edzarenski

Present Cost-Future Cost vs Present Value-Future Worth

September 13, 2023 12:04 pm / Leave a comment

A reader asked an interesting question, one that does not often come up in construction analytics. The following is an example to explain the difference.

The question: Our firm engages in construction projects that must be fully funded from cradle to grave to secure approval. A portion of these projects is remediation that will occur 10 years from now. What would be the Present Value to fund a project needed to be performed 10 years from now based on a similar project that cost $1,000,000 three years ago?

There are really two parts to this question. 1) What is the construction cost of remediation 10 years from now? 2) What is the Present Value of money today needed to fund that construction cost ten years from now?

is determine the construction cost in 10 years based on inflation rates and a known project cost.
is What is the value of money. How much do I need today to fund the project 10 years from now.

For the sake of this example we must assume some rates. Assume construction cost inflation the last three years was a total 25% and long term average inflation is 4%.

Present Cost to Future Cost is solved by applying construction inflation. To estimate cost of a project 10 years from now, we can only rely on long term average inflation for the type of work being performed. Long term average inflation is not the same as the inflation we have experienced over the last three years. So first let’s inflate the project from three years ago at 25% to today’s construction cost.

$1,000,000 (three years ago) x (1+25%) = $1,250,000 = similar project cost today.

Now let’s use long term average inflation (4%) to determine the construction cost 10 years from now. Inflation (like interest) must be compounded. So total interest over 10 years is interest for one year raised to the 10th power.

$1,250,000 (today’s cost) x (1+4%)^10 = $1,250,000 x 1.48 = $1,850,000

We would never assume the long term inflation to be repetitive of what we’ve seen over the last three years, so we use what we know occurred over the last three years to get to today, then project forward at the long term average historical rate.

The remedial work 10 years from now is estimated to cost $1,850,000. That is the Future Worth (FW) of the construction work needed. What is the Present Value (PV) of money needed to fund that Future Worth (FW)? How much must be invested in an account today so that it will grow to provide the funds needed to perform the FW work?

The growth rate of money is not the same as the inflation rate of construction. For the sake of this example, we need to make some assumption here for the growth rate of money. Let’s assume 3%. If we were to invest money today it can grow at 3%/year for 10 years. The answer to how much is needed to invest today (PV) to provide the full sum needed to fund the future (FW) is entirely dependant on the interest rate that can be secured for the term of the investment. We need $1,850,000 ten years from now. Divide the FW by the compounded rate of interest or money growth to find PV.

$1,850,000 (FW) / (1+3%)^10 = $1,850,000 / 1.34 = $1,376,000 (PV)

A Present Value (PV) of $1,376,000 must be invested today at a rate of 3% growth to ensure enough funds are available 10 years from now to perform the remediation work, a (FW) of $1,850,000.

Job Openings – Behind the Headlines

August 31, 2023 8:41 am / 6 Comments on Job Openings – Behind the Headlines

Construction Job Openings – Behind the Headlines

Recent data indicates ~ 300k job openings. Let’s look at support. To support those openings, there must be an equivalent added volume of work.

As we entered 2020, construction spending (in current $) was at a (then) all-time high of $1.530 trillion(t). Let’s set that point in time as the base and track growth since. Construction spending peaked in March 2023 at $1.970t and is currently at about $1.950t.

Volume growth in constant $ (constant $ = spending minus inflation) fell from $1.530t to $1.350t in Oct’22, has since returned to $1.450t as of June. So real volume growth is up off the bottom, but is still $80t or 5% below 2020. It is forecast to fall $50t over the next 6 months and return to current level in mid-2024.

Jobs, as we entered 2020, stood at 7.600 million(m). Jobs rapidly fell to 6.500m but recovered most of that by Dec 2020. Jobs now stand at 7.970m, up 5% since Jan 2020.

So, let’s summarize the facts: Since Jan 2020, spending is now nearly equal, volume of work is down 5%, but jobs are up 5%. So, since Jan 2020, jobs have increased 10% in excess of volume of work to support those jobs.

By my calc, if we were to add 300k jobs, either today or over the next year, we would see jobs increase by another 4%. Jobs growth since Jan’20 would exceed volume growth by nearly 14%. You might argue that 300k openings are there to fill the void of jobs supporting the current workload, but jobs growth already exceeds volume growth by 10% in the last 3 years.

Anyone want to try to explain how job openings of 300k is supported by the data?

Note 1: Job openings as of July are closer to 400,000

Note 2: plots shows baseline back to 2020 and 2001. Baseline 2001 situation becomes worse. See prior post https://edzarenski.com/2023/08/05/midyear-23-jobs-outlook/ for plots to baeline 2011 and 2020.

Midyear ’23 Jobs Outlook

August 5, 2023 10:43 am / 2 Comments on Midyear ’23 Jobs Outlook

Construction JOBS continue to creep higher, even when volume is falling. From Apr’22 to Oct’22 jobs increased 1.5% but volume of work dropped 10%. Jobs and volume should track together as seen from 2011 to 2018. Since Oct’22, jobs are up only 2% while volume up 7%. Volume is catching up.

