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Yearly Archives: 2016
- 10-24-16 Originally posted
- 2-10-19 updated index tables and plots to include Q4 2018 data
- 8-10-19 updated index tables and plots to include Q2 2019 data
- 1-14-20 added index table from 2015-2023 to include Q4 2019 data
This collection of Indices is published in conjunction with this linked commentary
See the article Construction Inflation 2020
Construction Cost Indices come in many types: Final cost by specific building type; Final cost composite of buildings but still all within one major building sector; Final cost but across several major building sectors (ex., residential and nonresidential buildings); Input prices to subcontractors; Producer prices and Select market basket indices.
Residential, Nonresidential Buildings and Non-building Infrastructure Indices developed by Construction Analytics, (in highlighted BOLD CAPS in the tables below), are sector specific selling price composite indices. These three indices represent whole building final cost and are plotted in Building Cost Index – Construction Inflation, see below, and also plotted in the attached Midyear report link. They represent average or weighted average of what is considered the most representative cost indicators in each major building sector. For Non-building Infrastructure, however, in most instances it is better to use a specific index to the type of work.
The following plots of Construction Analytics Building Cost Index are all the same data. Different time spans are presented for ease of use.
8-10-19 note: this 2005-2020 plot has been revised to include 2018-2020 update.
See the article Construction Inflation 2020
All actual index values have been recorded from the source and then converted to current year 2017 = 100. That puts all the indices on the same baseline and measures everything to a recent point in time, Midyear 2017.
All forward forecast values wherever not available are estimated and added by me.
Not all indices cover all years. For instance the PPI nonresidential buildings indices only go back to years 2004-2007, the years in which they were created. In most cases data is updated to include June 2019.
- June 2017 data had significant changes in both PPI data and I H S data.
- December 2017 data had dramatic changes in FHWA HiWay data.
SEE BELOW FOR TABLES
When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. When construction activity is declining, construction cost increases slow or may even turn to negative, due to reductions in overhead and profit margins, even though labor and material costs may still be increasing.
Selling Price, by definition whole building actual final cost, tracks the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor overhead and profit. Selling price indices should be used to adjust project costs over time.
quoted from that article,
R S Means Index and ENR Building Cost Index (BCI) are examples of input indices. They do not measure the output price of the final cost of buildings. They measure the input prices paid by subcontractors for a fixed market basket of labor and materials used in constructing the building. ENR does not differentiate residential from nonresidential, however the index includes a quantity of steel so leans much more towards nonresidential buildings. RS Means is specifically nonresidential buildings only. These indices do not represent final cost so won’t be as accurate as selling price indices. RSMeans Cost Index Page RS Means subscription service provides historical cost indices for about 200 US and 10 Canadian cities. RSMeans 1960-2018 CANADA Keep in mind, neither of these indices include markup for competitive conditions. FYI, the RS Means Building Construction Cost Manual is an excellent resource to compare cost of construction between any two of hundreds of cities using location indices.
Notice in this plot how index growth is much less for ENR and RSMeans than for all other selling price final cost indices.
8-10-19 note: this 2010-2020 plot has been revised to include 2018-2020 update.
Turner Actual Cost Index nonresidential buildings only, final cost of building
Rider Levett Bucknall Actual Cost Index published in the Quarterly Cost Reports found in RLB Publications for nonresidential buildings only, represents final cost of building, selling price. Report includes cost index for 12 US cities and cost $/SF for various building types in those cities. Boston, Chicago, Denver, Honolulu, Las Vegas, Los Angeles, New York, Phoenix, Portland, San Francisco, Seattle, Washington,DC. Also includes cost index for Calgary and Toronto. RLB also publishes cost information for select cities/countries around the world, accessed through RLB Publications.
Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in seven major cities and average. Chicago, Milwaukee, Seattle, Phoenix, Denver, Portland and Minneapolis/St. Paul.
Bureau of Labor Statistics Producer Price Index only specific PPI building indices reflect final cost of building. PPI cost of materials is price at producer level. The PPIs that constitute Table 9 measure changes in net selling prices for materials and supplies typically sold to the construction sector. Specific Building PPI Indices are Final Demand or Selling Price indices.
PPI BONS Other Nonresidential Structures includes water and sewer lines and structures; oil and gas pipelines; power and communication lines and structures; highway, street, and bridge construction; and airport runway, dam, dock, tunnel, and flood control construction.
National Highway Construction Cost Index (NHCCI) final cost index, specific to highway and road work only.
The Bureau of Reclamation Construction Cost Trends comprehensive indexes for about 30 different types of infrastructure work including dams, pipelines, transmission lines, tunnels, roads and bridges. 1984 to present.
IHS Power Plant Cost Indices specific infrastructure only, final cost indices
- IHS UCCI tracks construction of onshore, offshore, pipeline and LNG projects
- IHS DCCI tracks construction of refining and petrochemical construction projects
- IHS PCCI tracks construction of coal, gas, wind and nuclear power generation plants
S&P/Case-Shiller National Home Price Index history final cost as-sold index but includes sale of both new and existing homes, so is an indicator of price movement but should not be used solely to adjust cost of new residential construction
US Census Constant Quality (Laspeyres) Price Index SF Houses Under Construction final cost index, this index adjusts to hold the build component quality and size of a new home constant from year to year to give a more accurate comparison of real residential construction cost inflation
Beck Biannual Cost Report develops indices for six major U.S. cities and Mexico, plus average. I did not see specifically if the index is or is not a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost, but may be better used in conjunction with other more specific sector selling price indices. Beck has not published index values since 2015. Read the report for the trend discussion. Atlanta, Austin, Charlotte, Dallas/Fort Worth, Denver, Tampa and Mexico
Other Indices not included here:
CoreLogic Home Price Index HPI for single-family detached or attached homes monthly 1976-2019. This is a new home and existing home sales price index.
Consumer Price Index (CPI) issued by U.S. Gov. Bureau of Labor Statistics. Monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should not be used to adjust construction pricing.
Jones Lang LaSalle Construction Outlook Report National Construction Cost Index is the Engineering News Record Building Cost Index (ENRBCI), a previously discussed inputs index. The report provides some useful commentary.
Sierra West Construction Cost Index is identified as a selling price index but may be specific to California. This index may be a composite of several sectors. No online source of the index could be found, but it is published in Engineering News Record magazine in the quarterly cost report update.
Leland Saylor Cost Index Clear definition of this index could not be found, however detailed input appears to represent buildings and does reference subcontractor pricing. But it could not be determined if this is a selling price index. A review of website info indicates almost all the work is performed in California, so this index may be regional to that area. Updated Index Page
DGS California Construction Cost Index CCCI The California Department of General Services CCCI is developed directly from ENR BCI. The index is the average of the ENR BCI for Los Angeles and San Francisco, so serves neither region accurately. Based on a narrow market basket of goods and limited labor used in construction of nonresidential buildings, and based in part on national average pricing, it is an incomplete inputs index, not a final cost index.
