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Pandemic #14 – Impact on Construction Inflation

8-27-20 What impact will the pandemic have on Construction Inflation in 2020? Here’s Several inputs.

In April, and again in June, I recommended adding a minimum 1% to normal long-term construction inflation, to use 4% to 5% for 2020 nonresidential buildings construction inflation. Some of my peers were suggesting we would experience deflation. Only twice in 50 years have we experienced construction cost deflation, 2009 and 2010. That was at a time when business volume was down 33% and jobs were down 30%. Currently business volume and jobs are down 10% and by mid-2021 are forecast down 15%.

The Turner Construction Cost index for the Q2 is down 1% from Q1, effectively reporting 0% increase in the index year-to-date. But the Turner index year-to-date (avg Q1+Q2=1183) is still 3.6% higher than the average of Q1+Q2 2019 and 2.3% higher than the avg for all of 2019 (1156). So, while the index appears to show no gains in 2020, through the first six months it is already up 2.3% above the average 2019 index. http://turnerconstruction.com/cost-index

The Rider Levitt Bucknall Q2 2020 index is up 1.6% ytd, up 4.6% from the Q1+Q2 2019 average and up 3.1% above the 2019 average. https://s28259.pcdn.co/wp-content/uploads/2020/07/Q2-2020-QCR.pdf

The U.S. Census Single-Family house Construction Index is up 3.6% year-to-date through July. July 2020 is up 4.2% over July 2019. https://www.census.gov/construction/nrs/pdf/price_uc.pdf

Producer Price Index items for July construction reported by AGC on 8-11-20. Inputs to Nonres construction are down ytd -1.0% through July. Final Demand Nonres Bldgs is up 1.8% ytd through July. See https://www.agc.org/learn/construction-data/construction-data-producer-prices-and-employment-costs and https://edzarenski.com/2020/07/14/producer-price-index-year-to-date-june-july-2020/

R.S.Means quarterly cost index of some materials for the 2nd quarter 2020 compared to Q1: Ready-Mix Concrete 0%, Brick and Block +3%, Steel Items -2%, Wood products +3%, Roof Membrane +7%, Insulating Glass +6%, Interior Finishes -2%, Plumbing Pipe and Fixtures +7%, Sheet Metal +7%. https://www.rsmeans.com/landing-pages/2020-rsmeans-cost-index

U.S. manufacturing output posts largest drop since 1946. Think of all the manufactured products that go into construction of a new building: Concrete, steel, doors, windows, roofing, siding, wallboard, lighting, heating systems, wire, plumbing fixtures, pipe, valves, cabinets, appliances, etc. We have yet to see if any of these will be in short supply leading to delays in completing new or restarted work?

There have been reports that scrap steel shortages may result in a steel cost increase. The U.S. steel industry is in the most severe downturn since 2008, as steelmakers cut back production to match a sharp collapse in demand and shed workers. Capacity Utilization dropped from 82% to 56% in April. Now in mid-August, CapU is up to 61%, still very low. Steel manufacturing output fell by a third and is still down more than 25%. Until production ramps back up to normal levels there may be shortages or delays in delivery of steel products.

Since Q1, the cost of lumber has increase 120%, so expect residential inflation to increase faster than nonresidential. https://eyeonhousing.org/2020/08/average-new-home-price-now-14000-higher-due-to-lumber/ and revised http://nahbnow.com/2020/08/average-new-home-price-now-16000-higher-due-to-lumber/

Contractors have been saying they have difficulty acquiring the skilled labor they need. This has led to increased labor cost to secure needed skills.

But most important, this SMACNA report quantifies that labor productivity has decreased 18% to meet COVID-19 protocols. https://www.constructiondive.com/news/study-finds-covid-19-protocols-led-to-a-7-loss-on-construction-projects/583143/

Labor is about 35% of project cost. Therefore, just this productivity loss equates to 18% x 35% = 6.3% inflation. Even if, for all trades, the average lost time due to COVID-19 protocols is only half that, the added inflationary cost to projects is 3% above normal. I expect the Turner Nonres Bldgs index will reflect some added labor cost in the next two quarterly releases.

Post Great Recession, average nonresidential buildings inflation is 3.9%. For the last five years it’s 4.5%. Residential cost inflation averaged 4.1% and 4.5% for those periods. The 30-year average inflation rate for nonresidential buildings is +3.75%.  

Almost every construction market has a weaker spending outlook in 2021 than in 2020, because approximately 50% of spending in 2021 is generated from 2020 starts and 2020 starts are down.

Typically, when work volume decreases, the bidding environment gets more competitive and prices go down. However, if materials shortages develop or productivity declines, that could cause prices to increase.

Add to these issues the fact that many projects under construction have been halted for some period of time and many more have experienced at least short-term disruption. The delays may add either several weeks to perhaps a month or two to the overall schedule, in which case management cost goes up, or it could add overtime costs to meet a fixed end-date.

We can expect some cost decline due to fewer projects to bid on, which typically results in sharper pencils. But we can also expect cost increases due to materials, labor cost, lost productivity, project time extensions, and/or potential overtime to meet fixed end-date.

I expect non-residential buildings inflation to range between 4% and 5% for 2020 and 2021, perhaps 5% to 6% for residential work.

Pandemic #13 – Midyear Construction Outlook

Revised Construction Outlook 8-14-20 based on

  • Actual Spending data includes revisions 2018-2019 issued 7-1-20
  • Actual Jobs data includes BLS Jobs to July (12th) issued 8-7-20
  • Forecast includes US Census June 2020 year-to-date spending 8-3-20
  • Forecast includes Dodge construction starts Midyear Update 8-6-20

The first important thing to note is that the US Census, on 7-1-20, revised all spending data back several years. This is an annual occurrence. This analysis includes all revised data, which adds about $30 billion to 2018, $60 billion to 2019, half of all adding to residential, and revises 2020 data. Not everyone has yet updated to this recently revised data, so you may see differences when comparing forecast reports among several firms. If needed, refer to the percent.

Initial impact on spending from project delays/shutdowns

This compares the current construction spending data to a 2020 Forecast from April 1 before any Pandemic Impacts were recorded. It compares actual to what was expected Pre-Pandemic. The change in year-to-date (ytd) all occurred in 2nd quarter data. In fact, 1st quarter ytd growth was forecast at 7% and it came in at 9.5%. 2nd quarter growth was forecast at 6.8% and it came in at 1%.

Construction Spending 2020 year-to-date (ytd) thru June vs 2019

Actual ytd vs Pre-Pandemic Forecast ytd. Nearly all this change is due to projects delayed/shutdown.

  • Nonres Bldgs down 2.4% ytd in 6mo vs pre-pandemic forecast
  • NonBldg UP 3.0%
  • Residential down 4.9%
  • TOTAL down 1.9%

The measure of decline due to Pandemic delays and shutdowns is not the difference between Q1 and Q2 growth in ytd spending. Nor is the impact measured by the current difference in ytd performance vs 2019. It’s the difference between what was forecast for ytd growth pre-pandemic vs actual ytd growth.

