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Self-Checking Forecast

January 17, 2023 3:50 pm / Leave a comment

Two plots track how construction forecast matches up to actual spending. The light line is the monthly growth predicted by my forecasting. The same color dark line is the actual spending. The changes in Residential dominate the 1st plot, so the 2nd plot is just Nonresidential to improve the scale.

One comment about the Residential plot: Starts, which are needed to create the forecast, may not have accounted for the extreme inflation, so spending could have easily grown to 5% to 10% higher than the starts would have forecast. Notice the similarity between the two residential plots. Although the forecast is not at the same magnitude as the actual spending, it is still predicting the slope, the change in spending. Jul20 to Jan21 is where the plots varied.

Nonresidential forecasts vs actuals compare really well. By the end of 2020, my model was predicting a low point in nonresidential buildings spending out in the 2nd half of 2021. Nobody else predicted that bottom. The Starts Cashflow model does a good job of predicting spending.

Infrastructure Construction Expansion – Not So Fast

December 23, 2022 11:53 am / Leave a comment

Only once in 25 years have heavy engineering construction jobs increased more than 5% in one year (7.5% in 2018, 72,000 new jobs). Most of the time jobs growth is under 4% (40,000 jobs). Average growth the last 12 years (see notes below) is near 3% or 30,000 jobs per year.

U. S. Bureau of Labor Statistics (BLS) national data shows there are currently 1,078,000 Heavy Engineering jobs. In 2019 there were 1,084,000. There was a loss of nearly 100,000 heavy engineering jobs in early 2020 due to the onset of the pandemic. In 2022, heavy engineering jobs have been nearly constant, just above 1,070,000 the entire year.

Highway/Bridge comprises approximately 30% of all heavy engineering spending, so supports about 300,000 jobs per year.

The current forecast for new construction starts has increased the forecast for spending growth dramatically above previous years. Both starts and spending statistics give an indication of what to expect in the jobs situation. The spending forecast is indicating a need for a large increase in jobs to support the new work. Spending (also consider inflation) is the critical value that determines the need for jobs. Without sufficient jobs, the spending cannot take place. If jobs do not increase to support the forecast spending, the timeline for the spending very likely will get extended.

It takes 400 jobs per year to put in place $100 million of heavy engineering construction in the year. (Some types of work would take 500 jobs, but I’ll work with 400 here). A construction program that hypothetically adds $1 billion of new construction starts in a year would see that work put in place (for Highway work) approximately over the next few years at a ratio similar to a 15:30:35:20 schedule, $150 million the 1^st year, $300 million the 2^nd year, $350 million the 3^rd year and $200 million in the 4^th and 5^th years. To support $150 million growth in the 1^st year would require 600 new jobs. To support an increase of $1 billion in spending in one year would require 4,000 new jobs.

How will the average growth in jobs affect the growth in new starts and forecast spending?

Modeling the new starts forecast, based on the spending schedule outlined above, projects the spending forecast for Highway/Bridge work over the next few years will increase by $15 billion/year. This would indicate a need to add 15 x 4,000 = 60,000 new highway construction jobs each year in 2023, 2024 and 2025. But the entire heavy engineering jobs pool has increased by that amount only once in 25 years and average growth for all heavy engineering jobs is only 20,000 jobs/year. If we take out 2020, when jobs plummeted, the average growth from 2011 to 2022 was 30,000 heavy engineering jobs per year. Keep in mind, highway is only 30% (6,000 to 9,000) of those averages. This indicates it will be very difficult to support spending growth of this magnitude. While the starts projections and resulting spending forecast indicate rapid growth, this market sector has never experienced spending or jobs growth this fast and it is likely that growth will be slower than indicated.

Some of this added work will be absorbed into the existing workforce, backfilling a large deficit in business volume. See this short post Construction Spending – Volume – Jobs Since the Pandemic, nonbuilding construction volume (spending minus inflation) is down 20%, but nonbuilding jobs are down only 1.5%. Compared to 2019, nonresidential construction has an 18% business volume deficit. In other words, Nonres construction in 2022 now has 18% more jobs per volume of work put-in-place than it did in 2019. Total all construction business volume in that period is down 10% while jobs are up 1.5%.