Jobs have been increasing at 3%/year, or approx 200k to 300k jobs per year. In Feb 2020 there were 7.6 million construction jobs. Now there is almost 8.0 million. The average for 2020 dropped 3% or 170k jobs. But we regained jobs at 2.5% growth in 2021, 4.2% in 2022 and so far over 2% in 2023. Now this is interesting, because we did not see an increase in average volume in 2021, 2022 or 2023. In total, jobs are up 4.8% since Feb 2020, while volume of work is down 4.7%.

Construction Jobs have been on an even rate of growth approx. 2.5% to 3% per year, even when volume is falling. Spending has been on a bumpy climb, but keeps climbing. Without inflation real volume of work overall since 2020 has not increased at the same rate as jobs.

Current July Jobs are up 1.5% since Dec.’22, up 3% vs the average for 2022. July will be pretty close to the average for 2023. As construction inflation slowed down (has been slowing since mid-2022), volume gained ground on jobs over the last 9 mo., but jobs since Jan 2020 are still 10% higher than volume.

Here’s a look at total jobs just since 2020

Why do jobs sometimes/often grow faster than volume to support those jobs? Some possibilities:

When inflation is unusually strong, business planners may misjudge growth. Planning jobs growth on inflated revenues that net much lower than expected volume may lead to misjudging jobs growth. Result is jobs growth faster then volume.

When volume is decreasing, firms may be reluctant to (or smart not to) let go jobs. See the period on the above plot from Mar 2022 thru Oct 2022. Vol dropped 10%, Jobs increased 2%. So, the calculation shows a big excess in jobs for that period, because volume growth doesn’t support it. Within the next six months, volume increased 7%, making up half the difference.

Here’s jobs vs vol in each sector.

Notice how Rsdn jobs barely declined in 2020, but Rsdn volume increased 10%. Did that set off cries of jobs shortage in Rsdn? Not so in Nonres.

In Nonres Bldgs, volume by 2021 had fallen below growth in construction jobs. The deficit reached its worst in 2022 but in the last 9 months volume growth far faster than jobs growth has evened the balance.

Nonbuilding construction volume fell to a deeper deficit than Nonres Bldgs. But we can see the gap closing as volume increases faster than jobs.

These above three sector plots go back to base 2019, showing how much percent change there has been since 2019. For a longer term look, here below is a plot of Nonresidential Buildings back to 2011. On this plot we can see jobs growth, when compared to 2011, for Nonres Bldgs, is above volume growth since 2017. The low point of volume was in 2021. 2022-2023 has posted the most rapid growth in many years. This closes the gap between Nonres jobs and volume, very helpful to the productivity outlook.

When splitting out jobs by sector we must always remember that some Nonres bldgs jobs actually work on constructing residential buildings (for ex., steel and concrete on a multifamily hirise) but remain counted as nonres jobs. Also, some undocumented workers may not be counted at all in residential jobs. That skews the data plots. But you can see that it would reduce the jobs in Nonres and increase the jobs in residential, improving both plots.

Construction spending data is indicating a slight dip in volume growth over the 2nd half 2023, but then leading into much stronger growth in 2024 in all sectors. Volume by Feb’24 is back to today’s level after falling 5%. I don’t expect jobs to decline with the drop in volume. Maybe slow down. I think at worst jobs hold steady for a few months before resuming 2.5%-3% annual growth later this year.

When jobs continue to increase while volume is dropping, that wrecks productivity. But sometimes volume increases rapidly while jobs grow steady at a 3% rate. Look at the period Oct’22 thru Jan’23. Jobs increased 2%, but volume quickly jumped 6%.

The number of jobs required to put-in-place $1 billion of construction in one year, as plotted below, about 5000 for residential, is the inverse of the plot above, the annual amount of $ put-in-place per job, about $200,000 for residential.

Midyear ’23 Forecast Updated 10-12-23

July 19, 2023 7:45 am / 4 Comments on Midyear ’23 Forecast Updated 10-12-23

10-12-23 Updated PPI INPUTS added PPI plots

8-11-23 Updated PPI Inputs and Final Demand tables

8-12-23 Added Table that shows Spending, Inflation, Index, Constant$

When Census released May construction spending data on July 3 they also revised spending for all markets for the last 2 years. Largest revisions are usually in previous year. This changes % growth and baseline for the start of 2023.

Census added $50 bil to 2022, $27 bil to 2021 and $6 bil to Jan-Apr 2023. Largest revs 2022, Rsdn +$17bil, Mnfg +$7bil, Comm/Rtl +$6bil, HiWay +$4bil. Largest revs 1st 4 mo (JFMA) 2023, Rsdn +$6bil, Mnfg +$2bil. 2023 Forecast$ went up, but % increase went down, because 2022 $ revs went up by more.

