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Construction Starts > Cashflow > Backlog > Spending

The path from construction starts to spending is not direct and not quite as simple as you might think. Spending is the market activity measure that drives all construction economics, so that’s where we need to get too. With an appropriate modeling technique we can get from new starts to predicted spending in a few steps.

Starts CF 2015-2020 10-2-19

New Construction Starts (construction starts referred to here is Dodge Data & Analytics New Construction Starts) is excellent data for forecasting. The following forecast is entirely developed from starts data. No actual spending is incorporated into this forecast. The purpose is to show that using the data properly can produce an accurate forecast.

The starts data is a survey. As in any survey, starts represents a portion of new construction activity. Study shows the survey size varies with each market from about 40% to 70% of actual. Starts data captures a share of the total market or a portion of all construction, on average about 60% of all construction.

The easiest way to understand this is to compare total annual construction starts to total annual spending. National construction starts from 2016 to 2019 range from $750 billion/year to $800 billion/year, while spending in this period ranges from $1,200 billion/year to $1,300 billion/year. From this we see starts data captures a share of about 60% of the total construction market.

The total starts survey averages about 60% of the actual market. In this analysis every market is adjusted by its own individual market share factor. The adjusted starts represent the full amount of starts that would generate the full amount of spending.

To predict spending activity from new construction starts, the starts data must be spread over time using appropriate cash flow curves. On average about 20% of new construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in years three and four. The cash flow curves used in this model are specific to each market type and can vary from the average. 

Applying a market survey factor to develop full magnitude of spending and an expected duration for all starts, depending on market type, to produce a forecast cash flow from starts data, the predicted pattern of spending is developed. The factors have been shown to produce a reliable prediction of total future market activity.

Forecast Summary Table National 10-14-19

Backlog at the beginning of the year or new starts within the year does not give an indication of spending within the year. New starts within the year could contribute spending spread out over several years. Total cash flow in the year, or spending, could include cash flow from projects that started or entered backlog years ago.

Backlog increases if new starts during the year is greater than spending during the year. However, an increase in backlog does not necessarily indicate there will be an increase in market activity. An increase in backlog could represent a level rate of market activity, but for a longer duration.

Cash flow provides the best indicator of how much and when spending will occur. Cash flow from all previous starts gives a prediction of how spending will change monthly from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Total of all national construction starts increased every year since 2008. New starts slowed to +2% in 2018 and are forecast at a potential decline of 0.2% in 2019. Backlog is still up leading into 2020 but after that starts and backlog are forecast to remain flat or decline over the next few years. Total spending declines in 2022. However, as the next tables will show, work distribution is uneven with residential declining and nonresidential up.

Forecast Total All Markets Table National 10-14-19

Nonresidential Buildings starts (excluding Terminals) reached a new high every year since 2009. The last three years starts are up 3% to 4% per year. Every market posted increases in 2017 and 2018. Only Commercial/Retail declined in 2019. The largest increases over the last two years were Educational and Office Buildings. Spending is still strong in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

75%-80% of all Nonresidential Buildings spending within the year will be generated from projects that were booked in starting backlog at the beginning of the year.

CF Forecast NonResidential Table National 10-14-19

Nonbuilding Infrastructure markets total spending amounts to only about 70% of nonresidential buildings markets. The largest infrastructure markets are Highway/Bridge and Power but the largest increases in new starts recently are in Transportation (including all terminals) and Environmental Public Works. Transportation starts are up 25% in the last last three years and backlog to start 2020 is up 80%. Public Works starts are up 22% and backlog is up 30%

Nonbuilding Infrastructure starts can be erratic with a long pattern of up then down years. Starts (including Terminals) gained only 2% in 2019 but that is only low because Power, the largest market overall saw starts decline by 7%. Total infrastructure starts are at an all-time high.

CF Forecast NonBuilding Table National 10-14-19

Infrastructure backlog peaks in 2020 and remains high into 2021. Spending increases are in the 6% to 8% range at least for the next two years. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years. The largest spending increases in 2020 are in Transportation and Highway projects.

The Residential table shows that most of the spending in any year is cash flow from new starts. For short duration residential spending, single-family residential and renovations work, approximately 75% of the spending occurs in the year of the starts and 20% in the following year.

Forecast Residential Table National 10-14-19

For long duration residential spending, typical of multifamily residential, approximately 50%-55% of the spending occurs in the year of the start, 35%-40% in the next year and only 5%-10% occurs two years out.

Only 25% (for short duration SF and Reno) to 50% (for longer duration MF) residential spending within the year comes from work that was booked in backlog at the beginning of the year. The performance of residential spending in the year is very much dependent on new starts.

The level of activity has a direct impact on inflation. 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.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013. Residential construction spending dropped an unexpected 6% in 2019 and after adjusting for inflation that is a 10% decline in construction volume. Typically, large declines in volume are accompanied by declines in inflation. National average residential construction inflation for 2019 is now at 3.8%. 2020 is forecast at 3.75%.

Nonresidential Buildings indices have averaged 4.4% over the last five years and have reached over 5% in the last three years. But spending slowed dramatically in 2019. This forecast indicates spending in most nonresidential buildings markets will gain little in 2019, the slowest rate of growth post-recession. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years. Strong gains in spending historically has led to accelerated inflation. National average nonresidential buildings construction inflation for 2019 is now at 4.8%. 2020 is forecast at 4.2%.

Prelim 2019 Construction Spending

Note 11-8-19 on September spending: Construction Spending in September is up 0.5% from August and still down 2.2% year-to-date (ytd) from 2018. Spending in Q3 averaged the same as Q1.  Qtr/Qtr spending this year has ranged +/- 1%. Total 2019 spending will be down 1%. I’m expecting 2019 Nonresidential Buildings spending up less than 1%, Non-building Infrastructure up 7% and Residential spending down 6%.

10-3-19

Construction Spending in August is down slightly from July and down 2.3% year-to-date (ytd) from 2018. Spending for the last three months has remained flat. Qtr/Qtr spending has ranged +/- 2% for the last five quarters. Total 2019 spending will be down 0.5%. I’m expecting 2019 Nonresidential Buildings spending up 1%, Non-building Infrastructure up 8% and Residential spending down 6%.

Residential construction spending, down for six consecutive quarters, is now down 11% from Q1 2018. Residential volume (spending minus inflation), also down for six quarters, is down 16% from the Q1 2018 peak.

Some markets spending totals for 2019: Lodging +11%, Office +10%, Amusement and Healthcare both +5%, Commercial/Retail -14%, Highway +11%, Power +7%, Transportation +6%, Environmental Public Works (combined) +12%.

2020 forecast Starting Backlog for Nonresidential Buildings is currently up 6% and for Non-building Infrastructure is up 9%. Strong backlog leading into 2020 will increase spending in most nonresidential markets. Exceptions are: Commercial/Retail and Power backlog will decline. Residential spending is 65% dependent on new starts but Nonresidential spending is 80% dependent on backlog.

Forecast growth for 2020 is welcome since real construction volume, after accounting for 4% to 5% inflation, has been down for five of the last six quarters. Annual construction inflation since 2011 has been as high as 5.8%. For the last 3 yrs it has averaged 4.6%/yr. Construction spending for the last 3 years avg. annual growth is only 2.4%. When construction spending is lower than inflation, real volume is declining. Jobs must be compared to volume.

Total construction volume after inflation (quarterly avg) reached a peak in the 1st quarter of 2017 (which was then matched again in Q1 2018) and is now down 6% from the peak. Most of the volume decline was in Residential. Only Infrastructure has seen volume gains in the last two years. We have seen jobs growth slow in the last year, but the disparity between construction volume and jobs growth is the greatest ever. I expect to see a much more significant slow down in jobs growth.

Jobs vs Volume 1991-2019 10-3-19

Backlog growth over the past two years will provide the base for Nonresidential construction spending increases in 2020. Major backlog increases from 2018 to the start of 2020 are: Educational +12%, Office +25%, Commercial/Retail -14%, Highway +16%, Transportation +45% and Environmental +23%.

The forecast for 2020 spending is total $ up 3%, but Residential spending will be flat to down slightly.

Construction Spending Forecast strength over the next 18 months is all nonresidential. Current spending seasonally adjusted annual rate (SAAR) vs SAAR at the end 2020 shows Nonresidential Buildings now at $450bil will end 2020 at $500bil and Non-building Infrastructure, now at $340 billion, will end 2020 at $375bil. Residential is now at $510bil but will move up slightly then down to finish 2020 at $500bil.

 

Starts CF 2015-2020 10-2-19

WHAT IF? Construction Recession 2020

8-15-19

Talk these days isn’t whether or not we may slip into another recession, but when. With 2s/10s rate inversion as one signal, analysts are now watching for other signs. On any given day you can read articles pointing to why we are or why we are not headed into another recession. But, I wrote an article similar to this 3 years ago, so that opinion has been around awhile. I’m not taking a position here. I would just like to get a rough idea of implications, so I tested some data.

What would happen to this current construction recovery if we slip into recession?

If you think of a recession as having an immediate affect on total construction, like a quick drop in materials prices or cost of buildings, think again. Construction is sort of like an aircraft carrier, it takes a long time to turn around.

My starting baseline is my current construction spending and backlog forecast for 2019-2020 which includes YTD Spending and Starts through June. All spending and starts are current$, unadjusted for inflation. There is considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

NORMAL FORECAST current to Jul 2019 with no modifications

Spend Forecast 2018-2022 Baseline 8-15-19

NORMAL FORECAST spending plots for the next 18 months.

Spend Sector 2017-2020 8-14-19

Recession What If? Starting Point

The best indicator of future construction activity is the projected cash flow generated by all the construction starts that have been recorded. Construction starts mark the beginning of spending on new projects.  Projects can take many months to reach completion, and the cash flow varies over the project time.

For the 2020 forecast, we can look at new starts and backlog.

Construction Starts YTD total as of June is down 8% from 2018. That’s expected to improve by year end.

Residential construction starts peaked in 2018. Starts have been sideways or in light decline since mid-2018. Year-to-date June 2019 starts are down 9% from 2018. Avg SAAR for 1st 6mo 2019 is $315bil, same 6mo last year was $340bil. Starting backlog is down 5% from 2017 to 2019. Spending is forecast down 5% in 2019 and up only 1% in 2020.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Prior to this recession scenario analysis, nonresidential buildings spending was forecast up 10% in 2020 and 6% in 2021.

