Home » 2019 (Page 2)

Yearly Archives: 2019

Construction Starts Cash Flow vs Spending

This plot overlays two data sources, starts cash flow and spending. For each of the three major market sectors, Residential, Nonresidential Buildings and Non-building Infrastructure, a light colored line and a dark line are plotted. The light line is the expected direction spending will move estimated from the monthly cash flows from Dodge Data construction starts data. The dark line is the movement in actual spending. All the nonresidential buildings and infrastructure data is the sum of all the markets within the sectors. This plot is not generated for each market.

Starts CF 2015-2020 8-8-19

The actual spending should follow a pattern that is similar to the direction of movement predicted by the estimated spending. If the patterns are similar, it is an indication that the forecasting tools are generally accurate. The thing to watch for is that the direction of movement was predicted accurately. For instance, the Non-building Infrastructure lines show pretty well from Jan 2017 through June 2019 that the starts data estimated the direction spending would move. To a lesser degree, Nonresidential Buildings shows correlation. Residential spending long term agrees with the estimate from starts cash flows, but spending is much more smoothed and actual spending inflection points seem to lag the estimated.

 

Reliability of Predicted Construction Forecast Data is always foremost in the thoughts of an analyst. Cash flow models provide for approximately 75% to 80% actual jobs data in the predicted spending for the forecast 12 months out. For next month’s forecast we have 96%-97% actual jobs data in the forecast, only missing jobs that start within the next 30 days. Reliability trails off each month. So, this is useful as a way to check the forecasting model. Essentially, this provides a check on the method I use for forecasting spending. It lends credence to the validity of the future forecast.

The forecast monthly changes in cash flow generated by the starts data are used to predict future spending in all Construction Analytics spending forecasts.

(note 10-3-19: major revisions to starts data cash flow substantially reduces forecast spending in both 2019 and 2020. These revisions won’t be posted until November. Largest downward revisions 2019, Residential -15, Highway -10. Largest downward revisions 2020 Residential -23, Manufacturing -10, Power -12, Highway -12) 

11-25-19 table updated

Spend Forecast 2018-2019-2020-2021 11-19-19

Next Level of Tariffs Will Be Unknowns

Assessing the impact of this next level tariffs on the cost of construction has now become a nearly impossible task. Tariffs are on PARTS use in manufacture of goods. Who (architect? engineer?) will identify what parts are included in which products used in the building?

For example, look at something simple like light fixtures. The shell, the ballast, the reflector, the shade, the lamps or the wiring could be made in China. Who identifies where parts are made? Who now estimates the share of tariff increase on those parts to determine tariff impact on cost of manufacturing the entire light fixture?

Expand that issue to a pump assembly with valves and pressure gauges. Who identifies which parts in the pump assembly come from what country? How does an estimator determine the cost of manufacturing the pumps, valves and gauges and determine what fraction of total cost has a tariff?

This will inevitably lead to inflation, but it will be hidden inflation, hard to determine if a manufacturer’s price increase for a product is substantiated. This is not like the tariff on mill steel, a 25% tariff on mill steel which represents 25% of final structural steel bid, which represents 10% of the building cost.

At the conceptual or schematic design phase of construction, all the products are not even identified. And the project start date might be two years out. It can’t possibly be determined with certainty what factor should be carried to cover cost increases due to tariffs.

Inflation factors and contingency factors will need to increase to cover unknown costs. This increases the share of the budget that is unidentified, always a contentious issues with owners. Frankly with the margins general contractors or construction managers get for services on a large construction project, these unknown factors, if understated in cost factors, could wipe out the total fee or profit for the job.

This is not a good position to be in, but I don’t yet see how it would be any different.

Midyear 2019 Construction Spending Forecasts Compared

8-1-19 edited Nov 2019

Construction Analytics compares midyear construction spending forecast to other industry resources

(note 10-3-19: major revisions to starts data cash flow substantially reduces forecast spending in both 2019 and 2020. These revisions won’t be posted until November. Largest downward revisions 2019, Residential -15, Highway -10. Largest downward revisions 2020 Residential -23, Manufacturing -10, Power -12, Highway -12) 

The following comparison data is compiled from data published in several other reports, by FMI 2nd Qtr 2019 Construction Outlook,   ConstructConnect Summer 2019 PIP Construction Forecast and  AIA July 2019 Midyear Consensus Forecast. Data is all midyear forecast for 2019 and look ahead to 2020.

There are some significant differences in the forecasts, especially in the Non-building Infrastructure forecasts, but also in the Nonresidential buildings 2020 Forecast. I am substantially higher than my peers. Only time will tell who has the closest forecast.

All EdZarenski.com (Construction Analytics) forecasts are based on predicted cash flow from modeling Dodge Data construction starts and include ytd data through June. All other reports were published prior to Aug 1st so would not include the June spending.

How can we assess if forecasts are on track to finish as predicted? Well, for the 2019 forecast, as of August 1, we have actual spending and starts data through June.

