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Construction Economics Brief Notes 3-10-18

March 10, 2018 8:54 am / Leave a comment

3-10-18

Jobs and Volume

The period 2011-2017 shows both spending and jobs growth at or near record highs.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Construction added 185,000 jobs in the last 4 months. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Jobs increased by 27%, 15% in excess of volume growth.

Residential spending increased by 110% since 2010, but after inflation, real residential volume increased by only 57%. Jobs increased by only 37%, 20% short of volume growth.

Construction Jobs

Residential Construction Jobs Shortages

Construction Spending is Back

Inflation

Times of rapid spending growth are usually accompanied by higher rates of inflation.

Historical 20-year average total composite construction inflation, without including recession years, is 4.2%. When including the recession years, the average is 3.5%.

For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.

For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%.

Inflation in the highway sector averaged only 2.5% for last seven years. The power sector has experienced 5% deflation over the last 4 years.

Inflation in Construction 2018 – What Should You Carry?

Current$ vs Constant$

Construction spending reached a new high in 2017 at $1,236 billion in current $. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.

Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.

After adjusting all spending to equivalent 2017$, we see that all years from 1997 through 2008 had greater volume than 2017. In 2005 volume reached a peak at $1,450 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.

Construction Spending is Back

Spending

Total All 2018 construction spending is projected to increase 8% to $1.330 trillion.

Spending measured in current 2018$ will reach an all-time high, however, measured in constant inflation adjusted dollars, will still come in 14% below the 2005 high. When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007.

Nonresidential Buildings new starts are up 60% in four years. 2018 starting backlog is the highest ever, up 15% from 2017. Spending for 2018 is projected to increase 9%. For 2018, Educational spending is projected to increase 14%, the strongest growth since 2007. Starting backlog increased 10%/year for the last three years. Manufacturing posted several very large project starts in 2017. Spending is projected to increase 12% in 2018.

Non-building Infrastructure 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. Spending for 2018 is projected to increase 8% to an all-time high. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Spending is projected to increase 20-25%/year for the next two years.

Public construction is a subset of both Nonresidential Buildings and Non-building Infrastructure. Due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 spending growth are Educational and Transportation with a combined total forecast 20% growth. Expect 2018 public spending to increase 6% to 8%, the best growth in 10 years.

Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts. Total starts for the last 6 months are the highest since 2006, but new starts in 2018 are projected at only +7%. Residential spending in 2018 is projected to increase only 6% after five years of increases over 10%.

2018 Construction Spending – Briefs 1-26-18

Infrastructure and Public Work

Only 60% of all Infrastructure spending is publicly funded. That public subset of work averages growth of less than $10 billion/year.

The two largest markets contributing to public spending are Highway/Bridge (32%) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending.

Infrastructure construction spending is near all-time highs and has been for the last several years. Public spending is 10% ($30bil) below all-time highs, the largest deficits coming from Educational, Sewage/Waste Water and Water Supply.

Current levels of backlog and predicted new starts gives a projection that Public Non-building Infrastructure spending will reach an all-time high in 2018 and again in 2019.

Publicly Funded Construction

Down the Infrastructure Rabbit Hole

For the latest info see 2018 Construction Spending Forecast – Mar 2018

Construction Spending is Back

March 9, 2018 12:27 pm / Leave a comment

3-9-18

We’ve all seen headlines like, “Construction Spending is back to previous level”, or “Construction Spending back to a new high.” Here’s how even true information can be deceiving.

It’s true, construction spending in current $ reached a new high in 2017 at $1,236 billion. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.

Let’s say a store will sell a bushel of apples, cost $100 in 2014, $110 in 2015, $120 in 2016 and $130 in 2017. If we look at the current $ spent on apples each year, it looks like business is booming, up 30% in 3 years. But the reality is, with the exception of inflation, the apple business has not changed at all. Only one bushel of apples sold every year. The year to year change in un-adjusted current $ is the increase in cost, not the increase in volume.

Total construction spending in constant $ (inflation adjusted $) reached $1,236 billion in 2017. After adjusting all previous spending to equivalent 2017$, we can see that all years from 1997 through 2008 had higher volume than 2017. In 2000-2001 volume was just over $1,400 billion and in 2005 volume reached a peak at $1,454 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1995 through 2010 had higher volume than 2017. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. Spending in current $ is almost back to the peak of $438 billion in 2008, but volume is lower than almost all years from 1985 to 2010 and is still 22% lower than the 2000 high volume.