My midyear forecast here would be compared to the AIA Consensus Midyear July 2023 Forecast.

AIA Consensus Midyear July 2023 Forecast.

A significant difference here is that the AIA forecasts are all compared to 2022$ before the Census revisions published 7-3-23, which are included in my forecast. That would mean that all AIA Forecast, in all markets, would be lower since Census revisions were up in every market.

Be careful out there. Here are other significant watchouts to be aware of in available midyear forecasts:

One forecast is based on a recession.

No other forecast (as of mid-July) besides Construction Analytics (this forecast) includes the Census 2021-22 updates to spending put-in-place of $27bil in ’21 + $50bil in ’22.

One forecast has public works adding 2% to 4%/yr spending the next few yrs, while new starts are up 50%.

There is a remarkable 50% spread ($52bil) on the forecast growth in manufacturing spending in 2023.

There is a 15% ($270bil) spread in forecasts for total$ in 2024.

There is a 16% ($100bil) spread just in nonres bldgs forecast for 2023.

Residential Construction Spending Since Nov, Rsdn spending has seesawed up/down in a range from $840bil to $880bil. Currently at the high for the year. Will move slightly higher, but falls from peak in Q3. 2023 is currently down ytd 10%, will finish the year down 7%.

The big story is manufacturing construction spending. The average monthly expenditure on MNFG constr spending for the 4 years 2017-2020 averaged an annual rate of $78 billion, ending Dec’20 at $73bil. In 2021, spending was flat at $73bil. But by Dec’22, spending increased to $100bil. In the 1st 5mo of 2023, MNFG construction spending increased to an annual rate of $150bil.

8-12-23 Added this table, 2015-2025 Spending Inflation, Index, Constant 2019$

The path to constant volume starts with current spending. This table shows the progression of how we get there. Constant volume growth is what we compare to, for business volume or jobs growth.

Construction JOBS continue to creep higher. From Apr’22 to Oct’22 jobs increased 1.5% but volume of work dropped 10%. Jobs and volume should track together as seen from 2011 to 2018. Since Oct’22, jobs up only 2% while volume up 7%. Volume catching up.

Construction spending, particularly nonresidential buildings, stalls for the 2nd half of 2023. Spending is up/dn thru year end, ending the year about where it is now. But by year-end, after taking out inflation, volume will be down 2%. In last 3 yrs, jobs seldom drop along with volume. I think jobs will not track volume down 2%, but finish 2023 about where they are now.

Construction Spending since Feb 2020 has increased (monthly SAAR Current $) $425bil, up 28%. But inflation increased $480bil (32%). Actual volume of work has decreased 3.5% or $55bil (monthly SAAR Constant 2019 $) since Feb 2020. The big decline in constant $ in 2020 and in 2021 is nonresidential buildings. The big decline in 2022 is residential.

PPI Data for June

PPI Mtrl Inputs to Construction are up less than 0.1% in June, up less than 2% ytd. Cost of Inputs was up 30% over the last 2yrs. Year-to-date 2023 vs average 2022 Nonres Bldgs down 0.5%, Rsdn down 3.2%, Concrete products UP 10%-13%, Lumber/Plywood down 22%, Steel Products down 12%-15%, Diesel Fuel down 30%.

PPI Final Demand Construction for June, most Bldgs and Contractor costs peaked in March. 2nd qtr costs are not yet complete until July data gets released in mid-August. (The PPI Final costs is a three-month series that is corrected in data released for Jan, Apr, Jul and Oct.) Most costs are down 1% since Jan. Current avg all Bldgs and Trades cost are up 9% from avg 2022, but costs are headed down.

PPI INPUT TABLES UPDATED 10-13-23

The last column, YTD vs 2022avg, gives an indication of 2023 avg if current YTD costs remain constant for the remainder of the year. However, Inputs to Nonres Bldgs has been down 3 of last 4 qtrs. Res has been down 4 of last 5 qtrs. So it’s likely we will see some more downward pressure in the indices.

PPI FINAL DEMAND TABLE UPDATED 8-11-23

The PPI Final Demand index is a three-month series that is corrected in data released for Jan, Apr, Jul and Oct. Most Bldgs and Contractor costs peaked in March. With this PPI Final Demand Construction for July, 2nd qtr costs are now complete (with the July correction for MJJ). Most costs are down at least 1% since Jan. Current avg all Bldgs and Trades cost is up 8% from avg 2022, but costs are headed lower.

The Final Demand index posted declines for the two most recent adjustment months, Apr and Jul. If distributed back to the months being corrected, Apr into Feb and Mar, Jul into May and Jun, it shows all bldgs, except Office, have at least 6 months of declining cost. Office has been declining for only 3 months but Warehouse has been declining for 8 months. Buildings are down 1% to 3% so far this year.

The Avg Nonres Bldgs is down 1.4% in the last two quarters. And yet, if we hold the current index constant, keep it at today’s rate for the rest of the year, then the avg for 2023 will be up 7.8% from the avg 2022. I think, based on downward trend in costs, it will be lower than that at year end.