Aside from backfilling volume of work, this shows a shortfall of workers that would likely be needed to support the increased workload. The labor force is insufficient to accommodate that large an annual increase in spending. This could result in one or more of these outcomes: either the workforce must somehow increase faster, or the project spending could slow and duration would get extended, which is more likely.

Jobs shortfall to support 2022-2026 spending identifies unsupported need. If jobs cannot be filled, annual spending will be lower and construction timeline would get extended.

Currently, national construction unemployment rate is near or under 4%. That is an extremely tight jobs market, not an easy growth situation. Typically, when unemployment is in the 6% to 8% range there are workers on the sidelines ready to go right back to work. Unemployment seldom falls below 5%. The current jobs situation and unemployment rate seems to indicate there are few workers ready and available to support an immediate increased workload. This adds to the difficulty of expanding the workforce at a rapid rate.

In this analysis, the potential rate of jobs growth and the current unemployment rate both suggest that the projected rate of spending growth would not be supported. A slower rate of spending leads back to reducing starts.

Construction Inflation 2023

December 20, 2022 9:41 am / 10 Comments on Construction Inflation 2023

Construction Inflation

1-16-24 SEE Construction Inflation 2024

1-12-24 PPI Inputs table updated to Dec data, updated quarterly inputs, updated 2023 Firms Inflation plot

12-13-23 PPI ( Inputs Only) updated to Nov data

11-15-23 PPI Inputs and Final Demand updated to OCT data

10-13-23 PPI Inputs updated to SEP data

10-4-23 PPI Inputs and Final Demand tables updated to AUG data

8-11-23 PPI Inputs and Final Demand tables updated to July data

8-19-23 Inflation Table 2015-2025 updated to Q2 2023

Usually construction 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 in your budget an appropriate inflation factor to represent the expected cost of the building at that time. Why the midpoint? Because half the project cost occurs prior to that point and half occurs later than that. The balance point for spending is 50-60% into the schedule. Construction inflation should always be calculated from current cost to midpoint of construction, or in the case of converting an older actual cost to a future budget, from midpoint to midpoint.

Any time a construction project is delayed or put on hold to start at some future date, construction cost inflation must be calculated and added to the previous budget to account for the unanticipated cost increase due to the delay. Of utmost importance is using appropriate cost indices and forecasting future cost growth to account for the difference in original budget and revised budget.

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation.

Long-term construction cost inflation is normally about double consumer price index (CPI).
Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/supplier margins.
When construction volume increases or decreases rapidly, margins change rapidly.

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.

Consumer Price Index (CPI), tracks changes in the prices paid by consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should not be used to adjust construction pricing.

Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. The PPI tracks material cost inputs at the producer level, not prices or bids at the as-built level.

Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that DO NOT represent whole building costs yet are widely used to adjust project costs. Neither includes contractor margins.

It should be noted, there are far fewer available resources for residential inflation than for nonresidential inflation.

One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on inflation.

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

Selling Price is whole building actual final cost. Selling price indices track the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor margins or overhead and profit.

Refer to National Inflation Indices for comparison to several national selling price indices or various Input indices. National reference indices are useful for comparison. Few firms project index values out past the current year, therefore all future projections in these tables are by Construction Analytics.

1-18-23 Construction Analytics PPI Tables and Building Cost Index

Construction Inputs to Nonresidential Buildings dropped for five of of last six months, now down 5.2% since June, but still up 7.2% since last December. However, the average index for 2022, when compared to the average for 2021, is up 15.7%.

The average growth for the year accounts for all the peaks and valleys within each year and is the value carried forward into the index tables and charts. A glaring example of the difference between Dec/Dec tracking, or year over year, and annual average tracking, is Steel Mill Products which is down 28.7% Dec22/Dec21, but the annual average for 2022 is still up 9.0% from the average 2021. In fact, the last three years show Dec/Dec combined inflation is +71%, but the annual averages for the last three years show total inflation growth of 87%. Annual averages should be used to report inflation.

Residential inputs are down seven of the last eight months, down 7.1% since April, but still up 7.1% since last December. The average for 2022, when compared to the average for 2021, is up 12.7%.

Several major cost components have been on decline the last few months: Lumber/Plywood, Steel Mill Products, Fabricated Steel, Steel Pipe and Tube, Aluminum and Diesel Fuel. Of the 15 items tracked here, 10 declined in the last quarter. Concrete is the only product that has not posted any monthly decline in 2022. Costs are still high, but are moving in the right direction after 1st quarter 2022 costs that averaged +7% (28%annual) to +8%. Historically, most cost increases are posted in the 1st quarter and the least in the 4th quarter.