Spending year-to-date (ytd) gives some clues:

  • Amusement/Rec is up ytd 8.8%
  • Commercial is down ytd 8.6%
  • Lodging is up ytd 8.2%
  • Highway Bridge is up ytd 14.6%
  • Sewer/Water/Conserv is up ytd 16.2%
  • Communication is down ytd 7.4%

For the remainder of 2019 and 2020 forecast, we can look at new starts and backlog.

Construction Starts YTD total as of June is down 8% from 2018. That’s expected to improve by year end.

Residential construction starts peaked in 2018. Starts have been sideways or in light decline since mid-2018. Year-to-date June 2019 starts are down 9% from 2018. Avg SAAR for 1st 6mo 2019 is $315bil, same 6mo last year was $340bil. Starting backlog is down 5% from 2017 to 2019. Spending is forecast down 6% in 2019, down 2% in 2020 and near 0% in 2021.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Nonresidential buildings spending is forecast up 0.5% in 2019, up 4% in 2020 and up less than 1% in 2021.

Infrastructure starting backlog has increased 15%/year for the 3 years 2018-2020. Non-building infrastructure spending is forecast up 7% in 2019, up 8% in 2020 and 8% in 2021.

Table updated to Nov where data available

Spending Forecast Comp 2019 Midyear 2019 NOV update

For the 2020 forecast, we can take a look at new starts and backlog.

These markets recently posted the best construction starts 12 month totals ever over the noted period. Much of the spending from these starts occurs in 2020.

  • Manufacturing from Jun18>May19,  up 36% in two years
  • Office May18>Apr19,  up 8%/yr for the last 4 years
  • Educational Jun18>May19,  monthly rate for 12 of last 16 months increased by 20%.
  • Public Works May18>Apr19,  increased 30% in the last 24 months.

Manufacturing new starts jumped substantially in 2018 and so far in 2019 have remained higher. Growth in Manufacturing starts jumped 36% in two years. Office starts have increased on average 8%/yr for the last 4 years. Educational starts monthly rate for 12 of the last 16 months increased by 20%. Public Works starts combined (sewer, water supply, conservation) began to increase in 2017, then took off in 2018-2019 increasing 30% in the last 24 months.

These very long duration markets posted best new starts ever.

  • Highway Dec 17>Nov18, up 25% compared to prior 12 months, which was the 2nd best 12mo ever, with peak spending from those starts expected in 2020.
  • Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.

Backlog starting 2020 for these six markets is up an average of 25%, at the highest starting backlog ever for each of the six markets. Also, these six markets account for 1/3rd of all construction spending. 

Growth in new starts and backlog for the last three years (2017-2018-2019):

  • Manufacturing starts up 44%, backlog up 62%
  • Office starts up 30%, backlog up 62%
  • Highway starts up 45%, backlog up 70%;
  • Transportation starts up 64%, backlog up 138%;
  • Public Works new starts up 45%, backlog up 72%.

In the last two years, Commercial/Retail market starts are down 18% and 2020 starting backlog will be down 11%. The only other declines in 2020 starting backlog are Amusement/Recreation (-1%) and Power (-5%).

So, we are starting 2020 with the highest backlog on record after several years of elevated starts. However residential work is already down slightly while non-building infrastructure work is super-elevated.

Table updated to Nov where data available

Spending Forecast Comp 2020 Midyear 2019 NOV update

The baseline forecast produces spending increases of only 3% in 2021-2022, so is not aggressive in predicting future starts. Here’s some drivers of starts:

Educational 2019 spending is supported by a steady stream of strong starts that began in late 2017 and extended into summer 2018. Jun-Jul-Aug 2018 starts posted the best 3mo total starts ever and peak spending from those starts occurs from April 2019 to Jan 2020. Most spending in 2020 comes from projects that start in the 1st half of 2019. So far in 2019 starts are up 15% ytd over 2018.

Commercial  Both store and warehouse starts dropped in 2018. Commercial starts are seeing strong gains from distribution centers (warehouses, which are in commercial spending). Since 2015 the 10% decline in retail stores is being hidden by the 50% increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are down 5% in 2018 but increased 500% from 2010 to 2017.

Manufacturing Backlog is still very strong, but a drop in peak spending from the schedule of cash flows will lead to a period of moderate spending declines. After that, manufacturing spending increases steadily through the end of 2020. Current expectations are that manufacturing will finish the year up 8%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+.

(note 11-8-19: major revisions to Manufacturing starts data substantially reduces forecast spending in 2020 and 2021. Dodge Data, in their October Outlook 2020 report, reduced forecast for Manufacturing new starts from their June Midyear report by -$10bil (30%) for 2019 and by -$7bil (25%) for 2020. This reduces 2020 spending growth to only 4%.  

Office spending is expected to finish 2019 up 7% or less. New starts in 2018 were up 11% to a new high, but much of the peak spending, from over-sized long-duration projects, will benefit 2020 when I expect to see spending growth of 8%-11%.

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not consider the following: airports include not only land-side terminals but also air-side runway work; rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work. Construction Analytics follows U S Census construction spending reports which include all terminals and rail in Transportation.

Terminals and rail starts reached record highs in 2017 and record backlog in 2019. 2019 starting backlog is four times what it was in 2015.

