The attached plot shows actual and predicted construction spending compared to several industry leading indicators. The ABI, produced by the American Institute of Architects (AIA) shows work on the boards at architectural firms. Values above 50 indicate work increasing, values below 50 = work decreasing. The DMI is a survey from Dodge that gives an indication of new construction momentum. Starts is the total cash flow growth from all nonresidential starts currently in backlog.
Both the ABI and the DMI have long lead times. For example, the ABI value posted by AIA today is an indication of what to expect 9 months from now. I’ve plotted the values for ABI and DMI out at the lead time dates (# of months) in the future so they would correspond to future cash flows from all starts and predicted spending. The Starts, DMI and Spending values on this plot are indexed so they could be plotted with the ABI while keeping growth trends in each index true.
- ABI – Architectural Billings Index
- DMI – Dodge Momentum Index
- Starts – Aggregate Cashflows of Dodge Starts
- Spending – Actual and Predicted Construction Spending
Overall Spending mostly correlates with Starts except that Starts showed a steeper growth rate in 2016 before a drop. Starts and Spending match well for all of 2014 and 2015. Both DMI and ABI are more erratic, however, the advances and declines in the ABI do correspond well with pickups and slowdowns in Spending. From mid-2015 through the end of 2016, the DMI was in a narrow range and that could possibly be said to be in synch with a slowed period of Spending.
Although they don’t match exactly by month, the ABI, DMI and Starts all show a drop sometime between 4th qtr 2016 and 2nd qtr 2017. That appears in Spending as a slight dip in 1st qtr 2017. The ABI gives an indication of a nice increase midyear. Both DMI and Starts are indicating substantial growth in spending by year end 2017.
2-21-17 This Summary is a collection of briefs pulled from all the articles that make up the 2017 Construction Outlook
Total of all Dodge Data & Analytics new construction starts for 2016 finished as the highest year since 2005. After 2016 totals get adjusted up we might see 2016 growth of 4% to 5% over 2015.
- Residential starts in 2016 posted the best year since 2005-2006. New starts show an increase of only 6% for 2016, but that follows several years of growth averaging more than 20%/year. I expect after adjustments 2016 residential starts will be revised to 8% growth.
- Nonresidential Buildings starts for the last six months averaged the highest since the 1st half of 2008. I expect after adjustment nonresidential buildings will show a 2016 increase of about 8% to 9%.
- Infrastructure starts even though posting a substantial decline for 2016 came in at the second highest year on record. 2015 was up 27% from 2014. I expect after adjustments the 2016 decline will be revised up by 3 points to -8%.
The types, values and duration of projects that make up the backlog help get a clear picture of spending activity over time, particularly in the coming year.
Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current growth cycle. Spending from starting backlog has increased every year and in 2017 it will be up a total of 35% over 2014.
Total construction spending in 2017 will reach $1,236 billion, an increase of 6% over 2016, supported by a 4th consecutive year of strong growth in nonresidential buildings. The monthly rate of spending will range from near $1.2 trillion in January to $1.3 trillion at year-end.
- Nonresidential Buildings spending in 2017 will increase to $447 billion, 9.1% over 2016. Office spending will lead 2017 with 30%+ growth. Commercial, Lodging and Educational markets are all expected to post strong gains over 10%.
- Non-building Infrastructure, following two down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets.
- Residential will increase only moderately to $485 billion, adding 4.8% over 2016. That follows on three years of substantial growth averaging 17%/year.
- The entire construction industry best growth rate ever achieved (in constant 2016$) absorbed $1 trillion in new spending over 5 years. Infrastructure has not absorbed $1 trillion newly added work in 25 years.
- None of the starts or spending detailed above includes any projections of potential work from future stimulus.
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.
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. Public spending in 2017 could increase more than 8%.