Who’s Forecast is Closest?

June 26, 2023 12:47 pm / Leave a comment

Twice a year, in January and July, The AIA Consensus Forecast is released. The AIA solicits Nonresidential Building construction spending forecast data from a number of firms and publishes the collected data. It can be helpful to compare the forecasts to current actual data. This provides some clues as to which forecasts are in the ballpark and which just don’t seem to be on track with reality.

The following table presents the AIA 2023 Consensus Forecasts published in January. Alongside the AIA Forecasts is my forecast, Construction Analytics 2023 beginning of year nonresidential buildings forecast and the Actual year-to-date spending published by Census. The ytd values are not much different than the current forecast for the year. The values highlighted in green are those that are closest to the current ytd. and expected forecast for the year.

Just one example to highlight forecast performance, more than half of the forecasts submitted to the AIA Consensus for Manufacturing were 10% or less for all of 2023. The current year-to-date spending for manufacturing is up 83%. My current forecast for the year is 67%.

The AIA January Consensus forecast had Nonresidential Buildings up 5.8% for the year. Construction Analytics forecast was 15.8%. The current ytd is 30%.

The Midyear 2023 AIA Consensus will soon be published. I would expect to see some drastic revisions to some of the input forecasts to catch up to actual spending. Construction Analytics will publish a midyear forecast after the July 1 Census data release that includes the revisions 5 years back. FWIW, Construction Analytics midyear forecast, for the last 3 years, has come closest to the actuals for the year in more markets than any firm’s forecast included in the AIA Consensus. As you can see in the table above, it’s looking pretty solid that Construction Analytics beginning of year 2023 forecast also comes closest to forecast for the year. Closest comparison is made to my current 2023 forecast, in table below, so there is room for change. Year-end actual might not hit my forecast, so… Anyway, the percent increase in 2023 forecast shouldn’t change much with July data, so it’s a preview of my midyear forecast.

On July 1st, the Census will release the construction spending data for May. Along with that, they will revise data back 5 years. Usually, the biggest revisions are to last year. The revisions can sometimes be large enough to sizably change the percent growth within a market from year to year.

This following table shows YTD and my current forecast for 2023 and 2024. Discussion of the forecast is in the preceding post. Construction Data Briefs JUN 2023

Construction Data Briefs JUN 2023

June 16, 2023 8:31 am / Leave a comment

Nonresidential Buildings spending is leading Construction spending growth. For the first four months of 2023, total construction spending year-to-date (ytd) is up 6.1%. Nonresidential buildings spending is up 30% ytd compared to the same four months 2022, the fastest rate of nonres bldgs growth in over 20 years. Nonbuilding spending ytd is up 11%. Residential spending peaked in March 2022. Since then the annual rate of residential spending has dropped 11%.

SPENDING FORECAST

Total Construction Spending in 2023 is now forecast to reach $1,915 billion, an increase of 6.4% over 2022.

Nonresidential Buildings spending in 2023 is now forecast at $660 billion, an increase of 26.2% over 2022.

Construction Spending through April is up 6.1% ytd. Spending is forecast to finish 2023 up 6.4%.

Total construction spending for 2023 is on track to increase +6.4%. Residential -8.1%, Nonres Bldgs +26.2%, Nonbldg +14.4%.

SPENDING BY SECTOR CURRENT $ AND INFLATION ADJUSTED CONSTANT $

In 2023, it’s Nonresidential Buildings leading growth. In 2024, it will be Nonbuilding Infrastructure leading spending growth. Both are expected to grow greater than the inflation index.

Current $ Spending, Inflation and Volume

SEE Construction Inflation 2023

Inflation adjusted volume is spending minus inflation, or to be more accurate, spending divided by (1+inflation). Inflation adds nothing to volume growth. The following table shows spending, inflation and volume (spending without inflation) for each year. All $ are current to the year stated. The values in this table are not indexed to a constant value year. This simply shows business volume in any given year is not as high as spending would indicate. When inflation is positive, volume is always less than spending by the amount attributed to inflation.

Spending during the year is the value of business volume plus the inflation on that volume. When inflation is 12%, volume plus 12% = total spending. Revenue is generally measured by spending put-in-place during the year. In 2022, Nonresidential buildings inflation was 11.9%, so business volume was 11.9% less than spending, or less than revenue. Residential volume was 15.5% less then spending.

SPENDING TOTAL CURRENT $

VOLUME CURRENT $ = SPENDING MINUS INFLATION

CONSTANT $ = VOLUME OVER TIME

Overall Construction Spending is up 25% in the 38 months since the onset of the pandemic, but, during that same period inflation increased 31%. After adjusting for 31% inflation, constant $ volume is down 4%. So, while the plot on the left shows three years of increases in spending, the actual change in business volume is still down and has not yet returned to the pre-pandemic peak in Feb-Mar 2020.