If inputs costs remain where they are right now as we start the year, input costs for 2023 will finish the year at -2% Nonres and -4% Residential. If we were to post small but steady cost increases of 0.25%/mo for the rest of the year, we would end with both Res and Nonres input costs up 4% for the year.

4-14-23 PPI Inputs slowed considerably since last year.

PPI Inputs to Construction March 2023—Nonres down 0.1% in Mar, down 6 of last 12mo, -1%over 12mo. Rsdn down 0.3% in Mar, down 9 of last 12mo, -7.5% over 12mo.

Qtrly change last 5 qtrs Nonres 9.7, 3.0, -3.2, -2.5, 1.6 Rsdn 15.2, -1.4, -5.0, -2.3, 1.0

Historically, the 1st or 2nd qtr would post the highest gains for the year. Here’s 1st and 2nd qtr for 2021, 2022, 2023

Nonres 7.1% & 8.9, 9.7 & 3.0, 1.6 & … Rsdn 8.1 & 12.6, 15.2 & -1.4, 1.0 & …

Last 12 months down -1.0% for Nonres and -7.5% for Rsdn. 1st qtr 2023 1.6 and 1.0, instead of (2022) 9.7 and 15.2% and (2021) 7.1 and 8.1%

Still early, but 12mo, 6mo and 3mo PPI signs are pointing down or at least low increases for construction inputs in 2023

Be careful when referencing the 2023YTD. YTD is the growth so far this year. That is growth AFTER December. That does not represent the growth from the avg 2022. As an example, using Inputs to Nonres, the average growth in 2022 was 15.7%. That could be expressed as a starting Jan index of 100, a Jul 1 index of 115.7 and an ending Dec index of 131.4. The average of all 12 months in 2022 = 115.7, the average being at midyear. Well by averages the midyear index would be 115.7. The 2023YTD index is 2.6% since December (131.4) not 2.6% added to 115.7. This really highlights why it is much better to track the index than to report the percentage.

The last column, YTD vs 2022avg, gives an indication of 2023 avg if current YTD costs remain constant for the remainder of the year.

PPI INPUT TABLES and Inputs plot UPDATED 1-12-24

Final Demand PPI, or Selling Price, represents contractors bid price to client. Includes labor, material, equipment, overhead and profit. Labor includes change in wages and productivity. Every three months (Jan, Apr, Jul, Oct) BLS performs an update survey to correct these Final Demand indices. For the past six quarterly updates, about 80% to 90% of the change in the index was posted in the update month. Therefore, Final Demand indices should not be referenced monthly. These are quarterly indices. January is an update month. PPI Final Demand for Jan index is basically the correction for Nov and Dec. The index should NOT be compared mo/mo. Compare qtr/qtr, but make sure to use the correct update month with two other months, (Jan +Dec+Nov)/(Oct+Sep+Aug) The table shows the slowing progression from a 20% annual rate of gain for all of 2022 (avg nonres bldgs), to 2% the last two qtrs to only 0.1% the last qtr. Slowing is good. The last column, YTD vs 2022avg, gives an indication of 2023 avg if current YTD costs remain constant for the remainder of the year.

PPI FINAL DEMAND TABLE UPDATED 11-15-23

The Construction PPI Final Demand for Nonres Bldgs 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 Offc, have at least 6 months of declining cost. Office has been declining for only 3 months but Warehouse has been declining for 8 months.

The final demand PPI index for 2022 nonresidential buildings is substantially higher than Construction Analytics nonresidential buildings cost index reported in the index tables. These PPI values are but one of the references used to develop construction analytics building cost index.