Infrastructure starting backlog has increased 15%/year for the 3 years 2018-2020. Prior to this recession scenario analysis, non-building infrastructure spending was forecast up 12% in 2020 and 8% in 2021.

For nonresidential buildings, 80% of all spending in any given year is already in backlog from starts prior to that year. For non-building infrastructure it’s 85%. Starting Jan. 1, 2020, 80% to 85% of all nonresidential spending in 2020 is already on record in backlog. For residential, only 30% of spending in 2020 is in backlog at the start of the year. Due to shorter duration, spending is more dependent on new starts within the year.

Backlog starting 2020 for the following six markets is at the highest starting backlog ever for each of the six markets. Also, these six markets account for 1/3rd of all construction spending. Much of the spending from these starts occurs in 2020.

These markets posted the best construction starts 12-month totals ever (in noted period).

  • Manufacturing from Jun18>May19,  up 36% in two years
  • Office May18>Apr19,  up 8%/yr for the last 4 years
  • Educational Jun18>May19,  monthly rate for 12 of the last 16 months increased by 20%.
  • Public Works May18>Apr19,  increased 30% in the last 24 months.

These very long duration markets posted best new starts ever.

  • Highway Dec 17>Nov18, up 25% compared to prior 12 months, which was the 2nd best 12mo ever, with peak spending from those starts expected in 2020.
  • Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.

Growth in new starts and backlog for the last three years (2017-2018-2019):

  • Manufacturing starts up 44%, backlog up 62%
  • Office starts up 30%, backlog up 62%
  • Highway starts up 45%, backlog up 70%;
  • Transportation starts up 64%, backlog up 138%;
  • Public Works new starts up 45%, backlog up 72%.

In the last two years, Commercial/Retail market starts are down 18% and 2020 starting backlog will be down 11%. The only other declines in 2020 starting backlog are Amusement/Recreation (-1%) and Power (-5%).

So, we are starting 2020 with the highest backlog on record after several years of elevated starts. However residential work is already down slightly while non-building infrastructure work is super-elevated. It is this elevated backlog that will mute the impact of a recessionary downturn.

What If? we reduce new starts

If a recession were to occur, it would substantially reduce future construction starts. Most, if not all, projects already started would move on to completion, but new starts will be cut back. However, the last “construction” recession started in 2006-2007 with declines in residential work. New starts in nonresidential buildings kept increasing into 2008. The “nonresidential” spending recession did not start until 2009, three years after the beginning of the residential decline.

To get an idea how another recession might affect construction spending, I kept all backlog growth predicted through 2019, but I reduced future new construction starts, for two years, starting Jan 2020. I’ve started the reductions for all sectors at Jan. 1, 2020 because residential starts and spending have already been in decline for more than a year.

  • Residential starts reduced by 15% in 2020 and by 5% more in 2021
  • Nonresidential buildings reduced by 20% in 2020 and by 10% more in 2021
  • Infrastructure projects reduced by 10% in 2020 and by 5% more in 2021

This is only about 20% of the residential declines we experienced from 2006 to 2009, but I’m not anticipating another residential massacre. Residential has already been in decline for 12 months. The nonresidential buildings decline now is only half of 2008-2010. I reduced infrastructure by the least since there was only moderate decline in infrastructure work in 2009-2010, yet still I’ve reduced infrastructure twice as much as 2009-1010.  I allowed for a 3% increase in new starts in 2022 across buildings sectors and a 2% increase in infrastructure.

 

The Recession Scenario Results

The recession 2020 scenario keeps 2019 forecast intact and reduces new starts by 15%-20% in 2020 and 5%-10% in 2021, so imparts a two year downturn. It’s effects, begun Jan.1, 2020 could be translated over time, if say the same scenario started but 12 months later. Negative reaction in the market is quickest to happen for residential, delayed a year for nonres buildings and takes longest (2 years) for infrastructure, for reasons of longest duration type work and highest prior rate of backlog growth.

The recession affects are muted by the fortunate starting point of record high backlog. Residential construction spending will experience two to three declining quarters each of the next three years. But beyond Jun 2022, residential stabilizes and resumes growth. Residential is the only sector to post quarterly spending declines in 2020. Nonresidential buildings posts the 1st quarterly decline in Q1 2021 and has at least seven consecutive quarters of declines before flattening out in Q4 2022. Non-building Infrastructure experiences the 1st two consecutive quarters of decline starting Q4 2021 and reaches a low in Q4 2022. Due to the unevenness of growth, Total Construction spending increases through Q1 2020, posts two declining quarters in 2020 and three consecutive quarters of declines in each of 2021 and 2022.  

RECESSION FORECAST spending plots for the next 30 months.

Spend Sector 2017-2021 RECESSION 8-15-19

Here’s a reminder of the amount of reductions in new starts. I kept all backlog growth predicted through 2019, but I reduced future new construction starts, starting Jan 2020. I’ve started the reductions for all sectors at Jan. 1, 2020 because residential starts and spending have already been in decline for more than a year.

  • Residential starts reduced by 15% in 2020 and by 5% more in 2021
  • Nonresidential buildings reduced by 20% in 2020 and by 10% more in 2021
  • Infrastructure projects reduced by 10% in 2020 and by 5% more in 2021

We still see an 11% increase in backlog in 2020, because we did not reduce 2019 starts, but spending from reduced new starts in 2020 drops 2020 cash flow within the year to slow growth of 2%. Reference the baseline spending chart to see prior to reducing starts 2020 spending was forecast to increase 7%.  Backlog drops 7% in 2021 and then 11% in 2022. This model predicts a 4% decline in construction spending in 2021 (baseline was +3%) and a 5% drop in 2022 (baseline was -1%), setting us back to the level 2016-2017.

Cashflow Forecast TOTAL RECESSION 8-15-19

Starting Backlog is down 4.4% for 2023, but even modest new starts growth of 3% helps partially offset the decline in spending. Spending never drops below the level posted in 2015-2016.

The last recession started with residential in 2005 and ended with nonresidential in 2011. Total decline during that period set total spending back 12 years, although the setback was 15 years for residential, 7 years for nonresidential buildings and only 4 years for infrastructure. This mild recession causes a setback to 2015-2016 levels, back 6 years, and less for infrastructure.

RECESSION FORECAST current to Jul 2019 with reduced starts 2020-2021

Spend Forecast 2018-2022 RECESSION 8-15-19

 

Residential construction would drop about 6% in 2020 and then drop another 8% in 2021. Residential is far more dependent on new starts within the year for spending than on backlog. That’s why residential spending drops quicker than all other work.

Cashflow Forecast RECESSION Residential 8-15-19

 

Nonresidential buildings gain 5% in 2020 but then drop 6% in 2021 and 12% in 2022. The strength of backlog going into 2020 pushes most of the declines out to 2021 and 2022.

Cashflow Forecast RECESSION NonRes Bldgs 8-15-19

 

Non-building Infrastructure has so much work in backlog that this sector still posts spending gains in 2020 and 2021. It drops 8% in 2022. The strength of backlog going into 2020 pushes much of the declines out 2022.

Cashflow Forecast RECESSION NonBldg Infra 8-15-19

The baseline forecast would have produced spending increases of 9% from 2020-2022. The recession scenario indicates a 7% decline. That magnitude of turn around would impact the jobs situation. We would probably not see any reduction in workforce in 2020 but the spending declines in 2021 and 2022 could lead to a temporary loss of about 200,000 jobs in 2021 and 300,000 jobs in 2022.

Educational 2019 spending is supported by a steady stream of strong starts that began in late 2017 and extended into summer 2018. Jun-Jul-Aug 2018 starts posted the best 3mo total starts ever and peak spending from those starts occurs from April 2019 to Jan 2020. Most spending in 2020 comes from projects that start in the 1st half of 2019. So far in 2019 starts are up 15% ytd over 2018.

Commercial  Both store and warehouse starts dropped in 2018. Commercial starts are seeing strong gains from distribution centers (warehouses, which are in commercial spending). Since 2015 the 10% decline in retail stores is being hidden by the 50% increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are down 5% in 2018 but increased 500% from 2010 to 2017.

Manufacturing Backlog is still very strong, but a drop in peak spending from the schedule of cash flows will lead to a period of moderate spending declines. After that, manufacturing spending increases steadily through the end of 2020. Current expectations are that manufacturing will finish the year up 8%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+. Reductions in starts won’t show up as negative spending until 2022.

Office spending is expected to finish 2019 up 7% or less. New starts in 2018 were up 11% to a new high, but much of the peak spending, from over-sized long-duration projects, will benefit 2020 when I expect to see spending growth of 8%-11%.

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not consider the following: airports include not only land-side terminals but also air-side runway work; rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work. Construction Analytics follows U S Census construction spending reports which include all terminals and rail in Transportation.

Terminals and rail starts reached record highs in 2017 and record backlog in 2019. 2019 starting backlog is four times what it was in 2015.

However, much of that backlog is very long duration project spending that will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. From Oct’16 through Oct’18 there were sixteen $billion+ new project starts and seven $500million+ new starts. Some projects started in this period have peak spending occurring in 2020 and 2021.

Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 70% in the last 3 years leading into 2020. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.

Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed 14% gains in 2018 and the forecast is +15% in new starts in 2019.

 

 

Midyear 2019 Construction Spending Forecasts Compared

8-1-19

Construction Analytics compares midyear construction spending forecast to other industry resources

(note 10-3-19: major revisions to starts data cash flow substantially reduces forecast spending in both 2019 and 2020. These revisions won’t be posted until November. Largest downward revisions 2019, Residential -15, Highway -10. Largest downward revisions 2020 Residential -23, Manufacturing -10, Power -12, Highway -12) 

The following comparison data is compiled from data published in several other reports, by FMI 2nd Qtr 2019 Construction Outlook,   ConstructConnect Summer 2019 PIP Construction Forecast and  AIA July 2019 Midyear Consensus Forecast. Data is all midyear forecast for 2019 and look ahead to 2020.

