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Pandemic Impact #9 – Spending Revisions & Construction Jobs Reset

updated 7-2-20 to include May spending and June jobs report

6-26-20   April construction spending dropped only 3%, but jobs+hours worked dropped 16%. Even though May showed a partial jobs rebound, jobs during this period are still down much more than spending. If this data is accurate, we dropped about half a million jobs more than then the decline in spending would indicate. If so, it’s time to wake up and accept there has been no labor shortage, but rather there has been a huge excess of nonproductive labor.

We’ve seen in the past that jobs can grow in excess of volume growth, but we’ve never seen a period where jobs show a massive decline without a like decline in spending. If it is true that jobs declined without an equal drop in spending activity, then those jobs were nonproductive.

Is the industry about to reset jobs vs work volume? Or, should we expect revisions to the reported data? With the July 1 release of spending data, all monthly (not seasonally adjusted) spending gets revised back to Jan 2018. We’ll see if Mar-Apr gets revised to show larger spending losses.

This post will be expanded after the July 1 construction spending and jobs releases.

Data on recent Construction Starts for May from June 15 release

Dodge Construction Starts average for Apr+May 2020 compared to Avg Jan-Feb-Mar 2020 — Nonresidential Bldgs -34%, Nonbldg Infra -4%, Residential -27%.

Dodge Construction Starts average for Apr+May 2020 compared to Avg Apr+May 2019 Nonresidential Bldgs -18%, Nonbldg Infra -15%, Residential -3%.

So, while Nonresidential buildings starts were down 34% in Apr+May compared to Q1 2020, that’s down 18% compared to the same months 2019. Residential Apr+May starts are down 27% compared to the avg in Q1 2020, but that’s down only 3% compared to Apr+May 2019.

What impact does that have on the year? if Nonres Bldgs starts are down 34% for 2 months, that reduces starts by 6% (34 x 2/12 = 6) for the year (from the prior trend). If Residential starts are down 27% for 2 months, that reduces starts by 4.5% (27 x 2/12 = 4.5) for the year. The full impact on new construction starts will not be known for many months as owner’s make decisions whether or not to move ahead with new capital investment.

7-1-20  The Census Construction Spending report issued today revises spending back several years. 2015, 2016 and 2017 were all revised up 1% to 1.5%. 2018 was revised up 2% and 2019 up 4.5%.

The 3 month decline in spending for Mar-Apr-May 2020 is now reported at only 6%. There is still some disparity in the spending data (vs jobs) in 2020 that is subject to several more revisions and may not get revised for at least a year.

7-2-20  Jobs report for June covers the period May18-Jun14.  Construction spending released 7-1 covers May. We now have 3 months, Mar-Apr-May of spending and 3 months of jobs for the periods Mar16-Apr12, Apr13-May17 and May18-Jun14.  We now begin to get a picture of jobs losses and shutdowns.

Construction Jobs vs Spending Mar-Apr-May vs Feb

  • The 3-month average decline in Volume was -6%.
  • The 3-month average decline in Jobs+Hours was -11%.

Jobs vs Volume PIP 2001-2020 monthly 7-2-20

Construction Projects that shut down in Mar-Apr-May did not post lost revenues as deep as predicted. Spending was down only -4% from February to April.  In May the decline from February reached -6%. Compared to February, Residential spending for May declined -9.5%, Nonresidential Buildings -5% and Non-building Infrastructure declined only -2%.

The data for Mar-Apr-May 2020 shows that the spending drop from shut down delays was far less than anticipated. More than 90% of all work continued unabated through April and May. The result is fewer reductions thereby increasing spending in 2020 and less delayed work pushed out into 2021, lowering 2021 spending slightly. This shifts the balance of spending and now shows a small spending growth in 2020 and only a slight increase in 2021.

Non-building Infrastructure spending is up 8% year-to-date through May. Nonresidential Buildings is level year-to-date. Residential spending ytd is up 9%.

On April 1, the pre-pandemic forecast for 2020 spending was up 6% over 2019. The revised forecast is now up only 2.9%, based on the spending data for Mar-Apr-May released on 7-1-20. The biggest change contributing to the decrease is in residential work. Non-building Infrastructure work, particularly Power and Highway, continues to support spending the next two years.

Spend Recession 2020 Summary 7-3-20

These markets remained at level spending or posted gains in spending in April and May: Public Safety, Amusement/Recreation, Transportation, Communication, Highway/Street, Public Works. The largest declines in spending were in Residential, Lodging, Healthcare, Power and Manufacturing.