However, much of that backlog is very long duration project spending that will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. From Oct’16 through Oct’18 there were sixteen $billion+ new project starts and seven $500million+ new starts. Some projects started in this period have peak spending occurring in 2020 and 2021.

Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 70% in the last 3 years leading into 2020. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.

Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed 14% gains in 2018 and the forecast is +15% in new starts in 2019.

 

PPI Materials Prices YTD June 2019

Price changes listed here are year-to-date 2019 through June. Change is for 6 months YTD, not annualized. As a reminder, the Producer Price Index (PPI) DOES NOT include imports (imports are not produced in the US) or tariffs. Only pricing for domestically produced materials is included. That would include any decisions domestic producers make influenced by tariffs on imported products.

Prices for years prior can be found PPI Construction Materials Inputs Index

PPI Tables Update to June 2019

July 2019 Construction Briefs

7-26-19

Total all construction jobs including supervisory jobs is now only 3% below pre-recession high. However, volume of work adjusted for inflation is still 18% lower than pre-recession high. From the 2006-2007 pre-recession peak until now, non-supervisory jobs have recovered to within 6% of the previous high and supervisory jobs are now 7% higher than pre-recession high. 

Residential Construction jobs are up 78,000 in the past year, ~3% growth in jobs, but residential construction volume in the same period dropped 8%. Considering residential construction spending is down 8% ytd, residential construction inflation is up minimum 2-3%, so volume is down 10%-11%, and residential jobs are up 3%, 2019 will be the worst year for residential productivity declines since the period 2006-2009.

Rider Levett Bucknall national average construction cost inflation is currently up 2.6% for the 1st 6 months 2019, 5.2% annualized. It’s up 5.7% year over year. This is in line with Turner Construction’s quarterly Building Cost Index, also up 2.6% year-to-date, annualized 5.2%, and up 5.5% year over year. These are both nonresidential building final cost inflation indices.

The PPI average Final Cost of 4 Nonresidential Trades for the 1st 6 months is up 2.9%, annualized at 5.8%. The PPI average Final Cost of 5 Nonresidential Buildings for the 1st 6 months is up 2.6%, annualized at 5.2%.

Construction Analytics current nonresidential building cost index for 2019 is 5.0%.

Forecasting construction spending in 2019 up less than 2%, and composite construction inflation of 4.2%, real volume for 2019 will be down about 2.5%.

The share of total residential construction spending on renovations remained fairly stable from 2013 thru 2018 between 34% and 37% at an average rate of 36%, substantially lower than 2009-2012 when it ranged between 42%-48% and averaged 45%. The 2019 share of residential spending on renovations is forecast to reach 40%. Only 50% of all spending is single-family residential. Keep that in mind when referencing residential jobs to housing units.

With the release of data for July 2019 on September 3, 2019, un-adjusted construction spending data will be revised back to January 2013. Expect revisions to 2018 construction spending, in particular, I expect significant revisions to RESIDENTIAL spending in 2018. Residential construction spending in 2018 recorded 5 individual months in which the spending reported by Census varied from the statistical monthly avg by greater than 3 standard deviations. In 19 years, the only time reported spending has ever exceeded 3 standard deviations from the normal statistical monthly average was during the 2006-2009 recession. I expect all of these to be revised away.

Due to the delay in release of construction spending revisions, which would normally have been published July 1st, my midyear construction forecast will be delayed. There’s more to it than just updating 2018 spending. The spending data helps prove the new starts data, which then supports the forecast. Preparation of the midyear forecast begins after the release of the data update September 3rd.

What’s Happening In Construction Starts? YTD total is down 8% from 2018, BUT

These markets recently posted the best construction starts 12 month totals ever over the noted period. Much of the spending from these starts occurs in 2020.

  • Manufacturing from Jun18>May19
  • Office May18>Apr19
  • Educational Jun18>May19
  • Public Works May18>Apr19

These very long duration markets posted best new starts ever; Highway Dec 17>Nov18, up 25% compared to the prior 12 months which was the the 2nd best 12mo ever, with peak spending from those starts expected in 2020, and Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.

2020 Starting Backlog for these six markets will be up an average of 25%, at the highest starting backlog ever for each of the six markets.

Non-building Infrastructure construction starts increased 46% over the last 5 years (since lowpoint Q2 2014). Non-building Infrastructure spending increased 7% in 2018 and is forecast to increase 13%/yr for both 2019 and 2020. Big increases in Highway, Transportation and Public Works.

The markets dragging on construction spending are Commercial/Retail, Power and Residential. My forecast shows Commercial Retail declining from now through 2020, but hidden in that is the fact that Stores are down but Warehouses are up; Power which slows to finish flat next year; Residential construction starts peaked in Q1 2018. Year-to-date 2019 starts are down 9% from 2018. Although YTD spending is down 8%, we will see some improvement in the 2nd half 2019. Residential spending should finish down 5% in 2019 and shows very little improvement in 2020.

Spend Sector 2015-2019 8-5-19

Keep in mind the affect if inflation. If spending in a particular market drops 5% AND there is 5% inflation, the real market volume is down 10%. All nonresidential inflation indices are currently between 4% and 5% and are expected to remain near 4% in 2020. Residential inflation is currently near 3.5%.

