1-26-18 updated 3-5-18
Dodge Data posted December construction starts on 1-25-18, showing total starts increased 3% from 2016. However, this compares unadjusted 2017 starts to upwardly revised 2016 starts. Starts are always revised upward in the following year. I expect revisions will show 2017 starts increased by more than 6% over 2016. January starts, released 2-22-18 dropped 2% from December, but Residential starts hit the highest SAAR$ in 11 years and total starts SAAR$ went over $725 billion for 6th time in the last year and the only times since 2007.
Total starting backlog for 2018, currently at an all-time high, has increased on average 10%/year the last three years. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog.
Total All 2018 construction spending is projected to increase 8% to $1.330 trillion.
Spending measured in current 2018$ will reach an all-time high, however, measured more appropriately in constant inflation adjusted dollars, will still come in 14% below the 2005 high. When comparing inflation adjusted constant dollars, 2018 spending is still lower than all years from 1998 through 2007.
In constant inflation adjusted dollars, which more closely reflects volume, 2018 Infrastructure spending will reach a new high but nonresidential buildings is still 4-5 years away from a new high and residential spending is 6-8 years from a new high.
Read more about Constant Dollar Construction Growth
Non-building Infrastructure starts in 2017 are down 2%. However, we can expect post-year revisions to infrastructure starts. I expect, when all revisions are posted, that 2017 will show infrastructure starts increased a few percent from 2016. Starts peaked in 2015 and are still near that high-point. 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. Although 2017 shows a spending drop of 3.6%, spending is also prone to large upward revisions, particularly in Power, the largest market in Infrastructure. Starting backlog is up 25% in the last two years. Spending for 2018 is projected to increase 8% to an all-time high.
Transportation terminals 2017 new starts jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work, including terminals, runways, rail and dock work is the highest ever, up 80% from 2017, up 100% in the last two years. Spending has been within few % of the 2015 all-time high for 4 years. Spending is projected to increase 20-25%/year for the next two years.
Power plant new starts are down for the 2nd year but had hit an all-time high in 2015, up nearly 150% from 2014. Pipeline starts were up more than 125% in each of the past two years. Starting backlog for all power projects has nearly doubled in the last three years. Spending is projected to increase 5% and 7% in 2018 and 2019.
Highway spending is not projected to change by much, up only 2% in 2018, but it has been within a few percent of the all-time high for the last three years. Backlog from new starts has increased on average 6%/year for the last four years.
Nonresidential Buildings new construction starts in 2017 are up 7%. When all revisions are in, I expect that to climb over to 10%. Total starts for the last 6 months are 10% higher than any time since 2007. Starts are up 60% in four years. 2018 starting backlog is the highest ever, 10% above 2008, up 15% from 2017. Spending for 2018 is projected to increase 8% to 9%.
Office new starts hit an all-time high in 2016 and just missed surpassing that mark in 2017. Starts increased on average 22%/year from 2013 through 2016, but 2017 starts dropped 2%. Starting backlog increased dramatically during that 2013-2016 growth period and backlog is up 50% in the last two years. Spending followed with three years of growth over 20%/year from 2014 through 2016. The 3% spending growth currently recorded for 2017 is an unexplained anomaly. All other data indicates 2017 spending should have followed the pattern set in 2014-2016. Spending in 2018 is forecast to climb 8% and 2019 could increase 12%.
Educational new starts hit an eight year high in 2016 and increased another 6% in 2017. Total new construction starts for the last 6 months are 13% higher than any other 6-month total since 2008. Starting backlog has increased 10%/year for the last three years. The last three years we’ve seen spending increases of 6%, 5% and 3%. For 2018, spending is projected to increase 14%, the strongest growth since 2007.
Healthcare starts jumped 13% in 2016, the first significant increase in nearly 10 years. 2017 starts maintained even level with 2016. Coming into 2018, starting backlog is up 16% over the past two years, a sign for slow moderate growth. 2017 is the first time in 5 years Healthcare spending increased, up 4.3%. For 2018, spending is projected to increase 4%.
Manufacturing posted several very large project starts in 2017, increasing total starts 20% over 2016. This increased starting backlog 8% for 2018. Although still well below the banner years of 2015 and 2016, spending is projected to increase 12% in 2018 and 10% in 2019.
Amusement/Recreation new starts increased only 5% in 2017, but that follows a 30% increase in 2016, to reach a new high in 2017. New construction starts for the last 6 months is the highest 6-month total new starts ever recorded, 1/3rd higher than any time in last 10 years. This will help drive Amuse/Rec spending to double digit growth next two years. Starting backlog has doubled from 2014 to 2018. Spending increased only 5% in 2017 but spending is up 40% in the last 3 years, also reaching a new high in 2017. Spending is forecast to increase 20% for 2018 and 15% in 2019.
