5-10-21

Economists should be talking about this. While residential starts and spending are at all-time highs, nonresidential buildings starts have been down for months and spending is still declining.

Since Apr 2020 and now through March 2021, Nonresidential Bldgs construction starts, for 12 months, have averaged down 25%+ compared to Q1 2020. Recent Q1 2021 is still down 22% from Q1 2020.

A full year of nonres bldgs starts generates over $400 billion in spending. With starts down 25% for the past 12 months, that’s a loss of over $100 billion in spending that would have occurred over the next 1 to 3 years.

Spending follows as starts move, only later, so spending will fall.

Actual nonresidential buildings construction spending has been down 10 of the last 12 months. Now in Mar 2021 it is at its low point, 9% lower than Q1 2020. The forecast for the remainder of 2021 is down near 1%/month.

A simple model built to show when starts have maximum impact on spending indicates by Dec 2020 Nonres Bldgs construction spending put-in-place would be 10% lower than Q1 2020. Spending was actually 9% below Q1 2020. So the model seems to be on track.

This table sets Feb 2020 starts to a baseline of 10.0. All other starts afterwards are entered at the percentage of actual $ starts that month compared to Feb 2020, so 8.30 in March of 2021 represents starts for Mar 2021 were 83% of Feb 2020. A lost start is negative spending. So, instead of thinking of the peak month of spending, that becomes the month of greatest loss. Those months near the middle of the schedule, are highlighted here.

Dodge is forecasting new construction starts for nonres bldgs will increase ~4% in 2021 and ~10% in 2022. That means starts in 2021 will still be 20% lower than Q1 2020 and starts in 2022 will still be 12% lower. This has major implications.

Even at 10%/yr growth in new starts in 2022, 2023 and 2024, Nonres Bldgs Starts would not return to pre-pandemic level until mid 2024. If starts remain lower than Feb 2020 through 2023, then spending will remain lower than Feb 2020 through 2024.

That model, that’s on track so far, shows maximum impact from reduced 2020 starts will occur in Q2-Q3 2021. But what about 2021 starts? Negative impact continues longer than the # of months starts remain lower than Q1 2020. We now have 12 months of starts still averaging 22% below Q1 2020, so even when we begin to improve, we are measuring from a new base 22% down. For each lower month the greatest negative impact in spending is 10-12 months later. That loss of spending is shown in the following chart for Nonres Bldgs Spending.

By the end of 2021, Nonres Bldgs construction spending put-in-place is forecast to be almost 20% lower than Q1 2020. If the Dodge forecast of 4% growth in starts for 2021 is correct, then, even though 2021 had growth, it’s off the bottom, and 21 months of starts will have averaged down 22% from Q1 2020.

Nonresidential Bldgs construction spending follows as starts go. If starts are down, future spending will be down.

Nonresidential Buildings spending $ put-in-place will not return to pre-pandemic levels before 2024 or 2025.