Construction volume (spending inflation adjusted) hit a 3-year low in Nov-Dec-Jan. Annual volume since Dec 2015 increased 8% but then dropped 7%. Volume for the last 2 years increased less than 1%. Most of the decline to the low was residential. Nonresidential buildings and Non-building Infrastructure were flat.  All three sectors are expected to improve slightly in the 2nd half 2019, although real residential volume will still be down 9% in 2019 and 2% in 2020. Nonresidential Buildings and Non-building Infrastructure will post 6% and 9% increases in volume for 2020.

Construction Markets 2019 YTD Volume +/-   (Volume = Spending – Inflation)

  • TOTAL ALL -5%
  • Residential -12%
  • Manufacturing +5%
  • Office +4%
  • Lodging +3%
  • Amusement/Rec +4%
  • Public Safety +4%
  • Highway +8%
  • Transportation +3%
  • Public Works +12%
  • Commercial -13%
  • Educational -3%
  • Healthcare -5%
  • Power -4%
  • Communication -13%

ALSO SEE

May Construction Spending Report -Changes Since Dec 2019 Forecast

Notes on April 2019 Construction Spending Report

May Construction Spending Report -Changes Since Dec 2019 Forecast

7-1-19

May construction spending was posted by U.S. Census today at an annual rate of $1.294 trillion. Construction spending has averaged $1.296 trillion for the 1st five months of 2019. Year-to-date (ytd) spending is down 0.2% from the 1st five months of 2018.

Residential spending is down 8% ytd from 2019. Two thirds of that decline is in renovations which is down 15%. Single family (SF) is down 8% but multifamily (MF) is up 9%.  SF is 51% of all residential spending, MF is 15%, Reno is 34%.

Nonresidential buildings spending is up 3% ytd. Best performers ytd in nonres bldgs are Manufacturing +11%; Office +9%; Amusement/Recreation +9% and  Lodging +8%; (Public Safety is up +10% ytd, but represents less than 1% of nonres bldgs, so has little impact). Commercial is down -8%.

Non-building infrastructure is up 7% ytd. Best performers ytd in nonbldg infra are Highway +18%; Environmental Public Works (combined) +16%; Transportation +9%. Communication is down -7%.

Construction Analytics 2019 forecast for total construction spending for 2019 is now $1.330 trillion compared to $1.341 trillion forecast in December. The changes in the forecast by sector since December are: residential spending was forecast to reach $564 billion but is now projected to hit only $526 billion. Nonresidential buildings spending is now forecast to reach $454 billion, up $10 billion since December supported by increases in Educational and Manufacturing. Non-building Infrastructure spending is forecast to finish at $350 billion up $16 billion since the initial forecast. Most of the infrastructure increase is in Highway.  

Current forecast shows all three sectors improving by year end. Forecast spending for 2019 shows residential finishing down 5%, nonres bldgs up 4% and nonbldg infrastructure up 13%.

Inflation is expected between 4% and 5% in 2019. Volume is spending minus inflation. After adjusting for inflation, residential volume is expected to finish 2019 down 9%, nonres bldgs down 1% but nonbldg infrastructure up 8%.

This is the third year in which construction volume will post no significant gain. Spending in 2017 was up 4.5% and in 2018 up 5%, but after inflation, volume was up only 0.1% in 2017 and 0.2% in 2018.  Overall, total 2019 spending will finish up 1.7%, but volume after inflation will be down 2.7%.

While volume is now in the third year of no gains, jobs have increased, so far since Jan 2017 by 8%. This does not support the ongoing discussions of a labor shortage. In fact, jobs growth is exceeding construction volume.

Biggest upward revisions to my forecast since December: Educational from -4% to +5%, +$7bil; Manufacturing from -2% to +9%, +$7bil; Highway from +1% to +21%, +$18bil; Environmental Public Works from +7% to +24%, +$7bil.

Biggest downward revisions to my forecast since December: Residential from +0.5% to -5%, -$38bil; Commercial from -1% to -8%, -$8bil; Transportation from +14% to +7%, -$5bil.

Spend Forecast 2017-2018-2019-2020-2021 8-1-19

See also Notes on April 2019 Construction Spending Report which includes greater explanation of major market activity.

Bullet Points for May

Construction is cyclical in periods, not so much month over month. The 1st 5 months 2019 averaged slightly higher than the last 6 months of 2018.

Residential construction is the biggest drag on total spending right now. The current 3mo average spending is the lowest in 27 months. That will improve some over the next 12 months, but then, if the forecast for new construction starts does not improve, will head even lower for 2020.

All sectors will improve in the 2nd half of 2019 vs 1st half. Residential +3%, Nonresidential buildings +3%, Non-building Infrastructure +9%. These improvements are only enough to bring total 2019 spending to +2.3% over 2018.

Nonresidential new construction starts through 2018 are at all-time highs and are expected to set new highs again in 2019.

Although ytd spending is down 0.2% from the 1st five months of 2018, by year end ytd will climb to 2.3%. The 2nd half of 2018 was in decline while the 2nd half of 2019 is on the rise.