There are some significant differences in the forecasts, especially in the Non-building Infrastructure forecasts, but also in the Nonresidential buildings 2020 Forecast. I am substantially higher than my peers. Only time will tell who has the closest forecast.

All EdZarenski.com (Construction Analytics) forecasts are based on predicted cash flow from modeling Dodge Data construction starts and include ytd data through June. All other reports were published prior to Aug 1st so would not include the June spending.

How can we assess if forecasts are on track to finish as predicted? Well, for the 2019 forecast, as of August 1, we have actual spending and starts data through June.

Spending year-to-date (ytd) gives some clues:

  • Amusement/Rec is up ytd 8.8%
  • Commercial is down ytd 8.6%
  • Lodging is up ytd 8.2%
  • Highway Bridge is up ytd 14.6%
  • Sewer/Water/Conserv is up ytd 16.2%
  • Communication is down ytd 7.4%

For the remainder of 2019 and 2020 forecast, we can look at new starts and backlog.

Construction Starts YTD total as of June is down 8% from 2018. That’s expected to improve by year end.

Residential construction starts peaked in 2018. Starts have been sideways or in light decline since mid-2018. Year-to-date June 2019 starts are down 9% from 2018. Avg SAAR for 1st 6mo 2019 is $315bil, same 6mo last year was $340bil. Starting backlog is down 5% from 2017 to 2019. Spending is forecast down 5% in 2019 and up only 1% in 2020.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Nonresidential buildings spending is forecast up 10% in 2020 and 6% in 2021.

Infrastructure starting backlog has increased 15%/year for the 3 years 2018-2020. Non-building infrastructure spending is forecast up 12% in 2020 and 8% in 2021.

Spending Forecast Comp 2019 Midyear 2019

For the 2020 forecast, we can take a look at new starts and backlog.

These markets recently posted the best construction starts 12 month totals ever over the noted period. Much of the spending from these starts occurs in 2020.

  • Manufacturing from Jun18>May19,  up 36% in two years
  • Office May18>Apr19,  up 8%/yr for the last 4 years
  • Educational Jun18>May19,  monthly rate for 12 of last 16 months increased by 20%.
  • Public Works May18>Apr19,  increased 30% in the last 24 months.

Manufacturing new starts jumped substantially in 2018 and so far in 2019 have remained higher. Growth in Manufacturing starts jumped 36% in two years. Office starts have increased on average 8%/yr for the last 4 years. Educational starts monthly rate for 12 of the last 16 months increased by 20%. Public Works starts combined (sewer, water supply, conservation) began to increase in 2017, then took off in 2018-2019 increasing 30% in the last 24 months.

These very long duration markets posted best new starts ever.

  • Highway Dec 17>Nov18, up 25% compared to prior 12 months, which was the 2nd best 12mo ever, with peak spending from those starts expected in 2020.
  • Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.

Backlog starting 2020 for these six markets is up an average of 25%, at the highest starting backlog ever for each of the six markets. Also, these six markets account for 1/3rd of all construction spending. 

Growth in new starts and backlog for the last three years (2017-2018-2019):

  • Manufacturing starts up 44%, backlog up 62%
  • Office starts up 30%, backlog up 62%
  • Highway starts up 45%, backlog up 70%;
  • Transportation starts up 64%, backlog up 138%;
  • Public Works new starts up 45%, backlog up 72%.

In the last two years, Commercial/Retail market starts are down 18% and 2020 starting backlog will be down 11%. The only other declines in 2020 starting backlog are Amusement/Recreation (-1%) and Power (-5%).

So, we are starting 2020 with the highest backlog on record after several years of elevated starts. However residential work is already down slightly while non-building infrastructure work is super-elevated.

Spending Forecast Comp 2020 Midyear 2019

The baseline forecast produces spending increases of only 3% in 2021-2022, so is not aggressive in predicting future starts. Here’s some drivers of starts:

Educational 2019 spending is supported by a steady stream of strong starts that began in late 2017 and extended into summer 2018. Jun-Jul-Aug 2018 starts posted the best 3mo total starts ever and peak spending from those starts occurs from April 2019 to Jan 2020. Most spending in 2020 comes from projects that start in the 1st half of 2019. So far in 2019 starts are up 15% ytd over 2018.

Commercial  Both store and warehouse starts dropped in 2018. Commercial starts are seeing strong gains from distribution centers (warehouses, which are in commercial spending). Since 2015 the 10% decline in retail stores is being hidden by the 50% increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are down 5% in 2018 but increased 500% from 2010 to 2017.

Manufacturing Backlog is still very strong, but a drop in peak spending from the schedule of cash flows will lead to a period of moderate spending declines. After that, manufacturing spending increases steadily through the end of 2020. Current expectations are that manufacturing will finish the year up 8%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+.

(note 11-8-19: major revisions to Manufacturing starts data substantially reduces forecast spending in 2020 and 2021. Dodge Data, in their October Outlook 2020 report, reduced forecast for Manufacturing new starts from their June Midyear report by -$10bil (30%) for 2019 and by -$7bil (25%) for 2020. This reduces 2020 spending growth to only 4%.  

Office spending is expected to finish 2019 up 7% or less. New starts in 2018 were up 11% to a new high, but much of the peak spending, from over-sized long-duration projects, will benefit 2020 when I expect to see spending growth of 8%-11%.

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not consider the following: airports include not only land-side terminals but also air-side runway work; rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work. Construction Analytics follows U S Census construction spending reports which include all terminals and rail in Transportation.

Terminals and rail starts reached record highs in 2017 and record backlog in 2019. 2019 starting backlog is four times what it was in 2015.

However, much of that backlog is very long duration project spending that will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. From Oct’16 through Oct’18 there were sixteen $billion+ new project starts and seven $500million+ new starts. Some projects started in this period have peak spending occurring in 2020 and 2021.

Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 70% in the last 3 years leading into 2020. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.

Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed 14% gains in 2018 and the forecast is +15% in new starts in 2019.

 

What If No Future Starts?

6-27-19

What if there were no new construction starts beyond today?

What if the last new construction starts recorded for May (released by Dodge June 21) were the last to be posted and once those projects reached completion there would be no more work?

Of course this is a totally unlikely scenario, but deleting all future predicted starts allows to perform an important test. All the construction starts recorded as of today make up the backlog, and eventually that backlog will run out. So, if the new starts spigot was turned off today, how much spending would remain for 2019, 2020 and beyond? (For use later, new construction starts recorded through May generally equal an average of 40% of all starts expected each year).

The questions then are: How dependent is the spending forecast on construction backlog? How dependent is the construction spending forecast on new construction starts? What magnitude of miscalculation in the new starts forecast would be imparted to the spending forecast?

Single-family residential projects can take as little as 6 to 9 months to reach completion, multi-family perhaps twice as long. For the average nonresidential building, completion would be reached in about 24 months, but some large industrial projects will take three years or more. For some of the airport, highway and rail expansion mega-projects, the cash flow schedule of spending will take four to eight years to reach completion.

An average of ten years of monthly cash flows produces an average spending schedule for the various construction market sectors. Recognize that starts are posted every month, so January starts have twelve months of spending in the 1st year while projects that start in December have only one month of spending in the 1st year.

Residential project starts net about 65% of money spent in the 1st year, the year started, 30% spent in the following year and 5% spent in the third year, or 65-30-5. Although each type of nonresidential work has a more specific cash flow schedule, the average for nonresidential buildings is 20% spent in the year started, 50% in the second year and 30% in the third year, or 20-50-30. Very long duration infrastructure projects have a spending distribution on average that looks like 15-30-30-15-10.

Residential projects have the shortest schedule to completion. Work flow needs continual replenishment from new starts to support spending. The amount of work in backlog today would support only two thirds of anticipated 2019 spending and less than 10% of 2020 spending.

All Nonresidential buildings type currently have enough work in backlog to support 90%-93% of the total forecast spending in 2019. Current backlog would support only 50% of the total spending forecast for 2020. There’s only enough to support 10%-20% in 2021.

Power and Highway backlog as of today would support 95% of the total forecast spending in 2019 and 70%+ in 2020. Because these are long duration projects, there is enough in backlog today to support 40% of spending in 2021.

That’s a lot of good facts, but how can we use that information to perform an important test?

Let’s use the average nonresidential building for an example. For this example, let’s try to determine the validity of our 2019 forecast based on what we have in backlog today. New starts through May is about 40% of total starts expected in the year. Backlog through May supports 92% of spending in the current year. Spending in any given month has cash flow from an average of the previous 24 months of project starts, so the average of large numbers reduces potential error from backlog. The validity of our annual spending forecast is dependent on whether or not we correctly predicted the remaining 60% of starts for the year, and those starts support 8% of the spending forecast.

Therefore if we incorrectly forecast the remaining 60% of starts by 25%, then we incorrectly forecast total annual spending by 25% x 8% = 2%.

For the 2020 forecast, the math gets just a little more complicated. Remember we stated earlier that the typical spending schedule for nonresidential buildings is 20-50-30. So 20% of 2020 spending comes from new starts in 2020. Only 80% of 2020 spending comes from work in backlog at the start of the year. Based on what we have in backlog today, new starts through May 2019 supports 50% of 2020 spending. We are dependent on the expected new starts in 2019 to get us up to 80% of the expected spending in 2020.

We are expecting 60% more in starts in 2019 and that will support the currently missing 30% of 2020 spending. If we incorrectly forecast the remaining 60% of starts by 25%, then we incorrectly forecast total annual spending for 2020 by 25% x 30% = 7.5%.

Also for 2020, since 20% of all spending within the year comes from new starts within the year, if we incorrectly forecast 2020 new starts by 25%, then we incorrectly forecast total annual spending for 2020 by 25% x 20% = 5%.

I’ve posed this scenario by asking what would happen if we incorrectly forecast the remaining starts by an error of 25%. That would be a huge error, not very likely to occur. I’ve been tracking Dodge Data & Analytics construction starts for more than 10 years and have seen enough data to expect that by mid-year the unanticipated error in forecast starts for the end of the year might be more on the order of 5% to 10%, not 25%. And in fact, historically, revisions to year end starts data is usually UP, not down.