Current and predicted Inflation rates 1-18-23:

2020 Rsdn Inflation 4.5%, Nonres Bldgs 2.6%, Non-bldg Infra Avg -0.3%
2021 Rsdn Inflation 13.9%, Nonres Bldgs 7.4%, Non-bldg Infra Avg 7.9%
2022 Rsdn Inflation 16.1%,Nonres Bldgs 12.9%, Non-bldg Infra Avg 13.8%
2023 Rsdn Inflation 1.9%, Nonres Bldgs 4.0%, Non-bldg Infra Avg 4.3%

Current and predicted Inflation updated to Q4’22 3-3-23

2020 Rsdn Inflation 4.5%, Nonres Bldgs 2.4%, Nonbldg Infra -0.3%
2021 Rsdn Inflation 14.0%, Nonres Bldgs 8.0%, Nonbldg Infra 7.9%
2022 Rsdn Inflation 15.8%, Nonres Bldgs 12.2%, Nonbldg Infra 13.8%
2023 Rsdn Inflation 2.2%, Nonres Bldgs 4.8%, Nonbldg Infra 4.7%

Current and predicted Inflation updated to Q2’23 8-17-23

2021 Rsdn Inflation 13.9%, Nonres Bldgs 8.2%, Nonbldg Infra 7.8%
2022 Rsdn Inflation 15.7%, Nonres Bldgs 12.1%, Nonbldg Infra 16.9%
2023 Rsdn Inflation 1.2%, Nonres Bldgs 5.4%, Nonbldg Infra 3.9%
2024 Rsdn Inflation 4.0%, Nonres Bldgs 3.8%, Nonbldg Infra 3.5%

Current and predicted Inflation updated to Q3’23 10-2-23

2023 Rsdn Inflation 1.4%, Nonres Bldgs 6.0%, Nonbldg Infra 3.9%
2024 Rsdn Inflation 4.0%, Nonres Bldgs 3.8%, Nonbldg Infra 3.5%

Most of the tables and plots here are cumulative indexes. Construction Inflation annual percent for Nonres Bldgs is plotted on this bar chart. The gray bar represents range of predicted inflation from 8 to 10 sources. The dark line is Construction Analytics (final cost) BCI. The red dash is ENR BCI (input index). The range in 2021 and 2022 was widest ever. The range for 2023 is small.

Construction Analytics Building Cost Index and other industry references

Tables and Plots 2001-2015 updated to Q4’22 2-6-23:

the following table 2015-2024 was updated to Q2 2023 on 10-2-23

In the table above, dividing the current year by the previous year will give the current year inflation rate. All indices are the average rate for the year.

Also in the tables above, all reference indices data is gathered, then all are normalized to a common base, 2019 = 100. This allows to see how different indices compare.

How to use an index: Indexes are used to adjust costs over time for the effects of inflation. An index already compounds annual percent to prevent the error of adding annual percents. To move cost from some point in time to some other point in time, divide Index for year you want to move to by Index for year you want to move cost from, TO/FROM. Costs should be moved from/to midpoint of construction, the centroid of project cost. Indices posted here are at middle of year and can be interpolated between to get any other point in time.

Tables and Plots updated to Q4’22 2-6-23:

This Plot updated to Q3’23 11-15-23:

Plots below updated to Q4’23 1-12-24:

4-21-23 This table and plot is an extension of the tables and plots above. Data is as of Q4 2022, but the table covers from 1967 to 2000. Data is pretty sparse.

Previous year Construction Inflation 2022 – updated 12-10-22

Previous year PPI Tables 2022 Producer Price Index to NOV’22

Links to Data Sources Construction Inflation >>> Links

Construction Year-End Spending Forecast Dec’22

December 20, 2022 8:50 am / Leave a comment

A few brief comments. More comments to follow

Construction Spending – Volume – Jobs

December 3, 2022 8:25 am / 4 Comments on Construction Spending – Volume – Jobs

12-3-22

This plot is not showing good performance. Volume and jobs should be moving directly in tandem. When inflation is very high, spending climbs rapidly. But most of the climb is just due to inflation. To find out what’s really going on we need to look at business volume. Take out the inflation $.

Business volume = Spending minus Inflation. Inflation adds nothing to business volume. Inflation adds only to the amount of revenue that changes hands.

In 2022, residential spending is up 16%. Sounds great, homebuilder’s revenues are up 16%. It’s great until you note that residential inflation for 2022 is 15%. Real residential business volume for 2022 increased only 1%.

Since Jan.2020 spending is up 20%. Revenues are up 20%. It’s pretty hard to not think you need additional staff to support 20% growth in revenues. But inflation is 30%. Take out the inflation dollars and we find that volume is DOWN 10%. Well, during that time, jobs increased 1 to 2%. And yet, business volume is down 10%. That’s a massive 11%-12% loss in productivity. With labor being about 35% of the total cost of a job, that’s added about 4% to total inflation.

