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Saturday Morning Thinking Out Loud #6

Just a few thoughts on forecasting construction spending

If we look at actual data through September, with ~75% of the actual annual construction spending already in the year-to-date and only 25% of annual spending in the estimate to complete in the 4th quarter, if forecasts for year-end totals are not already within 2.5% of the final, that means the projections for the final quarter are off by more than 10%.

Cash flows from construction starts are the strongest predictor of total spending next month. Projects that already started are in backlog. Backlog is used to develop projections for spending. For next month we already have 96% of all work in backlog. The remaining 4% will be new starts next month. For two months out we have 92% and for three months out we have 88% already in backlog. So, the uncertainty on spending in the near term is pretty low. Even averaged over a quarter rather than being exact every month, it takes a major event to have a big miss on projections for the next quarter.

Although exact monthly values in spending may be difficult to predict, trends for monthly changes in spending are easier to predict. Often these trends have very small changes month to month. Monthly changes in spending of +/- 5% are uncommon and changes of +/- 10% are quite rare.

Some forecasts I’ve seen for construction spending would demand that month to month changes in the final quarter exceed 20% to 30%. It’s just not going to happen folks.

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