For 2017, several economists (including myself) are predicting total construction spending will increase by just over 6%. However, I’m also predicting that combined construction inflation for all sectors will increase by 4.0% to 4.5%. That leaves us with a net volume growth of only 1.5% to 2.0%. Therefore, for 2017, we should not expect jobs to increase by more than 1.5% to 2.0%, or 100,000 to 140,000.
Housing Starts (# of units started as reported by U.S. Census) can be erratic from month to month and short term changes in growth can sometimes be misleading. Trends should be looked at over longer term periods. New monthly starts on a seasonally adjusted annual rate (SAAR) basis for the last eight months through January 2017 have now averaged over 1,200,000.
For the last four months housing starts have averaged an annual rate of 1,250,000, an increase of 8.5% over the range-bound average of 1,150,000 for the previous six quarters.
Housing starts for 2017 could surprise to the low side. Spending is predicted to grow 5%, but almost all of that is inflation. New starts could finish lower than the 65,000 in 2016.
Most material prices have been muted over the last year, or even two years. Through the 3rd quarter 2016, material input prices had not registered a year over year gain for two years. In the last 4 months that has all changed. Steel, lumber and concrete are now all up in cost substantially over last year. Construction Input prices are up 4%. However, it is not material prices that have been driving inflation, which is up due to labor cost and market activity. Now material prices are also accelerating and that cold have a big impact on future inflation.
Final cost of materials averages perhaps 30% to 50% of building cost. The input cost of materials can contribute much less to overall project cost. For example a 10% cost increase in mill steel could add 0.4% to the total cost across all steel in a building. It could add 1% to the cost of a structural steel contract. A 10% increase in the cost of concrete, depending on if the building is a steel structure or a concrete structure, would add only 0.2% to 0.6% to the total cost of a building. A 10% increase in the cost of gypsum board would add less than 0.1% to the total cost of a building.
Constant $ adjusted for inflation converts all past spending into 2016$ for an equalized comparison. From the low point in 2011 we’ve increased spending by 48% but in constant 2016$ we’ve added only 29% in volume and we are still 16% below the 2005 peak. (updated plot 3-9-17)
As measured in comparable constant dollars, No, we are not back to previous levels of construction spending. We will probably not return to previous highs before 2020.
- 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% 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.
If you want to use a cost index to adjust project costs over time, you must understand what it measures. 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.
Articles Detailing 2017 Construction Outlook
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These links point to articles here on this blog that summarize end-of-year data for 2016 and organize in one place my projections for 2017.
Most Recently Published
New Starts and 2017 Starting Backlog
Housing Starts (# of units started as reported by U.S. Census) can be erratic from month to month and short term changes in growth can sometimes be misleading. Trends should be looked at over longer term periods. New monthly starts on a seasonally adjusted annual rate (SAAR) basis for the last eight months through January 2017 have now averaged over 1,200,000. For the last four months starts have averaged 1,250,000. Permits have been following a similar pattern. Although starts versus permits varies considerably in some months, statistically they follow the same growth pattern. Growth in the number of new starts has been 5% to 25% per year due to erratic movement but in the longer term has averaged 18%/yr over six years since January 2011. We experienced an un-sustained start to recovery in 2010, but essentially we went through a protracted bottom between 500,000 and 600,000 new starts that lasted all throughout 2009-2010.
Dodge Data reports SAAR new residential construction starts by contract value in current dollars (not inflation adjusted). Unadjusted growth for the same six-year period increased from $120 billion SAAR to over $300 billion SAAR, or at an annual rate of over 25%/year. However, there was 25% residential cost inflation during that period. In constant 2016$, Dodge new residential starts growth averages 20%/year for six years since January 2011.
Now let’s look at construction spending, actual dollar value of work put-in-place. Here’s where the data has a disconnect.
At the start of 2011, total residential spending had a monthly SAAR of $240 billion and at the end of 2016 was $470 billion, an increase of 16%/year for 6 years. To find real volume growth those values must be adjusted for inflation. After adjusting for inflation, the actual spending volume growth in 2016$ from 2011 through the end of 2016 increased from $305 billion to $465 billion, an increase of 52%, or an average increase of 9%/year for 6 years.