So, by deleting all remaining forecast starts data, we see the spending forecast based on cash flow of new starts would require a very large error in the starts forecast to translate into a large error in the spending forecast. If we apply a more reasonable and yet still conservative error of 10% in all projections of future starts, the forecast for 2019 spending would be off by less than 1% and the forecast for 2020 off by a total of 5%.

 

How to Use Construction Starts Data

New Construction Starts data is published monthly by Dodge Data and Analytics. Starts data captures a share of the total market or a portion of all construction, on average about 50% to 60% of all construction. Changes in sample size can introduce potential errors in forecast when using starts to predict construction spending.

In any survey, if sample size remains constant, let’s say at 50% of actual output, but survey response increases 5%/year, then that reflects output should increase at 5%/year. However, if survey response increases at 5%/year but sample size is increasing at 3%/year (50%, 53%, 56%, 59%, etc.) then actual output should increase at only 2%/year.

For a survey sample to be used to compare to itself from year to year to predict growth in spending, sample size must remain constant from year to year. If it is not constant, the apparent growth in starts does not all reflect real growth in spending.

It is impossible within a single year to verify if the current market share captured is constant with previous year sample size. The sample period of data is a year of new starts. To find out if the sample size is consistent, the sample must be compared to actual spending from starts from that period. Starts from any given year get spent over a period of the next 2 to 4 years. It takes several years to see the pattern of starts sample size versus actual spending. 

An average spending pattern for nonresidential buildings starts, OR A TYPICAL CASH FLOW CURVE, for any given year is: 20% of the revenue gets spent in the year started, 50% in the next year and 30% in the 3rd and 4th year. Multi-billion $ highway projects, manufacturing facilities, power projects and transportation terminals would have much longer duration cash flow curves. In other words, if you desire to predict construction spending in 2019, you need to know what starts were at a minimum in 2017 and 2018, and in many cases back to 2016 or even 2015.

2018 construction starts do not provide enough information to predict 2019 spending.

If starts survey sample size varies from year to year, it’s possible some of the spending growth anticipated from new starts may not represent growth in real volume of future work but could simply represent a change in sample size. Potential significant variations in sample size are seen in the data and may cause errors in the forecast.

Here are some examples. In the following table the line item “starts vs actual cash flow $” uses cash flow curves unique to each type of construction. For instance, in Office and Educational the spending curve is close to the average 20%/50%/30% as described above. That means 2015 starts is compared to a cash flow curve that spreads spending of 2015 starts over the next three years by 20%/50%/30%.

Starts vs Spending Cash Flow 3-2-19

In the Educational data we see it is unusual that Starts and Backlog continued to grow for five years but that same rate of growth was not reflected in actual spending. From 2013 to 2018 new starts increased more than 60% but spending for the period of those starts (97% gets spent between 2014-2020) increased only 30%. That would seem to indicate a very large volume of work is growing in backlog, and spending, at some point, should boom and remain high for an extended period. But the cash flow model is not in agreement.

A possible explanation is the sample survey of new starts has been increasing, so not all the starts growth for five years represents growth in new work. Some of the increase in starts is simply growth in sample size.

As evidence, Educational starts for the period 2012-2015 averaged just less than 50% sample size of actual total spending. In 2016-2018 the average sample size vs spending was over 60%.

 

Office Spending increased by 20%/year from 2013 to 2016, but in 2017 it turned to a 1% decline. That was unusual and unexpected since 2016 starts and 2017 backlog had both reached 10-year highs. Highly probable is that the sample size of starts increased dramatically in 2016 and the increase in starts was not all growth in real volume but was partially just a change in sample size, therefore the 2017 spending forecast may have been significantly overstated.

For the period 2011-2015 sample size increased from 45% to near 50% of actual total spending. In 2016, sample size jumped 25%! For 2016-2018 the average sample size vs spending was near 60%.

 

Transportation Terminals and Rail starts reached record high in 2017, both up 120% after a 35% increase in 2016. Starting Backlog increased 22% in 2017 then jumped 95% in 2018. Spending in 2018 is forecast to finish up more than 20%. However, Transportation sample size of new starts may have increased far more than any other market. Does it all represent a real increase in future spending or is this a good example of a change in sample size?

For the period 2011-2015 sample size increased from 25% to 30% of actual total spending. In 2016, sample size jumped to 40% of actual. In 2017 sample size jumped to 70%!

A large portion of the 2017 increase in starts is expected to be a change in sample size. Starts more than doubled from 2015 to 2017. If all that represented an increase in volume, spending would have doubled from 2016 to 2019. We already have actual spending in hand of more than half of 2017 starts and there is no possible outcome that shows the 125% increase in new starts in 2017 will produce an equivalent increase in spending. Most of the actual spending occurs in 2018 and 2019. For those two years, spending will be up 35%.

 

Office in 2016 posted a 31% increase in starts, mostly due to Hudson Yards and Vanderbilt Tower in NYC. This appears to have increased the annual share of market captured in the starts for 2016. Overall spending in the following years did not increase. Transportation starts in 2017 posted a 121% increase, but almost all of that can be attributed to an increase in market share captured due to $16 billion in starts for LaGuardia, Orlando and LAX airport work. In a year when several multi-billion $ projects start, the starts data share of market increases. This signifies a change in survey size, not an equally sizable increase in future construction spending.

Starts vs Spending Cash Flow 3-12-19

These examples show that starts share of market captured from year to year are not all consistent and therefore starts compared to previous year should not be used to predict spending directly but that starts sample size must be analyzed before using the data to forecast future spending. Construction Analytics models adjusted starts using unique cash flow curves to predict construction spending for the Economic Forecast published here.

Starts Modeling 3-7-19

2019 Construction Economic Forecast – Nonresidential – Dec 2018

Construction Analytics 2019 Construction Economic Forecast – Nonresidential

This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.

NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018.  Most spending from these new starts will occur in 2020. This will increase the 2020 nonresidential buildings spending forecast, with the largest increase in manufacturing. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis. The biggest changes reduced residential spending for the next two years.  See the 2019 Construction Economic Forecast – Summary for the residential analysis.

This analysis was edited 12-6-18 to include that most recent starts data and the U S Census October spending data.

For a fully formatted PDF of this Nonresidential report 2019 Construct Econ Forecast – NONRES – Dec 2018 RVSD 12-6-18

Link to 2019 Construction Economic Forecast – Summary

Summary

Total of All construction spending is forecast to increase 6% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.

01e summary

Nonresidential Buildings construction spending is forecast to increase 6% to $444 billion in 2018, 0% to $443 billion in 2019 and 9% to $482 billion in 2020. The forecast for 2019 will be supported by Office (which includes data centers) and Amusement/Recreation but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.

Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.7% to $334 billion in 2019 and 10.1% to $368 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.

27 sector plot for cover

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,328 trillion, a gain of 6.5%, that will most likely increase.

Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% growth for the 3-year period 2018-2020.

Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.

 

Construction Inflation Indices

Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long-term average inflation is 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.

Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Inflation in this sector has been at 4% or higher the last four years.

Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel tariff impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.

02 inflation bars

Non-building Infrastructure indices are far more market specific than any other type of index. Reference specific Infrastructure indices rather than any average.

These links point to comprehensive coverage of the topic inflation and are recommended reading.

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

Click Here for Cost Inflation Commentary – text on Current Inflation

 

New Construction Starts

All construction starts data in this report references Dodge Data & Analytics Starts Data.

For nonresidential buildings, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. This means that nonresidential spending growth in 2019 is still being affected by starts from 2016.

The following plot show the 3-month moving average and trend line of starts for Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.

06 starts nonres bldgs

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

Starts is a survey sample of a portion of all construction, on average about 50% to 60% of all construction. This can introduce potential error when using starts to predict spending. In any survey, if sample size remains constant, let’s say at 50% of population, but survey response increases 5%/year, then output of the population should increase at 5%/year. However, if survey response increases at 5%/year but sample size is increasing at 3%/year then output of the population should increase at only 2%/year.

If starts survey sample size varies from year to year, it’s possible some of the anticipated spending growth reported by new starts may not represent growth in real volume of future work but could simply represent a change in sample size. Potential significant variations in sample size are seen in the data and may cause errors in the forecast. The detail of Education spending provides an example.

 

Starting Backlog

Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. Starting Backlog for 2019 is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 years.

08e nonres bklg

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or several years ago.

  • 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
  • 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.

09 start bklg plot

Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.

10e infra bklg

 

Cash Flow

Simply referencing total new starts or backlog does not give the complete picture of spending within the next calendar year. Projects, from start to completion, can have significantly different duration. An office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also by old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Although new nonresidential buildings starts increased only 1.6% in 2018 note that cash flow increases by almost 8% due to a very large increase from starting backlog. To a lesser extent the same thing happens in 2019.

Non-building infrastructure starts and cash flow follows a similar pattern. In 2018 and 2019 new starts decline moderately, spending from new starts declines substantially but starting backlog and spending from starting backlog increases are so strong that total cash flow within the year continues to increase.

 

 Nonresidential Buildings Spending

Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, fall -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Rec support the 2019 forecast but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

17e spend nonres bldgs

18 nonres bldgs plot

Nonresidential buildings construction spending in constant $ (inflation adjusted $ to base 2017) will reach $424 billion in 2018 after hitting a post-recession peak of $431 billion in 2016 and dropping to $419 billion in 2017. In 2019 constant $ spending will total $420 billion. Constant $ spending or real volume growth shows all years from 1996 through 2009 had higher volume than any years 2016-2019. Volume reached a peak near $530 billion in 2000 & 2001 and went over $500 billion again in 2008. In constant $ volume, I don’t see returning to that peak before 2023.

19 nonres cur con 

Educational

New Starts averaged YOY growth of 11%/year for the last five years. Starts from the last five months of 2017 posted the highest 5mo total in at least seven years, 13% higher than the next best 5mo. The highest and 2nd highest quarters were both within the last 15 months, so both those periods contribute fully to 2018 spending. 2017 starts will support 25% of spending in 2019. Starts are expected to finish 2018 up 5%. 2018 starts will support 50% of spending in 2019 and 20% of spending in 2020.