Non-building Infrastructure construction spending in constant $ reached $294 billion in 2017. Recent highs were posted in 2015 and 2016 at $305 billion and $304 billion and 2018 is expected to reach $319 billion. Previous spending adjusted to equivalent 2017$ shows that 2008 and 2009 were both just slightly higher than $300 billion. Volume reached a peak $313 billion in 2016. Spending in current $ hit new highs in 2015 and 2016. This is the only sector that has current $ and constant $ at or near all-time highs.

Residential buildings construction spending in constant $ reached $523 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1996 through 2007 had higher volume than 2017. Volume reached a peak $748 billion in 2005. Only the years 2004-2006 had higher spending in current $. The 2005 current $ peak of $630 billion is still 17% higher than 2017, but 2017 volume is still 30% lower than peak volume.

This has several implications besides misleading headlines that claim construction is at a new high. Just look at the period 1996-2007 on the residential plot. Spending in current $ increased 130% from $270 billion to $620 billion. But this was during a period that recorded some of the highest residential construction inflation on record. Inflation was 90%. Follow the guidelines up to constant$ and see that real volume increased only 40% from $530 billion to $750 billion.

If you are hiring to meet your needs and you see that spending (revenue) has increased by 130%, do you hire to meet revenue? No. Hiring requires a knowledge of volume growth. Residential jobs during this time frame increased by 55%, more than real volume growth, but no where near the 130% spending growth.

The above plots were developed using current and historical Census construction spending and inflation indices were developed from construction industry resources, documentation which can be found here on this blog.

Construction Jobs

March 8, 2018 4:21 pm / 2 Comments on Construction Jobs

3-8-18

What data are analysts comparing to show construction jobs shortages?

There are numerous articles circulating in the industry regarding the difficult growth of construction jobs. Some compare the percent growth in jobs to the percent growth in construction spending, often citing that spending has increased far more than jobs.

Well yes, that’s true. BUT…

In the 5 years 2013-2017 jobs increased by 1.3mil or 23%. Spending increased by 45%. The industry, for 5 years, has been saying it is difficult to find skilled workers to fill jobs. And yet total construction jobs added in last 5 yrs = 1.3 million, near all-time high growth.

Only 3 times since 1970 have 5-year jobs totals increased by more than the most recent 5-year period 2013-2017. All of the top jobs growth occurred between 1994-2000.

Only 5 times has 3-year jobs growth exceeded the most recent 3-year period. The period 2004-2006, with the highest 3-year jobs growth, also represents 50-year peak construction volume, although closely rivaled for both jobs growth and peak volume from 1999-2001.

But, comparing jobs growth to spending growth is an invalid comparison. Jobs must be compared to volume. Spending is not volume.

Construction spending includes inflation. Inflation does not support jobs growth. If spending is increasing 6%/year and inflation increases 4%/year, then real construction volume is increasing only 2%/year. Balanced jobs growth would then increase 2%/year.

Spending is measured in current $, always current to the year, which includes inflation from year to year. Volume is reported in constant $, constant to the baseline year, which adjusts for inflation. Jobs should be compared to constant $ volume growth.

For the 5-year period 2013-2017, although spending increased 45%, inflation was near 4%/year for all 5 years. Real construction volume increased only 22%. Jobs, up 23%, just slightly exceeded volume growth during this period.

Update 3-6-19 – Jobs increased 324,000 in 2018, the largest increase since 2006. For the six years 2013-2018 jobs increased 1.6 million up 29%. Spending increased 50%. But after inflation volume increased only 25%. Jobs growth is exceeding volume growth.

I’ve written a series of articles on jobs vs spending/volume, comparing growth back to 2001. Links to the entire series can be found at the bottom of this post. Several things seem apparent from the analysis, among them, potentially hiring to match spending growth and hiring lags spending growth.

A benefit of the series is that it shows, although jobs/volume growth is nearly even, severe jobs imbalances exist within sectors. Nonresidential and Non-building show excess jobs while residential shows a severe jobs deficit.

Nonresidential buildings has had the largest jobs growth in excess of volume growth. This raises the question, are jobs being added in response to spending growth, which is almost 4%/year higher than real volume growth.