Non-building Infrastructure spending is the strongest it has been in many years. Indications are for a steady increase in spending completely through 2020. Highway, Transportation and Public Works are all contributing to increases.

Growth in new starts and backlog last three years: Highway starts up 33%, backlog up 42%; Transportation (since 2015) starts up 60%, backlog  up 100%; Public Works new starts up 38%, backlog up 33%. Backlog growth for these three markets all expected to increase ~25% for start of 2020.

Growth in annual spending in data going back to 2001: Highway spending for 2019-2021 best 3 yrs ever; Transportation 2018-2021 best 4 yrs ever; Public Works 2019-2020 best 2 yrs ever.

For nonresidential buildings, almost 80% of all spending in any given year is already in backlog from starts prior to that year. For non-building infrastructure it’s 85%. So come Jan. 1 2020, 80% to 85% of all nonresidential spending in 2020 is already on record in backlog. For residential it’s only 70% due to shorter duration and the dependence on more starts within the year.

Inflation has been increasing 4% to 5% per year since 2012. Construction spending needs to increase greater than inflation to add volume within the year. Total construction volume has not increased in over two years and will drop 2% in 2019.

Jobs are increasing while volume is decreasing. That’s like a factory putting on more workers to make fewer widgets.

I wouldn’t be surprised to see, within the next few jobs reports, a slowdown in total construction jobs growth but a pick up in heavy engineering jobs. If the last 5 months are an indicator, the decline may have already begun. We’ve just posted the lowest 5 months jobs growth (52k jobs) in the last 7 years.

For more on Jobs see Construction Jobs and JOLTS

My forecast output is dependent on all monthly cash flows from scheduled new construction starts. I rely on Dodge Data & Analytics for starts data.

This forecast does not predict a recession, however does reduce growth in new starts over the next three years. If a recession were to occur, it would substantially reduce future starts. However, the last “construction” recession started in 2006-2007 with declines in residential work. New starts in nonresidential buildings kept increasing into 2008. The “nonresidential” spending recession did not start until 2009, three years after the beginning of the residential decline.

 

What If No Future Starts?

6-27-19

What if there were no new construction starts beyond today?

What if the last new construction starts recorded for May (released by Dodge June 21) were the last to be posted and once those projects reached completion there would be no more work?

Of course this is a totally unlikely scenario, but deleting all future predicted starts allows to perform an important test. All the construction starts recorded as of today make up the backlog, and eventually that backlog will run out. So, if the new starts spigot was turned off today, how much spending would remain for 2019, 2020 and beyond? (For use later, new construction starts recorded through May generally equal an average of 40% of all starts expected each year).

The questions then are: How dependent is the spending forecast on construction backlog? How dependent is the construction spending forecast on new construction starts? What magnitude of miscalculation in the new starts forecast would be imparted to the spending forecast?

Single-family residential projects can take as little as 6 to 9 months to reach completion, multi-family perhaps twice as long. For the average nonresidential building, completion would be reached in about 24 months, but some large industrial projects will take three years or more. For some of the airport, highway and rail expansion mega-projects, the cash flow schedule of spending will take four to eight years to reach completion.

An average of ten years of monthly cash flows produces an average spending schedule for the various construction market sectors. Recognize that starts are posted every month, so January starts have twelve months of spending in the 1st year while projects that start in December have only one month of spending in the 1st year.

Residential project starts net about 65% of money spent in the 1st year, the year started, 30% spent in the following year and 5% spent in the third year, or 65-30-5. Although each type of nonresidential work has a more specific cash flow schedule, the average for nonresidential buildings is 20% spent in the year started, 50% in the second year and 30% in the third year, or 20-50-30. Very long duration infrastructure projects have a spending distribution on average that looks like 15-30-30-15-10.

Residential projects have the shortest schedule to completion. Work flow needs continual replenishment from new starts to support spending. The amount of work in backlog today would support only two thirds of anticipated 2019 spending and less than 10% of 2020 spending.

All Nonresidential buildings type currently have enough work in backlog to support 90%-93% of the total forecast spending in 2019. Current backlog would support only 50% of the total spending forecast for 2020. There’s only enough to support 10%-20% in 2021.

Power and Highway backlog as of today would support 95% of the total forecast spending in 2019 and 70%+ in 2020. Because these are long duration projects, there is enough in backlog today to support 40% of spending in 2021.

That’s a lot of good facts, but how can we use that information to perform an important test?

Let’s use the average nonresidential building for an example. For this example, let’s try to determine the validity of our 2019 forecast based on what we have in backlog today. New starts through May is about 40% of total starts expected in the year. Backlog through May supports 92% of spending in the current year. Spending in any given month has cash flow from an average of the previous 24 months of project starts, so the average of large numbers reduces potential error from backlog. The validity of our annual spending forecast is dependent on whether or not we correctly predicted the remaining 60% of starts for the year, and those starts support 8% of the spending forecast.

Therefore if we incorrectly forecast the remaining 60% of starts by 25%, then we incorrectly forecast total annual spending by 25% x 8% = 2%.