Vermeulens Construction Cost Index can be found here. It is described as a bid price index, which is a selling price index, for Institutional/Commercial/Industrial projects. That would be a nonresidential buildings sector index. No data table is available, but a plot of the VCCI is available on the website. Some interpolation would be required to capture precise annual values from the plot. The site provides good information.
Colorado DOT Construction Cost Index 2002-2019 Trade bids for various components of work published by Colorado Dept of Transportation including earthwork, paving and structural concrete.
Washington State DOT Construction Cost Index CCI for individual components or materials of highway/bridge projects 1990-2016
Minnesota DOT Highway Construction Cost Index for individual components of highway/bridge projects 1987-2016
Iowa DOT Highway Cost Index for individual components of highway/bridge projects 1986-2019
New Hampshire DOT Highway Cost Index 2009-2019 materials price graphs and comparison to Federal Highway Index.
New York Building Congress New York City Construction Costs compared to other US and International cities
U S Army Civil Works Construction Cost Index CWCCIS individual indices for 20 public works type projects from 1980 to 2050. Also includes State indices from 2004-2019
Comparative International Cities Costs – This is a comparative cost index comparing the cost to build in 40 world-wide cities If this International Cities Costs is a parity index, which involves correcting for difference in currency, then you must know the parity city in each country, which in the US I think is Chicago.
2-12-18 – Index update includes revisions to historic Infrastructure data
8-10-19 Note: updated index tables to include Q2 2019 data
1-14-20 This table updates 2018 and 2019 data and 2020-2023 forecast. Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% avg for the last 4yrs. Forecast residential inflation for the next three years is level at 3.8%. It was only 3.6% for 2019 but averaged 5.5%/yr since 2013.
How to use an index: Indexes are used to adjust costs over time for the affects of inflation. To move cost from some point in time to some other point in time, divided Index for year you want to move to by Index for year you want to move cost from. Example : What is cost in mid 2019 for a nonresidential building whose midpoint of construction was 2013? Divide Index for 2019 by index for 2013 = 109.6/86.0 = 1.27. Cost of building in 2013 times 1.27 = cost of same building in 2019. Costs should be moved from/to midpoint of construction. Indices posted here are at middle of year and can be interpolated to get any other point in time.
All forward forecast values where-ever not available are estimated by Construction Analytics, generally 0.5% to 1.0% lower each for 2019 and 2020.
See the article Construction Inflation 2020
updated 2-16-17 edited to include 2016 year-end total$ public vs private
The two largest components of Public Construction Spending, by far, are Highway/Bridge/Street and Educational Buildings. These two markets have more impact on the magnitude of public spending than any other markets. All of Highway ($90bil) is public spending. About 80% ($70bil out of $88bil) of Educational buildings is public spending. Together they add up to 55% of all public construction spending.
The next three largest public markets in order are: 70% of Transportation ($30/$42bil); all of Sewage/Wastewater ($22bil) and all of Water Supply ($12bil). These three markets account for only about 22% of public spending. Eight remaining markets, none larger than 3.5% of the total public sector, combined make up ~20% of total public spending. Five of those eight, Office, Health care, Public Safety, Amusement and Power, each account for $8 to $10bil and each is 3% to 3.5% of Public work.
Public Construction Spending average for the first six months of 2016 was the highest since 2010 and is up 10% from the Q4’13-Q1’14 low point.
Public spending finished 2016 down 0.8% from 2015, but that is down from a near six-year high, so spending is still strong. It is still -9% below its 2009 peak.
The biggest mover to total public spending this year is educational spending. Public educational spending in 2016 is up 4.7%. Because it represents 25% of all public spending, it has a net impact of moving total public spending up +1.2%, greater impact than any other market.
Public commercial spending is up 24% but has only a 1% market share of public work so moves public spending by only +0.24%. Power is down -20% but at a share of only 3% moves public spending by only -0.6%. Public components of office, public safety, sewage/waste disposal and water supply are all down by a combined -7%. At a combined market share of 18% that nets a -1.26% reduction in total public spending.
Public spending peaked in 2009 when Educational buildings spending was at its highest. Highway spending has been at or near its peak for the last 16 months but that, with current educational spending, which is still more than 20% below its peak, has not been enough to carry public spending to new highs.
Expected spending predicted from new construction starts gives a much better picture for 2017.
Highway/Bridge/Street starts in 2015 finished just shy of a 6-year high (in 2013) but 2016 was down 13% from 2015. On average 2015+2016 starts are still 5% higher than 2014. Highway projects are long duration, so very good starts from the end of 2014 and the beginning of 2015 will still contribute strong spending well into 2017. Highway spending is expected to finish up slightly over 2016.
Educational new starts in 2016 finished the year up 11%, posting a 4th consecutive annual increase and educational spending for 2017 should finish up 10%.
Transportation spending in 2017 should increase 6%.
Overall, total public construction spending in 2017 is predicted to grow by 8% to 9%, the first substantial growth since 2007, reaching new highs in the 2nd half. Educational spending will take the lead in 2017 public work. Historically, public spending increases by less than 10% per year.
Construction Starts for September were released 10-18-16 from Dodge Data and Analytics. Here’s some of the major points that can be developed from the data:
The six Nonresidential Buildings markets, Office (+30% YTD), Lodging (+50%), Educational (+10%), Healthcare (+20%), Commercial Retail (+15%) and Amusement/Recreation (+15%) make up 80% of all nonresidential buildings spending and account for combined growth of 16.5% in YTD new starts. Office and Lodging in 2016 will reach the 5th consecutive annual increase. Educational Markets, Commercial Retail and Amusement/Recreation will each record the 4th consecutive annual increase in total value of new starts. Spending combined for these six markets peaked in 2008 and dropped 37% to a bottom in 2012. For the last 3 years spending growth has ranged between 9%/yr and 12%/yr. For 2017, expect spending growth of 8%.
Manufacturing makes up 18% of nonresidential building market share. New starts 2016 YTD are down 54% from 2015. However, in 2014 and 2015 this market posted the fastest growth of any market in a decade and posted the two highest years on record for this market. It is currently settling back to a normal growth range. In 2014 starts increased 90%. In 2015 spending increased 33% to the highest ever recorded for manufacturing buildings. Spending will be down 2% to 3% in 2016 and down another 13% more in 2017, but 2017 will still be the 3rd highest year of spending on record.
Non-building Infrastructure starts will be down nearly 10% in 2016 but were up 25% in 2015. Power and Highway/Bridge/Street make up 2/3rds of non-building infrastructure spending. In 2015, Power starts increased 150% to an all-time high and Highway/Bridge/Street finished just shy of a 6-year high. It is not unexpected that starts in these markets will be down for 2016. The volume of monthly spending from projects started in 2014 and 2015 in this sector will contribute to spending for several years to come. Spending in 2017 will be the highest ever in this sector, up 7% from 2016.