Non-building Infrastructure recent growth is similar to Nonres Bldgs, but it started 2011 with a large deficit.

Residential comparisons uncover some hidden factors. In this Residential plot, spending increased by 100% since Jan 1 2011, but after inflation volume increased by only 57%. Jobs lag 20% behind at only 37%.

But, are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.

In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This then is residential space built using labor classified as non-residential commercial. BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity”

The series of articles explains much more detail including productivity (annual $ put-in-place), jobs/workload balance and hiring patterns.

Residential Construction Jobs Shortages 2-3-18

Construction Jobs / Workload Balance 11-7-17

Jobs vs Construction Volume – Imbalances 8-8-17

Construction Jobs Growing Faster Than Volume 5-5-17

A Harder Pill To Swallow! 4-8-17

Is There a Construction Jobs Shortage? 3-10-17

Behind The Headlines – Construction Jobs 2-16-17

Construction Spending vs Jobs 2-9-17

Saturday Morning Thinking Outloud #5 – Jobs Growth 12-3-16

Saturday Morning Thinking Outloud #3 – Construction Jobs 11-19-16

Construction Jobs – Behind The Headlines 10-13-16

Construction Jobs Show 3rd Qtr Growth 10-7-16

Publicly Funded Construction

February 28, 2018 9:44 am / Leave a comment

2-28-18

What types of construction might get funded by Infrastructure stimulus?
How big is the Infrastructure construction market?
What share of Infrastructure is Public work?
What other types of work are publicly funded?
How much new stimulus work can be added to current backlog?

Total all construction spending in 2017 will be about $1.240 trillion.
Infrastructure = $300 billion, 25% of all construction spending.
Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
Public Infrastructure = $170 billion. Private Infrastructure = $130 billion.
Power and Communications are privately funded infrastructure.

Nonresidential Buildings is 25% public (mostly institutional), 75% private.
Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
Public Commercial construction is not included.
Public Institutional = $100 billion, mostly Education ($70b).

Total Public Infra + Institu = $270 billion, 23% of total construction spending.

The potential target markets for an infrastructure stimulus plan could range from the $170 billion public civil infrastructure market up to a total $270 billion market that includes public institutional work. All of these types of projects may not get funded. Then again, Communications, which is 99% private and not included here, has been considered to receive some stimulus funding (rural broadband).

Total All Construction spending, all public + private construction, has average growth of $50 billion/year. Adding $100 billion of spending in a single year, from all sources public and private, is the maximum level of growth for the entire construction industry.

Public Infrastructure + Institutional average growth is $12 billion/year. It has never exceeded $30 billion in growth in a single year.

Public Infrastructure best growth (highest for at least 3 consecutive years, and in almost all cases was from 2005-2007) over the last 15 years, averages 10%/year. For Sewer, Water, Conservation and Communications that’s equivalent to adding only $1 bil to $2 bil per year. For Transportation it’s $4 bil/yr and for Highway it’s $8 bil/yr. For Public Institutional, Educational it’s $8 bil/yr. and other institutional about $2 bil/yr. If all these could hit best ever averages at the same time then Infrastructure spending would grow $25-$30 billion/year.

Spending growth from work already in record backlog for public infrastructure + institutional is predicted to increase by $10-$20 billion/yr. in each of next several years. Transportation alone for the next two years is increasing by more than $10 billion/year. Adding $15-$20 billion/year more in spending for an infrastructure expansion plan would push total public work well above record levels, at least for the next three years. That is probably not sustainable.

Public infrastructure and institutional, only 23% of the entire industry, can probably only absorb another $10 billion of new growth per year on top of the predicted growth. That would push growth to $20-$25 billion/year, near record growth in each of the next three years.

For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 new construction jobs per year.

Average post-recession growth in public infrastructure + institutional jobs is about 35,000 jobs per yr. Max growth was 50,000 jobs/yr. Historical maximum jobs growth would seem to limit spending growth to a total of about $15 billion/year. That is the amount of spending already predicted from work in backlog, without adding any more work from an infrastructure stimulus plan.

Because the potential markets to which stimulus might be applied are relatively small in comparison to all construction, and because those markets identified are already at record backlog, both historical maximum spending growth and jobs growth identify potential limits on infrastructure stimulus growth. Those limits are much lower than generally thought.