Bklg 01e Educ

Backlog in five years 2014-2018 increased 11%/year. It is unusual that Starts and Backlog continue to grow for five years but that growth is not reflected in actual spending. From 2013 to 2018 new starts increased 66% but spending for the period of those starts will increase only 34%. That would seem to indicate a very large volume of work is growing in backlog and spending at some point should boom and remain high for an extended period, but the cash flow model is not in agreement. A possible explanation is the sample survey of new starts has been increasing, so not all the starts growth for five years represents growth in new work. Some of the increase in starts is simply growth in sample size. Educational starts 2012-2015 averaged 50% sample size of total spending. In 2016-2018 the average sample size vs spending was 60%.

Spending is now at a post-recession high.  Spending increased 6%/year for 2015, 2016 and 2018, while 2017 increased only 1%. 2017 and 2018 are still subject to revision. Expect to see growth level off until mid-2019. Leveling at post-recession high is not a bad thing. A build-up of backlog is indicating that spending should increase substantially, but a disconnect in the analysis was noted above. Spending growth increases again in 2020.

At peak, educational represented 30% of all nonresidential buildings spending. Now it’s only 22%. That’s expected to increase slightly for the next three years.

Educational construction spending is forecast to reach $96 billion in 2018, $93 billion in 2019 and $103 billion in 2020.

 

Healthcare

Starts are at an all-time high, up almost 40% in the last 5 years. Some longer duration projects push a substantial amount of spending out to 2020.

Bklg 02e Hlthcr

Backlog increased 11% for 2017 and 8% for 2018. Backlog has been increasing unevenly and grew 30% in 4 years. Backlog increases 3% to start 2019 but is not indicating spending growth in 2019. Cash flow from backlog is indicating spending growth in 2020.

Spending has been very slow to recover, experiencing declines as recently as 2013 and 2014, hitting an 8 year low in 2014, when all other nonresidential building markets had already returned to growth. 2017 posted a gain of 4.4% but then 2018 gained less than 1%. Backlog is increasing but real spending gains won’t materialize until 2020.

Like Educational, backlog growth has been exceeding spending growth for the last few years. That would indicate spending at some point may boom and remain high for an extended period. Cash flow models indicate this may occur in 2020. Other possible explanations are; starts are overstated; cash flow curves (average 28mo) are too short in duration; projects got canceled after starts were recorded; large spending revisions could get posted in the future.

Healthcare construction spending for 2018 is forecast to finish at $42 billion, an increase of only 0.7% over 2017. Considering 4% inflation, Healthcare real volume has declined every year since 2012 with exception of 2017 which would have been flat. It will decline again in 2019 with a forecast -2.7% decline in spending. 2020 realizes the 1st big spending increase in 8 years, +14% to $47 billion.

 

Amusement/Recreation

Starts are up 13% in 2018. Although down 1% in 2017, starts increased at an average rate of 15%/yr. from 2013 through 2017. Within the past 15 months there have been five billion-dollar project starts.

Bklg 03e Amuse.JPG

Starting backlog increased 20%/yr for the last four years while spending was increasing at a rate of 10%/year. This means backlog should continue to support increased spending at least for the next few years.

Spending hit an 8 year low in 2013 but we’ve had 3 years of excellent growth of 10%/yr or more since then. 2017 spending increased only 7% and 2018 11%, but cash flow is indicating a 12% increase for 2019. This market is only 5% of nonresidential buildings spending.

Amusement/Recreation construction spending for 2018 is forecast to reach $28 billion, an increase of 12% over 2017. 2019 is forecast to increase 12% to $31 billion.

Pic Educ Hlth Amuse.jpg 

Commercial/Retail

Commercial/Retail starts have been increasing every year since 2010 but starts in 2018 are flat vs 2017 Starts are at a peak but after 5 years of 15%-20% growth/year are up only 4% in the last two years.

Commercial starts are seeing strong gains from distribution centers (warehouses which are in commercial spending). The decline in retail stores is being hidden by the increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are still up only 4% in 2018 but increased 500% from 2010 to 2017.

In 2010, Warehouse starts were only 1/3 of Store new starts. In 2018, Warehouse starts are 25% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010. See this Bloomberg article Warehouses Are Now Worth More Than Offices, Thanks to Amazon

Bklg 04e Comm

Some big projects from a period of strong new starts growth are ending. This will slow spending after 7 years of strong growth. 2018 backlog still produces a spending increase which may finish close to +5%, but forecast shows spending slows even more to only 2% in 2019 and less than 1% in 2020.

The biggest change in Commercial/Retail in the last few years is that backlog is now more heavily weighted with warehouse projects than store projects. The mix has shifted from 60/40 stores in 2014-2015 to 55/45 warehouses in 2018-2019.

Spending dropped from the high of $90 billion in 2007 to $40 billion in 2010. It has been growing steadily since reaching bottom in early 2011 and has recovered to an annual total rate of $92 billion in 2018. Spending increased an average of 13%/year for six years from 2012 through 2017. Spending growth will be flat in 2019 and 2020 but we are currently near the all-time high. It is worth noting that the $92 billion in 2018 dollars after accounting for inflation is still 30% lower than the $90 billion of spending in 2007.

Commercial/Retail construction spending is forecast to reach $92 billion in 2018, $91 billion in 2019 and $90 billion in 2020, flat to no growth after seven strong years.

 

Office

Starts finished 2018 up 8%. In 2016 starts were up 30% and had reached similar too highs in 1998 and 2006-2007. Starts have been increasing since 2010 with the strongest growth period 2013-2016, up 25%/year. Although the rate of growth slowed in 2017 and 2018, the total amount of starts is at an all-time high. In the last 12 months there are no less than a dozen project starts valued each at over $500 million, a few of those over $1 billion. That high-volume period of starts will elevate spending through 2019 and well into 2020. Data centers are included in Office.

Bklg 05e Offc

Backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018, backlog reached a new high, up 25% over 2017. Starting backlog for 2019, up 19%, is three times what it was just five years ago. Office starting backlog 2017-2019 increased an average of 20%/year. Backlog growth should support strong spending into 2020.

Growth of only 1% in starts for 2019 and 3% increase for 2020 keeps office starts near the all-time high. Even with low growth in new starts for the next two years, the amount of work in backlog from starts on record provides growth in spending for the next three years.

Spending increased by 20%/year from 2013 to 2016, but in 2017 it turned to a 1% decline. That was unusual and unexpected since 2016 starts and 2017 backlog had both reached 10-year highs. Possible explanations might be: a very large number of projects were canceled or delayed; potential revisions to 2017 Office spending may still be pending (In July every year, the previous two years of spending gets revised); but highly probable is the sample size of starts increased dramatically in 2016 and the 30% increase in starts was not all growth in real volume but was partially just a change in sample size, therefore the spending forecast may have been significantly overstated.

Again, it is worth noting that spending in 2018, which for the first time returned to the previous highs posted in 2008, once adjusted for inflation is still about 25% lower in real volume than 2008.

Office construction spending is forecast to reach $74 billion in 2018, $79 billion in 2019 and $84 billion in 2020.

 

Lodging

Lodging posted a new high for starts in 2018, up 8% over 2017. For the period 2011-2016 starts averaged over 30%/year growth for six years. In 2017, starts declined 4% but that remained near the 2016 high. Now with a gain in 2018, those three years average very evenly. Peak starts were in 2016.

Bklg 06 Lodg

Starting backlog averaged increases of 30%/yr. from 2015 to 2017. Lodging starting backlog jumped from $7 billion/yr. in 2014 to $15 billion/yr. in 2018. It has supported similar spending growth. Lodging projects have relatively short duration and timing of starts within the year is important to spending and next-year starting backlog. Compared to most other types of nonresidential buildings, a greater than average percentage of lodging spending occurs within the year started. So, movement in starts has a greater impact on spending within the year.

Lodging spending recorded the largest drop of any market, falling 75% from $36 billion in 2008 to $9 billion in 2011. However, it also recorded the strongest rebound of any market, climbing 20% to 30% per year for the 5-years 2012-2016. In 2011, Lodging dropped to only 3% of total sector spending. It rebounded to 7% in 2017. Lodging actual spending increased 12% in 2018. It’s still not back to the previous high of $36 billion in 2008. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.

Lodging construction spending for 2018 is forecast to reach $32 billion, an increase of 12% over 2017. Spending is forecast at $31 billion for 2019 and $32 billion for 2020.

Pic Comm Offc Lodg

 

Religious and Public Safety

Spending of $11-$12 billion/year represents only 2.5% of total nonresidential building spending. In 2008-2009 it was 5% of the total. The religious building market has been declining since 2002 and is down 55% since then. Public Safety peaked in 2009 and has declined every year through 2017, down 40% from the peak. In 2018, public safety spending is increasing.

I don’t track starts or backlog for these markets. I do track monthly spending and carry a forecast in the Table of Construction Spending classified as Other Nonres Buildings.

Religious and Public Safety currently amounts to $12 billion/year. A 10% change in spending of $1.2 billion in a year would amount to only 0.2% change in all nonresidential buildings spending. This category doesn’t often change by 10% yr/yr, so it’s affect is very small.

 

Manufacturing

Manufacturing reached record high starts in 2014 and record spending in 2015, posting a 100% increase in new starts in 2014 that drove starting backlog and spending to new highs in 2015 and 2016. New starts declined 20%-30%/year for the next two years after the high in 2014 but then 2017 starts increased 27%. Now 2018 starts have increased by 18%, yet that is still 15% lower than 2014.

Starts in June came in at four times the average of all monthly starts in the last three years. October came in at three times the average. Those two months would add up to more than half of annual starts for any of the last three years. Some of these projects will still be contributing to spending in 2023.

Bklg 07e Mnfg

Starting Backlog remained equally high in 2015 and 2016, but then dropped 17% in 2017. Backlog dropped 17% in 2017 and actual spending dropped 13%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts, up 27%. This will support a spending rebound in the future but not before a temporary drop in mid-year 2019.

Spending was forecast to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Based on cash flows from starts, from April 2016 through the end of 2017 spending was expected to decline in 17 of 21 months. It did decline in 14 of those months. Over the next 30 months there are only six months have a forecast to decline, all of those between March and September 2019, all caused by uneven cash flows from very large projects either ending or pushing spending out to future years. This will hold down total spending in 2019. Although backlog for 2019 is up 40%, much of the cash flow from that will occur in 2020.