This spending category includes sports stadiums which by some accounts may fall 40% in 2018, but that is hard to envision, considering the record new starts over the last 6 months. Sports stadiums is 1/3rd of Amuse/Rec so that would lower my forecast by about 10%. I’m sticking with my forecast.
Lodging experienced six consecutive years of massive growth in starts and spending after losing 75% of its pre-recession market. Starts grew 30%/year from 2011 through 2016. In 2017 starts posted a decline of 5%. Spending averaged 25% growth from 2012 through 2016, but posted only 7% growth in 2017. Backlog is still up slightly to start 2018. Spending is projected to come in at 8% growth for 2018. But backlog drops off 15% for 2019 and spending is expected to follow suit.
Commercial construction is being supported by new starts for warehouse construction which have increased seven consecutive years. In 2010 warehouse construction was only 20% of this market. From 2010, stores grew 50% to a peak in 2015, but warehouses grew 500% to peak in 2017 and are now 50% of the total market. Warehouses are increasing and stores are declining. In 2018, warehouses will make up 60% of the market. Total commercial starts for 2018 will remain equal to 2017 and 2016. The years of big backlog growth occurred from 2012 to 2017. Backlog remains constant from 2017 to 2018 and declines slightly in 2019. After 6 years of spending growth averaging more than 12%/year, spending will increase by only 4% in 2018 and 1% in 2019.
Public share of new construction starts are up only 10% in 3 years. But due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 spending growth are Educational and Transportation with a combined total forecast 20% growth. Expect 2018 public spending to increase 6% to 8%, the best growth in 10 years.
Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts. New construction starts for January 2018 are the highest in 11 years. Total starts for the last 6 months are the highest since 2006. Residential starts in 2018 are projected to increase 7% over 2017, almost all of that coming from new single family starts. Residential spending in 2018 is projected to increase only 6% after five years of increases over 10%.
In What Category is That Construction Cost? explains where some specific costs are carried, which may vary between sources. Take particular note of Transportation, Office and Commercial.
Starts Trends Construction Forecast Fall 2017 for a much more thorough handling of the starts forecast.
The Producer Price Index (PPI) for material inputs to construction gives us an indication whether costs for material inputs are going up or down. The PPI tracks producers’ cost to produce the product and supply finished products to retailers or contractors. However, that is far from the total cost from the contractor.
A good example is steel. The producer price for steel from the mill might be $750/ton for long beams and columns. The only increases captured at the producer level might be the changes in cost for raw material, energy to manufacture and the producers labor and markup. But the structural steel contractor is then responsible for delivery to shop, detailing, shop fabrication, transport to construction site, load and unload, cranes and welding equipment needed to install, installation crews and finally overhead and profit accounting for at least eight more points of potential cost change. Finally the steel subcontractor must then assess the market conditions, whether tight or favorable to higher profits, to adjust the bid price or selling price. The final cost of steel installed could be $3000/ton.
The PPI for Construction Inputs IS NOT a final indicator of construction inflation. It is an input to construction inflation. It does not represent the selling price, nor does it give any indication of the trend, up or down, of selling price.
In 2009 PPI for inputs was flat but construction inflation, as measured by final cost of buildings, was down 8% to 10%. In 2010, the PPI for construction inputs was up 5.3% but the selling price was flat. Construction inflation, based on several decades of trends, is approximately double consumer inflation. However, from mid-2009 to late 2012, that long-term trend did not hold up. During that period, PPI ranged from 0% to +6.8%, but construction inflation/deflation ranged from -10% to +2.3%, lower than PPI for all four years, something which seldom occurs. Construction inflation/deflation was primarily influenced by depressed bid margins, which had been driven lower due to diminished work volume.
The following table shows the differences between the PPI Inputs from 2011 to 2017 and the actual inflation for the major construction sectors. This table shows clearly that PPI Inputs and Inflation not only can vary widely but also may not even move in the same direction.
The PPI tables published by the Bureau of Labor Statistics do include several line items that represent Final Trades Cost or Whole Building Cost. Those PPI items don’t give us any details about the producer price or retail price of the materials used, but they do include all of the contractors costs incurred, including markups, on the final product delivered to the consumer, the building owner. I would note however that those line items in the PPI almost always show lower inflation than final Selling Price inflation indices developed separately from the PPI. Follow this link to table of inflation values which includes the PPI final cost for trades and buildings.