This article has more on the same topic Down the Infrastructure Rabbit Hole 2-16-18

PPI Construction Materials Inputs Index

February 20, 2018 1:17 pm / Leave a comment

2-20-18 original post

Feb 2019 Tables and Plots updated to end of 2018

Here’s the link to the June 2019 data

Here’s a link to the AGC APRIL 2020 summary report.

Producer Price Index of Materials Inputs to Construction. The 1st two plots are PPI Final Costs which includes all overhead and profit as sold. All other plots are PPI Input costs. Changes in PPI Input costs at the producer level may not reflect changes in actual pricing to contractors or changes in final cost as installed to building owner. Input Costs do not reflect retail markup or mark down and do not reflect overhead and profit markups that may change according to market activity.

PPI for Construction Inputs IS NOT a direct indicator of construction inflation. It does not represent selling price, the final cost of materials put-in-place which includes cost of labor, overhead and profit. See below link to description of Ovhd&Profit.

Cautions When Using PPI Inputs to Construction!

PPI Inputs and Inflation not only can vary widely but also may not even move in the same direction. See the above link for a table comparing PPI% vs Inflation%.

PPI Nonresidential Building Types

PPI Nonresidential Building Construction Sector — Contractors

Specific Building and Contractor PPI Indices are Final Demand or Selling Price indices. They are plotted above.

See this article by the Bureau of Labor Statistics on Nonresidential building construction overhead and profit markups applied to select Nonres building types

Bureau of Labor Statistics Producer Price Index measures PPI cost of materials price at producer level. The PPIs that constitute Table 9 of the BLS PPI Report measure changes in net prices for materials and supplies typically sold to the construction sector, but do not represent the final cost installed. They are known as PPI Inputs. They are plotted below.

PPI Materials and Supply INPUTS to Construction Industries

Here’s a brief summary of some of the PPI statistics tracked here:

One year (2018) change
biggest increases > Steel Pipe and Tube 21%, Fabricated Steel for Bridges 15%, Ornamental Metals 12%, Fab Structural Steel for Buildings 12%
biggest declines > Copper and Brass shapes -6%, Lumber and Plywood -4%

PPI Final cost of buildings and Trades up 4% to 6%
Final cost of buildings posted largest increases since 2008.
Final cost of trades (except for Roofing) posted largest increases since 2009.
Steel Products posted largest increases since 2008
Lumber and Plywood, which had risen dramatically (+30%) earlier in the year, now down 4% from Dec ’17

Two year (2017+2018) changes
biggest increases > Diesel fuel 45%, Steel Pipe &Tube 31%, Aluminum Shapes 16%, Fabricated Structural Metal for Buildings 16%, Ornamental metals 16%
no declines over a two year period

Most stable pricing over last 5 years, these items did not change by more than 5%/yr in any given year during the last 5 years and net the smallest total change for 5 years: Concrete Brick and Block, Concrete Pipe, Ready-Mix Concrete, Plastic Products, Insulation, Fabricated Steel Plate, Sand/Gravel/Crushed Stone.

The Materials Inputs indices plots above are generated by indexing the December to December percent changes in the table below. Data updated to include Dec 2018 published January 2019.

Each month, @AGCofA @KenSimonson puts out tables and explanation of recent changes in producer price indexes and employment cost indexes for construction materials inputs, and building types and subcontractor final demand cost. Best source available. Watch this AGC page for monthly updates to the PPI

Here’s the link to the June 2019 data

Down the Infrastructure Rabbit Hole

February 16, 2018 9:50 am / Leave a comment

2-16-18

Down the Infrastructure Rabbit Hole. A twitter thread on construction capacity.

The infrastructure sector is only 25% of all construction spending, with the largest share being the Power market. Power accounts for 33% of all infrastructure spending. Highway represents 30% and Transportation about 15%. However, Power is 80% private, Transportation 30% private.

Only 60% of all Infrastructure spending is publicly funded. Highway is about half of all publicly funded Infrastructure construction. That public subset of work in the last 25 years has grown by $20 billion/year only once and averages growth of less than $10 billion/year.

Most public work is Infrastructure or public works projects, about 60%, but some public work is nonresidential buildings, about 40%. Public Safety is 100% public. Educational projects are 80% public. Amusement/Recreation Facilities (i.e.’ Convention Centers, Stadiums) is 50% public. Healthcare is 20% public.