NONRESIDENTIAL SPENDING (CURRENT $) AND VOLUME (CONSTANT $)

Nonresidential Buildings spending in 2023 is forecast at $660 billion, an increase of 26.2%, or $137 billion.

In 2022 we realized the largest ever one-year increase in new nonresidential buildings construction starts, up 40%. Starts were also up 15% in 2021.

The AIA Consensus Construction Forecast, December 2022 predicts only a 5.8% increase in spending for nonresidential buildings in 2023. My beginning of year forecast for comparison was 15.8%. My current forecast is +26.2%. The current year-to-date spending through April is up 30%.

We began the year with record new starts indicating an increasing spending rate. The monthly rate of spending is up 12 of the last 14 months, has increased for 6 consecutive months and is up 20% in the last 6 months. The rate of spending is predicted to increase 10 out of 12 months in 2023, a total increase of 11% over the year. Barring any unforeseen negative occurrence, the trajectory in the rate of spending is increasing.

Year-to-date nonresidential buildings spending for Apr is up 30%. This is driven by Manufacturing, up 84% ytd, but also supported by Lodging up 40% ytd and Commercial/Retail up 23% ytd. Every nonresidential building market except Public Safety (up only 8%) is up greater than 10% ytd.

Nonresidential buildings spending fell 17% from March 2020 to Sept 2021, then increased 48% from Sept 2021 to Apr 2023. Currently, as of Apr 2023, spending is 24% higher than the pre-pandemic peak in Feb 2020. But nonresidential buildings inflation over that same 36 months increased 27%. Business volume in constant $ actually fell 25% from Feb 2020 to Sept 2021, and hit a secondary low in mid-2022. Since then, the actual change in business volume has increased 31%, but that still leaves volume nearly 2% lower than the pre-pandemic high.

Non-building Infrastructure spending for 2023-24 is forecast up 25%, up $50 billion/year for two years. Non-building Infrastructure will post the 1st year of sizable gains since 2019, forecast at $418bil, up 13.5% in 2023. In 2022, Highway and Public Utilities posted strong gains of 9.1% and 16.6%, but those gains were offset by a 8.7% decline in Power. For 2023, Highway and Transportation recorded the strongest starts in five years. All markets post spending gains in 2023, with Highway up 26%, Transportation up 6% and Public Utilities up 18%.

Non-building Infrastructure spending is up 6% since Feb 2020. After adjusting for 27% inflation, constant business volume is down 16%.

RESIDENTIAL SPENDING SF-MF-RENO CURRENT $ AND CONSTANT $

Residential starts are forecast down or flat in 2022 and 2023. Spending grew 44% in the last 2yrs, but inflation was 30% of that 44%. With no growth in starts forecast for 22-23, spending will struggle to keep up with inflation. Residential spending is forecast to fall 8% in 2023. Most of the decline is single family. Single family is down 24% over 12 consecutive down months. Multifamily is up 24% over the same 12 months. But, it’s not an even swap. There’s 3x more spending in SF than in MF. Renovations gained 25% in 2022 but spending varies +/- 10% throughout the year. Midyear there is potential for 6 consecutive down months that could send residential spending down another 7% before year end.

DOES VOLUME OF WORK SUPPORT JOBS GROWTH? or, Can jobs growth support volume of work?

Jobs should track volume, not spending growth. Volume = spending minus inflation. Volume is down, although now increasing, while jobs are up. Nonres Bldgs volume, in constant $, fell 25% from Feb 2020 to Sept 2021, and hit a secondary low in mid-2022. Since then, the actual change in nonres bldgs volume has increased 18%. Yet nonres bldgs jobs increased only 3.5%. That still leaves volume nearly 10% lower than the pre-pandemic high. If the same production levels ($ put-in-place per worker) as 2019 were to be regained, theoretically, nonresidential volume would need to increase 10% with no increase in nonresidential jobs. For now, productivity is well below that of 2019.

Nonresidential Buildings spending in 2023 is forecast at $660 billion, an increase of 26.2%, or an increase of $137 billion in 2023. Non-building Infrastructure spending for 2023-24 is forecast up 25%, up $50 billion/year each year.

Normally, it takes 5000 jobs to put-in-place $1 billion in one year. So an add of $100 billion in 2024 would need 500,000 new jobs. 2023 would need 750,000 new jobs.

If we were to grow the labor force to meet the newly identified workload added from new starts, we would need to double the prior maximum rate of construction jobs growth. Normal growth is about 250,000 jobs per year and maximum prior growth is about 400,000. The workload discussed above would require 750,000 + 500,000 new jobs back to back. That’s an expansion of the industry by 15%, in an industry that normally grows 3%/yr. This industry can’t grow that fast. (Which means I need to account for over-capacity growth as a potential reduction in future forecast. You can’t increase spending that fast if you can’t expand the industry that fast).

My first thoughts were, Jobs may not be able to increase fast enough to put-in-place the forecast spending. This impediment needs to be accounted for and could reduce overall construction spending forecast over the next two years. The most likely markets where a reduction would occur are Manufacturing, Highway, Commercial/Retail and Office.