Manufacturing construction spending is forecast to reach $67 billion in 2018, $65 billion in 2019 and then jump 25% to $82 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.

 

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works project starts increased 20% in 2018 and boost spending in 2019 and 2020.

20e spend nonbldg

Non-building Infrastructure constant $ volume reached a high of $309 billion in 2015 and peaked at the all-time high of $311 billion in 2016, but then dropped to $295 billion in 2017. 2018 saw a return to $303 billion and 2019 is projected to reach $309 billion. Only twice before, 2008 and 2009, did Infrastructure exceed $300 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.

21 nonbldg cur con

Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

22 infra plot

Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. 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. Transportation spending is projected to increase 15-20%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 7%. 2019 and 2020 are forecast to increase 6% to 10%.

 

Power

Power spending as reported by U.S. Census includes infrastructure for all electric power generation plants and distribution, gas and LNG facilities and all pipelines. In the last year there were more than twenty $billion+ project starts and a dozen more projects valued over $500 million each. In 2015 pipeline starts represented less than 10% of all power starts. In 2018 year-to-date, pipelines are half of all power work started. In three years, pipeline work increased by more than $20 billion or 500%.

Starts, completions and pauses in work cause erratic movement in actual spending. Cash flow may be adversely impacted by very large projects ending or by the delay of large projects that started previously. A multi-billion-dollar nuclear power plant stopped work and large pipeline project delays after the start was recorded have adversely impacted the cash flow forecast. This impacted the spending forecast in 2017, which finished down 5%, 15% below initial projections, and again 2018 will finish 10% below initial projections for 2018 posted back in Nov. 2017.

Bklg 08 pwr.JPG

Although total power starts for 2018 are down 13%, electric / power generation is down 35% but gas/LNG and pipelines starts are up. Starts peaked in 2015-2016, but total in backlog reached a peak in 2018. However, much of this work is very long duration projects, so 2018 backlog will be providing spending at least through 2021. Spending could see 5% gains in 2019 but unless 2019 starts increase 2020 will experience a modest decline. Dodge is predicting 2019 starts will decline 3%.

Power construction spending is forecast to reach $102 billion in 2018, $109 billion in 2019 but then only $107 billion in 2020.

Power spending highlights one of the biggest shortfalls of judging expected performance based on year-to-date change. Notice in the 1st quarter of 2018, spending year-to-date (YTD) was down 8% to 10% from 2017. It is clear now that did not give a good indication of how 2018 would proceed. A better indication is provided by the trend line expected in the current year versus the trend line in the previous year. If they diverge, then early YTD changes will not give a clear indication of expected performance in the current year. An example follows. Note, SAAR data shows performance trend but cumulative NSA$ is needed to get YTD$.

YOY trend Power example 11-28-18.JPG

YOY Power trend data 11-28-18

Power posted the highest spending for 2017 early in the year, then declined in the 2nd half. In 2018, the beginning of the year posted the lowest rate of spending for the year, increased through June, then stayed higher in the 2nd half. The YTD percent growth compared to 2017 has been increasing throughout the year. Higher spending in the 2nd half 2018 compared to the lowest values of the year in late 2017 will boost year-to-date spending every month through year end. Although YTD spending through August is up only 2%, I expect the total for the year will finish up 6%. Even if power spending declines 1% per month for the remainder of the year it will still finish up 5% over 2017.

 

Highway/Street/Bridge

Highway starts hit an all-time high in 2017 and are forecast to climb another 8% in 2018. This model is predicting starts growth will slow or level off after 2018.

Bklg 09e HiWay

Starting backlog increased 30% in the last 3 years and will increase another 14% leading into 2019. This long duration backlog is going to provide for a large increase in spending but not until late 2020 and even more-so into 2021.

Spending in 2018 did not increase in tandem with backlog, because the share of spending within the year from projects that started 1 or 2 years before began to decline. In 2020 and 2021, the share of spending within the year from projects that started 2, 3 and 4 years before is increasing.

Highway construction spending is forecast to reach $92 billion in 2018, $93 billion and then jump to $105 billion in 2020. 2021 may see an increase of 10% in spending.

 

Transportation

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not account that airports include not only land-side terminals but also air-side runway work and rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work.

Terminals and rail starts reached record high in 2017, both up 120% after a 35% increase in 2016. Spending in 2018 is forecast to finish up more than 20%. Starting Backlog increased 22% in 2017 then jumped 95% in 2018. However, Transportation sample size of new starts potentially increased 30%, far more than any other market. A large portion of the 2017 increase in starts is expected to be change in sample size. This model adjusts 2017 starts down by 20%. Still, most of that backlog spending will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. In the last 24 months there have been sixteen $billion+ new project starts and seven $500million+ new starts.

Bklg 10e Trans

2018 total starts are 100% higher than any other year prior to 2017. Starting Backlog skyrocketed from $15 billion in 2016 to $55 billion for 2019. Backlog will support spending for several years to come. Keep in mind, when a $4 billion project first gets recorded in starts, that is the general contract. Many subcontracts will be awarded by the general contractor over the next few years.

Based on predicted cash flows from starts, spending is expected to increase at least into mid-2021.  2018-2019-2020 should see increases of 15% to 20%/year. Dodge is forecasting 2019 starts will stay close to the elevated levels of 2017 and 2018. I’m predicting starts in 2019 will decline from 2018 simply due to the huge volume of new work that started in the last two years. Even with that, backlog could set a record high in 2020.

Transportation construction spending is forecast to reach $55 billion in 2018, $62 billion in 2019 and $75 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.

 

Environmental Public Works

Environmental Public Works includes sewerage projects, Water supply and Conservation, or Dams, water resource and river/harbor projects. New starts for all these type projects declined from 2014 through 2017. Then all showed gains in 2018 and the forecast is more gains in 2019. All of these projects are public spending and saw no real gains in spending from 2010 through 2017. With the projected increases in starts in 2018 and 2019, spending is now forecast to increase the next three years to a new high by 2020.

Bklg 11e PubWrks

Public Works construction spending is forecast to grow 9% to reach $43 billion in 2018, $46 billion in 2019 and $56 billion in 2020.

 

Communications

Starts data for communications is not regularly reported. Total starts for the year is always recorded well after year end. A moderate forecast is included for future starts growth the next two years.

Actual spending is erratic, up 10% one year down 3% the next then up 25% followed by 2% growth. 2018 should finish down 1% after a 12% gain in 2017. The forecast shows a 5% decline in 2019 and flat spending into 2020.

Bklg 12e Commun

Communication construction spending was up 12% in 2017 and finished at $24.8 billion The forecast for 2018 is down 1% to $24.5 billion. Expect $23 billion in 2019 and $23 billion in 2020.

 

For a PDF of this Nonresidential report 2019 Construct Econ Forecast – NONRES – Dec 2018 RVSD 12-6-18

 

Link to 2019 Construction Economic Forecast – Summary

2019 Construction Economic Forecast – Summary – Dec 2018

Construction Analytics 2019 Construction Economic Forecast

This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.

NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018.  Most spending from these new starts will occur in 2020. U.S. Census construction spending for October posted large reductions to several months of residential spending. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis, by far most of the 2019 and 2020 changes are significant reductions in residential spending. See the 2019 Construction Economic Forecast – Nonresidential for detail on all nonresidential and non-building markets

This analysis was edited to include the most recent starts data and the U S Census October spending data.

For a fully formatted PDF of this Report click

2019 Construction Economic Forecast – Summary – Dec 2018

 

Link to the 2019 Nonresidential Forecast Report

2019 Construction Economic Forecast – Nonresidential – Nov 2018

 

Summary

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.

01e summary

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.

Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.

27e sector plot for cover

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,321 trillion, a gain of 6.0%, that will most likely increase.

Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% new starts growth for the 3-year period 2018-2020.

Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.

 

Construction Inflation Indices

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.

Revenue is spending but real volume is spending minus inflation. Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long-term average inflation is 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.

To differentiate between Revenue and Volume you must use actual final cost indices, otherwise known as selling price indices, to properly adjust the cost of construction over time.

Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Spending needs to grow at a minimum of 4.7% just to stay ahead of construction inflation. Inflation in this sector has been at 4% or higher the last four years.

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.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index, Beck Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price of nonresidential buildings only. The individual average annual growth for all these indices over the past 4-years is 4.6%/year.

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 at the producer level, not prices or bids at the contractor 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 commonly used to adjust project costs. The ENRBCI tracks a limited market basket of labor and materials. RSMeans holds the quantity of materials and labor for a building constant. Neither index addresses contractor margins. However, they are useful in that they also publish input cost indices from many cities. This provides a reference to compare those cities to the national average, but still, only for a limited basket of labor and materials. Neither gives any indication of the level of market activity in an area.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for six years from 2013 to 2018 is 5.7%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and currently is near 5.5% in 2018. Anticipate national average residential construction inflation for 2018 at least 5.5 % to 6%.

Nonresidential Buildings indices have averaged 4% to 4.5% over the last five years and have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically has led to accelerated inflation.

There are clear signs of increasing construction activity and a tightening construction labor market.  The national construction unemployment rate recently posted below 4%, the lowest on record with data back to 2000. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. The average has been below 5% for the last 18 months. An unemployment rate this low potentially signifies labor shortages. The Job Openings and Labor Turnover Survey (JOLTS) for construction is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.  Labor shortages cause contractors to pay premiums over and above normal wage increases to keep workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data.

Recent news of tariffs has extended beyond just steel. I calculated a 25% tariff on raw steel would add 1% to the cost of nonresidential steel buildings. Hi-rise residential buildings, if building is structural steel, would fall in this category. Wood framed 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%. 

Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.

02 inflation bars

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation in 2018. Notice during that same period seldom did any input indices climbed above 3%.

03 inflation pct

Every index as published has its own base year = 100, generally the year the index was first created, and they all vary. All indices here are converted to the same base year, 2017 = 100, for ease of comparison. No data is changed from the original published indices.

04 inflation index

Non-building Infrastructure indices are far more market specific than any other type of index. Reference specific Infrastructure indices rather than any average.

These links point to comprehensive coverage of the topic inflation and are recommended reading.

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

Click Here for Cost Inflation Commentary – text on Current Inflation

 

Current$ vs Constant$

Comparing current $ spending to previous year spending does not give any indication if business volume is increasing. The inflation factor is missing. If spending is increasing at 5%/year at a time when inflation is 4%/year, real volume is increasing by only 1%.