Sewage/Waste Water and Water Supply add up to another 10% of the market. All other markets combined, Conservation and all other various nonresidential buildings, none more than 4% of the total, account for less than 20% of public spending.

It is rare that Nonbuilding Public Infrastructure construction spending increases by more than $10 billion in a year. Once, only once, it increased by an average of $10 billion/year for three years. Excluding recession, average annual growth is $4 billion/year.

It is rare for Total All Public Infrastructure to increase by $20 billion in a year. It has done so only ever twice. Excluding the two worst recession years, the average annual growth since 2001 is $7 billion/year.

For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 to 50,000 new construction jobs per year.

Either an infrastructure spending plan is used to create new work or it becomes a funding source to pay for work already planned, in which case it does not increase spending or jobs projections.

As proposed, states and municipalities would be required to come up with 80% of the funding for any new infrastructure project to qualify for 20% of funding from the federal government, potentially shifting the bond funding tax burden to states.

Alternatively, states could solicit private partnership funding, in which case what would normally be considered public assets could become privately controlled assets. This raises a whole new list of issues for discussion, not engaged here.

Infrastructure currently has the highest amount of work in backlog in history. Public work is at its 2nd highest starting backlog only to 2008. Starting backlog accounts for 80% of spending in the current year and 60% of spending in the following year.

Current levels of backlog and predicted new starts gives a projection that Public Nonbuilding Infrastructure spending will reach an all-time high in 2018 and again in 2019.

Total All Public Infrastructure in 2018 also reaches an all-time current$ spending high. However, in constant$, inflation adjusted, volume of work is still well below previous peak.

The non-building infrastructure construction sector does not have the capacity to increase spending over and above existing planned (booked and projected new starts) work by another $10 billion/year, nor does it have the capacity to add an additional 40,000 jobs per year.

Total All Public Infrastructure construction, including public works and Nonresidential public buildings, already has a growth projection near historic capacity. It cannot double that volume by another $10-$20 billion/year and add an additional 40,000 – 80,000 jobs per year.

Below is the timeline of my articles series on Infrastructure. Some of the numbers have changed slightly over the past year, but not enough to change the premise of the articles.

2-28-18 Publicly Funded Construction

2017/12/03 spending-summary-construction-forecast-fall-2017

2017/11/11 backlog-construction-forecast-fall-2017

2017/10/10 is-infrastructure-construction-spending-near-all-time-lows

2017/03/23 behind-the-headlines-infrastructure-spending-&-jobs

2017/03/06 calls-for-infrastructure-problematic

2017/03/05 infrastructure-public-spending

2017/01/30 infrastructure-ramping-up-to-add-1-trillion

2016/10/29 Saturday-morning-thinking-outloud-Infrastructure

Inflation in Construction 2019. What Should You Carry?

February 15, 2018 8:15 am / 6 Comments on Inflation in Construction 2019. What Should You Carry?

1-28-20 See the latest post Construction Inflation 2020

8-26-19 go to this article for Added links to sources for international construction inflation rates

1-14-20 added new index table covering 2015-2023 at Index Table Link – see link to Tables below

This table updates 2018 and 2019 data and 2020-2023 forecast. Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% avg for the last 4yrs. Forecast residential inflation for the next three years is level at 3.8%. It was only 3.6% for 2019 but averaged 5.5%/yr since 2013.

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

To properly adjust the cost of construction over time you must use actual final cost indices, otherwise known as selling price indices.

ENRBCI and RSMeans input indices are examples of commonly used indices that DO NOT represent whole building costs, yet are widely used to adjust project costs. An estimator can get into trouble adjusting project costs if not using appropriate indices. This plot of cost indices for nonresidential buildings shows how input indices did not drop during the 2008-2010 recession while all other final cost indices did drop.

CPI, the Consumer Price Index, tracks changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. The CPI is not related at all to construction and should not be used to adjust construction pricing. Historically, Construction Inflation is about double the CPI, but for the last 5 years construction inflation averages 3x the CPI.

Producer Price Index (PPI) Material Inputs (which exclude labor) to new construction increased +4% in 2018 after a downward trend from +5% in 2011 led to decreased cost of -3% in 2015, the only negative cost for inputs in the past 20 years. Input costs to nonresidential structures in 2017+2018 average +4.3%, the highest in seven years. Infrastructure and industrial inputs were the highest, near 5%. But material inputs accounts for only a portion of the final cost of constructed buildings.