Furthermore, the number of residential construction jobs reported by BLS increased only 33% over that time, an average growth rate of less than 6%/year.
What could explain these differences?
The low rate of jobs growth compared to spending growth is partially explained by the fact that in the preceding few years, even though about 1.5 million jobs were lost, 40% of the workforce, staff was not reduced nearly at the same rate that residential construction volume declined (55%). There remained significantly more staff on payrolls than was needed to complete the amount of volume that was being built during the residential recession. When growth resumed, spending increased at a much faster rate than new jobs were added and the excess labor slack was reduced. I suspect also that a portion of the labor vs spending difference is explained by the fact that not all jobs are captured by BLS. It has been suggested that a large percentage of residential workforce in some southwestern states is undocumented.
The variance between starts and spending is a bit more complicated. We need to look at completions vs starts, the mix and size of housing units being built and the amount of spending related to renovations.
The most commonly reported housing statistic is housing starts. Also in that data series is housing completions. Housing completions are always lower than starts. For the last five years completions have averaged almost 15% less than starts. While the growth in starts averaged 18%/year, growth in completions from 2011 through 2016 averages less than 15%/year.
From 2011 to 2016 the average number of new single family (SF) units started increased from about 450,000 to 800,000. During that same period multi-family (MF) starts increased from 100,000 to 440,000. The percentage of MF units in total construction grew from 18% to 36% of total.
On average MF units are about half the size of SF units. Although the average size of SF homes increased about 10% during this period, the growth in the number of smaller MF units exceeded that of larger MF units by a factor of 2x. The ratio of smaller MF units doubled.
The share of MF units as a percent of all units doubled and the ratio of smaller vs larger MF units doubled. The total square feet of housing being built increased but did not grow at the same rate as the number of units. The average size of all units is getting smaller and therefore the constant cost per unit went down.
I suspect the increased ratio of smaller MF units and the percent increase of MF within the total number of all housing units has a big influence on the overall average cost per unit of total housing. That with the lower growth rate in completions helps explain why spending is not increasing at the same rate as overall number of housing unit starts. We are building more units per dollar spending because average unit size is smaller.
There is one more hidden factor to look at. That is, residential construction spending includes renovations. From 2009 through 2012 renovations totaled 45% of all residential spending. It began to decrease in 2013. For the last three years, renovation spending accounts for only 33% of all residential construction spending. Renovation spending has no comparable # of units or total square feet associated with it.
The impact this has, since the share of renovations spending is declining, is to increase the percent growth in residential spending attributable to housing units to greater than the 9% calculated above. Removing renovations work from total spending shows growth in real inflation adjusted spending specific to housing units averaged about 13%/year for 6 years.
Summarizing everything from above, since 2011:
On the surface it looks like this:
- Housing Starts # of units increased at 18%/year
- Residential new starts in unadjusted dollars increased 20%/year
- Residential construction spending increased 16%/year
After adjusting both units and spending we get:
- Inflation adjusted total residential spending increased 9%/year
- Inflation adjusted spending on units (excluding renovations) increased 13%/year
- Growth in the # of housing units completed increased 15%/year
- Share of Multifamily units has increased
- Average size of multifamily units has decreased
- Average size of all housing units being completed has grown smaller
- The growth in the number of units completed can exceed the growth in spending because the average constant value cost per unit has decreased
The growth in the number of housing unit starts is NOT an indicator to use for forecasting growth in residential construction spending or constant volume. Increases in the number of units alone will not give a realistic indication of growth in residential jobs or spending. The rate of growth in completions, combined with the ratio of the sizes of units, not just size of SF homes but average size of all SF and MF units, has a significant influence on the spending volume and can only be compared to inflation adjusted spending specific to units, that is, total spending minus renovations.
2-17-17 Behind The Headlines
- From the Jan 2011 bottom of the recession in construction to current, both net jobs (jobs x hours worked) and volume (spending after adjusted for inflation) have increased equally by 28%.