For the 2020 forecast, the math gets just a little more complicated. Remember we stated earlier that the typical spending schedule for nonresidential buildings is 20-50-30. So 20% of 2020 spending comes from new starts in 2020. Only 80% of 2020 spending comes from work in backlog at the start of the year. Based on what we have in backlog today, new starts through May 2019 supports 50% of 2020 spending. We are dependent on the expected new starts in 2019 to get us up to 80% of the expected spending in 2020.

We are expecting 60% more in starts in 2019 and that will support the currently missing 30% of 2020 spending. If we incorrectly forecast the remaining 60% of starts by 25%, then we incorrectly forecast total annual spending for 2020 by 25% x 30% = 7.5%.

Also for 2020, since 20% of all spending within the year comes from new starts within the year, if we incorrectly forecast 2020 new starts by 25%, then we incorrectly forecast total annual spending for 2020 by 25% x 20% = 5%.

I’ve posed this scenario by asking what would happen if we incorrectly forecast the remaining starts by an error of 25%. That would be a huge error, not very likely to occur. I’ve been tracking Dodge Data & Analytics construction starts for more than 10 years and have seen enough data to expect that by mid-year the unanticipated error in forecast starts for the end of the year might be more on the order of 5% to 10%, not 25%. And in fact, historically, revisions to year end starts data is usually UP, not down.

So, by deleting all remaining forecast starts data, we see the spending forecast based on cash flow of new starts would require a very large error in the starts forecast to translate into a large error in the spending forecast. If we apply a more reasonable and yet still conservative error of 10% in all projections of future starts, the forecast for 2019 spending would be off by less than 1% and the forecast for 2020 off by a total of 5%.

 

Construction Jobs and JOLTS

6-16-19

8-15-19 edits – added plots

In early 2007, residential construction volume had already dropped 20% and total construction volume was down 10%, (the annual averages would not show this dramatic drop but a monthly plot would), yet construction job openings and labor turnover survey (JOLTS) was peaking at a 6 year high. From Jan 2007 to Jan 2008, construction had already lost 250,000 jobs. All of that was in residential construction. At the time, nonresidential construction was still growing.

Nonresidential buildings volume would peak in late 2008 and non-building infrastructure peaked in early 2009. By that time, in Q1 2009, residential volume was down 60%. Even though nonresidential construction was peaking, total construction was down 25%.

In 2008 construction jobs declined by another 500,000, about 90% residential jobs. JOLTS dropped to half of the 2007 peak high. It was over the next year or so that all construction began to decline, jobs would drop in all sectors and JOLTS would plummet to an all-time low.

The point is this: The construction recession began with the decline of residential construction in 2006-2007, at a time when JOLTS was at a 6-year high. Jobs declines lagged the decline in real construction volume (the annual average plot shows this well).

Jobs vs Volume 2001- 2010 6-16-19

It is remarkable how residential construction volume from the Q1 2006 peak to Q1 2007 had dropped 20% but residential jobs increased by 6%. JOLTS was peaking at a 6 year high. Although total construction jobs increased in 2006, jobs started to decline in the 2nd half 2006 and would drop 200,000 in 2007. JOLTS continued to show job openings increasing from mid-2006 to mid-2007. Neither jobs growth nor JOLTS reflected what was occurring in real construction volume and certainly did not give any leading indication of what was on the horizon.

The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from May 2012 through May 2019, construction added 1,870,000 jobs, an increase of 33%, the 2nd strongest jobs growth period ever recorded, not far behind 1993-99 when jobs and volume grew equally (JOLTS was not tracked before 2000). In the four years 2003-2006, just prior to the great recession we added 1 million jobs and volume growth kept up with jobs for the first three years, but then the residential recession started and volume began to plunge. However, JOLTS increased from 2003-2007. These three periods mark the best periods of jobs growth in the last 30 years.

During the last seven years, unlike 1993-99 or 2003-05, when jobs and volume grew equally, construction volume (spending minus inflation) increased by only 22%, far less than the 33% jobs growth. While contractors continue to report difficulty filling jobs, the pace of jobs growth is near an all-time high and is out-pacing the growth in volume of work to support those jobs. JOLTS increased every year during this period.

Now fast forward to 2019. Construction spending growth for the previous two years, 2017 + 2018, increased 4.5% + 5.0%. But inflation during this period was 4.4% + 4.8%. Real construction volume for the last two years increased less than 1%. But jobs increased by nearly 8% and JOLTS more than doubled from 2016 to the end of 2018.

This is a real head-scratcher. Volume has not increased for two years, yet jobs are up 8% and the indicator for job openings is increasing. This is not at all what the data should be showing.

In fact, from the 2006-2007 pre-recession peak until now, non-supervisory jobs have recovered to within 7% of the previous high, but construction volume is still 18% below the previous peak. Total all construction jobs is only 3% lower than the pre-recession high.

Jobs vs Volume 2011- Dec2018 7-9-19 fixed15

Just as the data showed in 2007, the data at the start of 2019 shows that we are top-heavy construction jobs that are not supported by real growth in construction volume.

