changes in spending when those projects come to an end.

> Compare current $ this year to any $ from years past, without taking inflation into consideration.

I recently read an article that claimed construction was back to pre-recession levels. What really was being identified in that article was that current 2016$ were back to the level of current 2006$. That’s like saying $100 today buys you the same products that $100 bought you in 2006. I bet it wouldn’t be too hard to find a few examples where that would not be true.

Comparisons of dollars over time almost always need to be made using constant dollars, that is, adjusted for inflation and all converted to the same point in time, usually today. Sure spending today is up more than 50% off the bottom and in current dollars is higher than the previous peak in 2006. But if we adjusted those 2006$ for inflation the dollars spent in 2006 would be worth much more today. Although current dollars are now higher than any time in the past, after adjusting for inflation we are still 18% below peak spending.