- Growth of only 100,00 to 140,000 new jobs in 2017 would be the slowest growth in 5 years and will look like a hiring slowdown. Some might attribute it to lack of available workers. In large part it may be due to a balancing of workforce to real volume growth.
- Staffing patterns (appear to) lag changes in work volume.
- These six Nonresidential Buildings markets, which make up 80% of all nonresidential buildings spending, posted the following growth in starts leading into 2017: Office +37%, Lodging +40%, Educational +11%, Healthcare +21%, Commercial Retail +11% and Amusement/Recreation +21%
- Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current nonres bldgs growth cycle.
- Office construction starting backlog for 2017 (projects under contract as of Jan 1, 2017) is the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began.
- For 2017, the amount of construction spending (on manufacturing buildings) from starting backlog has dropped 25% from the level of 2016. Even an increase of 50% in new 2017 starts would not make up for that loss.
- More infrastructure projects started construction in the 1st 6mo of 2015 than any time in history. This will boost infrastructure spending through 2017.
- As measured in comparable constant dollars, No, we are not back to previous levels of spending. We will probably not return to previous highs before 2020.
- The entire construction industry best growth rate ever achieved (in 2016 constant$) absorbed $1 trillion in new spending over 5 years. Infrastructure has not absorbed $1 trillion newly added work in 25 years.
- long term best average rates of growth (indicate) we could increase infrastructure spending through new stimulus between $7 billion to $10 billion a year
- 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.
- In the last 36 months, there were 16 Census construction spending releases that initially showed a decline vs the previous month. Five months showed a decline vs the previous year. After revisions every month was revised up from the original posted amount. There remained only 2 significant mo/mo declines. There were no remaining year/year declines.
- Current year YTD “not-yet-revised” values for new construction starts are always 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 to previous year values have never been down.
- Residential starts in 2016 posted the best year since 2005-2006. Residential starts bottomed in 2009 and have now posted the 7th consecutive year of growth.
- Total construction spending in 2017 will reach $1,236 billion supported by a 4th consecutive year of strong growth in nonresidential buildings.
- Office construction reached a new all-time high in September 2016. Spending will be in the range of +20% to +30% year over year growth for 2017 with total coming in at $91 billion.
- It’s real damn hard to add $100 billion in new construction volume in a year. After adjusting for inflation, construction volume has never increased by $100 billion. It has increased by $75 billion 4 times and 3 more times by $50 billion.
- If you want to avoid misusing a cost index, understand what it measures.
- Selling Price, by definition whole building actual final cost, tracks the final cost of construction. Selling price indices should be used to (adjust costs for inflation so you can) compare costs over time.
- In the six months from Oct’15 to Mar’16 construction added 225,000 jobs, the most in any six month period since the Oct-Mar 2005-2006, the very peak of the construction spending boom.
- In the last three years, we’ve added 840,000 construction jobs. We’ve also increased hours worked to an equivalent to 880,000 jobs, growth of 15%. That’s a faster rate of growth in three years than the 2004-2006 construction boom.
- In order to track jobs growth compared to the real amount of work put-in-place, construction spending must be adjusted for inflation to get real volume of work completed. The adjustment gives us what is referred to as “constant dollars.” Jobs must be adjusted for hours worked.
- For much of 2014 and 2015 construction spending real volume growth was exceeding jobs growth, but for 10 months from August 2015 through May 2016, volume growth stalled and (completely contrary to what one would expect in a labor shortage) new jobs growth exceeded volume by 3%. Only in the last few months has volume growth begun to outpace jobs growth again.
- From the Jan 2011 bottom of the recession in construction to current, both net jobs (jobs x hours worked) and volume (spending after adjusted for inflation) have increased equally by 28%.
- For 2017, several economists (including myself) are predicting total construction spending will increase by just over 6%. However, I’m also predicting that combined construction inflation for all sectors will increase by 4.0% to 4.5%. That leaves us with a net volume growth of only 1.5% to 2.0%. Therefore, for 2017, we should not expect jobs to increase by more than 1.5% to 2.0%, or 100,000 to 140,000.