Residential starts are having the best year since 2005-2006. Residential starts bottomed in 2009 and are now in the 7th consecutive year of growth. Although new starts will increase only about 7%-8% for 2016, that follows 4 years of growth averaging more than 20%/year. Spending peaked in 2005-2006 and dropped 60% to a low in 2009-2010. Spending has bounced 90% off the bottom in large part due to 17%/year average growth in 2013-2014-2015. Both starts and spending slowed in 2016 but still expect 7% to 8% spending growth in both 2016 and 2017.
Starts are recorded in full in the month a project starts but the total project budget gets spent over a long duration, so the effects on spending are spread over the next 2 to 3 years. Total starts are Up 10%/yr to 12%/yr for the last 4 years. The current forecast for 2016 is growth of only 3.5%, but that now leads us to a very important factor that must be considered when using starts data to predict future spending.
There is a major factor that keeps new starts in the current year from appearing as good as they should. Dodge Data continually revises starts. In every monthly release, the previous month is revised AND the last year’s year-to-date is revised. Dodge does incorporate other (usually minor) revisions at a later date, but the “12 month” revision to the previous year-to-date values captures a large part of all revisions.
So this September report includes revisions to the total 2015 YTD values through September 2015. None of the 2016 values yet include that equivalent “12 month” revision and won’t until next year. But the current year YTD not-yet-revised values are being compared to the previous year YTD revised values which has the affect of making current year growth appear lower than it should.
In the last 10 years the YTD revisions have never been down. Usually, most of the revisions occur to nonresidential buildings, about 5% to 6% per year, with only a 2% to 3% revision each to infrastructure and residential.
For total nonresidential buildings, so far year-to-date 2015 values through September have been revised UP by 9%. So while the 2016 year-to-date nonresidential buildings value this month is noted as down 2% compared to last year, much of the reason it is down is because 2015 values have had revisions applied that increase the 2015 base by 9%. We won’t get those equivalent “12 month” revisions applied to 2016 values until next year. When all the revisions are in, new starts for nonresidential buildings (typically revised up by 5% to 6%) in 2016 are on track to equal or exceed 2015 and perhaps record the third consecutive year of over $220 billion. We are within easy striking distance of the all-time high for nonresidential buildings starts reached in 2007!
For residential starts, if 2016 values get revised up next year by only 2%-3%, then 2016 will have grown by nearly 10% over 2015. Unless we experience a severe downward trend in new residential starts, which is NOT predicted, 2016 will post an all-time high for new residential starts.
(Year-to-date by market and month/month values by market are not published.)
Headline comparisons we read are often what happened this month versus last month or year-to-date versus last year. For comparisons to construction spending and jobs it is perhaps beneficial to look at recent and longer term trends. Here I will discuss construction jobs growth versus spending growth and highlight some of the pitfalls when comparing these values for productivity.
The most talked about reason for slower jobs growth is the lack of experienced workers available to hire. In fact, recent surveys indicate about 70% of construction firms report difficulty finding experienced workers to fill vacant positions. That certainly cannot be overlooked as one reason for slower jobs growth, but that is not the only reason?
Even with all this talk of difficulty finding experienced construction workers, there has been very good jobs growth. For the 5 ½ year period from the bottom in January 2011 to the present (August 2016) we added 1,240,000 construction jobs.
- Jobs increased by 23% in 5 ½ years with peak growth in 2014 and 2015.
- For the two years 2014+2015 we added 650,000 jobs, the largest number of new jobs in two years since 2004+2005.
In 2014-2015, jobs expanded by 11%, the highest number of jobs in a two-year span since 2004-2005 and the fastest two-year percent growth since 1998-1999. Peak growth was 6.1% in 2014 with slower growth in 2015. I expect even slower growth in 2016.
- For the 6-month period including Oct’15 thru Mar’16 construction gained 214,000 jobs, the fastest rate of consecutive months jobs growth in 10 years. Then, after 3 months of losses, July shows a modest gain.
Jobs growth from October 2015 through March 2016 was exceptional, 214,000 construction jobs added in 6 months, topping off the fastest 2 years of jobs growth in 10 years. That is the highest 6-month average growth rate in 10 years. That certainly doesn’t make it seem like there is a labor shortage. However, it is important to note, the jobs opening rate (JOLTS) is the highest it’s been in many years and that is a signal of difficulty in filling open positions.
I would expect growth like that to be followed by a slowdown in hiring as firms try to reach a jobs/workload balance, after such a robust period of jobs growth. It appears we may have experienced that slowdown. Jobs have been down four of the last six months and up most recently.
- Q2’16 jobs declined all 3 months. Keep in mind, this immediately follows the fastest rate of jobs growth in 10 years. But it also tracks directly to three monthly declines in spending. (I predicted this jobs slowdown in my data 9 months ago. I predicted the 1st half 2016 spending decline more than a year ago).
It is not so unusual to see jobs growth slowed in the 2nd quarter. It follows directly with the Q2 trend in spending and it follows what might be considered a saturation period in jobs growth. The last two years of jobs growth was the best two-year period in 10 years. It might also be indicating that after a robust 6 month hiring period there are far fewer skilled workers still available for hire. The unemployed available for hire is the lowest in 16 years.
Construction spending hit bottom at the same time as jobs, the 1st quarter 2011. For the same 5 ½ year period, Jan 2011 to Aug 2016, construction spending increased 52%, far more than jobs growth. For 2014+2015, spending increased close to 11% per year, the fastest spending growth in more than 10 years.
- For the same 6-months, Oct’15 thru Mar’16, Q4’15 spending was flat but by the end of Q1’16 spending had increased more than 4% in 6 months, to an annual rate of +8%.
- 2nd quarter 2016 spending came in 2% below 1st quarter.
- Total 1st half spending finished 7.2% above the 1st half 2015.
Although spending slowed in the 2nd quarter this year, in part it’s because the 1st quarter was so strong. They combined for a strong 1st half up 7.2% over last year.
Why is it that jobs don’t increase at the same rate as construction spending? Because much of that spending growth is just inflation, not true volume growth. Volume is construction spending minus inflation. To get volume we need to convert all dollars from current $ in the year spent into constant $ by factoring out inflation.
- Jobs growth should not be compared to spending growth.
- Spending increased 52% from Jan/Feb 2011 to Jul/Aug 2016.
- After adjusting for inflation from Q1 2011 to Q3 2016, we find that construction volume increased by 28% in 5 ½ years.
So, it looks like volume (+28%) still increased much more than jobs (+23%) in the same period and this would indicate increasing productivity. But this still is not the whole picture. Jobs need to be adjusted.