Construction Managers responsible for working with the client to manage project cost, part of which includes preparing a full building cost estimate, should not rely on PPI values as an indication of inflation. Selling price inflation indices are more appropriate indices to use to adjust project costs.
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 answering a client question, “What will it cost if I delay my project start?”, the proper value for inflation (which differs by sector and differs every year) can make or break your estimate.
Contractors responsible for a particular building material, although the PPI Inputs will not track market conditions sale prices from producer to the contractor, can get some indication of whether material prices are rising or falling. Contractors should be aware of PPI trends to interpret the data throughout the year.
PPI TRENDS HELP TO INTERPRET THE DATA
- 60% of the time, the highest increase of the year in the PPI is in the first quarter.
- 75% of the time, two-thirds of the annual increase occured in the first six months.
- In 25 years, the highest increase for the year has never been in Q4.
- 60% of the time, the lowest increase of the year in the PPI is in Q4.
- 50% of the time, Q4 is negative, yet in 25 years the PPI was negative only four times.
So when you see monthly news reports from the industry exclaiming, “PPI is up strong for Q1” or “PPI dropped in the 4th Qtr.” it helps to have an understanding that this may not be unusual at all and instead may be the norm.
I’ve read several articles recently describing, Why 2018 could be a boom year for construction spending. Several reasons being given to support a potential boom, when we look a little deeper, actually may not be good indicators at all to predict the trend for a strong year in 2018. In my Fall Forecast I do predict 8% growth in 2018 construction spending, but let’s take a look at what gets us there.
Data that doesn’t tell us much about the future trend in construction spending.
Jobs increased in 2017 up 35% over 2016. In 2017 construction added 210,000 jobs, growth of 35% over 2016, but in 2016 jobs growth decreased by 55% from 2015. 2016 growth was the lowest in 5yrs. In 2013 jobs growth increased by 85% and in 2014 by 71%, but in 2015 and 2016 jobs growth slowed. Yet 2015 was one of the best construction spending years on record. And in 2017, jobs growth increased over 2016 but spending growth slowed. The direction of jobs growth is not an indicator of the future trend in spending.
Nov 2017 spending was higher than expected, and YTD is up 4.2%. This is a slippery slope. Actually we won’t know any particular monthly spending until several months after the initial release. All monthly spending values are subject to revision three times after initial release. However, residential spending is higher than expected for the YTD and nonresidential buildings spending is below expectations for YTD. But more importantly, construction spending normally fluctuates. For instance, in the 2nd half of 2015, spending was down 4 out of 6 months, lower than forecast three times, posting a total decline of 2.5%. Yet 2015 finished the year up 10%. Then, in the 1st half of 2016, spending was up 5 out of 6 months, far exceeding forecast 3 times, posting a total increase of 6% in 6 months. 2016 finished up 6.5% for the year. Neither half performance predicted final results within the year or the forecast for the future. Furthermore, after inflation, 2017 spending is currently flat with 2016$, so all we are seeing in the 4.5% spending growth in 2017 is inflation. Current and past spending is not an indicator of the future trend in spending.
What data does give an indication of the future trend in construction spending?
Construction Starts (Dodge Data & Analytics DDA), Backlog, Cash flow from Starts, the Architectural Billings Index (ABI), The Dodge Momentum Index (DMI) and New Residential Permits and # of Units Construction Starts all give an indication of the future trend in spending.
Residential Permits and # of new units started gives a fairly immediate indication of residential activity. The ABI gives an indication of nonresidential building to start construction about 9 months out and the DMI about 12 months out. The ABI and DMI give some indication as to whether future starts will increase or decrease. DDA Starts give an indication of the percent growth in future work, but not when the spending will occur, so cannot be used directly to predict spending. A good example is the new start for airport terminal work recorded as a new start in 2017 at $4 billion. But it may take 5 or 6 years to complete that $4 billion project and only cash flow will show the impact on spending.
Care must be taken to use Starts data properly. It is regularly misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.
Cash flow is the best indicator of how much and when spending will occur. Cash flow from DDA starts gives a prediction over time of how spending from each month of previous starts will occur from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.
Of course, data highlighting demand, occupancy rates, labor and material trends and other economic factors affecting construction trends all weigh into determining future spending expectations. However, for nonresidential buildings and infrastructure approximately 75% to 80% of all spending within the year comes from starting backlog. Most economic factors that will have an affect on spending within the year are already captured in projects that have started and are in current backlog. On the other hand, new residential starts are more important. 70% of all residential spending in the year comes from new starts.
The following trend predictions are developed based on using this outline.