- Growth of only 100,00 to 140,000 new jobs in 2017 would be the slowest growth in 5 years and will look like a growth slowdown. Some might attribute it to lack of available workers. In large part it may be due to a balancing of workforce to real volume growth.
- Jobs growth is often slightly out-of-balance with real volume growth. But it does tend to come back to balance. If both were to grow at the same rate then productivity would remain unchanged. It will very likely vary slightly from balanced growth.
New construction starts in 2016 for Office Buildings is setting up a very strong spending growth pattern for the next 2 years.
The five largest metropolitan areas comprise more than one third of total national new starts in commercial-multifamily construction. Total commercial-multifamily starts are up 7%. Commercial starts alone are up 11%. New starts for office projects increased more than 30% in 2016. The following percentages are growth in starts for new Office Buildings. Reference Dodge Data & Analytics New Commercial and Multifamily Construction Starts.
- New York City-Northern NJ-Long Island -2%, but from 2015 that was up 138%
- Los Angeles-Long Beach-Santa Ana +67%
- Chicago-Naperville-Jolliet +22%
- Washington DC-Arlington-Alexandria +87%
- Dallas-Fort Worth-Arlington +31%
Office construction starting backlog for 2017 (projects under contract as of Jan 1, 2017) is the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. Also, the share of spending in 2017 from starting backlog is increasing.
Office spending since 2013 has increased every year by an average of more than 20%/year and is expected to continue or exceed that rate of growth in 2017.
Office construction spending reached a new all-time high in September 2016. Growth in office buildings will lead all 2017 commercial construction spending. Spending will be near +30% year over year growth for 2017 with total expected to come in at $91 billion.
Regardless what market fundamentals change for 2017, this work is already under contract and will be the driving force for 2017 nonresidential buildings spending.
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A few days ago I tweeted, “Last 16 months construction jobs growth outpaced growth in work put-in-place. Hard to see worker shortage from that perspective.”
The imbalance between construction spending and construction jobs is nothing new. It’s been going on for years. It reflects more than just worker shortages. In part it reflects hiring practices. It also captures changes in productivity due to activity. It also helps explain why sometimes new jobs growth rates do not follow directly in step with spending growth. That imbalance can be affected by either over/under-staffing or inflation.
This post presents a series of graphics that show the data that is compared and the percentages of increases (or declines) in balance between workers and output.
What data is available?
We get construction spending from Census and jobs from Bureau of Labor Statistics. For both we can break down the numbers by major construction sectors, Residential, Nonresidential Buildings and Non-building Infrastructure. Inflation is gathered from a number of sources and is specific to sector.
How to look at the data.
Construction spending must be adjusted for inflation to get real volume of work completed. Inflation (or deflation) can vary up or down by 2% to 10% but averages about 4%/year. The adjustment gives us what is referred to as “constant dollars.” Jobs must be adjusted for hours worked. Hours worked can change total workforce output by 2%-3%/year. Everything is converted to the most recent year for comparison.
This Building Cost Index plot shows inflation/deflation by sector. Note that it can vary dramatically from one sector to another. It is often driven by the amount of work activity within the sector. These indexes represent the actual final cost of buildings.
The inflation factors are applied to the annual spending within each sector. This plot shows the combined affect of inflation on total construction output. Current dollars is actual construction spending as reported by U.S. Census. Constant $ is inflation adjusted to 2016. Jobs adjusted for hours worked must be compared to constant dollars.
This plot breaks down the construction spending in constant dollars by sector. This provides the total work completed annually within each sector. This will allow tracking jobs by sector to constant $ by sector.
This plot shows U.S.Census CES jobs by sector. These are adjusted by the hours worked average per year. Hours worked doesn’t change by much within a single year but has varied by 4.5% from maximum to minimum and that has a significant affect on overall output. Adjusted jobs provides us with the total work output.
