Expanding on one of the four recession impacts outlined previously, #4 New Starts – future capital spending plans canceled.
What is the impact on future construction spending if new construction starts stopped for a month?
To analyze this scenario, several assumptions must be made. The assumptions are the variables, and as you will see, the variables change with the market and the severity of the shutdown. It will be easy to see the impact of any other alternative once one scenario is modeled.
1: An entire month of new starts is stopped. Later it can be determined what happens if only 50% stopped or only 25% stopped.
2: The average duration of jobs in this category is 25 months. Duration is different for each market and this will show the impact duration has on the outcome. Later it can be determined what happens if duration is 20 months or 33 months.
3: A straight line spending curve is assumed. That is, for a duration of 25 months 4% of the construction would be put-in-place each month. No, that is not how spending occurs, it actually follows a typical bell curve, but this allows us to visualize the impact. If duration were set at 20 months, 5% of spending would be p-i-p each month.
4: New Starts have been level indicating a steady stream of new work at the current level. New starts do vary up and down slightly each month, but prior to the pandemic impact the broad outlook was for not big changes from 2019 through 2021.
If an entire month of new starts at a level pace were to disappear, the volume that month would have added to each future month of spending disappears. For projects that have a 25 month duration, using a straight line spending curve, new starts in every month make up 4% of the spending in all future months until they are completed. The total spending in any given month is dependent on the spending contribution from the previous 25 months of projects started. Each month, a project that stated 25 months ago is completed, but a new project that started this month is added.
In this scenario, future spending is reduced by 4% per month for the next 25 months.
Now we can see what happens if only 50% of new starts disappear. If duration is kept at 25 months but only 50% of starts disappear for a month, then future spending will be reduced by only 2% per month for the next 25 months.
What happens if 100% of new starts for one month disappear but the type of project has an average duration of 33 months?
Projects with a 33 month duration contribute 3% of the monthly spending for the next 33 months. In this scenario, future spending will be reduced by 3% per month for the next 33 months. If duration is kept at 33 months but only 50% of starts disappear for a month, then future spending will be reduced by only 1.5% per month for the next 33 months. Long duration projects have a smaller monthly impact, but the impact lasts for a longer period of time.
Short duration projects such as housing have a more severe monthly impact, but the impact lasts for a shorter total duration. Projects with a 10 month duration contribute 10% of the monthly spending for the next 10 months. If 100% of new residential starts stopped for one month, future spending will be reduced by 10% per month for the next 10 months. If duration is kept at 10 months but only 50% of starts disappear for a month, then future spending will be reduced by only 5% per month for the next 10 months.
What happens if new starts shut down for two months? Double all the results above.
See also these articles for all the analysis to date on the Impact of the Pandemic.