- Jobs needs to take into consideration the hours worked.
Before the dramatic decline in jobs from 2007 through 2010, hours worked ranged between 37hrs/wk and 38hrs/wk. But by 2015, and into 2016, hours worked has been consistently over 39hrs/wk. So not only did the workforce grow by 1.24 million jobs (+23%), but also the entire 7.0 million work force is working about 4% more hours/week. This must be considered to get net jobs, or work output.
- After adjusting for hours worked from Q1 2011 to Q3 2016, we find that net jobs growth increased by 28% in 5 ½ years.
- Since Q1 2011 the constant $ value of construction spending increased by 28%.
- Since Q1 2011 Jobs/hours worked output also increased by 28%.
Since Jan 2011, volume increased 28% and workforce output increased 28%, for a net productivity balance, but in 2011 we had a significant productivity loss and a smaller loss in 2013. The huge 2011 productivity loss is probably in part explained by the resumption of hiring after historic job cuts, particularly in 2009 when the work force was cut 16% but, while spending declined by 16%, work volume declined only 11%, which may have overshot the balance mark. That helps account for the huge productivity gain in 2009, but also leads to the losses in 2010 and 2011.
From Jan 2014 to Dec 2015 volume increased by 15% and workforce output increased by only 10.5%. Total hours worked compared to total constant value of spending shows productivity increased for those two years. Historically, we should not expect to see productivity growth continue for a third year and as of August it is down year-to-date.
I expected to see a turn-around in jobs growth in the 2nd half of 2016, and so far, for the 3-month period July-Sept we’ve added 34,000 jobs. That’s starting out perhaps a little slower than I thought. For much of 2014 and 2015 volume growth was exceeding jobs growth, but for 10 months from August 2015 through May 2016, volume growth mostly stalled and jobs growth, which just had 6 months of record high growth, exceeded volume growth by 3%. Only in the last few months has volume growth begun to outpace jobs growth again. But I suspect it is this slow down in real volume growth that has led to slow jobs growth. This leads me to think if spending plays out as expected into year end 2016, then construction jobs may begin to grow faster in late 2016. However, availability could have a significant impact on this needed growth.
Availability already seems to be having an effect on wages. Construction wages are up 2.6% year/year, but are up 1.2% in the last quarter, so the rate of wage growth has recently accelerated. The most recent JOLTS report shows we’ve been near and now above 200,000 job openings for months. With this latest jobs report, that could indicate labor cost will continue to rise rapidly.
As wages accelerate, also important is work scheduling capacity which is affected by the number of workers on hand to get the job done. Inability to secure sufficient workforce could impact project duration and cost and adds to risk, all inflationary. That could potentially impose a limit on spending growth. It will definitely have an upward effect on construction inflation this year.
For all of 2016 and 2017, I predict construction spending will increase about 15%, BUT after inflation construction volume will increase only about 6% to 7%, most of that in 2017. For all of 2016 and 2017, I predict jobs will grow by 350,000 to 450,000, only about 5% to 6%.
Reference Source Information:
Allow me to start this post with a reference
from my blog post 8-6-16 Construction Jobs – Is July a Turning Point?
- For the 6 month period including Oct’15 thru Mar’16 construction gained 214,000 jobs, the fastest rate of growth in 10 years. Then, after 3 months of losses, July shows a modest gain.
- During that same period Q4’15 spending was flat but by the end of Q1’16 spending had increased more than 4% in 6 months, or at an annual rate of 8% to 9%.
- Even though some upward revision is expected for June spending, total Q2’16 spending will still be down 2% to 3% from Q1.
- Q2’16 jobs declined all 3 months, keeping in mind this immediately follows the fastest rate of growth in 10 years. But it also tracks directly to three monthly declines in spending.
Comment Update 10-7-16
June spending did get revised up by 1.85% and 2nd qtr spending came in 2.05% less than 1st qtr. However total 1st half spending finished 7.2% above the 1st half 2015. August spending looks low at 1st print but we can expect that to be revised up by 1% to 2%. Historically, the 1st release of construction spending gets revised up 90% of the time. So it looks like spending bounced off of the April-May low point.
The 2nd quarter jobs slowdown coincided with the 2nd quarter spending dip.
From my blog post 8-6-16 Construction Jobs – Is July a Turning Point?
It is not so unusual to see jobs growth slowed in these last few months. It follows directly with the Q2 trend in spending and it follows what might be considered a saturation period in jobs growth. The last two years growth was the best two-year period in 10 years. It might also be indicating that after a robust 6 month hiring period there are far fewer skilled workers still available for hire. The unemployed available for hire is the lowest in 16 years.
We got modest growth in July that I hope to see continue for the 2nd half 2016. I expect spending to experience strong growth in the 2nd half and jobs growth should follow closely, perhaps adding 125,000 to 150,000 more jobs. However, although I do expect both spending and jobs growth, jobs could be somewhat restrained by lack of available skilled workers.
Construction Jobs growth from October 2015 through March 2016 was exceptional, 214,000 construction jobs added in 6 months, topping off the fastest 2 years of jobs growth in 10 years. Growth like that can only be followed by a slowdown in hiring until companies reach a jobs/workload balance, and it appears we may have experienced that slowdown. Jobs have been down four of the last six months. I expected to see a turn-around in the 2nd half, and so far, for the 3 month period July-Sept we’ve added 34,000 jobs. That’s starting out perhaps a little slower than I thought. For much of 2014 and 2015 volume growth was exceeding jobs growth, but for 10 months from August 2015 through May 2015, volume growth stalled and jobs growth exceeded volume growth by 3%. Only in the last few months has volume growth begun to outpace jobs growth again. I predicted at least 125,000 new jobs in the 2nd half, so we would need to add 90,000 to 100,000 more before year-end. But, there could be skilled labor constraints and the Aug and Sept numbers are still subject to revision. And we still have 3 months to go.
A common headline we see when Census releases monthly figures for Total Construction Spending is “Spending Unexpectedly Declines Mo/Mo.” Here’s why that is almost always misleading. Construction spending gets revised, UP, usually. So, the first number released is generally low.
U S Census report for August Construction Spending released October 3 posts August at a seasonally adjusted annual rate (SAAR) of spending at $1.142 billion, down 0.7% from July and this reduces the year-to-date (YTD) spending from +5.6% last month to now only +4.9% higher than the same 8 months of 2015.
- Construction Spending for Nonresidential Buildings Aug vs July UP 0.4%, 6th monthly increase this year. YTD is UP 8.2% from 2015.
- Construction Spending for Nonbuilding Infrastructure Aug vs July DOWN 2.2%, 5th monthly decline this year. YTD is DOWN 0.4%.
- Construction Spending for Residential Aug vs July DOWN 0.2%, Only 2nd monthly decline this year. YTD is UP 6.2%.