For instance, Residential construction spending thru Q2, as reported in the US Census June construction spending release, is up ytd 7.8%. But pre-pandemic it was forecast to be up 12.7% ytd after 6 months. Hence, residential spending has been impacted by a 12.7% – 7.8% = 4.9% decline from original forecast thru June.

Future impact on spending from lost construction starts

Part one of the decline in construction spending was due to delays/shutdowns. Part two will be the impact of reduced construction starts. That has very little affect right now, but will play out over the next few years. But remember once again, the impact in 2021 is not measured by the difference between 2020 and 2021, its the difference between current forecast for 2020/2021 and the pre-pandemic forecast for 2020/2021.

Year-to-date, total construction starts are down 14%. Residential new starts are down 5%, nonresidential buildings down 22% and non-building infrastructure starts are down 14%.

Dodge updated their forecast to show 2020 construction starts for nonresidential buildings fall on average 20%, less in some markets, but -30% to -40% in a few. Only warehouses is up. Non-building starts fall on average 15%. Only Highway/Bridges is up. Residential starts may fall only 5%-10%.

How those lowered starts affect spending is spread out over cash flow curves for the next few years. This has a major impact on jobs later in 2020 and all of 2021 into 2022. For nonresidential buildings, the greatest impact to spending and jobs affected by a reduction of new starts in 2020 occurs from 2021 into 2022 when many of those lost starts would have been reaching peak spending.

Only about 20% of new starts gets spent in the year they started. 50% gets spent in the next year. The effect of new starts does not show up immediately. If new nonresidential buildings starts in 2020 are down 22%, on average, the affect that has on 2020 is reduced spending by -22% x 20% = – 4.4%. But the affect it has on 2021 is -22% x 50% = -11%.

Construction Spending FORECAST 2020 vs Pre-Pandemic Forecast

This change in forecast incorporates reduced new construction starts for 2020 but also includes the impact from delays and shutdowns.

  • Nonres Bldgs down 5.4% for 2020 vs pre-pandemic forecast
  • NonBldg down 0.3%
  • Residential down 6.5%
  • TOTAL down 4.5% vs pre-pandemic forecast

Construction Spending FORECAST 2021 vs Pre-Pandemic Forecast

Nearly all this change due to a reduction in new construction starts in 2020. Notice, it is nonresidential buildings that are impacted the most, down 10% from the pre-pandemic forecast.

  • Nonres Bld down 9.9% for 2021 vs pre-pandemic forecast
  • NonBldg down 6.4%
  • Residential UP 5.8%
  • TOTAL down 2.5% vs pre-pandemic forecast

Future impact on backlog from delays/cancellations and reduced starts

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. Many projects in backlog extend out several years in the schedule to support future spending, so backlog growth in not an indicator that tracks year over year with spending. Current backlog at the start of 2020 would still contribute some spending for the next 6 years until all the projects in backlog are completed.

The last time starting backlog decreased was 2011. Starting backlog will fall 10% in 2021 and 2% in 2022. Except for residential work, about 80% of annual spending comes from starting backlog.

Some of the projects delayed or canceled started before Jan. 2020. When one of those projects is delayed, the portion of the project delayed gets removed from 2020 backlog, but then gets added to future backlog. When one of those projects is canceled, the portion of the project not yet put-in-place gets removed from 2020 and future backlog. Not only does that reduced future backlog but also that retroactively reduces the backlog that was on record at the start of 2020. Therefore, 2020 backlog is reduced by delays and cancellations and future backlog is increased by delays, but reduced by cancellations and a loss of new construction starts.

The following is the difference between what was forecast for backlog pre-pandemic and currently projected backlog based on delays, cancellations and reduced starts.

Backlog projected for the start of 2020:

  • Total Construction down 3.6% vs pre-pandemic forecast
  • Nonresidential buildings down 8.3%
  • Non-building infrastructure up 0.5%
  • Residential backlog down 2.2%, new starts down 5.4%

Although two thirds of Residential spending comes from new starts within the year, 2020 backlog is down 2.2%. 2020 new starts are down 5.4%.

The biggest changes to 2020 backlog are Manufacturing, Commercial/Retail and Amusement/Recreation, all down 10% to 15%.

Backlog projected for the start of 2021:

  • Total Construction down 9.8% vs pre-pandemic forecast
  • Nonresidential buildings down 15.1%
  • Non-building infrastructure down 9.4%
  • Residential backlog up 3.6%, starts up 8.4%

For 2021, Power and Environmental Public Works are down 20% and 10% respectively, but Nonresidential Buildings shows most of the losses. Lodging -40%, Amusement -28%, Manufacturing -26%, and Office and Commercial both down about 15%.

  

Spending Forecast 2020 – 2021

Now that we have highlighted the change in the forecast compared to the pre-pandemic forecast, let’s look at the current spending forecast for 2020 and 2021.

Spend Recession 2020 Summary 8-14-20

See Pandemic #11 – June Construction Spending Update  for coverage of midyear spending year-to-date through June.

Spend Sector monthly 2015-2022 8-11-20

For 2020, the biggest declines are Manufacturing, Lodging and Amusement/Recreation, all down -8% to -10%. Commercial/Retail ends up +3.9% (this market is 60% Warehouse). Office and Educational are down -3% and -1%. Nonresidential buildings takes the brunt of declines in both 2020 and 2021.

In 2021, every nonresidential building market is down from 2020, some markets down 10% to 20%. Educational, Healthcare and Office are all down 3% to 5%. Non-building infrastructure Power market is down -11%, but Highway and Transportation are up +10% to 20%.

Spend YTD 2020 plus Markets 2020 2021 8-14-20

Almost every market has a weaker spending outlook in 2021 than in 2020, because of lower starts in 2020. Starts lead to spending, but on a curve, a good average for nonresidential buildings is 20:50:30 over three years. 20% of the total of all starts in 2020 gets spent in 2020 (yr1) and that represents also about 20% of all spending. 50% of the total value of 2020 starts gets spent in the following year, 2021. So, 50% of spending in 2021 is generated from 2020 starts. If starts are down 20% and 50% of spending comes from those starts, spending will be down 20% x 50% of the work.

Although starts are forecast down 15% to 20% in 2020 and UP 5% to 15% in 2021, the drop in starts in 2020 has the greatest impact on reducing spending in 2021. By June of 2021, spending is down 10% from Feb 2020 and volume is down 14%.

Before we can look at the effect on jobs, we need to adjust spending for inflation. The plot above “Spending by Sector” is current dollars. Here that plot is adjusted for inflation and is presented in constant $. Constant $ show volume. Notice residential remains in a narrow range after adjusting for inflation. No sector shows improvement in volume through Jan. 2023.

Spend Sector Constant2019 monthly 2015-2022 8-16-20

By far the greatest decline in volume is in the nonresidential buildings sector. Volume declines follow in line with spending declines. The greatest losses in 2020 are Amusement/Recreation, Lodging and Manufacturing. In 2021, every major nonresidential building market drops in volume.

