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Construction Jobs Outlook 10-11-21

The most recent BLS jobs report was released Oct 8, 2021. I expected construction jobs to decline. For the last 4 months, volume of work has been flat at 2% below the 1st quarter. My forecast indicated no support for jobs growth, but jobs increased.

Construction added 22,000 jobs in September. Jobs have increased only 4 out of 9 months this year. Since a large increase of 93,000 in March, construction has gained only 6,000 jobs. For all of 2021, jobs are up by 47,000. But after a brief increase in the 1st quarter 2021, volume of work is down, now down 2% since Q1 2021, only 1% above the lowest point since the onset of the pandemic and 6% below the pre-pandemic level.

In March and April of 2020 we lost 1.1 million jobs. But every month in 2020 after that we gained back jobs, all of that driven by large gains in residential work. There was no recovery in any nonresidential work in 2020. In fact, all nonresidential work continued to decline throughout the year. How much support did we get for jobs growth?

Inflation Does Not Support Jobs

We cannot overlook the affect of inflation. As of 10-14-21, nonres bldgs inflation for 2021 is estimated at 4.6% and residential inflation is estimated at 12.9%. 

Inflation adds to total spending but adds nothing to total work volume. Construction spending minus inflation (Volume) is what supports jobs. Spending is always reported in Current $, the value of the dollar at that time. Spending minus inflation is Constant $. Constant $ = Volume. Most of the increase in residential construction spending in these past two years is INFLATION. Nonresidential spending and volume are both down. There is no meaningful increase in total construction volume to support jobs growth.

Spending versus Volume through August 2021 since February 2020:

Residential spending is up +32%. After adjusting for inflation the real change in volume is up only +14%. Most of the 14% increase in volume occurred in 2020. Since Dec 2020, residential volume is up only 3.5%.

Nonresidential Buildings spending is down -17%. After adjusting for inflation, the real change in volume is down -22% (down 17% in 2020 and 5% ytd in 2021).

Nonbuilding Infrastructure spending is down -12%. After inflation, the real change in volume is down -19% (down 13.5% in 2020 and 5.5% ytd in 2021).

Residential jobs are up only 3%, but volume is up 14%. This is where the greatest need is currently.

Nonres Bldgs jobs are down 6.5%. Volume is down 22%. There is a considerable excess in jobs.

Nonbldg Infra jobs are down 5.5%. Volume is down 19%. There is a considerable excess in jobs.

Total ALL JOBS are down only 2.6%. Total Volume is down 6%. This means productivity is down.

Jobs Imbalances

The need identified in residential, and likewise the excess identified in nonresidential are not as extreme as both seem. There are a large number of jobs classified as nonresidential that actually perform residential work. Any large firm, and all it’s employees, if primary work is on nonresidential buildings, is classified nonresidential for the purpose of the jobs count. Workers are always classified by the primary classification of the firm they work for, not by the type of building they work on. However, the buildings they work on are always classified as to building type. This often occurs in large primarily nonresidential trades such as concrete, structural steel and HVAC, when working on multifamily high-rise buildings. These crossover jobs are not separable from the major classification. Therefore, most often, nonresidential jobs are overstated by workers involved in residential work and residential jobs are understated because some work is performed by firms whose primary classification in nonresidential.

(A separate issue arises from the fact that residential construction employs the largest percentage of immigrant workers, about 40% of the residential workforce, predominantly in southern states. Pew Research provided a study documenting that about 14% of all construction is performed by immigrant workers and about half of all immigrant workers are unauthorized. It is fair to suggest some portion of these residential workers are not being captured in the BLS Jobs survey, contributing to the above noted imbalances in residential jobs versus volume of work. For more information, use the search function in this blog for “Pew Research”).

Hours Worked

In the September BLS report, hours worked per week jumped to 40.0 hours form 38.8 in August. That’s an increase of 3%, an equivalent to adding 225,000 jobs. The recent increase in hours worked could also be equivalent to 40% of the residential workforce working a six-day week versus five days.

Comparisons of hours worked show a little deeper look into the jobs situation. Compared to the average monthly hours worked in the pre-pandemic 12 month period Mar 2019 to Feb 2020, which was a 13-year high: April 2020 was down 16%; Apr-May 2020 average was down 12%; Mar thru Dec 2020 average monthly hours worked was down 5.2%; 2021 year-to-date average monthly hours worked is down only 1.4%.

Now in September 2021 average monthly hours worked is within 0.5% of the peak in Feb 2020, now 1% higher than the 13-year high average in 2019. Keep in mind, current construction volume is still down 6% from Feb 2020.

The increase in total hours worked could have several different explanations: it may be a response to meet current residential demand or to rush to completion jobs that were delayed due to the pandemic; Contractors may add hours if they can’t find enough workers with the needed skills; Contractors may be adopting an approach to meet current work demands by increasing hours rather than adding jobs. Using that last approach would allow contractors to reduce hours, rather than reduce jobs, if future volume of work were to decline. There does not seem to be any increase on the horizon in nonresidential demand. Nonresidential volume has been decreasing 1% to 1.5% per month in 16 of the last 18 months. All sectors are forecast to experience volume declines for the next 6 to 12 months.

Productivity

Whenever there is insufficient growth in the volume of work to support growth in jobs or total hours worked, productivity is declining. The following plots shows volume of work (spending adjusted for inflation) plotted against jobs adjusted for hours worked. From 2011 through Jan 2018, although there are bumps in the plot, the two moved pretty closely in tandem. A big volume decline in 2018 did not result in a similar jobs decline but volume came back very close to jobs by Jan 2020. Contractors may not respond to an immediate drop in volume by cutting jobs if they anticipate a pickup in volume on the horizon. Since Feb 2020, jobs have recovered to growth, but volume has fallen and is still not in recovery mode. The next 12 to 18 months show volume struggles to recover. Jobs will be affected but contractors may not respond in like fashion.