8-3-19 > added plot > Plot below shows the same data as the above two plots, only plotted monthly, with all data from 2001 thru 2019 on one plot. From 1991 to 2000, jobs vs volume disparity was only 1%. This plot sets Jan 2001 to zero baseline for both jobs and volume. By Dec 2006 the disparity was 20%. This plot shows construction jobs growth vs volume growth now has a wider disparity than Jan 2007 when we were leading into the Great Recession. By far, the largest portion of this growing disparity is residential. In the last 24 months residential volume has decreased by 12% but residential jobs have increased by 7%. To be fair, that doesn’t include some nonresidential jobs that were actually doing residential work.

Jobs vs Volume 2001-Jun2019 8-2-19

Construction volume, (spending inflation adjusted to constant $ volume) hit a 3-year low in Dec-Jan.

8-3-19 > added 12 month trailing jobs plot. Jobs growth rate, although showing some minor up months, has been declining since Q3 2018. As of July 2019, the 12 month trailing total of new construction jobs has dropped almost 50% in 9 months. If we maintain the current rate of jobs growth (avg 15k/mo in 2019), within the next three months we will hit a six-year low. I’m expecting growth to slow, so we may hit that six-year low next month, in the August data.

Jobs trailing 12mo growth 2013-2019 8-2-19
With construction spending in 2019 predicted up only 2%, and forecasting 4.5% construction inflation for 2019, real volume for 2019 will be down 2.5%. Jobs thru April are already up 1.2% year-to-date. So the gap is widening.

We are in the third year of no increase in construction volume. But jobs have continued to grow and JOLTS is at an all-time high. These data sets should not occur at the same time. But this is exactly what occurred prior to the great recession after which we experienced a devastating drop in jobs. However, compared to the construction volume measured by inflation adjusted spending, both the changes in jobs and the JOLTS indicator of job openings seemed to lag real activity by about a year.

Even if we do not experience a construction recession similar to 2008-2011, the current situation may be signaling that we could experience a jobs correction with the slightest downturn. If a jobs correction does not materialize then we are headed for a period in which we will solidify the highest ratio of jobs per volume of work put-in-place as measured in the last 50 years.

Jobs per billion 1970-2018 6-16-19

See also these articles:

Construction Volume vs Jobs 2017-2018

Construction JOLTS – What’s wrong with this picture?

What Jobs Shortage?

A Harder Pill To Swallow!

Residential Construction Jobs Shortages

Construction Analytics Voted Best Construction Blog 2019

Ed Zarenski’s Construction Analytics blog

won the 2019 Best Construction Blog competition.

blog best

“Sometimes patience and quality count more for success than razzle dazzle and pushy marketing. These observations seem appropriate for the 2019 Best Construction Blog winner, Ed Zarenski’s Construction Analytics.”

“His blog’s uniqueness and success results from its detailed analysis and data about the construction economics topic, including forecasts and projections — with a Google search leadership relating to construction inflation.”

“Zarenski’s blog, effectively, provides a solid overview of the construction industry’s economic picture. That knowledge is useful for contractors, suppliers and professionals seeking to benchmark performance and plan their business’s future based on industry-focused but larger economic trends.”

Construction Analytics wins 2019 Best Construction Blog competition

 

 

Notes on April 2019 Construction Spending Report

6-3-19

Construction Spending for April came in at $1.299 trillion. Current spending has been stable for the last three months but at a level 1% to 2% lower than this time last year. That should change to positive growth as the year goes on because the 2nd half of 2018 was declining while the 2nd half of 2019 should increase.

Residential spending YTD is down 8%

Nonresidential Buildings spending ytd increased 3.5%

Non-building Infrastructure spending ytd is up 6%

 

Spending-Inflation-Jobs

In 2017 construction spending increased 4.5%, but inflation was 4.4%. Real construction volume increased only 0.1%.  In 2017, construction jobs increased 3.4%.

In 2018 with 4.8% inflation and only 5% spending growth, real construction volume increased only 0.2%.  In 2018, jobs increased 4%.

Considering 4.5% construction inflation for 2019 with spending predicted up only 2%, real volume will be down 2.5% from last year. Jobs thru April are up 1.2%.

Revenue growth looks like 5%/year but it’s all or nearly all inflation. We’ve grown top heavy jobs by 10% in less than three years.

Now well into the third year of jobs growth exceeding growth in work volume, unsupported jobs growth will eventually lead to downward correction in construction jobs. Maybe in 2019.

6-7-19 BLS released Construction Jobs for May, up 4,000. But March and April were both revised down by a total of 13,000. Only 26,000 jobs have been added in the last 4 months. That’s the slowest jobs growth for any four months since 2012. In 2018 jobs increased by an average 26,000/month.

From Jan 2017 to April 2019, jobs growth exceeded construction volume by 10%. The last four months is the slowest 4mo in seven years.

Is this the beginning of a jobs slowdown? Are greater job losses on horizon? The last two years look remarkably similar to 2005-2007 when jobs were still increasing rapidly but already residential construction was well into a downturn.

 

Residential construction spending saar for April 2019 = $506bil. April 2018 was $570bil. Down 9%. Monthly spending is down 10 of last 12 months. Current $ spending is indicating a 3% drop for 2019. After inflation, that would indicate an 8% drop in real 2019 residential volume.