However this is what happened the past year. In the last 12 months, Mar’22 to Mar’23, nonres bldgs jobs are up 3.5%. Nonres Bldgs spending is up 21%, but after ~7% inflation, volume of nonres bldgs workload is up 14%. So, we have a 3.5% increase in jobs to accomodate a 14% increase in volume.

The last year has shown a huge increase in the volume of nonres bldgs work, without an equal increase in jobs. This shows the excess nonres bldgs jobs for the past three years is now absorbing new workload, (a 3.5% increase in jobs to accomodate a 14% increase in volume), without a cry of jobs shortages.

SEE more discussion on Volume and Jobs

here 2023 Construction Volume Growth

and here Infrastructure Construction Expansion – Not So Fast

Sample PP Slides for Economic Forecast Q2 2023

May 17, 2023 11:17 am / Leave a comment

On Thursday morning May 25th, I will be presenting my Q2 2023 Construction Economic Forecast at Hanson Wade’s Advancing Preconstruction conference in Phoenix, AZ. Here is a selection of the slides cut from the full presentation.

The full presentation covers the data used in preparation of the full forecast, and it’s potential impact on the outcome, including Construction Starts, Backlog, Cashflow, Spending, Inflation, Business Volume, Jobs and Risk.

Hanson Wade’s Advancing Preconstruction conference is one of the largest, if not the largest, preconstruction conferences held in the United States. This is my 6th year presenting at AP.

EdZ 2023 Q2 SAMPLE Economic Forecast May 2023 Download

The Next Forecast Challenge

April 23, 2023 11:30 am / Leave a comment

The next big challenge in construction forecasting is to determine, Will Nonres Bldgs spending increase without an equal increase in nonres bldgs jobs? If so, by how much?

At the onset of the Pandemic, nonres bldgs jobs dropped 16%. Jobs have since recovered to down only 1% vs Feb 2020. Spending (bottomed in Sep 2021) fell 17%, but is now up 15% over Feb 2020.

But the key to this comparison is inflation, which, when subtracted from spending gives real volume growth. Inflation adds only to spending, it adds nothing to volume of work.

Nonres Bldgs inflation was 2.4% in 2020, 8.2% in 2021 and 11.9% in 2022. Total Nonres Bldgs inflation from Feb 2020 to Mar 2023 is 26%.

Since the onset of the Pandemic, Nonres Bldgs spending is up 15% but after inflation volume is down 8%. During that time jobs are down 1%. That’s now over three years that jobs exceed volume of work. Let’s look at more recent data.

In the last 12 months, Mar’22 to Mar’23, nonres bldgs jobs are up 3.5%. Nonres Bldgs spending is up 21%, but after ~7% inflation, volume of nonres bldgs workload is up 14%. So, we have a 3.5% increase in jobs to accomodate a 14% increase in volume.

The last year has shown a huge increase in the volume of nonres bldgs work, without an equal increase in jobs. This shows the excess nonres bldgs jobs for the past three years is now absorbing greater workload, (a 3.5% increase in jobs to accomodate a 14% increase in volume), without a cry of jobs shortages.

What’s the real magnitude of this difference in percent growth, a 10.5% increase in volume over jobs. Well that 10.5% increase in volume is $50 billion worth of construction put-in-place. Not delayed, not canceled, put-in-place. With no equal increase in jobs. So the existing jobs put this work in place. $50 billion in one year would normally require 250,000 jobs to put-in-place. Or by using overtime and working the existing workforce longer hours to get it done, the entire nonres bldgs workforce of 3.5 million would need to work 10 hour days 5 days a week to put that much extra work in place. Well, BLS reports hours worked changed by less than 1 hour/week.So, it wasn’t accomplished with added jobs and it wasn’t accomplished with overtime.

Some regular readers here could probably point back to a half dozen articles over the last few years in which I describe nonres bldgs volume levels had dropped but jobs had not. I mentioned before that existing jobs could and probably would absorb some of the growth. That could occur if there were a need to backfill volume to support the existing workforce.

The forecast for Nonresidential Buildings spending in 2023 is +20%. After 6% inflation, volume is forecast +14%. Jobs will not increase by 14%. Jobs have never increased more than 5% and normal is 3.5%. A 14% increase is equivalent to 500,000 jobs, just to support the growth in nonres bldgs. 500,000 jobs is double the normal annual rate of growth for all construction jobs. Nonres Bldgs is is only 33% of all construction

So the questions for the forecaster are these, 1) do we break the mold for construction jobs growth and add half a million jobs, and exceed all known indicators on construction jobs growth?, 2) Will volume vs jobs grow similar to the previous year, volume up 14% and jobs up 3.5%?, or 3) Does nonres bldgs volume growth slow down to a rate of growth more in-line with jobs growth?