The current Nonresidential buildings forecast of spending growth at 6.0% for 2018 would suggest that after inflation, nonresidential buildings construction volume is growing slightly.  So expect volume growth in 2018, but next year 4.3% inflation and no spending growth is signaling a volume decline in 2019.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Nonresidential jobs increased by 27% during that period, 15% greater than 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.

When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007. In 2005 constant $ volume reached a peak at $1,450 billion. At current rates of growth, we would not eclipse the previous high before 2022.

05 current constant

Spending in current $ is 14% higher than the previous 2006 high spending.

Volume after adjusting for inflation is still 14% lower than the previous 2005 high volume.

 

Jobs and Volume

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

A spending forecast of 6.6%+ in 2018, or an increase of $83 billion in construction spending, demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction “volume”. But construction jobs growth seems to closely follow growth in spending. Construction jobs have increased by 400,000 in a year only four times in the last 50 years, each time accompanied by one of the four highest spending growth increases in 50 years. However, $80 billion in added spending is not the same as $80 billion in volume, and jobs needed is based on volume.

Although spending will increase 6.6%, construction inflation has been hovering near 4.5% for the last five years. Real volume growth in 2018 after inflation is expected to be near 2% or only $26 billion. That would mean the need, if there are no changes in productivity, is to add only about 130,000 additional jobs in 2018, a rate of growth that is well within reach. That is less than the average jobs growth for the last seven years.

Construction added 1,400,000 jobs in the last 5 years, an average of 280,000/year. 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.

Total spending increased 60%+ since 2010, but with 30% inflation. Real total volume since 2010 has increased by only about 30%. Jobs also increased by 30%, in balance with need. But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 50% since 2010 with 35% inflation. Nonresidential volume since 2010 has increased by only 15%. Jobs increased by 27%, 12% in excess of volume growth.

Residential spending increased by 125% since 2010, but after 40% inflation, real residential volume increased by 85%. Jobs increased by only 40%, 45% short of volume growth.

Residential construction labor cannot be directly compared to residential volume because

  • Some residential high-rise jobs, for example structure, are performed by firms whose primary activity is commercial construction. Those jobs are classified as nonresidential.
  • Buildings that are multi-use commercial retail and residential, even lo-rise, may be built by contractors whose firms are classified nonresidential labor. The construction spending would be broken out to residential and nonresidential, but the labor would not.
  • Some residential immigrant labor is not counted

For these reasons, it is best to simplify comparisons of spending activity to total labor.

For more on Jobs see Construction Jobs and Residential Construction Jobs Shortages

 

New Construction Starts

New construction starts for the six months in the 1st half 2018 reached an all-time high.

New Construction Starts three-month average for May-Jun-Jul is $840 billion, all-time high.

Year-to-date (YTD) 2018 starts are currently reported as up only 2% from 2017, but 2017 starts through September have already been revised up by 9%, 10% in nonresidential buildings, 16% in non-buildings and 3% in residential. 2018 starts will not be revised until next year. Revisions have always been up.

Revisions for the last 10 years averaged more than +7%/yr., with most of the upward revision in nonresidential buildings. Revisions to nonresidential buildings have been greater than 10%/year for the last 7 years. Therefore, 2018 starts growth is very likely under-reported.

All construction starts data in this report references Dodge Data & Analytics Starts Data.

Dodge releases its first forecast of next year’s starts every year in the 4th quarter. Last year the first forecast for 2018 was for starts to increase 3% to $765 billion. 2018 starts, based on data as of September, could reach $806 billion, but at first appearing to show no gain from 2017. That’s because 2017 has already been revised up by $50 billion. After 2018 revisions are posted next year, 2018 starts could reach $830-$840 billion. Dodge forecast 2019 starts at $808 billion, no change from 2018. This will be subject to two upward revisions.

  • Previous year starts always later get revised upwards. Therefore, current year starts YTD growth is always understated. This analysis compensates for that.
  • New starts will generate record high starting backlog for every sector in 2019.
  • Even a low forecast for starts in 2019 produces record backlog for 2020.

For nonresidential buildings spending, long duration jobs can sometimes have a 5 to 6-year schedule. On average most years have at least some projects start that will be under construction for 4 years. For an entire year’s worth of starts, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. Residential starts contribute spending into the third year. This means that nonresidential spending growth in 2019 is still being affected by starts from 2016 and residential growth from starts in 2017. This also means that nonresidential spending growth in 2019 is still being affected by starts from 2016.

The next two plots show the 3-month moving average and trend line of starts for Residential and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.

06 starts two plots

The plot below is an index. The plot shows greater accuracy in the forecast when the slope of the predicted cash flow and actual spending plot lines move in the same direction. It’s not the spread between the lines that gives any indication. If the slope of the lines is the same, then the cash flow accurately predicted the spending.

The light green line for nonresidential buildings spending estimated from starts cash flow shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows close to the pattern estimated from cash flows.

07 starts index

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

 

Starting Backlog

Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. 2019 Backlog is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 years.

08e nonres bklg

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or several years ago.

  • 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
  • 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.
  • 70% of All Residential spending within the year is generated from new starts, but this is weighted because 85% of all residential work is short duration single family and renovation work.
  • 65% on long duration Multifamily Residential spending within the year will be generated from projects in starting backlog.

09 start bklg plot

Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.

10e infra bklg

Multifamily residential has a longer duration and a greater percentage of spending comes from backlog. But, due to the shorter duration of projects, about 75% of single family and residential renovation spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much short-term residential spending within the year.

11e Cashflow Forecast RSDN ALL 12-1-18

 

Cash Flow

Simply referencing total new starts or backlog does not give an indication of spending within the next calendar year. Projects, from start to completion, can have significantly different duration. Whereas a residential project may have a duration of 6 to 12 months, an office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also by old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,321 billion, a spending increase of 6.0% over 2017. The forecast for 2019, based on a minimal increase in starts, is $1,341 billion, an increase of only 1.5% over 2018. Dodge initial November 2018 forecast for 2019 construction starts is for $808 billion, no gain over 2018. However, subsequent revisions may increase that a few percent.

The following table illustrates the difference between Starts and Cash flow. It shows Manufacturing Bldgs. projects in backlog as of October 2018 and predicted starts in 2018 through 2021. Note there are sometimes vast differences between amounts of Starts, whether already in Backlog at beginning of year or New Starts within the year, and Cash Flow from Backlog and New Starts.

12e mnfg bklg cashflow

Cash Flow modeling predicted a huge decline of -16% in manufacturing spending in 2017. This was in stark contrast to seven other economic analysts who predicted spending would be between -7% and +7%, for an average of +0.4% as reported in the January 2017 AIA Consensus. Manufacturing spending actually ended the year at -13.0%. Obviously, there is no correlation between a 25% increase in new starts within the year and a predicted -16% drop in spending. The actual -13% drop in 2017 spending reflects a return to normal after an unusually large volume of spending in 2015 and 2016 that was generated by a record volume of starts in 2014.

Note that new manufacturing starts were up 27% in 2017 and could be up 18% in 2018, yet 2018 spending is forecast to increase only 1.5%. This is due to projects that started several years ago but are now coming to an end. They are dropping out of the monthly cash flows and holding down 2018 spending even though starts have been up substantially for two years. This substantial volume of new starts in 2017 and 2018 will be providing a boost to spending in 2020 and 2021.

 

Spending

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019 and 6.3% to $1.426 trillion in 2020.

13e spend sectors

Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.

The following table clearly shows there is not a correlation between starts in any year with spending in either the current or the following year. The practice of using construction starts directly to predict spending can be very misleading in an industry that relies on data for predictive analysis to plan the future. Not only does it not predict the volume of spending in the following year, it does not even consistently predict the direction spending will take, up or down, in the following year. It’s a false indicator and it’s not a good use of data.

14 spend vs starts

 

Residential Buildings Spending

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020.

Residential spending in 2018 slows after six years of growth all over 10%/year. Average spending growth the last seven years is 12%/year. Although Residential 2019 construction spending is still increasing slightly 0.5%, growth has slowed to less than inflation of 5%. Therefore real 2019 residential volume after inflation is forecast to decline by 4%+, the largest real volume decline since 2009. In 2018 residential spending increased 5.6%, but after inflation real volume increased only a fraction of a percent.

Residential spending in 2018 is 50% single family, 13% multi-family and 37% improvements. In 2011, improvements were 48% of residential spending.

Single Family Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts.

11e Cashflow Forecast RSDN ALL 12-1-18

Total starts for the last 6 months are the highest since 2006, but % growth has slowed considerably. New starts in 2017 which initially posted only 2% growth have already been revised up to 4%. I expect that to be revised up to 5%. Growth of 7% is expected for 2018. Slower growth is now expected after 5 years (2012-2016) of starts increasing at an average 20%/year. Multi-Family Residential spending is more dependent on backlog.

15e Cashflow Forecast RSDN MF ONLY 12-1-18

Residential spending hits a 12-year high in 2018. Residential spending reached a current $ peak of $630 billion in 2005. 2018 pending is still 10% below that peak. In constant $, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant $, 2018 spending is still 27% below the 2005 peak.

16 res nonres plot

 

Nonresidential Buildings Spending

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

17e spend nonres bldgs

18 nonres bldgs plot.JPG

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached as high as $440 billion in 2017 but averaged only $419 billion in 2017. In 2018 it will reach a high of $430 billion but average only $424 billion. The yearly average recently peaked at $431 billion in 2016. Constant $ spending or real volume growth shows all years from 1996 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $ 2018 is still 20% below that 2000 peak.

19 nonres cur con

 

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works had strong 20% growth in 2018 starts and Highway starts hit a new high in 2018.

20e spend nonbldg

Non-building Infrastructure construction spending in constant $ (inflation adjusted $) reached $311 billion in 2016, an all-time high, but then dropped to $296 billion in 2017. In 2018 it will reach $302 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.

21 nonbldg cur con

Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

22 infra plot

Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. 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. Transportation spending is projected to increase 20-25%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 8%. 2019 and 2020 are forecast to increase 5% to 6%.