Why 400,000 construction jobs are not coming back

Reduced starts in 2020 has a major impact on jobs later in 2020 and all of 2021 into 2022. For nonresidential buildings, the greatest impact to spending and jobs occurs from 2021 into 2022 when many of those lost starts would have been reaching peak spending.

Jobs data show construction added 20,000 more jobs in July. After losing almost 1,100,000 jobs in March and April (out of a prior total 7,600,000), we regained 450,000 jobs in May and 160,000 in June. That leaves construction down 440,000 jobs from the February high point.

Jobs are down 6% from Feb to July, but construction spending is down 7% through June and volume (spending adjusted for inflation) is down 9%.

Although we may get slight jobs growth in the next few months, there is little to no volume growth to support it. Spending is currently down 7% from the Feb high and volume is down 9%. More spending declines are minimal through Q1 2021. Due to the large declines in new construction starts, we will begin to see additional spending and volume declines by spring 2021. Most of the decline will be in nonresidential buildings.

This annual plot back to 1999 shows construction spending vs construction volume. Volume is spending minus inflation.  Notice, volume never recovered to peak 2005. Also notice, recent volume began to decline in 2018.

Spend current vs constant thru 2021 8-11-20

The long-term view of jobs vs volume shows an important point. With few exceptions jobs and volume grow equally. Setting a baseline to zero in 1990, there was a spread in 1992 that was nearly equalized by 1998. Jobs and volume growth remained near equal until 2004. Leading into 2006, spending increased by the most in 30 years. Jobs, which seem to lag slightly, grew 15% from 2004 thru 2006. But inflation posted the highest rate in 30 years. While jobs grew to meet spending growth, almost all the spending growth was inflation. By 2006, jobs growth exceeded construction volume by more than 15%.

Jobs vs Volume 1991-2022 2006 deficit 8-14-20

As I said, with few exceptions, jobs and volume grow equally. If we modify history to reset the baseline to 2006 by increasing volume, the plot now shows that all years from 2006 to 2017 remained consistent in jobs growth vs volume growth. So, with exception of 1992 and 2004-2005, all years from 1990 to 2017 had consistent growth in jobs and volume.

Leading into 2017, spending once again reached a rate of near record growth, second only to 2004-2005. Again, jobs, which seem to lag slightly, grew to meet spending growth. But inflation posted the highest rate since 2006. Once again, jobs grew rapidly, but almost all the spending growth was inflation. By 2019, for the second time, jobs growth exceeded construction volume by almost 15%.

Jobs vs Volume 1991-2022 2006 deficit reset 8-14-20

Jobs are supported by growth in construction volume, spending minus inflation. We will not see construction volume return to Feb 2020 level at any time in the next three years. This time next year, volume will be 5% lower than today, 14% below the Feb 2020 level.

We are currently down 440,000 construction jobs from the Feb high. We may regain 40,000 to 50,000 more jobs before the end of the year. But the declining work volume due to a reduction in new starts in 2020 is indicating by this time next year, not only is there no volume to regain 400,000 lost jobs, but we may lose another 200,000 jobs and be down 600,000 jobs below the Feb 2020 high.

The following plot is the same jobs and volume data as above, only plotted monthly rather than annually. Much of the fear decline of jobs in April has been corrected, but jobs are still down 440,000 from the February high. And yet, the plot shows jobs in excess of construction volume by about 12%.

Jobs vs Volume 2015-Jul 2021 dashed 8-14-20

Volume is set to decline at least for the next two years. There will be no volume growth to support jobs growth and long-term jobs growth already exceeds volume growth by 12%. This is not an environment that supports jobs growth.

SEE ALSO   Pandemic #14 – Impact on Construction Inflation

Pandemic #12 – Jobs & Starts Updated

8-7-20

Jobs data released today show construction added 20,000 more jobs in July. After losing almost 1,100,000 jobs in March and April (out of a prior total 7,600,000), we regained 450,000 jobs in May and 160,000 in June. That leaves construction down 440,000 jobs from the February high point.

Jobs are down 6% from Feb to July, but construction spending is down 7% through June and volume (spending adjusted for inflation) is down 9%.

Year-to-date, total construction starts are down 14%. Residential new starts are down 5%, nonresidential buildings down 22% and non-building infrastructure starts are down 14%. In April, I estimated jobs losses based on Dodge April forecast that new construction starts in 2020 would fall by 10-15% (see Pandemic Impact #4). Yesterday Dodge updated their forecast to show 2020 construction starts for nonresidential buildings fall on average 20%, less in some markets, but -30% to -40% in a few. Only warehouses is up. Non-building starts fall on average 15%. Only Highway/Bridges is up. Residential starts may fall only 5%-10%.

That lowers my forecast for 2021 and 2022.

How those lowered starts affect spending is spread out over cash flow curves for the next few years. This has a major impact on jobs later in 2020 and all of 2021 into 2022. For nonresidential buildings, the greatest impact to spending and jobs occurs from 2021 into 2022 when many of those lost starts would have been reaching peak spending.

Although we may get slight jobs growth in the next few months, there is little to no volume growth to support it. Spending is currently down 7% from the Feb high and volume is down 9%. More spending declines are minimal through Q1 2021. Due to the large declines in new construction starts, we will begin to see additional spending and volume declines by spring 2021. Most of the decline will be in nonresidential buildings.

Spend Sector monthly 2015-2022 8-11-20

Revisit Pandemic Impact #8 – Construction Outlook to compare this plot above to the forecast as of June 3 and to the original forecast at the start of this year.

Jobs are supported by growth in construction volume, spending minus inflation. We will not see construction volume return to Feb 2020 level at any time in the next three years. This time next year, volume will be 5% lower than today, 14% below the Feb 2020 level. In fact, volume began it’s decline in Q2 2018.

Spend current vs constant thru 2021 8-11-20

Almost every market has a weaker spending outlook in 2021 than in 2020. That’s because only about 20% of spending in the year is from new starts in the year. About 50% of spending from new starts in 2020 is spent in 2021. Although starts are forecast down 15% to 20% in 2020 and UP 5% to 15% in 2021, the drop in starts this year has the greatest impact in reducing spending in 2021.

Only about 20% of new starts gets spent in the year they started. 50% gets spent in the next year. The affect of new starts does not show up immediately. If new nonresidential buildings starts in 2020 are down 22%, on average, the affect that has on 2020 is reduced spending by -22% x 20% = -4.4%. But the affect it has on 2021 is -22% x 50% = -11%.

By June of 2021, spending is down 10% from Feb 2020 and volume is down 14%.

Jobs vs Volume 2015-Jul 2021 8-11-20

We are currently down 440,000 construction jobs from the Feb high. We may regain 40,000 to 50,000 more jobs before the end of the year. But the dropping work volume is indicating by this time next year we may lose another 200,000 jobs and be down 600,000 jobs below the Feb 2020 high. 