The result of lesser impact from fewer work shut downs in Apr-May is a better overall forecast for 2020 and a reduction of delayed work pushed into 2021. However, the forecast for 2020 may possibly get a bit worse with expected revisions. I was predicting shut downs of 10% to 15% and in some markets 25% and that did not show up in the Census spending report. But the uncertainty of what the fall brings still weighs heavy on any outlook. Still in question is whether some states may yet need to invoke temporary shut downs that were originally expected to occur in Apr-May.

After three months, there are still approximately 400,000 jobs lost without an equivalent decline in spending. Even with some future downward revisions to spending, my thoughts are we could expect many of these jobs lost for good. But this most recent data produced at least some of the correction I expected last month. The plot below of the number of jobs to put-in-place $1 billion of volume spiked downward in April by an unrealistic amount. With the most recent May-June data, spending dropped a bit more and jobs increased. This corrected the downward spike almost back up to where it was.  Spending is still subject to several revisions for a year. Don’t be surprised to see this plot move slightly higher in the near future. A higher value on this plot represents lower productivity. I would expect current conditions to result in lower productivity and eventually that should show up on this plot.

Jobs per 1B Volume PIP 2001-2020 monthly 7-2-20

My forecast updated to 7-2-20 shows spending increasing through the remainder of 2020 with almost all of the change due to restarting work that was shut down. But then as we turn into 2021, spending begins to fall slightly again through mid-year, with the emphasis on change due to loss of spending from a decrease in new starts in 2020. Still unknown, with no way to tell from the data, is how many of the projects that shut down will not restart? Also unknown is the impact of cancellations of starts for new capital investment.

Residential work posted the largest drop in spending so far, down almost 10% in three months. But even with that steep drop, residential spending is still up 9% year-to-date compared to 2019. Residential and Nonresidential Buildings posted large reductions in new starts in April and May. That will have an impact on 2021 spending. Only Non-building infrastructure is forecast to post sizable spending gains in 2020 and 2021.

Starts CF 2015-2022 7-3-20

 

 

 

Pandemic Impact #8 – Construction Outlook 6-1 April data

For up-to-date Outlook 

See Pandemic #13 – Midyear Construction Outlook published 8-14-20

See Pandemic #12 – Jobs & Starts Updated Aug 8 and 

Pandemic #11 – June data Construction Spending Update Aug 3 and 

Pandemic #10 – June New Construction Starts July 30 

 

Analysis of a Recession Scenario 2020-2022

based on 6-1-2020 data

This analysis relies on the first available hard data reports to forecast the impact of a construction recession scenario caused by the current Covid-19 pandemic. This scenario does not assume a catastrophic failure of the U.S. economy, but does assume a large decline in construction activity in 2020 and 2021. Data always gets revised in the following months.

This analysis generates spending cash flows from current and assumed reduced new construction starts to then determine how new starts and spending may affect future construction activity.

6-1-20 What We Know Today

The revised construction spending report for March, released June 1st, showed no decline in spending from February. Census revised March construction spending from the initial report of up 1% to, still remarkably, level with February. https://census.gov/construction/c30/pdf/release.pdf

This was the estimated growth before the pandemic. Shutdowns began March 15th. This report seems to indicate construction was totally unaffected in March! This is hard to grasp. Just the shutdowns in Boston and San Francisco starting Mar 15. affected 300,000 jobs and would calculate to have erased over $2 billion in work from March total spending. By one estimate, we had already lost 300,000 to 400,000 construction jobs by Mar.31st. How spending could have increased is baffling.

The first hard jobs data reflecting Coronavirus impacts on the construction industry was the jobs report released in the first week in May which covers jobs from mid-March through mid-Apr. From March 15th to April 12th, construction lost 975,000 jobs, 13% of the workforce. Construction unemployment, which was below 5%, as low as 3.2%, is now at 16.6%. https://bls.gov/web/empsit/ceseeb1a.htm . I expect to see downward revisions to March spending. In addition to a 13% drop in the number of jobs, hours worked also dropped 3%, so the total worker manpower and hours worked output dropped 16%.

Ten states account for 80% of the 975,000 construction jobs lost between March 15th and April 12th. CA, FL, MA, MI, NJ, NY, OH, PA, TX & WA. Eight of those states are in top ten states for total number of construction jobs, MA and WA are not. https://www.agc.org/news/2020/05/22/construction-employment-shrinks-49-states-and-dc-april-new-association-survey-finds?

The next jobs report due out June 5th covers the period from April 13th through May 17th. Expect more downward movement in the jobs numbers. I expect most construction jobs were lost early and are included in the April report, so next report June 5th we may see only 400,000 more construction jobs losses for the period April 13 through May 17. (This report will be edited to reflect the June 5th jobs data.)

