7-6-17 Construction Spending May 2017 – Behind The Headlines
Headline – Construction Spending for May came in flat compared to April, up 4.5% vs May 2016.
In this latest May report, April spending was revised up by 1% and May 2016 was revised up by 3%. The average revision since Jan 2016 is 3%/month. May 2017 will be revised in each of the next two reports and again with the May report issued in July 2018.
Current unadjusted construction spending is always being compared to previous months revised spending and growth is almost always being understated. Spending has been revised UP 45 times in the last 4 years.
In 2016, the 1st report indicated monthly spending declined 8 times from the previous month. After revisions, spending declined only twice from the previous month. Most MSM articles declaring construction spending was a miss are revised away in following months.
Nonresidential Construction Spending Remains Stagnant in May.
I’ve said this before many times, spending predictions are best tracked based on cash flows from all projects that have started. This is not simply tracking total backlog, nor is it tracking new construction starts. New starts (new backlog) represent only 20% to 25% of total spending within the year. Most spending comes from projects that started in previous years.
Big monthly changes in spending come from unusual fluctuations in starts. Very large projects ending (spending ending), compared to new projects starting, would cause a monthly drop in spending. The reverse would cause an increase. If a record volume month of construction projects that started two or three years ago are now reaching completion, and new starts today are experiencing normal growth not at record levels, then spending will most likely decline temporarily. Most monthly construction spending predictions are predetermined months ago.
Also, Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure is quite erratic while buildings spending has been climbing at a steady strong rate for several years. Buildings spending is up 2% from Q2’16 and up 6% YOY. In the 2nd half 2017 YOY spending is expected to reach 8%.
Most infrastructure projects that started in 2015 and 2016 are still ongoing so do not effect much change in current monthly spending. It is projects from late 2014/early 2015 that are finishing that are resulting in the largest share of current spending drops. Worthy of note is that non-building infrastructure spending just experienced two years of record highs, so even though spending is down slightly we will still see 2017 finish near record highs.
Construction Companies Continue to Face Labor Shortage Challenges
Construction Spending for the last 24 months increased +13%, but after inflation actual volume during that period increased only +5.5%. Construction jobs output, (jobs x hours worked) for that same period increased +7.6%. Overall, jobs output is exceeding the growth in volume put-in-place. Most of this is being driven by imbalances in Nonresidential Buildings, for which jobs output grew by 7% in two years but volume growth measured only 2% after inflation.
Why is it that jobs output is growing faster than construction volume? Could it be that shortages are localized, not as widespread as thought? Or perhaps it’s that contractors can’t get skilled workers, so they are hiring more workers with less skill? Maybe contractors anticipate growth, so they are hiring more now to prepare for the future? Whatever the case, jobs are growing faster than construction volume and that is not what should be expected in a labor shortage.
Are contractor’s responses to survey questions about filling job positions based on an anticipated need to staff up to meet revenue growth? If so, that is a major miscalculation to determine staffing needs. This is not as far-fetched as you might think. I’ve talked with numerous contractors in the past who were doing this. As I tried to explain in several previous articles, growth in revenue (or construction spending) doesn’t address how much of the growth is due to inflation. Right now, in fact for the last 24 months, the largest portion of spending growth is inflation, not real volume growth.
If you are hiring to match your revenue growth, you are part of the reason jobs are growing faster than volume. INFLATION!
Is there a Residential Construction Spending slowdown? If so, how significant?
YTD Residential Construction spending for the 1st 5 months 2017 is up 12.2% from 1st 5 months 2016. YTD has been above 12% since January.
Average spending for the last three months is up 4.0% from the average in Q4 2016. That’s a ~10% annual rate of growth. Starts cash flows are indicting flat spending for the next few months but then accelerated spending from late Q3 into the end of the year. Current projected spending for 2017 is $523 billion, +10.5% higher than 2016.
May vs April residential construction spending shows a 0.5% decline. However, April has been revised up once and May has not yet been revised. All months are revised twice after the first release of data. The average revision (to residential data) for the last 16 months is up 4%, the average revision for the last 28 months is up 7%. All revisions for the last 28 months were up. After revisions, there were only two monthly declines in the last 28 months, and both of those were slight.
If new starts collapse to show no gains for the remainder of the year, then based on starts already in backlog and reduced starts for the remainder of the year, spending would be reduced to $513 billion. That’s still 8.5% higher than 2016. Of course, this would be an extremely unlikely scenario. The last time residential construction starts declined for three or more consecutive months was 2010, and the last time there were no gains for six or more months was 2008.