Those are all the inputs, adjusted to a constant point in time, 2016. Now we can look at how adjusted jobs growth compares to real spending output. I’ve often referred to this as productivity. When spending output is growing faster than jobs, productivity is increasing. When jobs are growing faster than spending output, productivity is decreasing.
The difference between real spending output and jobs growth is more than simply explained as a change in productivity. It reflects the combined impact of hiring practices, hours worked, worker and skills shortages (or excesses) and changes in productivity on inflation adjusted spending. It does not provide a means to differentiate among these causes. However, regardless the cause, imbalances can be thought of as annual productivity gains or losses because they do indeed reflect the total real labor output required to perform the amount of real work put in place.
Leading up to and during the recession there appeared to be far more workers on hand than needed to get the work done. Prior to the recession, I expect a greater portion of the losses were over-hiring and worker productivity losses. It is not uncommon when work is plentiful that productivity declines (2005-2006). When spending started to decrease significantly it took a bit longer for companies to downsize their workforce. During that time (2007-2008) the greater portion of losses might be attributed to insufficient staffing reductions. As we approached the depths of the recession (2009-2010) staffing cuts exceeded the declines in actual work being put in place. Also, people who still had jobs were concerned about keeping their jobs and during such times at first productivity increases. At some point the insufficient staff becomes overworked and productivity declines (2010-2011). Post recession, spending increased faster than companies were replenishing their staff. That led to several years of productivity gains (2012-2015).
Another way to look at this same comparison is to plot the dollars of inflation adjusted volume of work per worker. Here I’ve plotted that by sector.
Some analysts prefer to report this as the number of jobs required to put-in-place $1 billion worth of work. Regardless how it is reported, it is imperative that the comparison be made to constant $, in this case adjusted here to 2016.
Finally we can look at the data for each sector and compare the work being completed each year to the total workforce output to complete that work. There are obviously significant differences in the data by sector.
The data outputs show some things that otherwise are not readily apparent. Note for instance that residential (constant $) spending peaked in 2005, but residential jobs peaked in 2006 when spending was already on the decline. That could be an indication that staffing patterns lag changes in work volume. From the 2005 peak to the 2008 bottom, residential spending declined from $700 billion to $300 billion, almost 60%, but jobs dropped from 3.5 million to 2 million, only about 45%. That would indicate that firms were significantly overstaffed at that time. That explains the several years of deep red bars on the residential productivity plot. That also helps explain in part the slow regrowth on residential jobs. For the real volume of work that was being completed at the time, which was real low, there was already excess staffing remaining on hand.
Work completed and worker output to complete the work will probably continue to be out of balance. It would be difficult to identify any abnormalities in the data releases, for example workers improperly classified to a sector. Any missing workers not captured in the survey would lower productivity. Real productivity gains and losses due to activity will always be a part of the mix. Hiring of less qualified workers due to skilled worker shortages is in the mix. And finally, companies delayed decisions on staffing adjustments will remain part of the issue.
The following table includes my 2017 growth forecast for construction spending in nonresidential buildings compared to the recently published AIA Consensus Forecast which includes individual forecasts from seven economists.
Construction Analytics (edzarenski.com) forecast is based primarily on scheduled cash flow of construction starts in backlog. About 75% to 80% of all nonresidential buildings construction spending in 2017 will be generated by projects that are already underway. Only 20% to 25% of all spending in 2017 will come from new projects that start in 2017.
See my recent blog post on 2017 Starting Backlog here describes in part how I use backlog starts data to generate future spending forecast.
Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current growth cycle. Spending in 2017 from that starting backlog has increased every year and it will be up 35% over 2014.
This comment I made two weeks ago in a post on Dodge Data 2016 Construction Starts helps explain in part the level of new starts in 2016 that established the pattern I see going into 2017:
“Nonresidential Building new starts in December remained consistent with October and November. Although well below the yearly highs reached in August and September, the final three months helped carry 2016 totals to an 8-year high. Nonresidential Buildings starts for the last six months averaged the highest since the 1st half of 2008.”