 

Pandemic #11 – June Construction Spending Update

Construction Spending thru June year-to-date is still UP 5% over Jan-Jun 2019.

Here’s the Census Release of June Construction Spending census.gov/construction/c

Q2 2020 spending is down 4.8% from Q1 2020. Prior to the Pandemic impact, Q2 was predicted to be up 1% over Q1. So, then the drop is -5.8% from the initial forecast.

Comparing 2020 spending to 2019 shows a different story. Q1 2020 is up 9.5% vs Q1 2019. Q2 2020 is up 1.2% vs Q2 2019.

The monthly rate of spending, seasonally adjusted (saar), has declined every month since the Feb peak. For 3 months Jan, Feb, Mar, the saar of spending stayed within 0.25% of the peak. Now in June, the saar is down -6%. Most of the decline was in April, -3.5%. May dropped <2% mo/mo, and June declined <1%.

Residential year-to-date (ytd) spending is up almost 8% over 2019 (80% of that is renovations). In fact, SF+MF is up ytd only 2.8%, while renovations, which went from 33% of the market last year to 36% of the market now, is up 18% ytd. Residential has more downside due to reduction in new starts before resuming growth next year. While the 2nd half of 2019 increased at an average rate of 1%/month, The 2nd half of 2020 will decline by an average 0.5%/month. Residential spending for 2020 is forecast to finish flat to down 1%.

Non-building Infrastructure sector ytd is up 7% over Jan-Jun 2019. Biggest mover is the Power market up 17% ytd. Every market but Conservation is up ytd. Non-building spending is forecast to close out 2020 up 6% over 2019 with strength in Power and Highway.

Nonresidential Buildings spending ytd is level with 2019. Big movers up are Comm/Rtl up 6.7% and Public Safety up 42%.

The construction sector did not experience a massive loss of spending from project shutdowns in Q2. Q2 was down 5%-6% from the pre-pandemic forecast. Jun is down only 0.7% from May with half of all markets posting monthly gains.

AIA Consensus Forecast Nonresidential Bldgs Construction Spending to decline 8.1% for 2020. Is there even a path to get there? In the 1st 6mo ytd is up 0.25%. What would nonres bldgs need to post yoy in the 2nd half to end the year down 8.1%? Spending would need to post declines every month (yoy) for the next 6mo at a rate of -16.7%/month. However, the worst decline in Q2 was only -3.2%. It’s not likely at all that Nonres Bldgs spending will fall to that extent.

Here’s an example of the path it would take to get to the AIA Consensus Forecast. For Commercial/Retail the AIA 2020 Forecast is down 7.7%. But year-to-date Comm/Rtl is up 6.7%. (I’ll remind you again, it’s almost all warehouses). At the worst month, June was still up 2% over Jun 2019. To drop from 6.7% in the 1st half to end down 7.7% at year end, the 2nd half would need to post monthly yoy values at -14.4% each month. That’s not very likely.

For the next 6 months my yoy forecast for Nonres Bldgs spending is up 0.4%.

The BIG question here is, How much of the decline in Q2 was delays and how much was canceled permanently? There is no good report available that defines the total value of work stoppages and work cancellations.

Q2 spending was down 5%-6% from the pre-pandemic forecast. If all of that was work canceled, and therefore we keep those monthly yoy declines of 5%-6% for the rest of the year, then we could see 2020 spending for Nonres Bldgs finish down 2.5% to 3%. But it is not even suspected that all of the Q2 decline was work canceled. Expect most of that was work delayed. Therefore, 2nd half should perform better than Q2 and the forecast for Nonres Bldgs for 2020 is flat to up 1%.

The forecast now has 6 months of actual spending and 6 months remaining of forecast based on new construction starts and backlog. Cash flow forecast from backlog is reduced by delays and cancellations. This forecast projects about 20% for delays and about 2% for cancellations. Also new starts are forecast to drop about 10% in 2020.

The Starts cash flow model has predicted the spending pretty well. The forecast side shows residential has not yet hit bottom, but will grow after Q3 into 2021, while nonresidential buildings falls for the next 12 months.

Starts CF 2015-2022 8-11-20

Currently, the outlook for total construction spending in 2020 is up 1% to 2%. Prior to March the forecast was 6%, so the forecast, although still up 1-2%, has fallen about 5%.

Both Residential and Nonresidential Buildings are forecast within +/- 1% of 2019. Non-building Infrastructure is forecast up 6%-7%.

Currently, inflation in 2020 is expected to range about 3%-4%. If total construction spending grows only 1%-2%, real growth in volume (spending after inflation) is falling. For 2020 and 2021, volume is down. That will not support jobs growth.

Jobs vs Volume 2015-Jul 2021 8-4-20

Mid-August this forecast will be updated with input from Dodge midyear construction starts. See Pandemic #12 for Jobs & Starts Update

 

 

Pandemic Impact #9 – Spending Revisions & Construction Jobs Reset

updated 7-2-20 to include May spending and June jobs report

6-26-20   April construction spending dropped only 3%, but jobs+hours worked dropped 16%. Even though May showed a partial jobs rebound, jobs during this period are still down much more than spending. If this data is accurate, we dropped about half a million jobs more than then the decline in spending would indicate. If so, it’s time to wake up and accept there has been no labor shortage, but rather there has been a huge excess of nonproductive labor.

We’ve seen in the past that jobs can grow in excess of volume growth, but we’ve never seen a period where jobs show a massive decline without a like decline in spending. If it is true that jobs declined without an equal drop in spending activity, then those jobs were nonproductive.

Is the industry about to reset jobs vs work volume? Or, should we expect revisions to the reported data? With the July 1 release of spending data, all monthly (not seasonally adjusted) spending gets revised back to Jan 2018. We’ll see if Mar-Apr gets revised to show larger spending losses.

This post will be expanded after the July 1 construction spending and jobs releases.

Data on recent Construction Starts for May from June 15 release

Dodge Construction Starts average for Apr+May 2020 compared to Avg Jan-Feb-Mar 2020 — Nonresidential Bldgs -34%, Nonbldg Infra -4%, Residential -27%.

Dodge Construction Starts average for Apr+May 2020 compared to Avg Apr+May 2019 Nonresidential Bldgs -18%, Nonbldg Infra -15%, Residential -3%.

So, while Nonresidential buildings starts were down 34% in Apr+May compared to Q1 2020, that’s down 18% compared to the same months 2019. Residential Apr+May starts are down 27% compared to the avg in Q1 2020, but that’s down only 3% compared to Apr+May 2019.

What impact does that have on the year? if Nonres Bldgs starts are down 34% for 2 months, that reduces starts by 6% (34 x 2/12 = 6) for the year (from the prior trend). If Residential starts are down 27% for 2 months, that reduces starts by 4.5% (27 x 2/12 = 4.5) for the year. The full impact on new construction starts will not be known for many months as owner’s make decisions whether or not to move ahead with new capital investment.