I recently read an article that stated (attributed to Assoc. Bldrs. & Contractors) that the construction industry needs to add 1,000,000 jobs over the next two years. Here’s why that won’t happen:

1) The construction industry has never added more than 440,000 jobs in one year. It’s only gone over 400,000 four times in 50 years, the last time 2005, and never two years in a row. The most construction jobs added in a year since 2011 is 360,000 in 2014. The average growth rate from 2011 thru 2019, and now also in 2022, is 230,000 jobs per year. The most jobs added in any two consecutive years is just over 700,000 in 1998-99 and 2005-06. So, the construction industry may not have the capacity to grow 1,000,000 jobs even in two years.

2) Since the Pandemic, nonresidential construction volume is down 20%, but nonresidential jobs are down only 1.5%. Compared to 2019, nonresidential construction has an 18% business volume deficit. In other words, Nonres construction in 2022 now has 18% more jobs per volume of work put-in-place than it did in 2019. Total ALL construction business volume in that period is down 10% while jobs are up 1.5%.

3) Inflation is playing a key roll here. In 2022, construction spending is increasing $160 billion or 10%. But inflation is 13%. Real total construction business volume in 2022 is down 3%. Jobs are up. For 2023, spending is forecast to gain $80 billion, 4.6%, but after inflation volume will be down 1%. 2023 numbers are driven down by residential.

4) In 2023, nonresidential volume increases $35 to $40 billion. Residential volume drops $50 billion. It takes 4000 to 5000 jobs to put-in-place $1 billion of volume in one year. Nonbuilding and nonresidential buildings growth of $40 billion would need 160,000 to 200,000 new jobs. Some small amount of that will come from the drop in residential. But, go back and read #2 again.

Since Jan 2020, the construction industry as a whole has nearly +175,000 (+2%) more workers to put-in-place -$175 billion (-10%) LESS volume. That’s a huge loss to productivity that may take years to recover, if ever.

Midyear 2022 Spending Forecasts Compared – updated 2-1-23

November 18, 2022 2:13 pm / Leave a comment

How we doin?

In the AIA Midyear 2022 Consensus, eight firms provided forecasts for Nonresidential Bldgs markets construction spending for 2022. Their forecasts for 2022 are summarized here, percent +/- growth. Construction Analytics midyear forecast is included for comparison. Who is closest, who’s not? The year-to-date (YTD) value is through September 2022. I’ll update after final spending for 2022 is posted in Feb. 2023, and then revised in July. The Sept YTD data was released Nov.1st. I’ve included my current (Nov) forecast for 2022 final spending, the eventual target of all these forecasts, to the left of the table.

Here’s the initial 2022 total year spending released 2-1-23. This will get minor revisions in Mar, Apr and Jul. As in past years, I’ve highlighted in green for best estimate and red for worst estimate. This is the 3rd consecutive year I’ve produced collectively better forecasts than those published in the AIA Consensus. You can follow the links below this posts to prior year comparisons.

Construction Briefs Nov’22

November 2, 2022 9:39 am / Leave a comment

Construction is Booming. Well, OK, construction is setting up to be booming in 2023-2024. New construction starts for Sept are down 19% from August and yet starts are still near the highest levels ever. Sept is 4th highest total starts ever, all four of the highest ever months of new starts are in 2022. July and Aug were the two highest months of new starts ever. Total growth in starts over 2021-2022 > Nonres Bldgs +50%, Nonbldg Infra +40%, Residential (all in ’21) +22%.

STARTS

Construction Spending will not be participating in a 2023 recession. Except, residential might. Residential starts in 2021 were up +21% to a really high new high. But starts are forecast flat in 2022 and 2023. Spending grew 44% in the last 2yrs, but inflation was 30% of that 44%. With zero growth in starts forecast for 22-23, spending struggles to keep up with inflation. Residential will post only an increase of 3% in 2023 spending, but midyear there is potential for 6 consecutive down months.

Current and predicted Inflation SEE Construction Inflation at Year-End 2022

Inflation adjusted volume is spending minus inflation.

Total volume for 2022 falls 1%. Rsdn +3%, Nonres Bldgs -1%, Nonbldg -9%.

Total volume for 2023 is up 1%. Rsdn -3%, Nonres Bldgs +8%, Nonbldg +2%.

