8-23-18

New Construction Starts for July in the latest report from Dodge Dodge July 2018 Construction Starts  are down 9% from June, but June starts reached an all-time high Seasonally Adjusted Annual Rate (SAAR) of $899 billion. July posted at $817 billion. May was $804 billion. The May-Jun-Jul three month average SAAR construction starts is $840 billion, all-time high.

The Dodge July construction starts report posted $78 billion of new starts and highlights 19 projects valued over $200 million, one of those at $2.4 billion and 17 projects valued between $100-$200 million. The Dodge June construction starts report posted $98 billion of new starts and highlighted 7 projects over $1 billion (totaling $16.5 billion), 17 more projects over $200 billion and 15 projects between $100-$200 billion. The starts report is a sampling of about 2/3rds of all projects.

New construction starts in the 1st half 2018 reached an all-time high.

The new high in construction starts is measured in current $. When adjusted for inflation (constant $), total starts are still about 20% below 2003-2004, when all sectors reached their previous highs. A closer look at constant $ starts adjusted for inflation shows nonresidential buildings about 8-10% below the previous high, non-building infrastructure about 6-8% above the previous high, but residential is still 40% below the previous high.

Residential starts average for the 6 months Jan-Jun 2018 is the highest since 2006. The 1st 6 months of 2018 is up 8% from the prior 6 months.

Dodge Outlook Midyear Update is forecasting 2018 single family starts to gain 6% and multifamily to gain 3%. Year-to-date through July, single family starts are up 7% and multifamily up 6%.

Non-building infrastructure starts for July are level with June and level with the average of the 1st six months. Starts may finish the year slightly down from 2017. However, 2017 was the best year of starts on record. The growth in Infrastructure starts will drive Non-building spending to record highs in 2018 through 2020.

Transportation, in Census spending reports, includes all airport work, air-side and terminals. It also includes rail work, track and terminals and dock work. In Dodge Data starts data, terminals are included in Other Institutional and rail work is included in Other Public Works. Terminals and rail work are included in this analysis in Transportation Infrastructure so that starts can be compared with Census spending data..

Terminal starts are down YTD, 50% lower than 2017. But 2017, which included the start of six major airport terminals, was so high, up 120% over 2016, that even though 2018 is down it will be the 2nd strongest year of starts on record. Rail work also doubled in 2017 and will remain close to even for 2018. Starting backlog for transportation projects doubled from the start of 2017 to the start of 2018. Backlog is on track to increase another 25% to start 2019. No other market will realize the gains in construction spending that we will see from transportation for 2018 and 2019.

Power generation plant starts cause erratic bumps in Power work. In the last year there have been a dozen or more project starts valued over $500 million each, six of those over $1 billion. Also included in Power, Pipeline starts represent half of all Power work started YTD. Cash flow may be adversely impacted by the delay of large projects that started previously. A multi-billion dollar nuclear power plant stopped work and large pipeline project delays have reduced the previous forecast for cash flow.

Highway starts hit an all-time high in 2017 and are forecast to surpass that by a few percent in 2018. Highway starting backlog increased 30% in the last 3 years and will increase 6% leading into 2019.

Nonresidential buildings starts in July reached $318 billion, down 22% from June, but June reached $402 billion, nudging up against the all-time high from 2008. 

Manufacturing starts are down 60% from June, but June was the highest month ever recorded, three to four times the average monthly starts. July is the 4th best month in the last 3 years, going back to April 2015, the 2nd highest month ever. The decline of manufacturing starts from the June high to a normal amount in July accounts for more than half of the total Nonres Bldgs decline in July. The news is not the decline in July, a return to normal, but the abnormally high starts in June.

Office and Warehouse starts, both up from a strong 2017, are seeing gains from data centers (in office) and distribution centers (in warehouse which is in commercial spending). Amusement/Recreation starts YTD are triple last year. The only nonresidential markets lower year-to-date are retail stores and healthcare. The decline in retail stores, which is also in commercial spending, is being hidden by the increase in warehouses, which are at an all-time high.

Adjusted for inflation, Jan 2008, by a few percent, is still the best ever for nonresidential buildings starts and spending.

The plots above show the 3mo moving average and trend line of starts for Residential, Non-building Infrastructure and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending.

The plot below is an index. The plot shows greater accuracy in the forecast when the predicted cash flow and actual spending plot lines move in the same direction. If the slope of the lines is the same, then the cash flow accurately predicted the spending.

The light green line, spending estimated from starts cash flow, shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows pretty close to the pattern as that estimated from cash flows.

Year-to-date (YTD) 2018 starts are up 2% from 2017, but 2017 starts through July have already been revised up by 12%, up 16% in nonresidential buildings, 22% in non-building  and 4% in residential. 2018 starts will be revised next year and revisions have always been up. Revisions in previous years have averaged more than +7%/yr. for the last 5 years, with most of the upward revision in nonresidential.

Dodge reported this headline on Nov. 2, 2017 “New Construction Starts in 2018 to Increase 3% to $765 Billion According to Dodge Data & Analytics.” At the time, Dodge predicted construction starts for 2017 on track to finish at $745 billion. However, as each new month of starts is reported in 2018, the comparable month in 2017 is revised up to the latest data. Currently through July 2018, total starts in 2017 have already been revised up to $795 billion. 2017 starts, once all revisions are posted, could reach close to $800 billion.

2018 starts, based on initial data this year, could reach $800 billion, at first appearing to show no gain from 2017. Historically, revisions increase the initial total. After revisions posted next year, 2018 starts could reach $830-$840 billion.

Starts in both 2017 and 2018 are stronger than expected just 6 months ago. The current SAAR monthly $ of starts is 10% higher than anticipated just 6 months ago.

Construction spending is up year-to-date through May in every sector. Only Manufacturing and Power markets are down YTD, but not enough to drag the sectors negative. Both markets are expected to finish the year up. (Religious market is down, but represents only 0.2% of spending).

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,336 billion, a spending increase of 7% over 2017. The forecast for 2019, based on a 3% increase in starts, is $1,398 billion, an increase of 4.6% over 2018. The strongest growth in spending for 2018 and 2019 is forecast in Non-building Infrastructure.