Materials price input costs in 2019 slowed to an annual rate of less than 1%.

Labor input is currently experiencing cost increases. When there is a shortage of labor, contractors may pay a premium to keep their workers. Unemployment in construction is the lowest on record. The JOLTS ( Job Openings and Labor Turnover Survey) is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.

Click Here for Link to a 20-year Table of 25 Indices

Inflation can have a dramatic impact on the accuracy of a construction budget. Usually budgets are prepared from known current costs. If a budget is being developed for a project whose midpoint of construction costs is two years in the future, you must carry an appropriate inflation factor to represent the expected cost of the building at that time.

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog.

Although nonresidential buildings new starts are up only 5% the last three years, spending from backlog in 2020 is up 20% in three years and reaches an all-time high.

Most spending for residential comes from new starts. Residential new starts in Q1-2018 reached a 12 year high. Spending from new starts in 2019 fell 6% but is up 6% for 2020. Spending from new starts in 2020 is back to the level posted in 2017 and 2018.

2020 starting backlog is up 5.5% across all sectors. However, while a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%.

Although many contractors report shortages due to labor demand, labor growth may slow due to a forecast 2019-2020 construction volume decline. But, we might see a labor decline lag spending/volume decline.

Expect 2019 escalation in almost all cases to finish at or lower than 2018.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013, but dropped to 4.3% in 2018 and only 3.6% in 2019. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. Typically, large declines in volume are accompanied by declines in inflation. Forecast residential inflation for the next three years is level at 3.8%.

Note 8-2-19: Residential inflation for the 1st half of 2019 has come in at only 3.5%.

A word about Hi-Rise Residential. Probably all of the core and shell and a large percent of interiors cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. This type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, use the residential cost index for single family but a more appropriate index to use for hi-rise residential construction is the nonresidential buildings cost index.

Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years. Spending needs to grow at a minimum of 4.4%/yr. just to stay ahead of construction inflation, otherwise volume is declining. Spending slowed dramatically in 2019. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years.

Material tariffs in 2018 and 2019 are already incorporated into inflation. Adjust for any new tariffs impact.

In another article on this blog, (see steel cost increase), I calculated the 25% tariff on steel would cost nonresidential buildings 1%. Some Infrastructure could be much more, i.e., bridges 4-5%. Residential impact would be small. A 25% increase in mill steel could add 0.65% to final cost of building just for the structure. It adds 1.0% for all steel in a building. If your building is not a steel structure, steel still potentially adds 0.35%.

Note 8-2-19: Nonresidential Buildings inflation for the 1st half of 2019 as tracked by most national selling price indices has come in at just over 5%.

Reliable nonresidential buildings selling price indexes have been over 4% since 2015. Some have averaged over 5% for the last four years. Construction Analytics forecast (line) for 2019 is currently 5.1%. This may move higher due to the impact of September 2019 tariffs which are not yet reflected in any indices.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stayed flat from 2015-2017, then increased 15% in 2018-2019. The IHS Pipeline and LNG indices increased 4% in 2019 but are still down 18% since 2014. Coal, gas, and wind power generation indices have gone up only 5% since 2014. Refineries and petrochemical facilities dropped 10% from 2014 to 2016 but regained all of that by 2019. BurRec inflation for pumping plants and pipelines has averaged 2.5%/yr since 2011 and 3%/yr the last 3 years.

Anticipate 3% to 4% inflation for 2019 with the potential to go higher in rapidly expanding Infrastructure markets, such as pipeline or highway.

This link refers to Infrastructure Indices.

Watch for unexpected impacts from tariffs. Steel tariff could potentially add 5% to bridges. Also impacted, power industry, pipeline, towers, transportation.

Long term construction cost inflation is normally about double consumer price inflation (CPI).
Since 1993 but taking out 2 worst years of recession (-8% to -10% total for 2009-2010), the 20-year average inflation is 4.2%.
Average long term (30 years) construction cost inflation is 3.5% even with any/all recession years included.
In times of rapid construction spending growth, construction inflation averages about 8%.
Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. It has averaged 4.2% for the last 4 years.
Residential buildings inflation reached a post recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.8% for the last 5 years.
Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/suppliers margins.
When construction volume increases rapidly, margins increase rapidly.
Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.