The loss of 975,000 jobs in a single month (if all jobs were lost for a full 30 days) at a rate of 60,000 jobs needed to put-in-place $1 billion in construction in one month, equates to a loss of $16 billion in spending between March 15th to April 12th.

In one of the most baffling reports I’ve seen, Census posted April Construction Spending down only 3%. It is beyond explanation that construction spending for March was flat and April declined only 3% from March, while we’ve lost 16% of worker output.

Jobs vs Volume 2001-2020 monthly 6-2-20

The change from March to April Construction Spending versus Construction Jobs varies by the most in 30 years. This is highly suspect! Jobs (and hours) are down 16% but spending is down only 3%, for a variance of 13%. The largest variances on record back to Jan 1991, most of which occurred in 2005-2006, are: in 360 months, jobs and spending growth varied by >4% only 10 times, >5% only twice. The 20 yr average 0.1%.

Variances like what the data show for this month have never occurred. A more likely explanation is there is an anomaly in the data. Either construction did not lose 975,000 jobs in a month or spending in April dropped a lot more than 3%. I suspect the later.

6-8-20 Another way of looking at the jobs data is this simple metric. The total number of construction jobs divided by the amount in $billions of work put-in-place each month = Jobs/$billion PIP. This value sometimes spikes or dips by 3% or 4%, but usually changes month to month by less than 1%. You can easily see the April construction jobs/spending data changed by what normally would take several years. The change in April spending data does not agree with the change in jobs data. It’s one thing to see a spike like this when jobs are increasing in excess of work put-in-place. But it is much more suspect to see jobs decline without a decline in work put-in-place. Who’s putting the work in place?

Here’s what that April variance would mean. If construction jobs+hours drop by 16% but spending drops by only 3%, then productivity as measured by amount of work put in place per job increased by 13%, IN A MONTH, DURING A PANDEMIC.

If there is essentially no change in productivity, but due to restrictions and higher overhead, costs go up, then you must accept construction inflation just increased by 13% in one month. But there is no data yet showing unusual labor or material cost increases.

Or, if some portion of this discrepancy is due to a change in productivity and some part due to rapid inflation, the 13% variance is somehow split between these two issues.

6-5-20 The May Construction Jobs report issued today for the period April 13 through May 17 shows an increase of 464,000 jobs (and hours worked). I missed that estimate. So did everybody else. Jobs and hours worked output is now down net 13% for March and April. Spending is down only 3%. I still expect April spending to be revised down.

6-5-20 The May jobs data today is indicating an initial month (April) of stop work down 975,000 jobs (16%) is now down only 10%, net 600,000 jobs as of mid-May. That’s equates to a two-month average of jobs and hours worked down by 13%.  My forecast was based on about 25% of work stopped for two months. If jobs is a better indication, the lesser extent of work stopped means the adjusted forecast will post higher spending in 2020 and will move less spending into 2021. The next important data date is July 1, when the May construction spending is released. With that May report every year, Census revises all previous months data back 5 years. We’ll see if April data gets revised down.   

6-9-20 “In total, the construction sector recorded almost 1.3 million layoffs during March and April.” NAHB  https://wordpress.com/read/blogs/68887359/posts/28427

6-5-20 There is a scenario in which jobs decline with little to no reduction in volume. But, it accepts that there was a very large number of nonproductive jobs in the workforce. I’d been writing about the increasing disparity for the last few years between volume growth and jobs growth Expect Construction Jobs Growth to Slow in 2020.  Since 2017 jobs have been increasing but volume of work has been decreasing or level. It’s possible a large portion of the jobs losses in April are resetting this balance with little to no impact on volume output. These would be jobs that would probably not come back.

6-5-20 For Mar-Apr, 975,000 jobs were lost for a single month (if all jobs were lost for a full 30 days). For Apr-May, we regained 464,000 jobs. Net jobs loss for two months is about 600,000 jobs. April spending was down only 3% or $40 billion seasonally adjusted annual rate (SAAR) . At a rate of 60,000 jobs needed to put-in-place $1 billion in construction in one month, this equates to a loss of $10 billion in not seasonally adjusted (NSA) spending PER MONTH for both April and May. That would be a decline in the SAAR of spending of $120 billion. March posted no decline. April posted a $40 billion decline and we will get May spending on July 1st. The spending data remains suspect.