Spending Forecast / Volume Forecast / Jobs Forecast

For the full spending forecast see Construction Spending Update 10-1-21

Construction spending is on track to increase 5.8% in 2021 over 2020. But after taking out inflation, spending minus inflation, or volume, in 2021 will be down 2.5%. Total spending increases $87 billion over 2020, but after inflation volume will actually be down $32 billion. Residential spending increases $130 billion (+20%), but after 13% inflation residential volume increases only $49 billion. Nonresidential Buildings spending decreases $34 billion but after adjusting for 4.5%+ inflation real nonresidential buildings volume falls $52 billion. Non-building Infrastructure spending decreases only $9 billion but after adjusting for 7%+ inflation real non-building volume falls $30 billion.

All sectors are forecast to decline over the next 6 to 12 months. Residential has already captured large gains this year. Forecast declines are due to moderate ups and downs in when and how strong new starts were posted. Nonresidential construction volume growth is falling due to a huge amount of nonresidential buildings starts (-22%) and to a lesser extent non-building infrastructure starts (-15%) that disappeared from April 2020 through April 2021. The affect of those lost starts, which would have had peak spending from mid-2021 to mid 2022, is such that the volume of work will continue to decline throughout 2021 and well into 2022.

Since Feb 2020, total construction volume has recovered to a point that is down 6%, but jobs have increased back to a level that is down only 2.6%. Jobs are increasing at a rate that is closer to the growth in construction spending, which includes inflation and is substantially greater than the rate of growth of construction volume.

Although jobs should follow growth or declines in volume, as the plot above from 2011 through 2017 shows, things don’t always go as the forecast predicts. If jobs growth follows more closely to volume growth, which it should, this time next year construction could be down another 200,000 jobs.

Construction Spending Update 10-1-21

Construction Spending Actual through August 2021

Total Construction Spending compared to same period 2020 is now up 7.0% year-to-date (ytd). Residential spending continues to perform better than forecast and is now up 25.8% ytd. Nonresidential Buildings is now down -8.7% and Nonbuilding Infrastructure is down -3.8%, both improved in the last two months.

The single largest impact to the change in this forecast from last month is Residential. Spending continues to perform better than cash flow predicted from starts would indicate. For August, I expected residential spending to drop 1% compared to July, but it increased 0.4%. Also, it increased from an upwardly revised July. In this August spending report, residential spending was revised upwards in both June and July by 1% each month. That pushes the total up for my forecast for the year.

Highway also posted large upward revisions, +3% to June and +2% to July, but these revisions combined represent only $515 million. The Residential revisions alone total $2.2 billion, more than double the revisions to all other markets combined, including Highway.

Year-to-date through August, while residential is up 25.8%, all but one single nonresidential market is down. 15 of 16 nonresidential markets are down -8.7% for nonresidential buildings and -3.8% for nonbuilding infrastructure. Only Sewage/Waste Water is up 3.6% ytd., but that’s only 2% of all nonresidential construction. It’s half of the $ in the table item Sewer / Water / Conservation.

By year end I expect residential spending to finish up 20%, nonresidential buildings to finish down 7% and nonbuilding to finish down 3%.

Construction starts are slowly leading the way to recovery, with remarkable strength in residential, but construction spending, which is dependent mostly on starts from previous years (nonres bldgs starts in 2020 down -20%), will remain depressed for nonresidential construction well into 2022. New nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.

Residential starts gained only +3% in 2019, increased +6% in 2020 and are forecast up +9% in 2021 and +7% in 2022. Residential spending surprisingly increased +15% in 2020 to $638 billion and is forecast up +20% to $767 billion in 2021, but only +4% in 2022. Both residential starts and spending are at all-time highs. That is driving total spending to new highs.

Nonresidential Bldgs starts fell -4% in 2019, -21% in 2020 and are now forecast up +8% in both 2021 and 2022. New starts for 2021 are still -20% below the peak in 2018. Most of the fall off in starts in 2020 would have produced peak spending in 2021. Nonresidential Bldgs spending fell only -2% in 2020 but is expected to fall -7% in 2021 and -2% in 2022.

Comparing combined 2020 and 2021 starts, the only markets to show positive growth over 2019 are Commercial/Retail, +5% (due to warehouses) and Healthcare, +7% (due to hospitals). The average growth in starts of all other nonresidential buildings markets for 2020 x 2021 combined is still 35% lower than 2019. Public Bldgs increased in 2020 but fell back in 2021.

My forecast, ever since August 2020, has been showing a decline in nonresidential buildings spending on a long downward trend through 2021 and into 2022. That forecast was then and still is now correct. The nonresidential building spending plot below shows that spending has declined in 16 of the last 18 months. Spending hits a bottom in 2022.

Nonbuilding starts were up 3% in 2019, fell -15% in 2020 and forecast indicates +6% growth in both 2021 and 2022. Nonbuilding starts are 10% lower than 2019. Nonbuilding spending gained only +1% in 2020, but the forecast is down -3% for 2021 and is expected to drop -5% in 2022. Like nonresidential buildings, the large drop in 2020 starts would have had peak spending well out at the midpoints of those projects, many of which would have been in 2021 or 2022.

For more on construction starts SEE New Construction Starts as of Aug’21

Behind the Headlines

An anomaly in the data is the Manufacturing spending data versus expectations. In 2020, Dodge posted a 57% drop in new starts for Manufacturing. Since many of these type projects have long time spans to completion and peak spending is near the midpoint of a project schedule, most of the drop in spending from that huge loss of new starts would normally occur in years following the starts. I predicted the drop would occur in 2021 and 2022, expecting it would produce a 20% decline in spending in 2021. But year-to-date Manufacturing spending is down only 1%. It did produce an 11% decline in 2020 spending, but that is not the extent of the total loss. This puts into question either my forecast of when the drop would occur or percent decline in starts reported. You can’t have a drop of 57% in starts activity and get only a 1% decline in spending the following year. Based on spending in 2020 and 2021 ytd, my forecast model is indicating there may be a variance in 2020 starts data % of market captured.