Comparisons using the first print of data almost always reflect a lower mo/mo or yr/yr growth rate than the final actual result because the first print “unadjusted value” is being compared to previous month or last year “adjusted values.” Construction spending, from 1st release to last revision of data, has been revised upward every month since August 2013. That would indicate the first reports of an “unexpected decline” almost always get revised up in following months.
The latest spending release is pending revision for the next two months and then the whole year gets one (usually final) revision in the middle of next year. Sometimes there is a second annual revision the following year.
Total construction spending, from 1st release to last revision of data, has been revised upward in the last 32 months by an average of +2.3%/month. However, the average revisions for the last 12 months have averaged only +1.3%/month. Sometimes the 1st revision is down then the 2nd up. Downward revision is rare. The very strong historical trend is for upward revisions after the first release of monthly data.
Some examples of revisions:
- Total construction spending over the last 12 months has been revised UP 10 of 12 times. The average of all revisions is +1.3%/month. Monthly revisions have ranged from -0.5% up to +3.4%.
- Office spending has been revised UP 4 of 7 times in 2016. The average revision is nearly flat but revisions have ranged from -3% to +6.5%.
- Commercial spending has been revised UP 4 of 7 times in 2016. The average revision is +1.1%/month. Revisions have ranged from -1.5% up to as high as +8% for a particular month.
- Residential spending has been revised UP 6 of 7 mo in 2016. The average revision is 2.1%/month. Monthly revisions have ranged from -1.6% to +7.5%
- Power Infrastructure has been revised UP 6 of 7 times in 2016. The average revision is +4.7%/month. Revisions have been as high as 9% for a particular month.
For 2016, final data won’t be published until July 2017, but so far through July, monthly revisions have reversed 4 out of 5 initial mo/mo declines to increases.
For all of 2013, 2014 and 2015, the average month/month growth rates increased from an initial reading of +0.14% to a final reading of +0.76%.
For all of 2014 and 2015, the average year/year growth rates increased from an initial reading of +8.1% to a final reading of +10.8%.
Dodge Data and Analytics yesterday released August new construction starts. The August number came in right about where I expected it, just over $700 billion. August starts are 21% higher then July which was an 8 month low. However, year-to-date through August totals $439 billion, down 7% from the same period 2015.
August came in at a seasonally adjusted annual rate (SAAR) of $711 billion, the highest since May 2015. In fact, this is only the fourth month since January 2008 that registered new starts over a SAAR $700 billion. The other three were in the 1st half of 2015.
Nonresidential Buildings new starts for August came in at a seasonally adjusted $267 billion, the second highest month since early 2008. The year-to-date is down compared to last year because 2015 had some very high months that helped the first half of 2015 reach an average of $214 billion, but the first five months of 2016 had some soft months that averaged only $189 billion. New starts for the last three months average $212 billion and starts have been increasing since May.
Residential new starts reached a SAAR of $291 billion in August, the third time this year over $290 billion, averaging over $280 billion so far for 2016, the highest since 2007.
Non-building Infrastructure starts for August total SAAR of $153 billion. Infrastructure starts fluctuate much more than any other and this year have ranged from $121 billion to $200 billion. Last year they ranged from $127 billion to $261 billion. Since 2006 Infrastructure starts annual totals have been between $140-$160 billion, except for last year when they shot up to $180 billion. So even though 2016 is coming in near the high end of the average from 2006-2014, it’s still well below last year because last year was so unusually high.
But there is another major factor that keeps new starts from appearing as good as they should look. Dodge Data continually revises starts. In each monthly release we can see not only the previous month revision but also the previous year-to-date revision. They do incorporate other revisions at a later date, but the “12 month” revision to the previous year-to-date values captures a large part of all revisions. So this August report includes revisions to 2015 values through August 2015. None of the 2016 values yet include that “12 month” revision. In the last 10 years the revisions have never been down. Usually, most of the revisions occur to nonresidential buildings, about 5% to 6% per year, with only a 2% to 3% revision to infrastructure and residential.
For nonresidential buildings, so far year-to-date 2015 values have been revised UP by almost 8%. So while the 2016 year-to-date nonresidential buildings value this month is down 10% compared to some very strong starts in early 2015, part of the reason it is down is because 2015 values have had revisions applied that increase the 2015 base by 8%, but we won’t see those equivalent “12 month” revisions applied to 2016 values until next year. When all the revisions are in, new starts for nonresidential buildings in 2016 are on track to equal or exceed 2015 and perhaps record the third consecutive year over $220 billion. We are within easy striking distance of the all-time high for nonresidential buildings starts reached in 2007!
For residential starts, if 2016 values get revised up next year by only 2%-3%, then 2016 will have grown by nearly 10% over 2015. Unless we experience a severe downward trend in new residential starts, which is NOT predicted, 2016 will post an all-time high for new residential starts.
9-18-16 update Mar 2018
Recent articles suggest that steel cost is expected to increase and this will almost certainly affect the cost of construction. But just how much of an affect would a cost increase have on total building cost? The cost increase that is being talked about is the mill price cost of steel, or something like pipe and tube producer price (PPI), since pipe and tube is a world trade item, but not a Fab Steel PPI. None of these include total cost of steel installed. The PPI is the price after fabrication. Total cost is the contractor’s bid or selling price installed which includes all markups (or markdowns).
PPI Steel Materials Inputs plot updated 2-10-19 to include 2018 data
The questions we need to answer are:
- How much of a cost increase will we see in the raw product, manufactured raw steel?
- How much steel is used in a building?
- What affect will a raw material cost increase have on the cost of steel installed?
- How much does that change the cost of the building?
It might help to start with a basic understanding of steel manufacturing and use.
Basic Oxygen Steel (BOS) steel making uses between 25 and 35% recycled steel to make new steel. BOS steel usually has less residual elements in it, such as copper, nickel and molybdenum and is therefore more malleable than EAF steel so it is often used to make automotive bodies, food cans, industrial drums or any product with a large degree of cold working. Cold rolled steel is in this category which would include gypsum wall system steel studs and HSS Hollow Structural Sections.
Electric Arc Furnace (EAF) steel making contains more residual elements that cannot be removed through the application of oxygen and lime. It is used to make structural beams, plates, reinforcing bar and other products that require little cold working. EAF steel uses almost 100% recycled steel. Most steel that goes into a building or civil structure is in this category. 2/3rds of all steel manufactured in the US is EAF steel.
Typically quoted benchmark steel pricing that I’ve seen is based on either cold-rolled-coil sheet steel or hot-rolled-coil sheet steel. This is a common product used for the automotive industry or appliance, but not so much for the construction industry (steel studs vs structural steel). EAF Structural steel is nearly 100% dependent on recycled steel so is not as much affected by price changes of iron ore, as is BOS steel.