The pre-pandemic construction seasonally adjusted annual rate (SAAR) spending forecast was for a rate of $1,395 billion from March through July. Assuming no unusual changes in jobs, productivity or inflation, the spending can be calculated from the number of jobs available to perform work. For pandemic impact based on job losses, we should see March SAAR spending at $1,350 billion. April construction spending should drop to under $1,200 billion from a high of $1,386 billion in February. I expect to see March spending get revised downward. I expect April spending to be revised down 6% to 10%. For these reasons, my forecast is not using the reported April spending data.

Pandemic Impact on Construction

This was the baseline forecast pre-pandemic. It shows considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

This plot shows actual spending through January 2020 and forecast spending for 2020 through 2022 based on the predicted cash flow from existing starts and projected starts pre-pandemic.

PRE-RECESSION SCENARIO FORECAST SPENDING

Spend Sector 2015-2021 monthly 3-5-20

Backlog leading into 2020 was up 30% in the last 4 years, at all-time high. Although spending was forecast up only 4%/yr. the next two years, spending is at an all-time high. 80% of all nonresidential spending in any given year is from backlog. If new starts drop by 10%, that has only a 1.5% to 2% impact on total spending in the first year. The following year spending would be down 4% to 5%. Residential spending is far more dependent on new starts than backlog. Only about 30% of residential spending comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total spending by 7% in that year.

Residential construction starts peaked in 2018. Starts in 2019 are level yoy, but have been flat or in moderate decline since mid-2018. Spending was forecast up 5% in 2020 but down 1% in 2021.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Starts have moved sideways or in slight decline since mid-2018. 2019 starts are down 9% from 2018. Spending was forecast up 3% in 2020 and 2021.

Infrastructure starting backlog, by far the most robust, has increased 15%/year for the 3 years 2018-2020. Spending was forecast up 6% in 2020 and up 8% in 2021.

Recession Scenario

Regardless what may lead to a construction recession, in this case a global pandemic, it is the current high amount of work in backlog that will work hard to mute its effect.

When a recession occurs, new construction starts would be substantially reduced. Although some projects will be canceled or delayed mid-schedule, most projects already in construction would move on to completion.

Construction projects will most likely experience delays. Potential product shortages, delivery delays and shutdowns will drive up costs and extend project schedules.

Projects in planning may be canceled due to drop in demand, decline in capital or slowdown in economy. Retail stores may cancel expansion, educational facilities may delay starting new construction, transportation facilities may postpone later phases of long planned growth.

This recession scenario does not assume a catastrophic failure of the economy.

This pandemic recession forecast is based on the following:

  • April spending is forecast and not carried as reported due to reasons cited.
  • New Construction Starts in 2020 canceled, Residential -15%, Nonresidential Buildings -8%, Non-building Infrastructure -11%, Total Construction starts canceled -11%.
  • Work in backlog that has been delayed, minimum 2 month delay, restart build up over a period of 8 months; Residential -30%, Nonresidential Buildings -28%, Non-building Infrastructure -22%, Total Construction delays -25%.
  • Work in backlog that has been canceled, Residential -3%, Nonresidential Buildings -3.4%, Non-building Infrastructure -2.2%, Total Construction backlog canceled -2.8%.

This plot shows the resulting change in spending. Only the estimated spending to the right of the dateline changes.

RECESSION SCENARIO FORECAST SPENDING

Spend Sector Recession 2015-2022 6-3-20

 

6-20-20  Data on most recent Construction Starts

Dodge Construction Starts average for Apr+May 2020 compared to Avg Jan-Feb-Mar 2020 Nonresidential Bldgs 66%, Nonbldg Infra 96%, Residential 73%.

Dodge Construction Starts average for Apr+May 2020 compared to Avg Apr+May 2019 Nonresidential Bldgs 82%, Nonbldg Infra 85%, Residential 97%.

So, while Nonresidential buildings starts were down 34% in Apr+May compared to Q1 2020, that’s down 18% compared to the same months 2019. Residential Apr+May starts are down 27% compared to the avg in Q1 2020, but that’s down only 3% compared to Apr+May 2019.

Nonbuilding Infrastructure starts in Apr+May are down only 4% from Q1 average, but Q1 is already 15% lower than last year.

What impact does that have on the year? if Nonres Bldgs starts are down 34% for 2 months, that reduces starts by 6% (34 x 2/12) for the year (from the prior trend). if Residential starts are down 27% for 2 months, that reduces starts 4.5% (27 x 2/12) for the year. Most of the impact in nonresidential occurs from 12 to 24 months out. Most of the residential impact occurs in the first 12 months.

