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Construction Forecasting – Volume

Feb 26, 2019

Since the bottom of the construction recession year 2011, through 2018 construction spending has increased 67%. During that time construction volume has increased only 32%. All the rest was inflation.

Construction spending is not the only factor for business growth planning. The adjustment for Inflation is the most important factor.

If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending minus inflation.

Spend current vs constant 2018 2-26-19

Look at the data to the left of the vertical line through 2006. Notice in the bottom plot in the years 2004 and 2005 there is very high spending but very low volume. In 2006 spending was up 4% but real volume declined 3%. For those three years inflation totaled nearly 30%. On the top plot you can see the cumulative effect of several years of high inflation. From 2000 to 2006 spending increased 45% but volume barely moved at all. During this period jobs increased by about 15% and even that outpaced volume. Businesses watched as spending increased 45% in seven years. They increased staff by 15%, but real volume was flat. Heading into the recession construction dollars on the books had been increasing for years but volume was stagnant and companies were top-heavy with jobs.

Addressing the current period 2011 through 2018, if you base business growth on your annual revenue growth, or spending, rather than using inflation adjusted dollars, your forecast for business growth over this eight year time period would be more than double actual volume growth.

Notice the blue bars for annual spending growth in 2017 and 2018 at approximately 4% and 5% respectively. But look at the black lines superimposed on those bars that reflect real volume growth after inflation. There has been only 1% real volume growth in the last two years. Yet jobs increased 8% in two years. Most of the growth in spending is inflation dollars, not real volume growth. Inflation does not support jobs growth.

For 2017-2018 residential spending increased 17% but volume was up only 7%. Nonresidential buildings spending up 6.5% but volume was down 2.5%. Non-building infrastructure spending was up 4% but volume was down by 3%. Inflation across these sectors totaled 7% to 10% for these two years.

Construction jobs, now over 7,400,000 have been over 7,300,000 since summer 2018. The last time jobs were over 7,300,000 was mid-2005 through early 2008, at which point the recession abruptly caused the loss of over 700,000 jobs within 10 months and more than 2 million jobs over the next three years. Jobs are now only 5% lower than the previous high of 7,700,000 in 2006-2007. But construction volume is still 15% below peak constant $ volume reached in early 2006. So the current situation of jobs growth rate exceeding volume growth is worse than it was leading into the last recession.

For 2019 I expect residential and nonresidential buildings to experience a slight decline in volume. I do not yet see a recession as volume picks up again in 2020, but  nonresidential construction jobs in particularly have been increasing faster than volume for several years. Part of that is explained by some nonresidential workers are used to build residential space (hi-rise structure). When the next downturn hits, the potential need to cut nonresidential construction jobs may be quite painful.

Please Vote in Best Construction Blog Competition

Best Construction Blog voting begins 2-1-19 and continues through 3-31-19.

This blog, Construction Analytics – edzarenski . com, has been nominated for the 2019 Best Construction Blog competition.

In January, more than 8,000 visitors generated 17,000 views. The 2019 Economic Forecast Summary had more than 3,000 views and the Inflation Index Tables more than 4,000 views. This blog now gets more visitors and more views per month than I got per year when when I worked for and my reports were published and distributed by a major national construction firm. I believe that is because of the varied content being made available to the public.

There are a lot of readers out there accessing materials on this blog. That’s a lot of potential voters. I’m asking for your vote.

If you visit my blog because you find value in the construction economic news provided here, then please take a minute to visit the link below and vote for Construction Analytics. Thank you. Ed Zarenski

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