The United States is the world’s largest steel importer. Of the 30MMT imported, 50%+ of that comes from our top few import suppliers, Canada, Brazil, South Korea and Mexico. Russia supplies 7%-9%. No other country supplies more than 5% of our imports. China supplies less than 2% of our steel imports, The U.S. is responsible for almost 10% of global steel imports, more than double the second largest importer. The U.S. annually imports about $20-$25 billion of steel, $2 billion from Mexico.
The United States consumes approximately 110 million tons of steel each year. More than 40 million tons is used in the construction industry. The next largest industries, automotive and equipment and machinery, together do not use as much steel as construction. The U.S. imports about 30% of the steel it uses.
Structural steel is the most widely used structural framing material for buildings used in the U.S. with nearly 50% market share in nonresidential and multistory residential buildings. Prior to the recession steel had a 60% market share.
Sources are also linked below.
What affect might a steel cost increase have on a building project? It will affect the cost of structural shapes, steel joists, reinforcing steel, metal deck, stairs and rails, metal panels, metal ceilings, wall studs, door frames, canopies, steel duct, steel pipe and conduit. Structural steel and reinforcing steel are hot-rolled long products, EAF steel. All the others are cold-rolled flat sheet BOS steel.
Here are some averages of the percentage of steel material costs as related to total project construction cost. For a building that is predominantly masonry, these percentages would be reduced considerably. For a heavy industrial building the percentages might be higher.
Assuming a typical structural steel building with some metal panel exterior, steel pan stairs, metal deck floors, steel doors and frames and steel studs in walls, then all steel material installed represents about 14% to 16% of total building cost.
Structural Steel only, installed, is about 9% to 10% of total building cost, but applies to only 60% market share of steel buildings. The other 6% of total building cost applies to all buildings.
Other steel is very likely higher to take into account any increased cost in major mechanical equipment such as chillers, pumps, fan powered boxes, cooling towers, tanks, generators, plumbing fixture supports, electrical panel boxes and cable trays.
If the structural steel subcontractor increases bid price by 10%, that raises the cost of the building by 1%, but if it is the mill price of steel that increases by 10% the increase to final building price is far less. It is the mill price of steel, rather than fabricated steel, that you would track in the producer price index (PPI).
The final cost of steel installed in a building is about four times the cost of the raw mill steel material used in making and installing the final product. Why so different? Well, for instance, structural steel cost includes: raw mill steel cost, delivery to shop, drafting, shop fabrication, shop paint, delivery to job site and shop markup. At the job site it includes: unload and sort, field installation crew, welding machine, crane and operator, contractor’s overhead and profit and sales tax.
Assuming a building as described above, a 10% increase in the cost of mill steel, which (material only) affects one fourth the cost of 16% of the total building cost, then a 10% increase in the cost of ALL mill steel may result in a composite price increase on a whole building of about 10% x ¼ x 16% = 0.4%. A 10% increase in the cost of mill steel just for structure may result in a composite price increase on a whole building of about 10% x ¼ x 10% = 0.25%.
So, if the mill cost of steel were to increase 10% from $700/ton to $770/ton prior to shop fabrication, for a $100 million building, that could add roughly 0.25% ($250,000) to the cost of the structural steel contract or roughly 0.4% ($400,000) to the total cost of all steel.
A 25% increase in mill steel could add 0.65% to final cost of building just for structure. It adds 1.0% for all steel in a building.
For a project such as a steel bridge, where not just 16% of cost is steel material, but potentially 40% to 60% of cost is steel, a 25% increase in mill steel might add as much as 3% to 4% to final cost.
links to relevant data
1-28-20 See the new post Construction Inflation 2020
8-10-19 updated plots and commentary
General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of escalation in construction projects. To properly adjust the cost of construction over time you must use actual final cost or selling price indices.
Inflation in construction acts differently than consumer inflation. When there is more work available, inflation increases. When work is scarce, inflation declines. A very large part of the inflation is margins, wholesale, retail and contractor. When nonresidential construction was booming from 2004 through 2008, nonresidential final price inflation averaged almost 8%/year. This was at a time when input costs were averaging between 5% and 6%/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 a total of 17% deflation from 2007 through 2011. From 2008 to 2010, nonresidential buildings experienced 10% deflation in two years.
The following plots are all the same data. Different time spans are presented for ease of use.
8-10-19 note: this 2005-2020 plot has been revised to include 2018-2020 update.
Nonresidential Buildings – Since 1993, the 25-year long-term annual construction inflation has averaged 3.5%, even when including the recessionary period 2007-2011. Long-term average inflation, without recessionary declines, is 4% for 20 non-recessionary years since 1993. During rapid growth period of 5 years from 2004-2008, inflation averaged 8% per year. Since 2011, nonresidential buildings inflation has averaged 3.8%, averaging 4.25%/yr. for the last 4 years with a high of 5.1% in 2018.
Residential, from 2007- 2011 experienced 5 consecutive years of deflation, down 20%. In the 4-year boom just prior to that, 2003-2006, inflation averaged 9% per year. Residential inflation snapped back to 8.0% in 2013. It slowed to 4.4% in 2018 but has averaged over 5% for the last three years.
Construction Spending growth posted two separate 4-year periods of 40%+ growth, up 41% in 2012-2015 and up 40% in 2013-2016, exceeding the growth during the closest similar four-year periods 2003-2006 (+37%) and 1996-1999 (+36%), which were the two fastest growth periods on record with the highest rates of inflation and productivity loss. Growth peaked at +11%/year in 2014 and 2015, exceeded only slightly by 2004-2005.
Spending growth slowed to 7.0% in 2016 and only 4.5% in 2017. In 2018, spending dropped to a gain of only 3.3%. It’s expected, after revisions that 2019 spending will finish at a gain of less than 2%.
Producer Price Index (PPI) Material Inputs (excluding labor) costs to new construction increased +4% in 2018 after a downward trend from +5% in 2011 led to decreased cost of -3% in 2015, the only negative cost for inputs in the past 20 years. Input costs to nonresidential structures in 2017+2018 average +4.2%, the highest in seven years. Infrastructure cost are up near 5% and single-family residential inputs are up 4%. But material inputs accounts for only a portion of the final cost of constructed buildings.
Labor input is currently experiencing cost increases. When there is a shortage of labor, contractors may pay a premium to keep their workers. All of that premium may not be picked up in wage reports. Also, some of the labor inflation is due to lost productivity due to less skilled workforce. Unemployment in construction is the lowest on record. There is some sign of jobs growth slowing down in Q2 and Q3 2019, and potentially getting slower.
Nationally tracked indices for residential, nonresidential buildings and non-building infrastructure vary to a large degree. When the need arises, it becomes necessary that contractors reference appropriate sector indices to adjust for whole building costs.