7-1-20  The Census Construction Spending report issued today revises spending back several years. 2015, 2016 and 2017 were all revised up 1% to 1.5%. 2018 was revised up 2% and 2019 up 4.5%.

The 3 month decline in spending for Mar-Apr-May 2020 is now reported at only 6%. There is still some disparity in the spending data (vs jobs) in 2020 that is subject to several more revisions and may not get revised for at least a year.

7-2-20  Jobs report for June covers the period May18-Jun14.  Construction spending released 7-1 covers May. We now have 3 months, Mar-Apr-May of spending and 3 months of jobs for the periods Mar16-Apr12, Apr13-May17 and May18-Jun14.  We now begin to get a picture of jobs losses and shutdowns.

Construction Jobs vs Spending Mar-Apr-May vs Feb

  • The 3-month average decline in Volume was -6%.
  • The 3-month average decline in Jobs+Hours was -11%.

Jobs vs Volume PIP 2001-2020 monthly 7-2-20

Construction Projects that shut down in Mar-Apr-May did not post lost revenues as deep as predicted. Spending was down only -4% from February to April.  In May the decline from February reached -6%. Compared to February, Residential spending for May declined -9.5%, Nonresidential Buildings -5% and Non-building Infrastructure declined only -2%.

The data for Mar-Apr-May 2020 shows that the spending drop from shut down delays was far less than anticipated. More than 90% of all work continued unabated through April and May. The result is fewer reductions thereby increasing spending in 2020 and less delayed work pushed out into 2021, lowering 2021 spending slightly. This shifts the balance of spending and now shows a small spending growth in 2020 and only a slight increase in 2021.

Non-building Infrastructure spending is up 8% year-to-date through May. Nonresidential Buildings is level year-to-date. Residential spending ytd is up 9%.

On April 1, the pre-pandemic forecast for 2020 spending was up 6% over 2019. The revised forecast is now up only 2.9%, based on the spending data for Mar-Apr-May released on 7-1-20. The biggest change contributing to the decrease is in residential work. Non-building Infrastructure work, particularly Power and Highway, continues to support spending the next two years.

Spend Recession 2020 Summary 7-3-20

These markets remained at level spending or posted gains in spending in April and May: Public Safety, Amusement/Recreation, Transportation, Communication, Highway/Street, Public Works. The largest declines in spending were in Residential, Lodging, Healthcare, Power and Manufacturing.

The result of lesser impact from fewer work shut downs in Apr-May is a better overall forecast for 2020 and a reduction of delayed work pushed into 2021. However, the forecast for 2020 may possibly get a bit worse with expected revisions. I was predicting shut downs of 10% to 15% and in some markets 25% and that did not show up in the Census spending report. But the uncertainty of what the fall brings still weighs heavy on any outlook. Still in question is whether some states may yet need to invoke temporary shut downs that were originally expected to occur in Apr-May.

After three months, there are still approximately 400,000 jobs lost without an equivalent decline in spending. Even with some future downward revisions to spending, my thoughts are we could expect many of these jobs lost for good. But this most recent data produced at least some of the correction I expected last month. The plot below of the number of jobs to put-in-place $1 billion of volume spiked downward in April by an unrealistic amount. With the most recent May-June data, spending dropped a bit more and jobs increased. This corrected the downward spike almost back up to where it was.  Spending is still subject to several revisions for a year. Don’t be surprised to see this plot move slightly higher in the near future. A higher value on this plot represents lower productivity. I would expect current conditions to result in lower productivity and eventually that should show up on this plot.

Jobs per 1B Volume PIP 2001-2020 monthly 7-2-20

My forecast updated to 7-2-20 shows spending increasing through the remainder of 2020 with almost all of the change due to restarting work that was shut down. But then as we turn into 2021, spending begins to fall slightly again through mid-year, with the emphasis on change due to loss of spending from a decrease in new starts in 2020. Still unknown, with no way to tell from the data, is how many of the projects that shut down will not restart? Also unknown is the impact of cancellations of starts for new capital investment.

Residential work posted the largest drop in spending so far, down almost 10% in three months. But even with that steep drop, residential spending is still up 9% year-to-date compared to 2019. Residential and Nonresidential Buildings posted large reductions in new starts in April and May. That will have an impact on 2021 spending. Only Non-building infrastructure is forecast to post sizable spending gains in 2020 and 2021.

Starts CF 2015-2022 7-3-20

 

 

 

Pandemic Impact #7 – Forecasts Based on Little Hard Data

5-8-20  The jobs report today shows construction lost 975,000 jobs last month.

AGC forecasts “virtually no new private starts except pandemic-related and emergency repair work.” This is probably the most pessimistic of forecasts but let’s look closer. Private construction comprises 75% of all construction work, but residential is 40% out of the 75%. In some cases residential work was allowed to continue, perhaps leading to a continuation of residential starts. Healthcare, Office, Warehouse (in Commercial/Retail), Data Center (in Office), Transportation and Manufacturing (Industrial) all have a large share of private work and all may include some critical projects for which starts may proceed. So, a large portion of new private starts might proceed.

Dodge forecasts new residential construction starts in 2020 will end down -12%,  commercial (90% private) down -16%, institutional (50% private) down -7%, Manufacturing/Industrial (100% private) down 22% and Non-building (40% private) down -16%.

ConstructConnect forecast for 2020 construction starts; Residential -29%, Nonresidential Buildings -32%, Non-building Infrastructure -17%. Total Construction starts for 2020 down 27%.

AIA Consensus of eight construction firms 2020 construction spending forecast for nonresidential buildings : Commercial -14%, Institutional -7%, Total Nonresidential Buildings -11%.

CBRE Research reported 70% of total under-construction industrial space nationally remained active. Most of these projects were deemed essential.

Here’s a sampling of Dodge construction starts through March for ten areas: Houston-Baytown-Sugarland, Phoenix-Mesa-Scottsdale, Ohio, Atlanta-Sandy Springs-Marietta, Boston-Cambridge-Quincy, California, Florida, New York-Northern New Jersey-Long Island, Pennsylvania, Seattle-Tacoma-Bellevue. These ten areas represent about one third of all U.S. construction starts. Compared to the same period 2019; Total construction starts are down 3.5%; Nonresidential Buildings down 2.5%; Non-building down 3.5%. Residential starts are up 10%. Only Seattle posted a decline in residential starts. 

From March 15th to April 12th, construction lost 975,000 jobs, 13% of the workforce. Not shown in the jobs plot below is that hours worked dropped 3%, so the total work output dropped 16%. Construction Unemployment, which was recently below 5%, as low as 3.2% in summer 2019, is now at 16.6%. The next jobs report covers the period from April 13th through May 17th. Expect more downward movement in the jobs numbers.