Part of the difficulty with the manufacturing data arises from the fact that history shows only approximately $20bil/yr to $30bil/yr is captured in the new starts data reported and yet spending has been in the range of $70bil/yr to $80bil/yr. That means only about 25% to 35% of the total market activity is being captured in the starts data. But from this we need to predict 100% of the future spending. This % of total market captured in the starts data fluctuates up and down. So the difficulty is predicting actually how much of the market is captured, and that varies. The question is this: How much of the change in the starts data reflects an expected change in future market activity versus how much of the change in starts reported represents an unidentified variance in % of market captured. A variance in % of market captured in the data may not indicate a change in future market activity (spending). Since project schedules can be anywhere from less than 20 months to more than 4 years, any given year of actual spending could have some portion of that spending generated by project starts from the previous 4 or more years. It takes several years of actual spending to identify the differences in these two parts of the question. Only future data will help resolve this question.

Another set of data to question is residential starts. Currently, for 8 months through August, starts are up 18% over 2020. Starts began to climb in July 2020 and posted a very strong final 5 months of 2020. This year average starts to date is at all-time highs. But Dodge, in the 3Q21 Outlook, forecast 2021 residential starts up about 9%. In order for that to happen, for the remaining 4 months residential starts would need to drop 20% from the current average rate, 10% below the most recent month. That seems a bit unrealistic. That would set the monthly rate back to a point lower than anything experienced since the pandemic lows in Apr-May-Jun last year. It seems to me residential starts will finish quite a bit higher than that. I’m carrying 12% growth for the year in my forecast.

Recovery

Recovery in both nonresidential buildings and nonbuilding backlog begins to build in a few markets in 2021. Even though starts growth in % is greater than spending growth in %, overall spending in nonresidential buildings and non-buildings in dollars, not %, is exceeding new starts. Therefore both will begin 2022 with lower backlog than 2021. Total all nonresidential 2021 starting backlog dropped -9% from 2020. Starting backlog to begin 2022 will be down another -5%. Based on forecast growth in new starts, backlog increases 4% for 2023.

Aside from residential, recovery to the levels of revenue (spending) recorded in Q1 2020 or earlier won’t show up before 2024.

The following table shows ytd through August $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.

Impact of Pandemic Slowdown

The impact of reduced starts in 2020 is showing up in the 2021 year-to-date results. Total Nonresidential Buildings starts were down -20% from April 2020 through March 2021 compared to pre-pandemic high in Q1 2020. Nonres Bldgs starts improved from Apr-Jul 2021 and for those 4 months managed to equal the pre-pandemic high. However, the 2021 average year-to-date through August is still 14% lower than the pre-pandemic high. Nonbuilding Infrastructure starts returned to pre-pandemic high several months ago, but have since slowed.

Due to the large drop in new nonresidential buildings starts from Apr 2020, that continued at a level down -20% until March 2021, some markets will be affected by a downward trend in spending for two to three years.

The greatest downward impact from a -20%, year-long loss of starts in nonresidential spending will be felt throughout 2021 and into 2022.

Construction Analytics has been describing this situation and provided plots showing what would occur in nonresidential buildings spending since August 2020. A review of the historical forecasts will show those forecasts mostly correct. The plot below, Construction Spending by Sector, shows the current forecast and actual data through August 2021. The explanation and the plotted data have been similar since last year.

Over the next 9 months, every sector will post more down months (in spending) than up months, although the declines will be most noticeable in nonresidential buildings. The plot line for Nonresidential Buildings may not look like much is going on, but in a minute you will see the magnitude of that downward sloping line.

Overall performance forecast by sector has changed very little since May of this year.

While most markets recover to positive new starts growth in 2021, spending growth lags, showing the downward trend in 2021 as a result of lost starts in 2020.

This next plot changes the scale so the nonresidential buildings spending data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps to visualize the dramatic decline in nonresidential buildings spending. From Apr through Dec 2020, nonresidential buildings spending fell at a rate of 1.75%/month. Jan 2021 and Mar 2021 are the only up months since Feb 2020. From Apr 2021 through Aug 2021, the rate of spending fell at 1.25%/month. Currently, the annual rate of spending is 17% below the pre-pandemic peak. By midyear 2022, the annual rate of spending will be -20% lower than the pre-pandemic peak. It could take two to three years after that to recover to the pre-pandemic level of spending.

A typical batch of new nonresidential construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the calendar year gets spent in the year started, 50% in the next year and 30% in years following. Total nonresidential buildings starts in 2020 were down -20% ($90 bil in spending) and nonbuilding starts were down -10% ($35bil). Under normal conditions, we know how much of that $125 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential buildings starts, depressed for 13 months, posted starts indicating recovery beginning in April this year.

Infrastructure

Let’s assume INFRASTRUCTURE BILL new starts begin in Jan 2022, and let’s also assume $100 billion worth of work gets awarded in 2022. That’s $100 billion of starts in 2022. Only a maximum of 20% (the 1st year portion of the cash flow 20/50/30) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in 2022, only 20% of that or only $20 billion would get spent in 2022. So, there will be very little impact on total 2022 construction spending as a result.

That changes dramatically for the second year. For 2023 we get 50% of the spending from 2021 starts and 20% from 2022 starts, so $70 billion in spending, growth of $50 billion.. That’s already more than the industry can handle.

Total Public Infrastructure and Public Institutional, the total public work pool for which infrastructure investment is a potential, represents a total LESS THAN $350 BILLION annually, less than 25% of all annual construction. Average growth is $12 billion/year. Looking back to 1993, this subset has never exceeded $35 billion in growth in a single year. If we award (start) $100 billion in new work each year for the next 5 years, we would cap out the growth rate for spending in this subset of work, with no room for any additional new starts from any other sources. The work would be completed after 8 years.

This image has an empty alt attribute; its file name is spend-public-infra-institu-8-2-21.jpg

Forecasting Reliability

All the forecast spending in the data above is developed from monthly cash flow of new starts. This plot shows the history of the cash flow forecast (the light colored line) to the actual spending growth (the darker line). The cash flow forecast has been predicting the drop in nonres bldgs spending since last year. Although actual spending is somewhat more uneven, the forecast accurately predicts the direction spending is headed.