I’m heavily leaning to #2, volume will exceed jobs growth. Some of the added work in the near future will be absorbed by the current workforce, but the workforce has already absorbed a great deal in the past year. Also I do think I’m partly leaning towards #3, volume growth will slow to less than currently predicted, although not nearly to the low level of historical jobs growth. I don’t expect jobs growth to exceed historical maximum of 5% annually, 175,000 nonres bldgs jobs. I do expect volume growth will exceed jobs growth, but by much less than in this past year. I do expect to extend the forecast spending out to a further date.

Construction Data Briefs APR 2023

April 7, 2023 3:04 pm / Leave a comment

Construction is booming. Nonresidential buildings is leading growth. For the first two months of the year, total construction spending year-to-date (ytd) is up 5.9%, but nonresidential buildings spending is up 23% ytd, the fastest rate of nonres bldgs growth in over 20 years. Nonresidential buildings annual rate of spending has increased 19% in the last six months. Nonbuilding spending ytd is up 8%. Nonbuilding annual rate of spending increased 10% in the last four months. Residential spending peaked in March 2022. Since then the annual rate of residential spending has dropped 11%.

Total Construction Spending in 2023 is now forecast to reach $1,894 billion, an increase of 5.3% over 2022.

Nonresidential Buildings spending in 2023 is now forecast at $629 billion, an increase of 20.3% over 2022.

STARTS

The rate of construction spending in 2023 will be influenced predominantly by a 40% increase in new nonresidential building starts in 2022. In recent years, new nonres bldgs starts averaged $300 billion/year. In the 2nd half of 2022, starts averaged over $500 billion/year. Many of those projects will have peak spending in 2023. Some will occur in 2024.

Residential construction (Dodge) starts posted the five highest months ever all in the 1st 6 months of 2022. In the second half of 2022, residential starts fell 15%. In Jan and Feb 2023, starts dropped another 20% below 2nd half 2022. Starts are now down 25% in 12 months.

Nonresidential Bldgs starts in 2022 posted the largest ever one-year increase in new nonresidential buildings construction starts, up 40%. Starts were also up 15% in 2021. Nonres Bldgs new starts in the 2nd half 2022, averaged 67% higher than any other 6mo period in history.

Growth in Manufacturing construction starts for 2022 far surpasses growth in any other market, up over 150%. Office is up 36% (datacenters), Healthcare up 17%, Comm/Rtl up 23% (warehouses).

Non-building starts increased more than 100% in July 2022. The 2nd half 2022 was up 50% over 1st half 2022. Starts for 2023 are forecast up 15%. For 2022, Highway up 25%, Transportation up 45%, Power up 30% and Public Works up 15%.

SPENDING FORECAST

Construction Spending through February 2023 is up 5.9% ytd. Spending is forecast to finish 2023 up 5.3%.

While residential falls back nearly 7% in 2023, Nonresidential buildings is leading with a forecast of 20% spending growth.

Total construction spending for 2023 is on track to increase +5.3%. Residential -6.7%, Nonres Bldgs +20.3%, Nonbldg +13.5%.

SPENDING BY SECTOR CURRENT $ AND INFLATION ADJUSTED CONSTANT $

In 2023, it’s Nonresidential Buildings leading growth. In 2024, it will be Nonbuilding Infrastructure leading spending growth. Both are expected to grow greater than the inflation index.

Current $ Spending, Inflation and Volume SEE Construction Inflation 2023

Inflation adjusted volume is spending minus inflation, or to be more accurate, spending divided by (1+inflation). The following table shows spending, inflation and volume (spending without inflation) for each year. All $ are current to the year stated. This table shows that inflation adds nothing to volume growth. All values in this table are current to the year stated. The values in this table are not indexed to a constant value year. This is an attempt to show that business volume in any given year is not as high as spending would indicate. When inflation is positive, volume is always less than spending by the amount attributed to inflation.

Spending during the year is the value of business volume plus the inflation on that volume. When inflation is 12%, volume plus 12% = total spending. Revenue is generally measured by spending put-in-place during the year. In 2022, Nonresidential buildings business volume was 12.2% less than spending, or less than revenue. Residential volume was 15.7% less then spending.

SPENDING TOTAL CURRENT $ AND INFLATION ADJUSTED CONSTANT $

Overall Construction Spending is up 22% in the 36 months since the onset of the pandemic, but, during that same period inflation increased 31%. After adjusting for 31% inflation, constant $ volume is down 7%. So, while the plot on the left shows three years of increases in spending, the actual change in business volume is still down and has not yet returned to the pre-pandemic peak in Feb-Mar 2020.

NONRESIDENTIAL SPENDING (CURRENT $) AND VOLUME (CONSTANT $)

Nonresidential Buildings spending in 2023 is forecast at $629 billion, an increase of 20.3%, or $100 billion and add another $50 billion in 2024.

In 2022 we realized the largest ever one-year increase in new nonresidential buildings construction starts, up 40%. Starts were also up 15% in 2021.