The U. S. Census March construction spending forecast was UP. It should not be up. I’ve stated this could potentially be due to insufficient real data input and more dependent on typical spending curves to fill in the blanks due to lack of response with real hard data input. I expect downward spending revisions to the March data. Here’s two examples to support my expectations:

  • In any given month about 15% of Residential construction spending comes from new starts that month. March Not Seasonally Adjusted (NSA) spending is historically 15% higher than Feb. But March backlog (without any project delays) was level, new starts in $ increased only 8% and new starts # of units fell 22%, yet March reported residential spending still increased 15%. With a level backlog (which assumes no shut downs) and a new starts below par, residential spending for March should not have increased by the normal historical amount.
  • Total NSA construction spending in March increased 9.6% from Feb, historically it would increase 10.5%, so that seems normal. However, in the last two weeks of March it is estimated workforce declined by 300,000+, 4%. It is unlikely construction recorded a 4% boost in productivity in Mar.

Jobs Pandemic 2020 thru 2021 5-8-20

There still is little hard data to go on, but based on what I’ve gathered to date, here is my Construction Analytics latest forecast.

Work in backlog that has been delayed, minimum 2 month delay, restart build up over a period of 8 months; Residential -30%, Nonresidential Buildings -28%, Non-building Infrastructure -22%, Total Construction delays -25%.

Work in backlog that has been canceled, Residential -3%, Nonresidential Buildings -3.4%, Non-building Infrastructure -2.2%, Total Construction backlog canceled -2.8%.

New Construction Starts in 2020 canceled, Residential -15%, Nonresidential Buildings -8%, Non-building Infrastructure -11%, Total Construction starts canceled -11%.

Construction Spending Forecast 2020 – Residential -2%, Nonresidential Buildings -4%, Non-building Infrastructure <-1%, Total Construction Spending 2020 -2.3%.

Spend Sector Pandemic 2015-2022 5-8-20

The loss of 975,000 jobs in a single month (if all jobs were lost for a full 30 days), at a rate of 60,000 jobs needed to put-in-place $1 billion in construction in one month (5000 jobs per $1bil pip/yr), equates to a loss of $16 billion in spending between March 15th to April 12th. Normally in this period spending would be $100 to $105 billion. We won’t see the hard spending data for this period until June 1st with first revision July 1st. A $16 billion drop would equate to a 1.25% decline in annual construction spending.

A recent AGC survey of contractors indicates:

  • 50% of respondents said an owner halted current work
  • 67% are experiencing project delays/disruptions
  • 49% said suppliers had notified them deliveries would be delayed or canceled
  • 28% reported that an owner canceled an upcoming project
  • 35% laid of workers

Just keep in mind, this is a survey of companies responding they have experienced these issues. It IS NOT an indication that 50% or 67% of all construction projects are halted or delayed. If a contractor has 10 ongoing projects and experiences a delay on three of them, or even one of them, he would have answered affirmative in the above survey. As an example, 35% of respondents reported they laid off workers and today’s jobs report shows the workforce dropped by 13%.

ConstructConnect has compiled a list, by state, of construction projects that have been delayed or canceled. From this list you can get an idea of the number of projects that have been delayed or canceled, but you cannot determine the amount or $ value of work that has been delayed or canceled. To get that level of detail, you would need to know the schedule for each job, the start date/end date and the amount of work already put-in-place.

There are no standard means of capturing the duration of delays or the $ value of delays or cancellations from backlog. We may never know the total value of work delayed/work canceled. This is what makes current forecasting so difficult.

See also these articles for all the analysis to date on the Impact of the Pandemic.

Pandemic Impact on Construction – Recession in 2020?

Pandemic Impact on Construction – Part 2

Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #4 – Construction Jobs Recovery

Pandemic Impact #5 – Restarting Construction

Pandemic Impact #6 – The Lost Month

Pandemic Impact #6 – The Lost Month

5-2-20

Expanding on one of the four recession impacts outlined previously, #4 New Starts – future capital spending plans canceled.

What is the impact on future construction spending if new construction starts stopped for a month?

To analyze this scenario, several assumptions must be made. The assumptions are the variables, and as you will see, the variables change with the market and the severity of the shutdown. It will be easy to see the impact of any other alternative once one scenario is modeled.

Assumptions:

1: An entire month of new starts is stopped. Later it can be determined what happens if only 50% stopped or only 25% stopped.

2: The average duration of jobs in this category is 25 months. Duration is different for each market and this will show the impact duration has on the outcome. Later it can be determined what happens if duration is 20 months or 33 months.

3: A straight line spending curve is assumed. That is, for a duration of 25 months 4% of the construction would be put-in-place each month. No, that is not how spending occurs, it actually follows a typical bell curve, but this allows us to visualize the impact. If duration were set at 20 months, 5% of spending would be p-i-p each month.

4: New Starts have been level indicating a steady stream of new work at the current level. New starts do vary up and down slightly each month, but prior to the pandemic impact the broad outlook was for not big changes from 2019 through 2021.

If an entire month of new starts at a level pace were to disappear, the volume that month would have added to each future month of spending disappears. For projects that have a 25 month duration, using a straight line spending curve, new starts in every month make up 4% of the spending in all future months until they are completed. The total spending in any given month is dependent on the spending contribution from the previous 25 months of projects started. Each month, a project that stated 25 months ago is completed, but a new project that started this month is added.

In this scenario, future spending is reduced by 4% per month for the next 25 months.

Now we can see what happens if only 50% of new starts disappear. If duration is kept at 25 months but only 50% of starts disappear for a month, then future spending will be reduced by only 2% per month for the next 25 months.

What happens if 100% of new starts for one month disappear but the type of project has an average duration of 33 months?

Projects with a 33 month duration contribute 3% of the monthly spending for the next 33 months. In this scenario, future spending will be reduced by 3% per month for the next 33 months. If duration is kept at 33 months but only 50% of starts disappear for a month, then future spending will be reduced by only 1.5% per month for the next 33 months. Long duration projects have a smaller monthly impact, but the impact lasts for a longer period of time.

Short duration projects such as housing have a more severe monthly impact, but the impact lasts for a shorter total duration. Projects with a 10 month duration contribute 10% of the monthly spending for the next 10 months. If 100% of new residential starts stopped for one month, future spending will be reduced by 10% per month for the next 10 months. If duration is kept at 10 months but only 50% of starts disappear for a month, then future spending will be reduced by only 5% per month for the next 10 months.

What happens if new starts shut down for two months? Double all the results above.

See also these articles for all the analysis to date on the Impact of the Pandemic.

Pandemic Impact on Construction – Recession in 2020?

Pandemic Impact on Construction – Part 2

Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #4 – Construction Jobs Recovery

Pandemic Impact #5 – Restarting Construction

 

Pandemic Impact #5 – Restarting Construction

4-18-20

Construction does not come roaring back in Q3 or Q4 2020. The seasonally adjusted annual rate of total construction spending will not return to the Jan-Feb 2020 level until at least 2023.