2021 Midyear Forecasts

Here’s how my (Construction Analytics) midyear spending forecast compared to various firms’ data published in the AIA Midyear Forecasts and how we all compare to the current August year-to-date spending. The year-to-date (ytd) performance provides insight into expected final 2021 performance. For example, the year-to-date Educational spending is -10.6% with 8 months of spending recorded. You can see in the table, one firm had forecast that educational will finish up 3.5% for the year. (Not shown here, but the AIA Consensus for Educ. is -2.1%). With 8 months of actual ytd data and only 4 months remaining (estimate to complete or etc), we can tell what would be needed in the remaining 4 months to get to any particular estimate.

To finish the year up +3.5%, for the next 4 months Educational spending would need to average +32% year-over-year (yoy) growth per month over last year to swing from currently down -10.6% to up +3.5% . Well, Educational spending is down 16% from the 2020 high, has been averaging down 11% yoy for the last 7 months, has fallen 7 of the last 8 months and is down mo/mo an average of 1.5%/mo for the last 6 months. With this performance over the past year, the probability is not likely at all that Educational construction spending is going to flip from a negative yoy -10.6% to an avg of +32%/mo for the remaining 4 months to finish the year up +3.5%. (To meet the AIA Consensus for Educ., the final 4 months would need to swing to +15%/mo). While there are some good estimates, there are many more examples like this in the AIA forecasts.

In 2020, Construction Analytics produced more accurate midyear forecasts than any firm reporting in the AIA Midyear Outlook. Here’s the 2021 midyear forecasts compared to the current August year-to-date. As for the 2022 Outlook, every forecast in the AIA Midyear report predicts 2022 nonresidential buildings spending will increase. See my spending forecast table above in this report where I’ve projected almost every nonresidential market down in 2022.

JOBS DATA has been updated with the jobs data release on 10-8-21

SEE Construction Jobs Outlook 10-11-21

New Construction Starts as of Aug’21

Construction Starts for August reported by Dodge.

Residential construction starts fell 9% in August, but that is after the previous 8 months of Residential starts were each higher than any other months ever recorded. The average of new residential starts for 2021 is 18% higher than the pre-pandemic high in Feb 2020 and 24% higher than the average for 2020..

The 4 highest months on record for residential construction starts are Mar (peak), Apr, May and Jun 2021, indicating spending should remain high. My current forecast has 2021 residential construction spending up 19% for the year.

Compare new construction starts for residential to new starts for nonresidential buildings. The current situation is like night and day.

Nonresidential Bldgs construction starts fell 13% in August. Compared to the pre-pandemic high (Feb 2020), May (+8%) and Jun (+1%) are the only two months higher. July was 2% lower, Aug 14% lower. The average for all 2020 finished 20% lower than the pre-pandemic high in Feb 2020. New 2021 starts avg is 9% below Feb 2020.

If monthly starts can recover to the pre-pandemic high of Feb 2020 from here on forward, then the low point of spending will be in the 3rd qtr 2021. Monthly spending still would not recover to pre-pandemic level until Jan 2023. However, we are currently not at a consistent recovery to pre-pandemic levels of new starts and the longer we remain below recovery level both dates would move out.

New starts in almost every Nonresidential Bldgs market are up for 2021, but some of that 2021 growth is off of such a low base in 2020, the combined current level is still quite low, far below the pre-pandemic highs. Compared to pre-pandemic starts, Mnfg is down -30%, Office -13%, Lodging -57%, Amuse/Rec -30%. Only Healthcare +5% and Public Bldgs +8% are up. The good news is total nonresidential buildings starts for the 4 months Apr’21 thru July’21 is now 52% higher than Apr’20 thru Jul’20.

Manufacturing was by far the worst performer in 2020, new starts in 2020 down 55%. Although Lodging gets a lot of attention because starts dropped 50% and spending reacted immediately by dropping 13% in 2020 and currently -30% for 2021, but that’s only for a total decline of $13 billion over two years. Manufacturing spending, for projects which have longer durations, fell $9 billion in 2020 and could drop another $12 billion over the next two years.

Manufacturing construction spending peaked between 2015 (all-time high of $83bil) and 2019 ($81bil). We won’t see spending like that again before 2025 unless new construction starts double and that is not in the forecast.

New manufacturing starts for 2021 are up more than 35% for 2021, but that 35% increase is from 2020’s 55% decline, an 8yr low, so 2021 is still lower than the previous 3 years. Manufacturing markets are improving, but off of an 8yr low, so it will take some time to get back to 2015-2018 values.

Warehouses is the biggest up story of all. Warehouses are included in the Commercial/Retail sector and represent now about 60% of the Comm/Rtl total $. In 2017-2019 that was only 40%-45%. Warehouse starts were up +25% in 2019, +14% in 2020 and are forecast +24% for 2021. Starts are also forecast up for 2022.

Some data on the Office sector: Starts in 2020 fell 20% from the 2019 high. Total office starts in 2021 are up 4%, but most of that is Data Centers ( up15%). Office space starts are up less than 2%. In Q1 2021, 46% of all office starts was renovation. Office Vacancy rates reached as high as 16% to 17% in Q1 and Q2 2021, but are now back down to 12%. Pre-pandemic vacancy rate was 9%.

Included in the Office sector, Data Centers is about 15%-20% of the Office total. Starts fell 22% in 2019 and 23% in 2020. Starts are up 17% in 2021, but still 30% below the 2018 high.

Amusement/Rec spending in 2021 could finish down 15%, with new starts up only 3% to 4%, but that’s up from 2020 which was down 35%. Educational spending will be down 8% to 10% and new starts are down to flat.

Nonbuilding Infrastructure construction starts are up 1% in August. Compared to the pre-pandemic high (March 2020), August is up 2%. However, the 2020 average finished higher than the pre-pandemic level and every month since last August has been higher than March 2020. New 2021 Nonbuilding starts avg is 10% higher than March 2020.

The only non-building markets to show growth in 2020 starts were Highway/Street (+9%) and Sewer (+5%). Power posted the largest losses, down 38%. That represents a loss of $45 billion in construction that would have been spread over the next 3 to 5 years. Almost all nonbuilding markets will post gains in 2021. Non-building Infrastructure markets are usually not affected as much in a downturn because public funds are committed to these projects. Power shows most of the losses because it is 95% private work.