 

Public Infrastructure and Public Institutional

Less than 60% of all Non-building Infrastructure spending, about $170 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

About 25% of all Nonresidential Buildings spending, about $110 billion, is publicly funded, mostly Educational. Nonresidential buildings spending makes up almost 40% of Public spending.

  • 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).

23 pub prv spend.JPG

 

Public Infrastructure + Public Institutional = $280 billion, 23% of total construction spending.

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

See also Publicly Funded Construction

See also Down the Infrastructure Rabbit Hole

24 pub prv share

Public Spending

Total public spending for 2018 is projected to finished up 9.5% at $320 billion. Every major public market is projected to finish up for 2018. By far, the largest Public spending increases for 2018 are Highway, Transportation, Sewer and Waste Disposal and Water Supply.

25e pub prv sectors

The two largest markets contributing to public spending are Highway/Bridge (32% of total public spending) and Educational (25%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending. Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20% public. Power is about 6% public, along with few other smaller shares.

Public spending hit a 4-year low in mid-2017. It has been increasing since then and is now near an all-time high. I’m expecting to see strong growth through 2020.

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 growth are Educational (+15%) and Transportation (+35%), with a combined total forecast 20% growth in public spending.

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.

26e pub bklg

For a Full Formatted PDF of this Report click

2019 Construction Economic Forecast – Summary – Dec 2018

 

Link to the 2019 Nonresidential Forecast Report

2019 Construction Economic Forecast – Nonresidential – Nov 2018

Reliability of Predicted Construction Forecast Data

10-2-18

It’s not uncommon that clients ask for a forecast of construction spending for the next three years. It is less common that forecasters explain the reliability of the data in a forecast.

To predict the reliability of the data in a forecast, several assumptions must be stated.

Cash flow curves are generated to predict the spending pattern. These are assumed to be reliable. The cash flows are generated from monthly data releases for New Construction Starts. The Starts data is assumed reliable. However, major sector data is revised in the following month and again in the same month the following year. These revisions are incorporated when released, but nonresidential building markets revisions are not posted at the same frequency. That data becomes available in the 4th quarter report of the following year. It is updated at that time. The analytical methods are assumed to be reliable.

The primary driver of the spending forecast is New Construction Starts. Care must be taken to use Starts properly. Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 70% of industry activity and that varies by market type, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Projected starts data cannot be used to directly forecast expected construction volume. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of future backlog and spending be developed.

For short duration residential spending, single-family residential and renovations work, approximately 75% of the spending occurs in the current year and 20% in the following year.

For long duration residential spending, typical of multifamily residential, approximately 50%-55% of the spending occurs in the current year, 35%-40% in the next year and only 5%-10% occurs two years out.

For nonresidential buildings spending long duration jobs can sometimes have a 5 to 6-year schedule. On average most years have at least some projects start that will be under construction for 4 years. For an entire year’s worth of starts, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. This also means that nonresidential spending growth in 2019 is still being affected by starts from 2016.

Non-building Infrastructure spending has many of the longest duration jobs. Some job starts in the last two years have 6 to 8-year duration. Many years have at least some projects start that will be under construction for 5 years. For the entire year of starts, approximately 15% of the spending occurs in the year started, 40% in the next year, 33% in the third year and 12% in the fourth year or later year. This also means that non-building Infrastructure spending growth in 2019 is still being affected by jobs that started in 2015.

  • 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
  • 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.
  • 70% of All Residential spending within the year is generated from new starts, but this is weighted because 85% of all residential work is short duration single family and renovation work.
  • 65% on long duration Multifamily Residential spending within the year will be generated from projects in starting backlog.

Multifamily residential has a longer duration and a much greater percentage of spending comes from backlog. But, due to the shorter duration of projects, about 75% of single family and residential renovation spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much short-term residential spending within the year. For that reason, the reliability of SF and Reno residential work drops more quickly than all other types.

For any future forecast month, the most information is in hand the month before. For example, in the month of October the forecast for November includes a projected cash flow which is based 96%-98% on actual projects. Only the small amount from new projects that start in November is predicted. Assessing the amount of actual data versus the amount of predicted data gives an indication of how much weight can be placed on the forecast. Obviously, the balance of actual versus predicted data changes the further out in time we view the forecast.

Reliability of Data 10-2-18.JPG

From the current date, the forecast for the next month includes 95%-98% actual data. Only the cash flow curve and the predicted duration affects the reliability of the forecasts and even that is minor.

Twelve months from the current date, the forecast is more dependent on predicted starts and therefore the percentage of actual data drops. The Non-building Infrastructure forecast includes 85% actual data. The Nonresidential Buildings forecast includes 80% actual data. The Residential forecast includes 30%-40% actual data.

Two years out from the current date, the forecast is far more dependent on predicted starts. The Non-building Infrastructure forecast includes 45% actual data. The Nonresidential Buildings forecast includes 30% actual data. The actual data in a residential forecast drops to near zero with very little remaining in backlog and that only from multifamily.

Three years out from the current date, the forecast is near entirely dependent on predicted starts. The Non-building Infrastructure forecast includes about 15% actual data. The Nonresidential Buildings forecast is approaching zero. The residential forecast has already be reliant on predicted data for the past year.

To put this in perspective, let’s assume a Jan 1, 2019 forecast which includes all actual construction starts through Dec 2018. We’ll look at the forecast for 2020 and 2021. Also, we’ll base the volume of actual data on each sector’s actual data and its share of total construction spending. Non-building Infrastructure has the most actual data long term, but it is the smallest share of total construction. Residential has the least long-term data but is the largest share of total construction.

In my Jan. 1, 2019 forecast, the forecast for the year 2020, the period only 12 to 24 months out, actual data drops from 60% at the start of the year to 20% at the end. So, the 2020 forecast includes only an average of 40% actual data. In the forecast for the year 2021, the period from 24 to 36 months out, the actual data drops from 20% to 4% over the course of the year. Very little actual data is influencing the forecast.

Three years out from the current date the reliability of the forecast is dependent on the economic outlook of the developer and the predictive methodology of the analytic tools.

It’s good to know, when you are looking at a forecast that projects three years out past the current year, there is nearly no actual data in that forecast. It’s all predicted.

June Construction Starts Reach New Highs

7-25-18

New construction starts, posted today by Dodge Data & Analytics, measured in current dollars, came in at a seasonally adjusted annual rate of $896,000 million, up 11% from May. May, originally posted at +15% over April, was revised up 3.5%.

2nd qtr increased 7.5% from 1st qtr., and 1st half increased 4.5% from the previous 6 months.

The June SAAR (seasonally adjusted) amount of $896,000 million is the highest on record. However, in constant $, adjusted for inflation, there were a few months from 2004 through 2006 that would still be slightly higher. After revisions, it will likely be higher.

Year-to-date starts through June total $396,000 million, 1% higher than the same six months of 2017, but that amount is not as low as first comparison would indicate. 2017 starts through June have already been revised up by 14%, up about 20% in nonresidential and 5% in residential. 2018 starts will be revised again next year and revisions have always been up. Revisions in previous years have averaged more than +7%/yr. for the last 5 years, with most of the upward revision in nonresidential. Therefore, the potential that 2018 YTD gains at a later date will increase vs 2017 is expected.

2017 starts final, once all revisions are posted, could reach close to $800 billion.

New starts data is a sampling of project starts, representing about 60% of total work volume. Actual starts dollars cannot be used directly to represent spending. However, tracking the rate of change in predicted cash flow from starts allows to predict the rate of change in spending.

From Sept’17 through Jun’18 new construction starts reached the highest monthly average since 2004 and are now just below the all-time high.

Residential starts average for the 6 months Jan-Jun 2018 is the highest since 2006. The 1st 6 months of 2018 is up 10% from the prior 6 months.

Non-building infrastructure starts for June are down 28% from May, but that is not particularly newsworthy, because May had an unusually high amount of starts. May included almost $8 billion of pipeline, rail and sewerage projects starts, 3x normal, while June settled back to normal.  June Infrastructure starts are still higher than the average of the previous 6 months. The average Infrastructure starts for Apr-May-Jun is the highest since Q1 2015 when massive new starts for energy plants drove Infrastructure starts to all-time highs. Starts may finish the year close to the same as 2017, but, if slightly higher, could still be the best year of starts on record. The growth in Infrastructure starts will drive Non-building spending to record highs in 2018 through 2020.

Starts 2008-2018 nonbldg 7-26-18

Nonresidential buildings starts in June reached $402 billion, nudging up against the all-time constant $ high from 2008. In fact, in un-adjusted dollars current $, June 2018 starts reached a new high. Manufacturing starts are double the amount from same period in 2017 and Amusement/Recreation starts are triple last year. The only nonresidential market that is lower year-to-date is retail stores. Adjusted for inflation, Jan 2008, by a few percent, is still the best ever for nonresidential buildings starts and spending.

Starts 2011-2018 nonres bldgs 7-25-18

The plot above shows 3mo moving average and trend line for Nonresidential Buildings Starts. Starts can be erratic from month to month. The trend line gives a better impression of how starts will impact spending.

The plot below is an index. The plot shows accuracy when the predicted cash flow and actual spending plot lines move in the same direction.

The light green line, spending estimated from starts cash flow, shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows pretty close to the pattern as that estimated from cash flows.

Starts CF 2015-2018 7-25-18

It’s notable that new construction starts through June are up 1% from 2017. When the 2018 forecast was first issued last November, 2017 starts were predicted to finish the year at $742 billion. The original forecast for 2018 starts growth predicted starts would increase 3% over 2017 to a 2018 total of $765 billion. Well, the current total for 2017 is now $780 billion. Since November, the 2017 base has been revised up by  almost $40 billion. 2017 starts could finish close to $800 billion, more than double the original forecast % growth. And yet, the YTD total for 2018 is still 1% above that revised value.

Starts in both 2017 and 2018 are stronger than expected just 6 months ago. The current SAAR monthly $ of starts is 10% higher than anticipated just 6 months ago.

Construction spending is up year-to-date through May in every sector. Only Manufacturing and Power markets are down YTD, but not enough to drag the sectors negative. Both markets are expected to finish the year up. (Religious market is down, but represents only 0.2% of spending).

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,330 billion, a spending increase of 6.6% over 2017.

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