ENRBCI and RSMeans input indices are prefect examples of commonly used indices that DO NOT represent whole building costs, yet are widely used to adjust project costs. An estimator can get into trouble adjusting project costs if not using appropriate indices. The two input indices for nonresidential buildings did not decline during the 2008-2010 recession. All other final cost indices dropped 6% to 10%.
From 2010 to 2019, total final price inflation is 110/80 = 1.38 = +38%. Input cost indices total only 106/85 = 1.25 = +25%, missing a big portion of the cost growth over time.
CPI, the Consumer Price Index, tracks changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should never be used to adjust construction pricing. Historically, Construction Inflation is about double the CPI. However for the last 5 years it averages 3x the CPI.
Taking into account the current (Jan 2018 12 mo) CPI of 2% and the most recent 5 years ratio, along with accelerated cost increases in labor and material inputs and the high level of activity in markets, I would consider the following forecasts for 2018 inflation as minimums with potential to see higher rates than forecast.
Residential construction, from 2007- 2011, experienced five consecutive years of deflation, down 20%. In the 4-year boom just prior to that, 2003-2006, inflation averaged +9% per year. Residential construction inflation saw a slowdown to only +3.5% in 2015. However, the average inflation for five years from 2013 to 2017 is 6%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and reached 5.8% in 2017. For 2018, residential final cost inflation indexes are up only 4.5%. Residential construction inflation for 2019 is now about 4% to 4.5%.
A word about Hi-Rise Residential. About 95% of the cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. This type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, a more appropriate index to use for hi-rise residential construction is the nonresidential buildings cost index.
Nonresidential Buildings inflation, during the rapid growth period of five years from 2004-2008, averaged 8% per year. Inflation averaged near 4% per year for the 4 years 2014-2017.
Several Nonresidential Buildings Final Cost Indices averaged over 5% per year for the last 2 years and over 4% per year for the last 5 years. Nonresidential buildings inflation totaled 22% in the last five years. Input indices that do not track whole building cost would indicate inflation for those four years at only 12%, much less than real final cost growth. For a $100 million project escalated over those four years, that’s a difference of $8 million, potentially underestimating cost.
Nonresidential buildings spending slowed from 2017 to 2019 but is now entering a phase in which it may reach the fastest rate of growth in three years, which historically leads to accelerated inflation. Construction inflation for nonresidential buildings for 2018 and 2019 was 5%/yr. For 2020 expect 4.25%, rather than the long term average of 3.5% to 4.0%.
Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stayed flat from 2015-2017, then increased 6%+ in 2018. The Highway index for 2019 is up about 6%. The IHS Pipeline and LNG indices increased in 2018 but are still down 20% since 2014. Coal, gas, and wind power generation indices have gone up only 6% in seven years. Refineries and petrochemical facilities have dropped 5% in 4 years but 2018 regained the level of 2013. Input costs to infrastructure are down slightly from the post recession highs, but most have increased in the last year. Input cost to Highways are up 5.0% and to the Power sector are up 3.6% in 2018. Work in Transportation and Pipeline projects has increased dramatically in 2017 and 2018.
Infrastructure power indices registered 2.5% to 3.5% gains in 2017 and again in 2018. Highway indices increased 6.6% in 2018. Anticipate 4% inflation for Power sector and at least 5%-6% inflation for Highway in 2019 with the potential to go higher in rapidly expanding markets, such as pipeline or highway.
This plot for nonresidential buildings only shows bars representing the predicted range of inflation from various sources with the line showing the composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation of less than 1%, the actual inflation is following a pattern of growth above 4%. The low end of the predicted range is almost always established by input costs, while the upper end of the range and the actual cost are established by selling price indices.
8-10-19 note: this 2005-2020 plot has been revised to include 2018-2020 update.
A word about terminology: Inflation vs Escalation. These two words, Inflation and Escalation, both refer to the change in cost over time. However escalation is the term most often used in a construction cost estimate to represent anticipated future change, while more often the record of past cost changes is referred to as inflation. Keep it simple in discussions. No need to argue over the terminology, although this graphic might represent how most owners and estimators reference these two terms.
In every estimate it is always important to carry the proper value for cost inflation. Whether adjusting the cost of a recently built project to predict what it might cost to build a similar project in the near future or adding an escalation factor to the summary of an estimate for a project with a midpoint 2 years out, or answering a client question, “What will it cost if I delay my project start by one year?”, whether you carry the proper value for escalation can make or break your estimate.
- Long term construction cost inflation is normally about double consumer price inflation (CPI).
- Since 1993 but taking out 2 worst years of recession (-8% to -10% total for 2009-2010), the 20-year average inflation is 4.2%.
- Average long term (30 years) construction cost inflation is 3.5% even with any/all recession years included.
- In times of rapid construction spending growth, construction inflation averages about 8%.
- Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. It averaged 4.6% for the 4 years 2016-2019.
- Residential buildings inflation reached a post recession high of 8.0% in 2013 but dropped to 3.5% in 2015. It averaged 4.6% for the 4 years 2016-2019, but is at the low point of 3.3% in 2019.
- Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/suppliers margins.
- When construction volume increases rapidly, margins increase rapidly.
- Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.
Construction Spending 2016 – Nonresidential Markets
Nonresidential Buildings spending for July totaled a SAAR of $403 billion, down slightly from June but up 1.3% from the May dip. Spending YTD for nonresidential buildings through July is up 8.0% over 2015. The current 3-month average of $403 billion is up slightly from the 1st quarter but is still 9% below the peak in 2008.
How does actual spending YTD compare to my early 2016 forecast?
Nonresidential Bldgs predicted YTD $236.9b, actual YTD $228.1b (-$8.8bil, -3.7%).
Nonresidential Buildings spending for 2016 predicted in Dec 2015 $439.2b. Now with YTD data through July forecast spending for 2016 is $410.9b (-$28.3bil, -6.4%).
Total Nonresidential Buildings construction spending increased 9.7% in 2014 and 13.8% in 2015 and will grow 8.5% in 2016 and 6.3% in 2017.
Nonresidential Buildings Spending History
- 5 years 2004-2008 up 64%
- 3 years 2006-2008 up 45%
- 3 years 2009-2011 down 36%
- 2 years 2014-2015 up 25%
Manufacturing construction spending YTD is down 2.6% from 2015. However, that is because 2015 manufacturing construction spending reached all-time highs after record new starts in 2014, some of which will extend spending into 2017. 2016 is on track to reach the second highest year of spending on record, only slightly below 2015. Although new starts YTD in 2016 are down 75% from 2015, that will have most affect next year. A very large volume of starts in mid-2014 and early 2015 will generate spending extending into the 2nd half of 2016and early 2017. Total manufacturing construction spending for 2016 will finish 2% below 2015. Due to declining new starts in 2015 and 2016, spending in 2017 will drop more than 10%, and yet still be the 3rd highest year on record. Manufacturing construction represents 19% of total nonresidential buildings spending.