Midyear 2021 Economic Forecast Presentation

Construction Spending 2021 Update 8-2-21

Construction Spending Actual through June 2021

Total Construction Spending is up 5.4% year-to-date (ytd) from the same six month period 2020. Residential is up 24.5%, Nonresidential Buildings is down -10.1% and Nonbuilding Infrastructure is down -5.4%.

The single largest impact to the change in this forecast from last month is Highway and Street. Highway spending in June fell 5%, while my forecast was predicting a gain of +3%. I then lowered my forecast for the rest of this year.

Year-to-date through June, while residential is up 24.5%+, all but one single nonresidential market is down. 15 of 16 nonresidential markets, 98% of combined total nonresidential market value, are down a total of -8%. Only Sewage/Waste Water is up 2.5% ytd. That’s half of the $ in the table item Sewer / Water / Conservation. For the remainder of the year, the rate of nonresidential decline will slow to -4%.

Construction starts are leading the way to recovery, but construction spending, which is dependent mostly on starts from previous years (nonres bldgs 2020 down -20%), will remain depressed for nonresidential construction well into 2022. New nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.

It is remarkable that both total new construction starts and total construction spending are UP for 2021, but that needs further explanation.

Residential starts increased +9% in 2020 and forecast up +19% in 2021. Residential spending increased +15% in 2020 and is forecast up +18% in 2021 and up +7% in 2022. Both residential starts and spending are at all-time highs. That is what is driving the totals to new highs.

Nonresidential Bldgs starts fell -4% in 2019, -21% in 2020 and are forecast up only +2.5% in 2021. 2021 starts are still -22% below the peak in 2018. Nonresidential Bldgs spending fell only -2% in 2020 but is expected to fall -8% in 2021 and -5% in 2022.

Nonbuilding starts were flat in 2019, fell -15% in 2020 and forecast indicates +4% growth in 2021. Nonbuilding starts are 11% lower than 2019. Nonbuilding spending gained only +1% in 2020, but forecast fell -3% in 2021 and is expected to drop -5% in 2022.

The Total Construction Spending plot doesn’t show enough detail. As described above, more detail is needed to understand what is going on. The sector plot below shows residential up and nonresidential down..

Recovery in both nonresidential buildings and nonbuilding backlog begins to build in a few markets in 2021. But overall, spending in nonresidential buildings and nonbuilding is exceeding new starts, therefore both will begin 2022 with lower backlog than 2021. Total all nonresidential 2021 starting backlog dropped -13% from 2020. Starting backlog at beginning of 2022 will be down another -8%. Backlog increases for 2023.

Aside from residential, recovery to the levels of revenue (spending) recorded in Q1 2020 or earlier won’t show up before 2024.

The following table shows ytd through June $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.

Impact of Pandemic Slowdown

The impact of reduced starts in 2020 is showing up in the 2021 year-to-date results. Total Nonresidential Buildings starts were down -20% in 2020. Nonres Bldgs starts for the 1st 6 months of 2021 are level with 2020, still down -8% from the pre-pandemic high in Q1 2020. There is some good news! Nonres Bldgs starts in Q2 2021 are now back above the pre-pandemic high, indicating recovery underway. Nonbuilding Infrastructure starts were down -10% in 2020, but returned to pre-pandemic high several months ago.

Due to the large drop in new starts from Apr 2020, that continued at a level down -20% to March 2021, some nonresidential markets will be affected by a downward trend in spending for two to three years.

The greatest downward impact from a -20%, year-long loss of starts on nonresidential spending will be felt throughout 2021 and into 2022.

Over the next 9 months, every sector will post more down months (in spending) than up months, although the declines will be most noticeable in nonresidential buildings.

Overall performance by sector has changed very little since May.

While most markets recover to positive new starts growth in 2021, spending growth lags, showing the downward trend in 2021 as a result of lost starts in 2020.

This next plot changes the scale of the spending plot so the nonresidential buildings data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps immensely to visualize the decline in nonresidential buildings spending. By midyear 2022, the annual rate of spending will be -20% lower than the pre-pandemic peak. It could take two to three years after that to recover to the pre-pandemic level of spending.

A typical batch of new construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the year gets spent in the year started (or over the 1st 12 months), 50% in the next year ( next 12 mo) and 30% in years following. Total nonresidential buildings starts in 2020 were down -20% ($90 bil in spending) and nonbuilding was down -10% ($35bil). Under normal conditions, we know how much of that $125 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential buildings starts, depressed for 13 months, posted strong starts indicating recovery beginning in April this year.

If INFRASTRUCTURE BILL starts don’t begin until the 2nd half of 2021, only 30% (of the 1st year cash flow 20/50/30 that is based on 12mo) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in the 2nd half 2021, only 30% x 20% or only about 6% would get spent in 2021. That’s $6 billion, or less than 1% of annual construction spending. So, there will be very little, if any, impact on 2021 construction spending as a result.

Total Public Infrastructure and Public Institutional, the total public work pool for which infrastructure investment is a potential, represents a total LESS THAN $350 BILLION, only 25% of all construction.

All the forecast spending in the data above is developed from monthly cash flow of new starts. This plot shows what the history looks like when comparing the cash flow forecast to the actual spending growth. Although actual spending is somewhat more uneven, the forecast accurately predicts the direction spending is headed.

JOBS DATA updated 8-6-21

Construction Jobs for July are expected to increase. Jobs are now down 3 consecutive months. Comparing jobs year-over-year in residential is strongly skewed by the rapid declines then rapid growth in 2020. That did not occur in nonresidential. July posted an increase of 11,000 jobs. Year-to-date thru July construction is up by 21,000 jobs. Jobs are down -227K (-3.0%) from Feb 2020 peak. Hours worked are down less than -1%, equivalent to about 50,000 jobs. Expect this downward trend to accelerate into year end.

Construction spending minus inflation (Volume) supports jobs. Most of the increase in residential construction spending this year is INFLATION. Nonresidential spending and volume are both down. There is no meaningful increase in total construction volume to support jobs growth.

Don’t ignore inflation. While residential spending is forecast UP 19% in 2021, 11% of that is inflation. Real volume is up only +8%. Nonres Bldgs volume after inflation is forecast down -12%, Nonbuilding volume down -7%.