The AIA Consensus Construction Forecast, December 2022 predicts only a 5.8% increase in spending for nonresidential buildings in 2023. My beginning of year forecast for comparison was 15.8%. My current forecast is +20.3%.

We began the year with record new starts indicating an increasing spending rate. The monthly rate of spending is up 12 of the last 14 months, has increased for 6 consecutive months and is up 20% in the last 6 months. The rate of spending is predicted to increase 10 out of 12 months in 2023, a total increase of 11% over the year. Barring any unforeseen negative occurrence, the trajectory in the rate of spending is increasing.

Year-to-date nonresidential buildings spending for Jan+Feb is up 23%. This is driven by Manufacturing, up 53% ytd, but also supported by Lodging up 38% ytd and Commercial/Retail up 23% ytd. Every nonresidential building market except Educational (up only 8%) is up greater than 10% ytd.

Nonresidential buildings spending fell 17% from March 2020 to Sept 2021, then increased 36% from Sept 2021 to Feb 2023. Currently, as of Feb 2023, spending is 14% higher than the pre-pandemic peak in Feb 2020. But nonresidential buildings inflation over that same 36 months increased 26%. Business volume in constant $ actually fell 25% from Feb 2020 to Sept 2021, and hit a secondary low in mid-2022. Since then, the actual change in business volume has increased 18%, but that still leaves volume nearly 10% lower than the pre-pandemic high.

Non-building Infrastructure spending for 2023-24 is forecast up 25%, up $50 billion/year for two years. Non-building Infrastructure will post the 1st year of sizable gains since 2019, forecast at $415bil, up 13.5% in 2023. In 2022, Highway and Public Utilities posted strong gains of 9.1% and 16.6%, but those gains were offset by a 8.7% decline in Power. For 2023, Highway and Transportation recorded the strongest starts in five years. All markets post spending gains in 2023, with Highway up 26%, Transportation up 9% and Public Utilities up 8%.

Non-building Infrastructure spending is up 4% in 36 months since Feb 2020. After adjusting for 26% inflation, constant business volume is down 17%.

RESIDENTIAL SPENDING SF-MF-RENO CURRENT $ AND CONSTANT $

Residential starts are forecast down or flat in 2022 and 2023. Spending grew 44% in the last 2yrs, but inflation was 30% of that 44%. With no growth in starts forecast for 22-23, spending will struggle to keep up with inflation. Residential spending is forecast to fall 7% in 2023. Most of the decline is single family. Single family is down a total of 23% over 10 consecutive months. Multifamily is up 22% over 13 consecutive months. Renovations gained 25% in 2022 but spending varies +/- 10% throughout the year. Midyear there is potential for 6 consecutive down months in residential spending.

DOES VOLUME OF WORK SUPPORT JOBS GROWTH? or, Can jobs growth support volume of work?

Jobs should track volume, not spending growth. Volume = spending minus inflation. Volume is down, although now increasing, while jobs are up. Nonres Bldgs volume, in constant $, fell 25% from Feb 2020 to Sept 2021, and hit a secondary low in mid-2022. Since then, the actual change in nonres bldgs volume has increased 18%. Yet nonres bldgs jobs increased only 3.5%. That still leaves volume nearly 10% lower than the pre-pandemic high. If the same production levels ($ put-in-place per worker) as 2019 were to be regained, theoretically, nonresidential volume would need to increase 10% with no increase in nonresidential jobs. For now, productivity is well below that of 2019.

Nonresidential Buildings spending in 2023 is forecast at $629 billion, an increase of 20.3%, or $100 billion and another $50 billion in 2024. Non-building Infrastructure spending for 2023-24 is forecast up 25%, up $50 billion/year each year.

This growth amounts to an increase of $150 billion in 2023 and $100 billion in 2024. It takes 5000 jobs to put-in-place $1 billion. So $100 billion in 2024 would need 500,000 new jobs. 2023 would need 750,000 new jobs.

If we were to grow the labor force to meet the newly identified workload added from new starts, we would need to double the prior maximum rate of construction jobs growth. Normal growth is about 250,000 jobs per year and maximum prior growth is about 400,000. The workload discussed above would require 750,000 + 500,000 new jobs back to back. That’s an expansion of the industry by 15%, in an industry that normally grows 3%/yr. This industry can’t grow that fast. (Which means I need to account for over-capacity growth as a potential reduction in future forecast. You can’t increase spending that fast if you can’t expand the industry that fast).

4-16-23 update- Everything forecast above is predicated on the normal cash flow of forecast new starts. As of yet, this forecast has not been reduced to reflect the inability of the industry to expand jobs fast enough to absorb the volume of spending generated from forecast starts. Whether new starts get canceled or delayed, spending needs to be reduced annually for at least the next two years simply because jobs cannot increase fast enough to put-in-place the forecast spending. This impediment needs to be accounted for and could reduce overall construction spending forecast by approximately $40-$60 billion in 2023 and $25-$40 billion in 2024. The most likely markets where a reduction would occur are Manufacturing, Highway, Commercial/Retail and Office.