Nonresidential Buildings spending for 2016 totaled $409 billion, UP 8.1% from 2015.
Nonresidential Buildings spending in 2017 is forecast to increase to $447 billion, 9.1% over 2016.
The most recent 3-month average seasonally adjusted annual rate (SAAR) is already leading into 2017 starting at $420 billion only 5.5% below the peak in 2008. By midyear 2017 the SAAR will reach a new all-time high.
The widest variances between my forecast and the AIA panel forecasts are in Office, Manufacturing, Educational and Commercial. Here are explanations to support my forecast.
Office project starts at the end of the year increased more than 30% for 2016. Office construction 2017 starting backlog (projects under contract as of Jan 1, 2017) is the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office spending began. More importantly, the share of spending from starting backlog is also increasing for 2017. This is setting up a very strong spending growth pattern for the next 2 years.
Manufacturing buildings new starts dropped 33% in 2015 and 38% in 2016. A disproportionately large portion of both 2015 & 2016 spending was generated from starts in 2014. In 2014, starts had jumped 80%+, but now almost all of that work is completed. For 2017, the amount of spending from starting backlog has dropped 25% from the level of 2016. Even an increase of 50% in new 2017 starts would not make up for that loss.
Educational buildings new starts increased 11% in 2016. But more important is that the total value of starting backlog has been increasing for several years. In 2015, the value of starting backlog increased only 5% over 2014. In 2016 it was 9% and in 2017 it is 13%. Even if new educational starts in 2017 decline by 10% to 20%, 2017 spending is being driven higher by the work already in backlog.
Commercial spending increased 11% in 2016. For 2017, spending from starting backlog will increase 10%, and starting backlog is at the highest level since pre-recession. In fact, spending from starting backlog will be 40% higher than 2014. Since starting backlog generates about 75% of spending within the year, most of the growth in 2017 is coming from very strong starting backlog.
Once again,”Simply referencing total backlog does not give a clear indication of spending within the next calendar year. The only way to know how much of total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects that have started in backlog.”
With few exceptions over the last three years, Construction Analytics, Dodge Data & Analytics and ConstructConnect have provided the most accurate forecasts. We’ll see in Feb. 1, 2018 how we all did when the total 2017 spending report gets released.
Current $ vs Constant $
This clearly shows the impact of inflation on comparing Construction Spending data. Reports commonly compare current $1.166 trillion 2016 total spending today back to the (then) current $1.150 trillion at 2006 peak. Of course that seems to establish a new high. But that is so misleading.
Constant $ adjusted for inflation converts all past spending into 2016$ for an equalized comparison. From the low point in 2011 we’ve increased spending by 51% but in constant 2016$ we’ve added only 31% in volume and we are still 16% below the 2005 peak.
As measured in comparable constant dollars, No, we are not back to previous levels of spending. We will probably not return to previous highs before 2020.
The widening gap from right to left, as we look back in time, is the cumulative affect of inflation. It might be only 2% or 4% looking back one year, but back to 2003 it’s 40%.
Impact of Inflation
In all projections, the affect of inflation must be considered. Why is tracking inflation important? Well, as an estimator it’s necessary to assign the appropriate cost to items over time. And it’s needed to properly interpret construction economics. But it’s also important for business management.
Due to construction inflation, a company that was building $700 million in nonresidential buildings in 2005 needs to build $1 billion today just to remain the same size as in 2005. Increasing revenues by 5% annually in a period when inflation is increasing by 5% is not increasing annual volume. While revenue may be increasing, volume would be static. Over a period of years, if this were to occur, since some companies will grow, the amount of volume available to bidders could potentially restrict growth in the number of bidders able to secure new work or in the growth in the size of companies.
In this table, both the index values and the resultant annual escalation are shown. The index value gives cumulative inflation compared to 2016$.
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