Spend TOTAL monthly 2018-2021 4-18-20 recession

I’ve outlined in previous “Impact” articles what we might expect for cash flow and backlog through 2020 and into 2021. After the resumption of work that had been halted, which for various reasons cited will take several months, and which is not all expected to return to a full level of pre-pandemic spending, a pull-back in new construction starts will hold spending nearly flat from Q3 2020 through Q2 2021. During that time nonresidential work will reach a post-pandemic peak but residential work will hit a post-pandemic low. Non-building Infrastructure work is not affected nearly as much and still shows spending growth leading into 2022-2023.

Spend Sector monthly 2018-2021 4-18-20 recession

The U.S. steel industry is in the most severe downturn since 2008, as steelmakers cut back production to match a sharp collapse in demand and shed workers. Capacity Utilization dropped from 82% to 56%. Steel manufacturing output has fallen by a third and industry executives and analysts expect production to drop further. Approximately 40% of all steel is used in the construction industry. Until production ramps back up to normal levels expect shortages or delays in delivery of steel products.

Firms currently engaged in NYC public design work have been directed to immediately halt all services. Why? The city is anticipating a $7.4 billion drop in tax revenue for this fiscal year and next. Tax revenues will be down across the entire economy. Expect other municipalities to reduce plans for future capital investment?

Dallas/Fort Worth International Airport officials may have to postpone or scale back the airport’s $3.5 billion capital expansion plan, including construction of a new Terminal F. (Fort Worth Star-Telegram) Expect to see more scaling back of long planned expansion projects due to losses in revenue and profits needed to support growth.

U.S. manufacturing output posts largest drop since 1946. Think of all the manufactured products that go into construction of a new home: Doors, windows, roofing, siding, wallboard, lighting, heating, plumbing fixtures, wire, pipe, cabinets, appliances, etc. How many of these will be in short supply leading to delays in completing new or restarted work?

The value of construction projects delayed or canceled has not yet been summarized, but surveys show the number of firms affected by delays and cancellations.

  • 79% were working on (transportation) projects that had been shut down by agencies.
  • 35% of AGC’s respondents indicated that they had received cancellation orders on projects issued by government or statewide agencies.
  • 60% received orders to halt or cancel current projects (or those starting within the upcoming 30 days) on private and publicly owned projects.
  • 11% of projects  in the preconstruction phase were canceled.
  • More than 40% of companies reported furloughing or terminating workers from offices and jobsites.

The Architectural Billings Index ABI survey for March, recorded the largest single monthly decline ever recorded (and that’s just for March). Billings at architecture firms plummeted in March as the ABI fell by 20.1 points to a score of 33.3 for the month (a score over 50 indicates increasing billings, a score below 50 indicates declining billings).The index dropped more in one month that it did in three years in the Great Recession. 36% of firms predict the pandemic will have a serious to devastating impact on their firm, while 66% anticipate that their annual revenue will be considerably lower than it is at present. Firms estimated that their billings would decline by 15% in April.

The ABI is a 9 month leading indicator, but I would suggest it’s usefulness as an indicator will be disrupted for at least the next 9 to 12 months. Certainly the current month and next few months of construction are not accurately indicated by the ABI from 9 months ago and it is unlikely that 9 months from now construction will experience a precipitous drop. Perhaps the ABI gives us an indication of the direction, up or down, that future construction will take, but not the magnitude. 

See also these articles for all the analysis to date on the Impact of the Pandemic.

Pandemic Impact on Construction – Recession in 2020?

Pandemic Impact on Construction – Part 2

Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #4 – Construction Jobs Recovery

 

 

Pandemic Impact #4 – Construction Jobs Recovery

4-15-20  How will each of the 4 shutdown impacts affect construction?

An estimate of the amount of construction volume lost between March and April could be on the order of 10% to 12%. We won’t see April construction spending #s until June 1st, but a loss of 10% equates to about $10-$12 billion work stopped in a single month.

Associated General Contractors of America reported 40% of construction firms had furloughed or terminated workers by April 10.

  • 30% of firms said they had been asked by government officials to shut down jobs.
  • 53% of respondents said their projects have been delayed by owners.
  • 7% said owners had canceled their projects.

NAHB 4-15-20 Builder Confidence Posts Historic Decline

If they stop buying them, next they stop building them. I’m forecasting temp shut down of 15% of residential backlog and a 10% drop in new starts.

U.S. manufacturing output posts largest drop since 1946

Think of all the manufactured products that go into construction of a new home: Doors, windows, roofing, siding, wallboard, lighting, heating, plumbing fixtures, wire, pipe, cabinets, appliances, etc. How many of these will be in short supply leading to delays in completing new or restarted work?

Pandemic Construction Forecasting needs to account for 4 types of impacts.

  • 1 Work stoppage – stay at home, how deep is the work stoppage
  • 2 Work restart – % restart/month, how slow does work restart
  • 3 Work canceled – some work never restarts, how severe
  • 4 New Starts – future capital spending plans canceled, how cautious

Spend Sector monthly 2018-2021 4-18-20 recession

The initial shutdown cumulative total spending lowest point is in April-May 2020 due to the abrupt shut down. When work rebounds, it restarts gradually over a period of months. Some of the work that shut down will not restart. Also, reduced new starts lowers the cumulative total spending again in the first half of 2021, where residential spending hits it’s low point. Here’s the jobs impact of each.

  • 1 Work stoppage – stay at home, how deep is the work stoppage

From March 15th to April 15th, it is estimated that about 10% to 12% of all construction work stopped, or about $10-$12 billion work stopped in a single month. This work remains on hold as we assess when it is appropriate to reopen the economy. A $10 billion/month work stoppage shuts down 600,000 jobs/month from Mar 15 to Apr 30, perhaps longer.

  • 2 Work restart – % restart/month, how slow does work restart

For a number of reasons, all work will not restart immediately. I’ve modeled the work to restart over 6 months. If only 33% of the stopped work resumes in May, only 33% or 200,000 of the 600,000 lost jobs return, 400,000 remain shut down. If each month 100,000 more jobs restart, the net lost time over 6 months is 1,800,000 man-months or an average of 300,000 jobs for 6 months.

  • 3 Work canceled – some work never restarts, how severe

It’s possible some work will be put on hold for a long time or outright canceled. If 10% of all work that was forced to shut down does not restart, then about 1.5% of all work in backlog disappears. There was $1.3 trillion in starting backlog leading into 2020. A 1.5% decline in backlog amounts to almost $20 billion in work that might not restart. That workload would have taken place over the next 20-30 months, so it is equivalent to about $1 billion a month. Jobs lost would equate to 4000 to 5000 jobs for 20 to 30 months.

  • 4 New Starts – future capital spending plans canceled, how cautious

Dodge is now forecasting a 10% to 15% decline in new construction starts in 2020. (Prior to the pandemic, Dodge was forecasting a 4% drop in new 2020 starts). If new starts drop by 10%, that equates to a decline of about $130 billion in future work. That would be spread out over the next 3 years or so. On average that reduces jobs by about 20,000, but that loss lasts for the next 3 years.

 

Construction spending varies from month to month, but total annual rate of spending will not return to the Jan-Feb 2020 level until at least 2023. Construction jobs may not reach the Feb 2020 level again until 2024.