If you are still measuring your business growth by change in revenue, you’re including inflation as part of your growth. Inflation is simply more paper dollars exchanging hands, not growth.

Total construction jobs through July measured from peak pre-pandemic (Feb 2020) are down 3%. Volume growth (spending minus inflation) from Feb 2020 to July 2021 is down 6%. Since the onset of the pandemic, we now have 3% more jobs than we have volume of work to support those jobs. The result is a 3% loss in productivity.

Residential change in revenue from Feb 2020 to July 2021 is up +28%. But the real change in volume after inflation is up only +13%. Residential jobs are up only 3%. This is where the greatest need is currently.

Nonresidential Buildings change in revenue from Feb 2020 to July 2021 is down -15%. After inflation, the real change in volume is down -19%. Nonres Bldgs jobs are down only -7%. This is considerable excess jobs to support the current work.

Nonbuilding Infrastructure change in revenue from Feb 2020 to July 2021 is down -10%. After inflation, the real change in volume is down -17%. Nonres Bldgs jobs are down only -6%. This is considerable excess jobs to support the current work.

The need identified in residential, and likewise the excess identified in nonresidential are not as extreme as both seem. There are a large number of jobs classified as nonresidential that actually perform residential work. Any large firm, and all it’s employees, regardless of the job they perform, if they primarily work on nonresidential buildings, is classified nonresidential for the purpose of the jobs count. However, the buildings they work on are always classified as to building type. This often occurs in several large primarily nonresidential trades such as concrete, structural steel and HVAC, when working on multifamily high-rise buildings. These crossover jobs are not separable from the major classification.

In constant $ (spending adjusted for inflation), even though residential constant $ volume is up 13% from Q1 2020, current total $ volume of all types of work, residential and nonresidential, is 6% lower than the peak average in Q1 2020. Total all $ volume will fall another 5% by year end 2021.

Construction spending is on track to increase 4.7% in 2021 over 2020. But after taking out inflation, spending minus inflation in 2021 will be DOWN 2%. Residential spending increases $115 billion (+18%), but after 11% inflation residential volume increases only $50 billion. All nonresidential spending decreases $49 billion but after adjusting for 4%+ inflation real nonresidential volume is down $86 billion. Total construction volume (spending minus inflation) is expected to decline 5% from May to Dec. Construction Jobs are expected to follow suit.

Construction volume growth is falling due to huge volume of nonresidential starts (-22%) that disappeared in 2020. The affect of those lost starts, which would have had peak spending in mid-2021, is such that the volume of work is declining throughout 2021.

Of concern is that since Feb 2020, total construction volume has recovered to a point that is down 7%, but jobs have increased back to a level that is down only 3%. Jobs are increasing at a rate that is closer to the growth in construction spending, which is substantially greater than the rate of growth of construction volume.

Jobs are increasing faster than the volume of work (which supports jobs). What are the implications of this to the construction industry? The industry as a whole now expends 4% more labor (jobs) to put-in-place every $1 billion worth of work than it did in Feb 2020. That impacts job total labor cost. That is lost productivity and impacts inflation.

Although residential jobs are currently increasing, nonresidential jobs will continue to fall, dropping another 4% over the next 12 months. If jobs growth follows more closely to volume growth, which it should, this time next year construction could be down another 200,000 jobs.

2021 Midyear Forecasts

Here’s how the current year-to-date spending performance, as of June data, compares to various firms’ Midyear Forecasts. The ytd provides insight into expected final 2021 performance. For example, the year-to-date Educational spending is -10.8% with 6 months of spending recorded. One firm has forecast educational will finish up 3.5% for the year. With only 6 months remaining (estimate to complete or etc), here’s how the remaining 6 months would need to perform for that to happen.

[(forecast% x 12) – (YTD% x 6)] /6mo etc = [(+3.5% x 12) – (-10.5% x 6)] /6 = [(+42) – (-64)] /6 = 106/6 = +17.6%.

For the next six months Educational spending would need to average +17.6% growth over last year to swing from currently down -10.8% to end the year up +3.5%. Well, Educational spending is down 16% from the 2020 high, has fallen 9 of the last 13 months and is down an average of -1.5%/mo for the last 5 months. With this performance over the past year, the probability is exceedingly low that Educational construction spending is going to flip from a negative monthly rate of spending to an avg of +17%/mo for the next six months to finish the year up +3.5%. There are numerous examples like this in the forecasts.

Speaking Engagement – ASPE

I’ll be presenting “Construction Economic Forecast 2021 – Behind the Headlines” at American Society of Professional Estimators annual summit on Friday Aug 27 in San Antonio (in-person)

https://aspenational.org/mpage/2021AnnualSummit…

there is virtual registration for this event

Inflation – PPI data Jun to Sept Updated 10-14-21

7-15-21 Final demand pricing is still well below materials price increases. However, it’s hard to visualize how more of the cost does not get passed on to consumer. I’m expecting future reports will show final cost inflation increasing.

10-14-21 My current forecast for inflation in 2021 is now 4.5% for nonresidential buildings and 13% for residential. Residential inflation seems to have slowed but nonresidential is headed towards 5%.

Most years, inflation climbs at a steady rate. 2021 could end up being a year in which inflation is drastically different in one or two quarters vs the entire year.

8-13-21 As expected, many Final Demand prices surged in July by 1.5% to 2%.

10-14-21 Final Demand Trades prices up again since July. Some Buildings increased. Wood products have come way down, but almost every other material product has gone up, metals way up.

PPI INPUTS only Sept 2021

PPI Final Demand only Sept 2021

Link to AGC page of producer price monthly reports

AIA Midyear Consensus

7-16-21

The AIA Midyear Consensus solicits the nonresidential buildings construction spending forecast from a number of firms and publishes those results and the Consensus average. The table posted here includes all the AIA forecasts and Construction Analytics 7-2-21 forecast.

https://www.aia.org/articles/6416440-outlook-has-improved-for-construction-spen

Also included in this table is the year-to-date (ytd) actual spending through May. With 5 months of actual data, that ytd result should sway any forecast for any market estimate of year end result. A review of several years of history over all markets shows there are very few instances in the historical data where year end performance swings by more than 10% from ytd at month 4 or 5. Normal variances for about 80% of instances are in the range of 3% to 5%. So with few exceptions, at 5 months into the year, we could estimate year end will be within +/-5% of year-to-date. And yet, there are many instances in these forecasts that are outside that expected range.