Office construction spending YTD is up 22% from 2015. Although new starts are currently down slightly from last year, starts are expected to grow 4% for 2016. Office starts have been strong since 2013. Vacancy rates peaked in 2010 and demand for office space has been increasing. A large component of office construction is data centers. Although we may see a few months of spending declines in late 2016, the large volumes of spending generated by several years of strong starts will keep total spending high. Office construction spending increased 23% in 2014 and 19% in 2015 and it will grow 23% in 2016 and 15% in 2017. Office construction represents 17% of total nonresidential buildings spending.
Commercial construction spending YTD is up 11% from 2015. Commercial new starts have been increasing slowly for the last 4 years. Spending will remain nearly flat for the next several months and is forecast to grow very slowly through mid-2017, then taper off slightly. Commercial construction had its biggest years in 2012-2013-2014 with growth of 11%, 12% and 18%. Total commercial construction spending for 2016 will finish 9% higher than 2015 and 2017 will grow 3% to 4%. Commercial construction represents 18% of total nonresidential buildings spending.
Lodging construction spending YTD is 29% higher than 2015. Lodging construction spending has exceeded the growth rate of all other markets. Starting in 2012 annual spending increased 19%, 25%, 24% and 30%. However, during that time lodging averaged only 5% of total nonresidential buildings spending. It now represents just under 7%. Total lodging construction spending forecast growth for 2016 is 25%. For 2017 expect spending growth of only 8%.
Educational construction spending YTD is up 4.8% from 2015. Educational buildings spending experienced the longest downturn of any market, declining for 5 consecutive years from 2009 through 2013. It has been slow to recover with 2015 showing the first real growth of only 4.8%. 2014 marked the beginning of the turn but registered growth of less than 1%. New starts posted 15% growth in 2014 and then slowed to only 4% growth in 2015. However, a large volume of those starts occurred in late 2014 and then again in early 2015. The timing of these starts generates a lot of spending in late 2016. I expect spending in the 2nd half 2016 to grow 5% over the 1st half. Total educational construction spending for 2016 will finish 8% higher than 2015 and 2017 will grow 9%. Educational construction spending is the largest component of nonresidential buildings representing 22% of total nonresidential buildings spending. Before the 5 years of declines it represented 30% of nonresidential buildings spending.
Healthcare construction spending YTD is up only 2.3% from 2015. Healthcare new starts since 2011 increased only in 2014. Spending may see some moderate declines in late 2016 before resuming slow growth in 2017. Changes and uncertainty in the healthcare climate are having a dampening effect on spending growth. Total healthcare construction spending for 2016 will finish only 2% higher than 2015 and 2017 will grow 3% to 4%. Healthcare construction represents 10% of total nonresidential buildings spending.
Amusement/Recreation construction spending YTD is up 10.1% from 2015. New starts were very strong in 2013 and 2014 and generated strong spending increases of 10% and 18% in 2014 and 2015. However, starts in 2015 declined slightly and 2016 starts to date have been flat. Spending through 2016 will remain strong but we will experience moderate declines in the 1st half of 2017. Total Amusement/Recreation construction spending for 2016 will finish 12% higher than 2015 but 2017 will grow only 2%. Amusement/Recreation construction represents 5% of total nonresidential buildings spending.
Non-building Infrastructure spending for July fell to a SAAR of $289 billion, down slightly over for the last four months. YTD spending through July is up only 1.3% over 2015. Spending began to slow in April and May and is now at the 2016 low. The current 3-month average is down 4% from the 1st quarter. However, spending on non-building infrastructure reached an all-time high in the first half of 2014 and has remained near those highs through 2015 into the 1st quarter of 2016.
How does actual spending YTD compare to my early 2016 forecast?
Non-building Infrastr predicted YTD $156.2b, actual YTD $160.5b (+$4.3bil, +2.8%).
Non-building Infrastrusture spending for 2016 predicted in Dec 2015 $293.2b. As of July data forecast spending for 2016 is $297.3b (+$4.1bil, +1.4%).
Total Non-building Infrastructure construction spending increased 8.8% in 2014 but decreased 1.5% in 2015. It will grow only 1.2% in 2016 but then 9.6% in 2017.
Non-building Infrastructure Spending History
- 7 years 1995-2001 up 56%
- 4 years 2005-2008 up 60%
- 3 years 2009-2011 down 8%
- 3 years 2012-2014 up 19%
Power construction spending YTD is up 6.0% from 2015. Power new starts are erratic. Also some power projects are very long duration from start to finish. In 2012 starts totaled over $50 bil., in 2013 only $30 bil. and in 2014 less than $25 bil. In 2015 starts reached an all-time high of $56 bil. The power construction spending pattern for 2012-2015 was +30%, -4%, +18%, -16%. Many of the starts in 2012 supported 18% spending growth in 2014, yet not much of the record year of starts in 2015 supported spending in 2015. Although new starts in 2016 are forecast to drop by 30%, that’s still over $40 bil. and more than in 2013 or 2014. Part of the reason for a drop in spending in 2016 is the tailing off of projects that started in previous years combined with the fact that 2013 and 2014 were “lean” years. Cash flow of starts determines spending and it follows the erratic flow of starts. A very high volume of starts in early 2015 will generate spending extending out through 2019. I’m forecasting total power construction spending for 2016 will finish only 1.2% higher than 2015 and 2017 will increase 7%. Power construction represents 32% of total non-building infrastructure spending.
Highway/Bridge/Street construction spending YTD is up only 2.5% from 2015. Some highway and street projects are long duration from start to finish. Although new starts in 2015 increased by 11%, that was significantly unbalanced with two very high months of new starts in the 1st quarter and below average starts for almost the entire 2nd half of 2015 and the 1st half of 2016. The very high months have starts with much longer duration so do not add significantly to monthly spending, they spread the spending over a longer period of time. Spending has declined in 8 out of the last 12 months. I’m expecting declines in 6 out of the next 12 months. Yet the plus months will still carry both 2016 and 2017 to spending growth. I’m forecasting total highway/bridge/street construction spending for 2016 will finish 4.5% higher than 2015 and 2017 will increase 8%. Highway/Bridge/Street construction represents 32% of total non-building infrastructure spending.
Transportation/Air/Rail construction spending YTD is down 2.4% from 2015. YTD spending is 9% lower than what I had predicted in my early 2016 forecast. There is a disconnect between where Dodge reports transportation starts and how U S Census reports transportation spending, so it is difficult to directly relate the two. I’m forecasting total transportation construction spending for 2016 will finish 2.5% higher than 2015 and 2017 will increase 6%. Transportation construction represents 16% of total non-building infrastructure spending.