See also Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #3 – Jobs Lost, Inflationary Cost

4-9-20

See Also Pandemic Impact on Construction – Recession in 2020  3-20-20

See Also  Pandemic Impact on Construction – Part 2   3-31-20

See Also Pandemic Impact #4 – Construction Jobs Recovery  4-15-20

Today, with the unemployment claims report, we get an indication of the 3rd out of 4 weeks of the total April monthly jobs report. When the April jobs report is released on May 8th, it will cover the period March 15 through April 12. For the first two weeks, there were 10 million new unemployment claims and within that data, the Economic Policy Institute estimated there were 310,000 construction jobs lost. Today’s report show the three-week total is now 16 million claims. That could potentially indicate a total 500,000 construction jobs lost in three weeks, and that represents only 3/4ths of the April jobs report. There are still areas of the country that are just beginning to issue stay-at-home orders, so this trend will likely continue next week. When we see the next jobs report May 8th, we could see a total monthly loss of more than 600,000 construction jobs, a loss of more than 8% of the workforce. In the worst months of the 2008-2009 recession it took 5 months to lose over 600,000 jobs.

See Pandemic Impact #7 for an update on Jobs Lost

Jobs Recession Scenario thru 2021 4-11-20

History dating back 30 years shows that construction companies have always reduced jobs by less than the reduction in work volume lost. In the previous recession, work volume fell by 50% but jobs declined by only 35%. In other words, companies tend to retain more staff than the remaining workload will support. As a result, work put in place per job, a simple measure of productivity, goes down. This drives cost up.

Given the above, we can estimate the amount of construction volume lost between March and April could be on the order of 10% to 12%. We won’t see April construction spending #s until June 1st, but a loss of 10% equates to about $10-$12 billion work stopped in a single month. After four months averaging above a seasonally adjusted annual rate (SAAR) of $1.360 trillion, we could see March SAAR spending drop to $1.320 trillion and April down to $$1.280 trillion.

Pandemic Construction Forecasting needs to account for 4 types of impacts.

  • 1 Work stoppage – stay at home, how deep is the work stoppage
  • 2 Work restart – % restart/month, how slow does work restart
  • 3 Work canceled – some work never restarts, how severe
  • 4 New Starts – future capital spending plans canceled, how cautious

The initial Pandemic Recession Scenario developed in my 3-20-20 article included  a greater reduction in new starts, but did not factor in the widespread shutdown of commerce in March-April. This plot shows the shutdown, the big dip in the first half of 2020. The initial shutdown cumulative total spending (deepest) low point is in April-May 2020 due to the shut down which then rebounds with the restart of most, but not all, work. Then the cumulative total spending low point due to reduced new starts occurs in the first half of 2021, where residential spending hits it’s low point.

Spend Sector monthly 2015-2022 4-10-20 recession

 

Will Construction Experience Inflation or Deflation?

Although as of yet there is no solid information available on materials pricing or national reports on inflation, these issues may come up;

There is a cost to temporarily shutting down a job and then re-mobilizing. That cost definitely was not included in any budgets on any projects. That cost, already incurred, will be absorbed into the final cost of projects, inflating the original projected cost. That will become a factor adding to 2020 inflation.

Some analysts are suggesting there will be a large surplus of materials that will drive cost down. However, there are reports cautioning to expect shortages or long delays of materials due to the fact that some manufacturers have experienced the same shut downs as the industries that use their products. Production of all types of products has slowed with the lack of workforce. One recent article cited expectations of many shortages of electronic, mechanical and technology components, a large volume of which are imported. So there may be difficulties in getting components of electrical, plumbing, mechanical, controls or technology products needed to complete manufacturing of the products needed on jobs in the near future.

Worldwide shipping and moving of all types of products that arrive in shipping containers has been drastically disrupted. By Mar 1 shipping at the Port of Los Angeles was already down 25%. This will cause delays in imported product deliveries which will either result in the need to use alternate products, time extension to completion or need for accelerated schedule.

There will be some difficulty associated with staffing back up to previous levels. As workers are cut from jobs, some will immediately begin to seek other available work with some potentially leaving the construction industry permanently. Although wage negotiations may be held in check, some contractors may offer incentives to secure sufficient labor to support the completion of their projects, driving up the cost of labor. Also worker productivity will be reduced to accommodate new rules instituted to insure worker health safety and distancing.

The restart is going to cause bottlenecks. Every job will be requesting delivery of needed products at the same time. The supply-side system is not designed to handle that massive influx of all-at-the-same-time orders and deliveries. This will result in materials delivery delays and/or priority order added premiums.

Along with materials issues, we can expect once projects come back on-line, some owners are going to ask for accelerated schedules to meet critical end dates. Any move to accelerate project schedules will add cost to labor. In fact it could add considerable cost. If a project is shut down for two months and the owner asks to make up 1 month, it takes more than one month of overtime to accomplish that.  All overtime, including second shift work, has some lost productivity associated with it, so you never get hour for hour production on overtime hours. If the owner wants to try to meet the original scheduled end date, or make up even some of the delay, all the cost of overtime and lost productivity inflates the original cost.

Management cost to see the projects through delay, ramp back up and finally reach completion, probably at a time extension, increases beyond the original proposed staffing and time on the job.

It will take several months, perhaps even the remainder of the year, to see a trend in new construction starts. Expect capital investment plans in new building projects to increase in some markets (i.e., healthcare) but to decline in others (hospitality). Many companies will experience dramatically reduced revenues and profits which will cause them to reassess plans for future capital investment. If capital investment declines overall, which I expect it will, the amount of construction activity next year will decline. Early discussions of infrastructure investment, if increased investment comes to be reality, could change this outcome. Markets could be a bit more competitive next year if the volume of work out for bid declines. That would have a tendency to offset some of the inflationary measures listed above.

Dodge Data & Analytics on 4-9-20 released their  first indications of recession analysis. Dodge predicts a 10% to 15% decline in new construction starts in 2020, but then an increase in all sectors in 2021. Dodge tracks new starts only, so does not project the spending impact of a decline in starts or of project delays.

Repeating what I stated in a previous article, What all this will do to the construction inflation rate is hard to predict. If materials shortages or delivery delays develop, that would cause prices to increase. Also, many projects that were already under construction were halted for an undetermined period of time. The delays may add several weeks to a few months to the overall schedule. These issues all add cost to a project as describe above. Looking to the future, if new starts work volume decreases, then the bidding environment gets more competitive and prices go down. However, I think in this case the materials availability issues, potential labor availability, productivity and schedule delays will outweigh any decline in work available for bid. For the short term, I would suggest to add a minimum of 1% to all baseline inflation rates for 2020 and 2021. Further assessment of future bidding environment will be required.

The first hard data on construction jobs won’t be issued until May 8th when we will get mid-March to mid-April jobs, and not until June 1st for April construction spending activity. April activity will be revised to a better number on July 1st. So the construction industry is really at a disadvantage not knowing the real impacts for several months.

 

 

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