The question is, can we determine, how accurate are these forecasts? Some rudimentary checks and balances, and some simple proportional math, provide the answer.

If you forecast a construction spending mrkt to finish 2021 at -30%, but the ytd after 5 months is -5%, the next 7 months would need to average near -50% to get to -30%. With the change in the yoy rate less than -3%/mo, it can’t happen.

If you forecast a construction spending market to finish 2021 at +3.5%, but the ytd after 5 months is -11%, the next 7 months would need to average +14% above Jun-Dec 2020 to get there. That’s a 25%/mo swing from the current rate that would need to hold steady for 7 months.

Likewise, If you forecast a construction spending market to finish 2021 at +11%, but the cum ytd after 5 months is -3%, the next 7 months would need to average +21% above Jun-Dec 2020 to get there. That’s a 24%/mo swing from the current rate for 7 months. Swings like that just don’t happen.

Another market with a glaring example, this time in almost every forecast. Lodging forecasts in the AIA Consensus range from -14% to -20%, with one wild estimate at -43%. Construction Analytics forecast for Lodging is -26%. The year-to-date is -27%. Well, from April to December 2020, spending fell at a rate of 4%/month. In the 1st 5 months of 2021, spending has been down slightly, still hovering near the December low. There are no indications that spending is poised for a rebound. In fact the forecast calls for spending to continue falling through 2021. The current monthly rate of spending averages -25%/mo from 2020. In order to hit any of the forecasts between -14% and -17%, the current rate of spending would need to flip by 15 to 20 percentage points for all of the remaining 7 months of 2021. Spending would need to increase at a rate of 2.5% per month for the next 7 months. This is a good time to remind everyone that Lodging construction starts last year dropped 45%, so the trend is down, not up. Current indications are that spending will decline 9 out of the next 12 months.

The forecasts in this Consensus report have numerous examples like those above. Nonresidential Bldgs actual ytd for the 1st 5 months is -10.5%. Consensus forecast for 2021 is -3.9%. The next 7 months each would need to avg +1% over 2020 to get there. The monthly rate of spending is currently -6% to -10% below 2020 and has fallen 13 of the last 15 months. That’s not going to flip to +1% immediately and stay at that level for 7 months.

The argument cannot be used that monthly data should not be compared to 2020 because of the rapid decline due to shutdowns skewing all the data. That did not occur in nonresidential buildings. Nonres bldgs spending declined 5% in April, but then it averaged a steady -1.5%/mo decline for the remainder of 2020. As of May 2021, spending is right where it was in December, still 16% lower than March 2020. There are no huge down months in 2020 to which 2021 spending would be compared resulting in a large increase to year-to-date percent.

At midyear, the ytd values give some indication of how the year will end. There are a few examples in historical data in which a market did swing by 10% or more from midyear to year-end, but there is less than 10% chance of a market varying by more than 10% and more than an 80% chance markets vary by only 3% to 5%. Rarely does -2% become +8% or +7% become -3%.

9-1-21 updated tabled added Here’s the same Midyear forecasts with year-to-date updated to July spending. Only the year-to-date has been updated in this table. All forecasts are as reported in July.

6 out of 8 construction spending forecasts for nonresidential buildings reported in the AIA Midyear Outlook Jul’21 could now only be realized IF construction spending YOY for the next 5 months turns positive, in some cases it would need to grow to +10% to +12% YOY for the next 5mo. Currently, YOY is -7%. Construction spending YOY has been near -8% to -7% for last 4 months. The next 5 months is forecast to improve, but improves only to -4%, does not turn positive. There are no indications in the forecast that YOY spending will turn positive any time in the next 12 months.

Compare Current Construction Forecasts

Compare Construction Analytics current construction spending forecast to the most recent forecasts by FMI and ConstructConnect.

Construction Analytics (CA) and ConstructConnect (CCon) forecasts include year-to-date spending. FMI report is titled 2021 2nd quarter edition, but also states based on 4th quarter 2020 actuals.

Both FMI and CCon forecasts have not yet been updated to include 2019 and 2020 revisions released on 7-1-21.

Construction Analytics forecast includes 2019 and 2020 revisions and includes May ytd spending.

Spending Total Put-in-place Forecasts for 2021 range from $1,422 billion (FMI) to $1,574 billion (CCon). Construction Analytics (CA) forecast is $1,526 billion. This is quite a wide spread. Here’s a few of the major differences:

Residential CA = $741 bil, FMI = $627 bil, CCon = $728 bil

Educational CA = $99 bil, FMI = $103 bil, CCon = $108 bil

Healthcare CA = $48 bil, FMI = $49 bil, CCon = $53 bil

Power CA = $110 bil, FMI = $120 bil, CCon = $137 bil

Transportation CA = $56 bil, FMI = $54 bil, CCon = $65 bil

https://edzarenski.com/2021/07/01/construction-spending-2021-thru-may/

https://www.fminet.com/news/2021/04/09/fmi-releases-second-quarter-issue-of-2021-north-america-engineering-and-construction-outlook/

https://www.constructconnect.com/blog/quarterly-u.s.-put-in-place-forecast-report-summer-2021

The FMI forecast for residential appears to not yet have been updated to reflect record spending from October through May. I’d expect that will soon be updated. Residential spending year-to-date (ytd) is up 23% and has averaged a seasonally adjusted $740bil for the past 7 months. For the remainder of the year it’s expected to decline about 0.5%/month, but residential spending will still finish 2021 well over $700 billion.

For Power to end up at CCon = $137bil in 2021, considering the ytd through May is already -7%, the remaining 7 months of the year would need to average up 30%. Markets don’t jump that much higher and maintain that level for the next 7 months.