SPENDING TOTAL ALL $ CURRENT $ AND INFLATION ADJUSTED CONSTANT $

Overall Construction Spending is up 15% since the onset of the pandemic, but, after adjusting for 25% inflation, volume is down 10%. Residential jobs are near even on track with volume, but Nonres and Nonbldg have volume deficits of approx 20-25% vs jobs.

Feb 2020 to Aug 2022
Resdn spend +42%, vol +6.5%, jobs +7%
Nonres Bldgs spend -8%, vol -24%, jobs -3%
NonBldg spend -7.5%, vol -24%, jobs +1%

JOBS VS CONSTRUCTION VOLUME VS SPENDING (VOL = SPENDING MINUS INFLATION

Labor Shortage? Jobs should track volume, not spending growth. Vol = spending minus inflation. Volume is down while jobs are up. If the same production levels ($ put-in-place per worker) as 2019 were to be regained, theoretically, nonresidential volume would need to increase 20% with no increase in nonresidential jobs. I don’t expect that to occur, therefore, productivity will remain well below that of 2019.

LABOR PRODUCTIVITY

Over the next year or two, there could be several billion$ of construction spending to repair hurricane damaged homes in Florida. That spending will NOT be reported in Census spending reports. Renovations to repair natural disaster damage are not recorded in construction spending. Construction spending to replace homes entirely lost to damage IS reported in Census spending, but is reported as renovations/repair, not new SF or MF construction.

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

Construction Spending thru Aug’22

October 4, 2022 6:58 am / 2 Comments on Construction Spending thru Aug’22

Construction Spending year-to-date thru August is up 10.9% and is on track to finish the year up 10.1%. Leading gainers for 2022 forecast are Manufacturing spending up 23%, Commercial/Retail up 17% and Residential with a 2022 forecast up 16%. Nonres bldgs are forecast up 7.8%. Nonbuilding Infrastructure is held to a forecast loss of 0.3% due to nearly a 10% drop in Power but offset by a 16% gain in Sewer/Water/Conservation. Every nonresidential building category thru August year-to-date inched closer to both my midyear forecast and my current annual forecast. This plot shows the spending forecast from starts cashflow vs actual spending to date. Starts cashflows do a good job of predicting spending.

starts-cf-index-nonres-2015-2022-10-3-22

Significant changes since my 9-1-22 forecast: Residential up $11bil 1.3%, Manufacturing up $6bil up 8%. Residential construction spending is down 3.5% from the most recent peak in Mar 2022. It is on track to finish the year up 16%. Residential construction starts, $ as measured by Dodge, JJA 3mo avg is down 10% from the peak in the previous 3mo. But that peak qtr, MAM, is up 5% from the total in 2021 which was up 22% from 2020. Avg starts for the last 20 months has remained above the former high in 2005.

spending-ytd-2022-plus-markets-2021-2023-10-3-22

Nonresidential Buildings Construction spending is on track to finish the year up 8% powered by a 23% increase in Manufacturing spending and a 17% increase in Commercial/Retail spending. Nonresidential Bldgs new starts are projected to finish up 22% in 2022.

spend-all-monthly-current-2018-2023-10-3-22

Total ALL Nonresidential construction spending, buildings and nonbuilding, is down 2.8% from the most recent peak in March 2022, but is up 5.2% year over year. Total Nonresidential spending is on track to finish the year up 4%, led by a 7.5% annual increase in Nonres Bldgs. but held back by a 9% drop in Power, 30% of the non-building total. Spending took a downturn in April but this is expected to turn up after September. Most of the downturn is due to residential. By October all sectors are forecast to post gains.

spend-sector-monthly-current-2018-2023-10-3-22

The difference between these two plots is INFLATION, which adds nothing to the volume of work. The CONSTANT$ plot is like the volume of business that takes place. The Spending plot shows the $ that changed hands to conduct that business volume.

Construction Starts Thru Aug’22

September 22, 2022 3:42 pm / Leave a comment

Total construction starts for August did indeed fall (9%) as predicted from the lofty highs recorded in July. This is not alarming as you will see why.

Nonres Bldgs construction starts in July, $ as reported by Dodge, increased 75%+ from the previous month and 65%+ from the previous 3mo and 6mo avgs. That is a once in a decade increase. In 2018, starts posted an increase of 60%. The July and August 2022 starts is the only time starts exceeded that of 2018.

