2-21-17 This Summary is a collection of briefs pulled from all the articles that make up the 2017 Construction Outlook

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NEW STARTS

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 1^st 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%.

BACKLOG

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.

SPENDING

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.

PUBLIC CONSTRUCTION

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%.

JOBS

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

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.

MATERIALS

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.

INFLATION

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.

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