The spread of Spending Put-in-place Forecasts for 2022 ranges over an even wider difference, from $1,355 billion (FMI) to $1,703 billion (CCon). Construction Analytics (CA) forecast for 2022 is $1,533 billion. This is an exceptionally wide spread with some obvious areas of attention.

2022 Residential CA = $779 bil, FMI = $567 bil, CCon = $781 bil

2022 Nonresidential Buildings CA = $421 bil, FMI = $432 bil, CCon = $474 bil

2022 Nonbuilding CA = $333 bil, FMI = $356 bil, CCon = $448 bil

note: Transportation and Communication carried in nonbuilding for like comparison.

At this time of year some firms will present midyear forecasts. My latest report is May ytd data released July 1. With the August 2nd and 6th spending and jobs releases for June we have half a year of data, I’ll base a midyear report on that. I don’t expect any big change since the May data. Not all midyear forecasts will have the same ytd data, so could vary in that respect. So, watch for the midyear forecasts!

Here’ is a link to the results of 8 firms forecasts at Midyear 2020 compared to actual revised final 2020 spending. Also here is the same firms 1st forecast for 2021 compared to actual year-to-date 2021

Measuring Forecasting Methodology & Accuracy

Construction Spending 2021 updated 7-2-21

Construction Spending Actual through May 2021

Total Construction Spending is up 4.6% year-to-date (ytd) from the same five month period 2020. Residential is up 23.4%, Nonresidential Buildings is down -10.5% and Nonbuilding Infrastructure is down -5.8%.

This analysis includes spending revisions to 2019 (up $26bil, +1.9%) and 2020 (up up $37bil, +2,6%).

In the 1st 3 months of 2020, spending had reached an all-time high averaging a SAAR of $1,521 billion.

In the 1st 3 months of 2021, spending again hit a new all-time high averaging a SAAR of $1,544 billion. In May, spending is $1,545 billion.

Year-to-date through May, while residential is up 23%+, 15 of 16 nonresidential markets, 98% of total nonresidential market value, are down a total of -8.6%. For the remainder of the year, the rate of nonresidential decline will slow to -4%.

Construction starts are leading the way to recovery, but construction spending, which is dependent mostly on starts from previous years (2020 down -22%), will remain depressed for nonresidential construction well into 2022. Recovery in backlog begins to build in a few markets in 2021. However, new nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.

Aside from residential, recovery to the levels of revenue (spending) recorded in Q1 2020 won’t show up before 2024.

The following table shows ytd through May $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.

The impact of reduced starts in 2020 is showing up in the 2021 year-to-date results. Total Nonres Bldgs starts were down 22% in 2020. Nonbldg Infrastructure starts were down 13%. Some of these markets will be affected by a downward trend in spending for two to three years.

2020 starts for select markets:

  • Amusement -38%
  • Commercial/Retail -14%
  • Office -20%
  • Lodging -50%
  • Manufacturing -57%
  • Power -38%

The greatest downward impact on spending will be felt in mid-2021. Over the next 9 months, every sector will post more down months than up months, although the declines will be most noticeable in nonresidential buildings.

For the next few months the residential year-to-date comparison will be skewed. It is going to increase due to the steep fall-off in spending back in April and May 2020. Then, months of strong growth, a total +38% in 7 months in residential from May 2020 onward, with no equivalent growth increase this year, will cause ytd comparisons to decrease. So, even though residential spending is not forecast to increase any more in 2021, residential spending will peak at +25% year-to-date in the May-June data (due to the steep decline in spending in 2020) before falling back to end at +16% ytd for year end.

While most markets recover to positive new starts growth in 2021, spending growth lags, showing the downward trend in 2021 as a result of lost starts in 2020.

This next plot changes the scale of the spending plot so the nonresidential buildings data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps immensely to visualize the decline in nonresidential buildings spending. By midyear 2022, the annual rate of spending will be 20% lower than the pre-pandemic peak. It could take two to three years after that to recovery to the pre-pandemic level of spending.

A typical batch of new construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the year gets spent in the year started, 50% in the next year and 30% in years following. Total nonresidential buildings starts in 2020 were down -22% ($100bil in spending) and nonbuilding was down -13% ($50bil). Under normal conditions, we know how much of that $150 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential buildings starts, down now for 12 months, posted some hint of recovery in April.

If new infrastructure bill starts don’t begin until the 2nd half of the year, only 25% to 30% (of the 1st year 20/50/30 that is based on 12mo) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in the 2nd half 2021, only 30% x 20% or only about 6% would get spent in 2021. That’s $6 billion, or less than 1% of annual construction spending. So, there will be very little if any impact on 2021 construction spending as a result.

In constant $, spending adjusted for inflation, even though residential constant $ volume is up 13% from Q1 2020, current total $ volume of work is 5% lower than the peak average in Q1 2020. This will fall another 5% by year end 2021.

JOBS DATA updated 7-2-21

Construction Jobs for June (May16 thru June12) are down slightly (-7,000) from May. May was revised down slightly (-6k) and April (-4k) revised down slightly. Jobs are now down 3 consecutive months. Comparing jobs year-over-year is strongly skewed by the rapid declines then rapid growth in 2020. Year-to-date thru June construction is up only 10,000 jobs. Jobs are down 238K (-3.1%) from Feb 2020 peak. But also, hours worked dropped -1.3%, equivalent to another 100,000 jobs. Expect this downward trend to accelerate into year end.

Construction spending minus inflation (Volume) supports jobs. All of the increase in construction spending this year is INFLATION. There is no meaningful increase in construction volume to support jobs growth.

Construction spending is on track to increase 3.8% in 2021 over 2020. But after taking out average 6% inflation, spending minus inflation in 2021 will be DOWN 2%. Residential spending increases $103 billion (+16%), but after 8% inflation residential volume increases only $47 billion. All nonresidential spending decreases $47 billion but after adjusting for 4% inflation real nonresidential volume is down $77 billion. Total construction volume (spending minus inflation) is expected to decline 5% from May to Dec. Construction Jobs are expected to follow suit.

Although residential jobs are currently increasing, nonresidential jobs will continue to fall, dropping another 4% over the next 12 months. This time next year construction could be down another 200,000 jobs.

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