After the resumption of work that had been halted, which for various reasons cited will take several months, and which is not all expected to return to a full level of pre-pandemic spending, a pull-back in new construction starts will hold spending nearly flat from Q3 2020 through Q2 2021. During that time nonresidential work will reach a post-pandemic peak but residential work will hit a post-pandemic low. Non-building Infrastructure work is not affected nearly as much and still shows spending growth leading into 2022-2023.

Construction Spending Forecast 2020 – Residential -2%, Nonresidential Buildings -4%, Non-building Infrastructure <-1%, Total Construction Spending 2020 -2.3%.

Residential construction spending would drop 11% from $566 billion to $506 billion in 2020 and then drop 18% from $550 billion to $453 billion in 2021. Residential is far more dependent on new starts within the year for spending than on backlog.

Nonresidential Buildings spending drops 8% in 2020 from $469 billion to $434 billion and then drops 2% from $475 billion to $468 billion in 2021.

Non-building Infrastructure spending drops 5% in 2020 from $348 billion to $330 billion and then drops <1% from $378 billion to $376 billion in 2021.

By 2022, nonresidential buildings and infrastructure are back within 1% to 2% of baseline pre-pandemic spending. However, residential spending is set back $100 billion, back to the level of 2016.

About 300,000 of the jobs lost do not return. While about 75% of the initial jobs lost have returned by the end of 2020, we then slowly lose jobs for the next two years.

Spend Recession 2020 Summary 6-2-20

Total all spending would drop from the current 2020 forecast of $1.380 trillion to $1.270 trillion. In 2021 and 2022, instead of baseline spending of $1.400 trillion, spending would drop to near $1.300 trillion, back to the level of 2018. The losses in the Great Recession, a total drop of almost $400 billion, set construction spending growth back 12 years.

The difference with shutdown vs a reduction in new starts is that work shut down is delayed. It will reduce total spending in that month in 2020 but will simply shift all remaining months and the end of the projects, which could occur in 2020, 2021 or later. If 50% of all U.S. construction shut down for two months, it would delay $100 billion worth of work, most of it from 2020 into 2021.

7-3-20  updated spending data    on 7-1 Census released spending data for May and revised all monthly data back two years. 2018 and 2019 spending was revised up by 2% and 4%. But more important, the data for Mar-Apr-May 2020 shows that shut down delays were far less than anticipated. More than 90% of all work continued unabated through April and may. The result is fewer reductions in spending in 2020 and less delayed work pushed out into 2021. This shifts the balance of work to now show slight growth in 2020 and only a minor increase in 2021. SEE PANDEMIC #9

 Inflation

When we see spending increasing at less than the rate of inflation, the real work volume is declining. With typical construction inflation between 3% and 5% annually, a spending drop of -2.8% in 2020 may reflect a work volume decline of 6% to 8%. Spending growth of 2% when inflation is 3% is really a decline in volume of work by 1%. The extent of volume declines would impact the jobs situation.

Historically jobs declines of the same magnitude do not follow immediately after volume of work declines, therefore after the initial delayed job losses return to work, we would not expect to see much reduction in workforce in 2020.

What this will do to the construction inflation rate is hard to predict. Typically, when work volume decreases, the bidding environment gets more competitive and prices go down. However, if materials shortages develop, that would cause prices to increase.

There have been reports that scrap steel shortages may result in a steel cost increase and numerous imported products are not available or in short supply. Some firms that manufacture goods used in construction were closed temporarily, so their production was disrupted.

Steel Statistics and Steel Cost Increase Affect on Construction?   2/3rds of all steel manufactured in the U.S. is EAF steel made from scrap steel. Almost 100% of steel used in construction is EAF steel. The Pandemic is causing scrap steel shortages.

U.S. Steel production through May is down 13% compared to the same period 2019. Steel imports are down 20%. The U.S. imports about 30% of all the steel it uses. 40% of all steel used in the U.S. is used for construction. So through May, total steel available in the U.S. is 13% + (20% x 30%) = 19% less than 2019.

Add to these issues the fact that many projects under construction may have been halted for a period of time and many more may have experienced disruption. The delays may add several weeks to perhaps a month or two to the overall schedule and management cost goes up. I think in this case the materials availability issues and schedule delays will outweigh any decline in work available for bid.

Only twice in 50 years have we experienced construction DEflation, 2009 and 2010. That was at a time when business volume was down 33% and jobs were down 30%. I expect inflation to range between 4% and 5% for 2020 and 2021, lower for residential work.

You can visit Ed Zarenski’s website,

Construction Analytics – Economics Behind the Headlines

at https://edzarenski.com/

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