Historically, then starts would fall back to the 3mo or 6mo (normal) avg rate within the next two months. Never have starts increased the month after or even within the next several months after reaching such a high level. Until now. After posting a 75% increase in July, Nonres Bldgs starts for August increased 7%.

The total dollar value of Nonres Bldgs starts in July and August exceeded the total for all Nonres Bldgs starts in Jan+Feb+Mar+Apr.

Even assuming the next 4 months starts fall back to less than the avg rate before the extreme highs in July and August, Nonres Bldgs starts are on track to increase 20%+ for the year, an annual rate of growth achieved only once before, in 2014. With that assumption, for the next 4 months starts will fall 45% from the current high and still be enough to post the highest year ever. Don’t be alarmed if over the next 4 months Nonres Bldgs starts decline from the lofty highs in July and August. Those monthly highs seem unsustainable.

Non-bldg starts are on track to increase +14% total for 2022. Year-to-date non-bldg starts are up 21% with the largest increase in Utility/Gas plants. The entire decline in total starts for August was in non-bldg, but the August level, down 36% from July, is still the 2nd highest since Nov 2019 and in fact the 3rd highest ever.

What’s causing these huge gains? Along with moderate strength across many markets, mega-project starts in last 2 months. $25bil in 3 manufacturing plants, $15bil in 2 LNG projects (these are non-bldg) and $10bil for an airport terminal. Most of the spending from these projects, expected at the midpoint of construction, will occur after 2023.

Residential starts are on track to gain +2% in 2022. A 2% gain may not seem like much but is on top of a 23% gain in 2021 starts. The 1st six months of residential starts in 2022 is at an all-time high. Residential construction starts for JJA 3mo avg is down 10% from the peak in the previous 3mo. But that peak qtr, MAM, is up 5% from the total in 2021, which was up 22% from 2020. Residential starts fell a total of 14% over 3 consecutive months from the peak in Apr to Jul. Starts in August are up 1% from Jul. Avg starts for the last 20 months, in current $, are above the former high in 2005. But inflation adjusted constant$ would put recent starts 60% lower than the former 2005 highs.

Construction Jobs and Inflation

September 2, 2022 9:49 am / Leave a comment

Construction jobs through August 2022 increased to 1.1% above the pre-pandemic high in Q1’20. Factoring in hours worked, we find that is reduced slightly to show jobs x hours worked for August 2022 is 0.4% lower than the peak in Q1 2020. Most anyone would say jobs have returned to the pre-pandemic high.

Construction spending through July is 14.3% higher than the pre-pandemic high in Q1’20. BUT INFLATION through July is 23% higher than pre-pandemic Q1’20. Therefore real construction volume (spending minus inflation) is currently 7% BELOW the pre-pandemic high in Q1 2020.

Jobs are up, but volume is down.

So, when you read that jobs are back to pre-pandemic levels, maybe that’s not as great as you might think. Sure more people are back to work, but has the volume of work needed to support those jobs increased sufficiently?

Inflation hides a lot of reality. We now produce 7% less volume of work put-in-place with 1.1% more workers putting in 0.4% less hours than before. That’s a huge construction productivity loss, down 6.6% in the last 30 months. Where does that productivity loss show up in the data?

Here’s the plot of actual and forecast CONSTRUCTION SPENDING. Compare this to the next plot.

Here’s the plot of actual and forecast CONSTRUCTION SPENDING ADJUSTED FOR INLATION.

Notice, Residential volume is up 11% since Q1 2020, but nonresidential buildings volume is still down 23% and non-building volume is down 18%.

Let’s say construction labor is 35% of total construction cost. If wages go up by 5%, then total cost goes up by 5%x35% = 1.75%. Well, if productivity declines by 6.6%, labor cost goes UP by 6.6%x35% = 2.3%.

That’s the inflation cost. Here’s a look Behind the Headlines. These two plots show the number of jobs required to put-in-place $1 billion of volume (inflation adjusted spending) or the inverse, the amount of volume put-in-place by one job in one year.

It’s great that jobs are coming back, but don’t overlook the cost that has added to inflation. Don’t expect to see a lot of improvement over the next 12 months. In fact, if jobs continue to grow at the current rate (or any rate for that matter), this time next year the imbalance is worse.

Construction Analytics

Author Archives: edzarenski

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