Residential spending for Q1 2019 is 11% below Q2 2018. The decline is about half in single family and half in renovations. Multi-family spending is up 8% ytd (but accounts for only 12%-13% of all residential spending). Total spending for the first four months of 2019 is the lowest residential spending saar for any 4mo in more than two years.

I’ve posted reasons why I expect upward revisions to residential spending, but I question if revisions can offset the current decline from 2018. With a deficit near 10%, it now looks like residential construction spending will NOT post any gains in 2019 and could finish the 2nd consecutive year of zero growth or real volume decline.

In real volume, after adjusting for inflation, residential construction through April is down 13% year over year. We haven’t posted a volume decline like that since 2009. Perhaps revisions will recover half that decline, but not all. Contrary to the decline in real volume, in the last year residential construction jobs are UP 3.5%.

 

Educational spending will finish 2019 much stronger than current spending but the yearly totals will only make slight gains over 2018. There was an uneven distribution of spending curve peaks contributing less in the 2nd half of 2018 that is now behind us. 2019 spending is supported by a steady stream of strong starts that began in late 2017 and extended into summer 2018. Jun-Jul-Aug 2018 starts posted the best 3mo total starts ever and peak spending from those starts occurs from April 2019 to Jan 2020. I’m predicting 3% growth in 2019 and 9% in 2020. Some of the expected stronger spending in 2020 could move into 2019. Current spending is up 6.6% ytd over 2018. Most spending in 2020 comes from projects that start in the 1st half of 2019. So far in 2019 starts are up 15% ytd over 2018.

Commercial spending is currently down 4.5% ytd. It will move slightly lower before it improves, finishing the year down 2%. Both store and warehouse starts dropped in 2018. 2020 may not get more than a 2% gain in spending. Commercial starts are seeing strong gains from distribution centers (warehouses, which are in commercial spending). Since 2015 the 10% decline in retail stores is being hidden by the 50% increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are down 5% in 2018 but increased 500% from 2010 to 2017.

Manufacturing spending, up 10% year-to-date, currently appears stronger than it is expected to finish the year. Backlog is still very strong, but a drop in peak spending from the schedule of cash flows will lead to a period of moderate spending declines from March through September. After that, manufacturing spending increases steadily through the end of 2020. Initial forecast was for 2% growth in 2019. Current expectations are that manufacturing will finish the year up 6%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+.

Office spending, currently up 9% ytd, similar to manufacturing, could post several months of moderate declines from June to November, but then rebound with a steady stream of increases through 2020. In fact, my forecast shows office spending will remain flat or post a slight declines in 6 out of the next 7 months and finishes the year near the same monthly rate of spending as we are at now. Office spending is expected to finish 2019 up 6% or less. Initial forecast was up 6% for 2019. New starts in 2018 were up 11% to a new high, but much of the peak spending, from over-sized long-duration projects, will benefit 2020 when I expect to see spending growth of 7%.

Healthcare starts dropped back a bit in 2018, finishing 9% down. This slowed spending to remain flat for 2018 and 2019. Spending ytd is up only 1% from 2018. Backlog increased 11% for 2017 and 8% for 2018, but with the slowdown in new starts in 2018, 2019 backlog will be down slightly. New starts need to increase in 2019 to see growth in 2020 starting backlog.

Healthcare construction spending for 2018 is forecast to finish at $42 billion, an increase of only 0.2% over 2017. Considering the recent range between 3.5%-5% inflation, healthcare real volume has declined every year since 2012 with exception of 2017 which gained only 0.3%. It will decline again in 2019 with a forecast 0.6% gain in spending, but with a 4.5% rate of inflation. Dependent on how starts materialize in 2019, 2020 could realize the 1st big spending and real volume increase in 8 years. 

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not consider the following: airports include not only land-side terminals but also air-side runway work; rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work. Construction Analytics follows U S Census construction spending reports which include all terminals and rail in Transportation.

Terminals and rail starts reached record highs in 2017 and record backlog in 2019. 2019 starting backlog is four times what it was in 2015.

However, much of that backlog is very long duration project spending that will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. From Oct’16 through Oct’18 there were sixteen $billion+ new project starts and seven $500million+ new starts. Some projects started in this period have peak spending occurring in 2020 and 2021.

Transportation spending is up 8% ytd but could post several slow months in mid-2019. Spending in 2018 is forecast to finish up more than 19%. Spending for 2019 is expected to finish up only 4% but then increase at least into mid-2021.  2020 and 2021 could see increases in spending of 15% to 20%/year.

Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 50% in the last 4 years leading into 2019. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.

Highway construction spending ytd is up 17%. Spending is forecast to increase 16% in 2019 and 10% in 2020. 2021 may see an increase of 10% in spending.

Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed gains in 2018 and the forecast is more gains in 2019. All these projects are public spending and saw no real gains in spending from 2010 through 2017. Spending ytd 2019 is up 16% to 20% for this group. I’m predicting 2019 spending will finish up 22% and 2020 spending is now forecast to increase 17%.

 

%d bloggers like this: