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Construction Activity Notes 4-25-18


Brief notes on spending, starts, backlog, jobs and inflation from March and April tweets.

Nonresidential construction spending is not decelerating in 2018. Will see best growth since 14% in 2015.

Residential construction spending is slowing to +7% growth in 2018, after 6 consecutive years of strong growth averaging 13%/year.

Non-building Infrastructure forecast growth of 8% in 2018, potential to hit a new all-time high due to very large projects in Power and Transportation.

Public construction spending in 2018 is forecast to reach $307 billion, an increase of 8% over 2017, the best growth in 10 years. Educational and Transportation will contribute equally and together account for more than half of the Public spending growth in 2018.

In Oct 2016 and again in Feb 2017, I forecast Manufacturing spending would fall 13% in 2017 after hitting peak spending in 2015 from massive growth in new starts in 2014. At that time, the AIA consensus forecast (average of seven analysts) was that spending would increase +0.4%. By July the consensus had been revised to average -6.6%. I updated my forecast to -11.8%. Based on cash flows, from April 2016 through the end of 2017 I expected spending to decline in 17 of 21 months. It declined in 14 of those months. Manufacturing spending finished 2017 down 11.9%.

In Fall 2017, I predicted Manufacturing construction spending would increase +9% in 2018. However, through March, total construction starts for Manufacturing over the last 12 months would count as the 2nd highest year on record. Therefore I’ve recently revised my forecast up to +13% spending in 2018. I’m now expecting double digit % spending growth in both 2018 & 2019. The January 2018 AIA consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 spending will decline. My data shows increases in starts and backlog indicate large gains.

Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 24% in two years.

Nonresidential Bldgs 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% with 2018 spending forecast up 9%. Institutional accounts for 52% of 2018 construction spending growth, Commercial 27%, Industrial 21%.

80% of all nonresidential buildings construction spending forecast in 2018 is already in backlog projects at the start of the year.

New Construction Starts are booming (need to look past the mo/mo and ytd)

  • Residential – 2 highest qtrs since 2006 in last 12 months
  • Nonres Bldgs – 3 highest qtrs since Q1 2008 in last 15 months
  • Nonbldg Infra – highet qtr since Q1 2015 peak in last 6 months.

Construction Starts data is regularly misinterpreted in common industry forecasting articles. Starts do not directly indicate changes in spending. A Forecast Cash Flow from Starts gives an indication of the rate of change in spending.

Educational new construction starts total from the last five months of 2017 posted the highest 5mo total starts in at least seven years, 13% higher than the next best 5mo. Jan 2018 monthly spending up 12% from 2017 mid-year low.

Healthcare construction starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. Spending will increase slowly.

Amusement/Rec construction starts avg of +15%/yr for 5yrs, up 30% in 2016, 5% in 2017. In last 6mo, Aug 2017 to Jan 2018, four very large billion$+ projects started, almost a year’s worth of new starts in 6mo. Backlog indicates 15%-20% spending increases for 2018 and 2019.

In 2010, Warehouse new construction starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010.

Lodging starting backlog up 13% for 2018, having already averaged increases of 30%/yr since 2015. Starting backlog jumped from $7 bil/yr in 2014 to $17 bil/yr in 2018, supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.

New construction starts for Manufacturing total for the last 12 months would count as the 2nd highest year on record. I’m now expecting double digit % spending growth in both 2018 & 2019. The consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 manufacturing bldg spending will decline.

Structural steel contract includes structural shapes, steel joists, metal deck, stairs and rails, about 10% of total building final cost.

Other steel in a building can include reinforcing steel, exterior metal wall panels, metal ceiling frames, wall studs, door frames, canopies, steel duct, steel pipe and conduit, about 6% of total building cost.

All steel (in a structural steel building) is at least 16% of total building cost. There are more hidden costs of steel in mechanical, electrical and plumbing equipment.

Raw mill steel is about one fourth the final cost of structural steel installed. A 25% increase in cost of mill steel could raise a structural steel subcontract bid price by 6.25%. At 10% of total building budget, that would raise total building cost by 0.625%.

A 25% increase in cost of mill steel could raise the other nonstructural steel costs by 6.25%. At 6% of total building budget, that would raise total building cost by 0.375%.

A 25% tariff on mill steel raises building cost inflation by at least 1%. That’s about $7.5 billion of unexpected cost inflation just in 2018.

Watch for unexpected impacts from steel tariffs, potentially adding 5% or more to total cost of bridges (plate steel). Also impacted, power industry, pipeline, transmission & communication towers, transportation.

Steel tariff is going to inflate the cost of the proposed $2.1 billion Gordy Howe International Bridge by $100 million. That will hurt the budget.

2018 Construction Spending Forecast – Nonresidential Bldgs construction spending in 2018 forecast to reach a new high, $459 billion, up 9% over 2017, passing the previous 2008 high. In constant $, 2018 will still be 18% below peak.

An estimator could be far off when indexing construction cost using a general cost index versus an actual selling price index.

Failure to account for the affect of inflation on the cost of construction could result in a failure to be profitable.

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

For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%. In 2013 it reached a 12-year high of 8%.

If you are hiring to meet your needs and you see that construction spending (revenue) has increased by 25%, do you hire to match revenue? No! Hiring requires a knowledge of volume growth, and revenue doesn’t show that. Revenue minus inflation shows volume.

Construction activity has a direct influence on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs.

Construction Jobs vs volume growth the last 5 years is nearly even, yet jobs imbalances exist within sectors. Nonresidential Buildings and Non-building Infrastructure show excess jobs while Residential shows a severe jobs deficit. But not all of the apparent deficit in residential jobs is real.

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

In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This is residential space built using labor classified as non-residential commercial.

BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity.”

So, the mis-classified labor reduces the nonresidential excess and offsets a portion of the residential shortfall.

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

Construction added 177,000 jobs in the 4 months Nov’17-Feb’18. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Construction jobs pulled back 15k in March, but this follows the strongest month (Feb +65k) in 12 years, so not totally unexpected. I think Mar Construction jobs, (-15k), more likely a pause after Feb (+65k), strongest month in 12 years.

see also Construction Economics Brief Notes 3-10-18

Construction Overtime – A Common Miscalculation


Construction Overtime – A Common Miscalculation

You never get full production out of all overtime hours worked. A common miscalculation when applying overtime overlooks productivity losses.

Let’s say we have a project that has 100 manweeks of productive work (100mw x 40hrs = 4000 manhours) remaining on the schedule to completion, but that we absolutely must finish the job is less time. Also, let’s say we modify the work week from 5 days 8 hours = 40 hours/wk to Overtime (OT) 6 days 10 hours = 60 hours/wk. A simple calculation indicates that if we add 50% more hours per week (60hrs vs 40hrs), we could finish the job in 1/3 less time.

  • Original plan = 4000 manhours / 40 hrs/week/man = 100 manweeks
  • Revised plan = 4000 manhours / 60 hrs/week/man = 67 OT manweeks
  • Time saved = (100–67)/100 =33/100= 33% time saved, 33 mwks saved
  • Cost added would be +20%. See example of cost calculation below.

But, unfortunately, that would not be correct. That would have to assume no OT productivity losses. You won’t get 60 productive hours out of a man in a 6-10s 60-hour OT workweek. You will get only 50 productive hours.

Productivity loss graphic from Applied Cost Engineering, Clark and Lorenzoni, Marcel Dekker, Inc., 1985.

Overtime productivity

Yes, you still pay for all hours and the man is still on the job for 60 hours, but work progress slows as workers are kept on the job for longer periods. So how much time would be saved on the schedule?

Revised plan productivity 4000 manhours work / 50 productive hrs per week per man = 80 OT manweeks to completion.

Time saved = (100 – 80) / 100  = 20/100 = 20% time reduction or 20 mwks saved, not 33.

What did we get from this application of overtime compared to the original?

  • 20 mnwks LESS of normal 40hrs =20×40= 800hrs less at normal 1x rate
  • 80 mnwks at 20hrs/wk at OT, 1.5x rate =80×20= 1600hrs more at 1.5x rate
  • Net cost 1600 x 1.5 – 800 x 1 = 1600 equivalent extra cost hrs over base 4000.
  • Time saved (100-80)/100 = 20%
  • Cost increased 1600/4000 = 40%

This simple example shows the full hourly time savings is not realized due to lost productivity plus many of the hours worked are at a higher cost. Though the initial basic OT estimate forecast 33% time saved at 20% extra cost, that scenario actually saved only 20% time and added 40% cost, double the initial budget.

There’s a significant difference in the original un-adjusted OT estimate of time/cost versus the OT time/cost analysis for nonproductive hours. That would be a serious mistake in estimating and could have serious cost implications against the budget.

This will vary with the OT scenario selected or any other data set used, but generally the more days and longer hours worked, the higher the extra cost ratio. Of course, a better way to accomplish a tightened schedule might be to add a second shift rather than work men longer hours. However, in times of restricted labor supply that might not be feasible.

See this blog post for OT productivity loss rates Overtime Isn’t Always What It Seems – Lost Productivity Construction



Construction Economics Brief Notes 3-10-18


Jobs and Volume

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

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

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

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

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

Construction Jobs

Residential Construction Jobs Shortages

Construction Spending is Back



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

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

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

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

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

Inflation in Construction 2018 – What Should You Carry?


Current$ vs Constant$

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

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

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

Construction Spending is Back



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

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

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

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

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

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

2018 Construction Spending – Briefs 1-26-18


Infrastructure and Public Work

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

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

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

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

Publicly Funded Construction

Down the Infrastructure Rabbit Hole


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



Residential Construction Jobs Shortages


During the period  including 2011 through 2017, we had record construction spending, up 50% in 5 years, moderate inflation reaching as high as 4.6% but averaging 3.8%, record construction volume growth (spending minus inflation), up 30% in 5 years and the the 2nd highest rate of jobs growth ever recorded.

Residential spending was up 90% in 5 years, but real residential volume up only 50%. Residential inflation, at 6%/year, was much higher than all construction. Jobs increased only 33%.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-1999 with the highest 5-year growth ever of 1,483,000 jobs. That same 93-99 period had the previous highest spending and volume growth. 2004-2008 would have reached those lofty highs but the residential recession started in 2006 and by 2008 spending had already dropped 50%, offsetting the highest years of nonresidential growth ever posted.

The point made here is the period 2011-2017 shows spending and jobs at or near record growth. Although 2017 slowed, there is no widespread slowdown in volume or jobs growth.

This 2011-2017 plot of Construction Jobs Growth vs Construction Volume Growth seems to show there is no jobs shortage. In fact it shows jobs are growing slightly faster than volume. But that just does not sit well with survey data from contractors complaining of jobs shortages. So how is that explained?

Jobs vs Volume 2011-2017 2-1-18

There have been cries from some quarters, including this blog, that the answer lies in declining productivity. There seems to be plenty of workers, but it now takes more workers to do the same job that took fewer in the past. As we will see, that is part of the answer, but doesn’t explain why some contractors need to fill vacant positions. To find data that might answer that question about a jobs shortage we must dig a little deeper.

The total jobs vs volume picture masks what is going on in the three major sectors, Residential, Nonresidential Buildings and Non-Building Infrastructure. A breakout of jobs and volume growth by sector helps identify the imbalances and helps explain construction worker shortages. It shows the residential sector at a jobs deficit.

7 years 2011-2017  – % Jobs growth vs % Volume growth

  • Totals All Construction  Jobs +31%, Volume +30%
  • Nonres Bldgs  Jobs +27%, Volume +19%
  • Nonbldg Hvy Engr  Jobs +21%, Volume +12%
  • Residential  Jobs +40%, Volume +54%

The totals show jobs and volume almost equal, data that supports the 2011-2017 totals plot above and what we would expect in a balanced market. But severe imbalances show up by sector. Both nonresidential sectors jobs growth far outpaced volume growth. Residential stands out with a huge deficit, with jobs way below volume growth.

Just looking at 2017 growth shows the most recent imbalances.

2017 % jobs growth vs % volume growth

  • Totals All Construction Jobs +3.4% Volume -0.8%
  • Nonres Bldgs Jobs +3.3% Volume -1.6%
  • Nonbldg Hvy Engr Jobs +1.7% Volume -6.0%
  • Residential Jobs +3.5% Volume +4.2%

Census recently released initial construction spending for 2017, totaling $1.230 trillion, up only 3.8% from 2016. What is somewhat disconcerting is that 2017 construction spending initial reports growth of 3.8% do not even match the total inflation growth of 4.6% for 2017, indicating a -0.8% volume decline. However, as does always occur, I’m expecting upward revisions (estimated +2%) to 2017$ construction spending on 7-1-18. If we don’t get an upward revision, then 2017 will go down as the largest productivity decline since recession. Even if we do get +2% upward revision to 2017$ spending, 2017 volume would be revised up to +1.2% and jobs growth will still exceed volume growth.

Let’s look a little deeper at the data within the sectors. Each chart is set to zero at Jan 2011 so we can see the change from that point, the low point of the recession, until today. At the bottom of each chart is shown a Balance at start. That represents the cumulative surplus or deficit of jobs growth compared to volume growth for the previous 10 years prior to Jan 2011. If there are no changes in productivity, or no surplus or deficit to counteract, then jobs should grow at the same pace as volume.

There are slight differences between the data in the three sector charts and the total construction chart. The sector charts use annual avg data and the totals chart uses actual monthly data.

Jobs vs Volume 2011-2017 NonResidential Bldgs 2-3-18

Jobs vs Volume 2011-2017 NONbuilding 2-3-18


Nonresidential Buildings and Non-building Infrastructure, over seven years and the most recent three years, show jobs increasing far more rapidly than volume. Nonresidential Buildings started 2011 with a surplus of jobs after the recession, but Infrastructure started 2011 with a substantial deficit of jobs. Only in this last year did Infrastructure jobs reach long-term balance with work volume.

Nonresidential Buildings started 2011 with a 13% surplus of jobs and more than doubled it in the seven years following. I’ve suggested before it could be that a part of this surplus is due to companies hiring to meet revenue growth, and not inflation adjusted volume. Although nonresidential spending actually increased 43%, volume since 2010 has increased only 12%. Since 2010 there has been 30% nonresidential buildings inflation, which adds zero to volume growth and zero need for new jobs. A 43% increase in spending could lead companies to erroneously act to staff up to meet spending, or revenue, more than needed for the 12% volume increase.

Jobs vs Volume 2011-2017 Residential 2-3-18

This plot for residential work shows from 2011 to the end of 2017, we’ve experienced a 20% growth deficit in jobs. How many residential jobs does this 20% growth deficit represent? From Jan 2011 through Dec 2017, residential jobs increased from approximately 2,000,000 to 2,700,000. So the base on which the % growth increased over that time is calculated on 2,000,000. An additional 20% growth would be a maximum of 400,000 more jobs needed to offset the seven year deficit. But what about the imbalances that existed when we started the period?

During the residential recession from just 2005 through 2010, residential volume declined by 55%, but jobs were reduced by only 38%. For the entire period 2001-2010, total volume of work declined by 14% more than jobs were reduced. Some of the surplus jobs get absorbed into workforce productivity losses and some remain available to increase workload. It’s impossible to tell how much of that labor force would be available to absorb future work, so for purposes of this analysis an estimate of at least 5% seems not unreasonable. That would mean for 2011-2017, instead of a need for an additional 20% more jobs, the need could be reduced by 5% or 100,000 jobs.

This analysis shows a current deficit of 300,000 to 400,000 residential construction jobs. While it does also show nonresidential buildings jobs far exceed the workload and there are more than enough surplus jobs to offset the residential deficit, there would be several questions of how transferable jobs might be between sectors.

  1. Are there highly technical specialty jobs in Nonresidential Buildings that would not be transferable to Residential?
  2. What is the incidence of specialty workers engaging in work across sectors? i.e., job is counted in one sector but working in another sector.
  3. What has been the impact of losing immigrants from the construction workforce?
  4. Is the ratio of immigrant workers in Residential much higher than Nonresidential?
  5. Is the pay more attractive in Nonresidential construction?
  6. What, if any, percentage of the Residential workforce is not being counted? Day labor?

I think most of these would have a more negative impact on Residential jobs. However, there is some possibility that the overall deficit may not be quite as high as available data show (points 2 and 6). And there is always the possibility that we’ve crossed a threshold that has led to new gains in productivity, although to some extent, the stark differences between Residential and Nonresidential Buildings data might counter that proposition.

These two following report references both document that there is a large unaccounted for shadow workforce in construction. This workforce is probably mostly residential.

Pew Research Center – “Share of Unauthorized Immigrant Workers in Production, Construction Jobs Falls Since 2007” 

NAHB’s HousingEconomics.com “Immigrant Workers in the Construction Labor Force”

Unemployment and productivity includes only jobs counted in the official U.S. Census Bureau of Labor Statistics (BLS) jobs report.  Both these reports document a large, unaccounted for shadow workforce in construction. By some accounts, 40% or more of the construction workforce in California and Texas are immigrant workers. Immigrants may comprise between 14% and 22% of the total construction workforce. It is not clear how many within that total may or may not be included in the U.S. Census BLS jobs report. However, the totals are significant enough that they would alter some of the results commonly reported.

The best way to see the implications that the available data do show is to look at productivity. The simplest presentation of productivity measures the total volume of work completed divided by the number of workers needed to put the volume of work in place, or $Put-in-Place per worker. In this case, $ spending is adjusted for inflation to get a measure of constant $ volume, and jobs are adjusted for hours worked.

As the Residential jobs deficit increases vs workload, this plot shows that $PIP is increasing. That makes sense. The workload continues to increase and the jobs growth is lagging, so the $PIP per worker goes up. For Nonresidential Buildings, the rate of hiring is exceeding the rate of new volume and therefore the $PIP is declining.

Prod $PIP by Res Nonres only 2001-2017 2-4-18

In boom times, residential construction adds between 150,000 and 170,000 jobs per year and has only twice since 1993 added 200,000 jobs per year. In the most recent several years expansion, residential has reached a high of 156,000 jobs in one year but has averaged 130,000 per year over 5 years. So it’s pretty unlikely that we are about to start adding residential construction jobs at a continuous rate of 200,000+ jobs per year.

If residential jobs growth were to increase by 50,000 jobs per year over and above current average growth, it would take 6 to 8 years to wipe out the jobs deficit in residential construction.

This problem is not going away anytime soon.

For more history on jobs growth see Is There a Construction Jobs Shortage?

For more on the imbalances of Res and Nonres jobs see A Harder Pill To Swallow!

For some hypotheses as to why nonresidential imbalances continue to increase see Construction Spending May 2017 – Behind The Headlines

Cautions When Using PPI Inputs to Construction!

The Producer Price Index (PPI) for material inputs to construction gives us an indication whether costs for material inputs are going up or down. The PPI tracks producers’ cost to produce the product and supply finished products to retailers or contractors. However, that is far from the total cost from the contractor.

A good example is steel. The producer price for steel from the mill might be $750/ton for long beams and columns. The only increases captured at the producer level might be the changes in cost for raw material, energy to manufacture and the producers labor and markup. But the structural steel contractor is then responsible for delivery to shop, detailing, shop fabrication, transport to construction site, load and unload, cranes and welding equipment needed to install, installation crews and finally overhead and profit accounting for at least eight more points of potential cost change. Finally the steel subcontractor must then assess the market conditions, whether tight or favorable to higher profits, to adjust the bid price or selling price. The final cost of steel installed could be $3000/ton.

The PPI for Construction Inputs IS NOT an indicator of construction inflation. It does not represent the selling price, nor does it give any indication of the trend, up or down, of selling price.

In 2009 PPI for inputs was flat but construction inflation, as measured by final cost of buildings, was down 8% to 10%. In 2010, the PPI for construction inputs was up 5.3% but the selling price was flat. Construction inflation, based on several decades of trends, is approximately double consumer inflation. However, from mid-2009 to late 2012, that long-term trend did not hold up. During that period, PPI ranged from 0% to +6.8%, but construction inflation/deflation ranged from -10% to +2.3%, lower than PPI for all four years, something which seldom occurs. Construction inflation/deflation was primarily influenced by depressed bid margins, which had been driven lower due to diminished work volume.

The following table shows the differences between the PPI Inputs from 2011 to 2017 and the actual inflation for the major construction sectors. This table shows clearly that PPI Inputs and Inflation not only can vary widely but also may not even move in the same direction.

AAA PPI vs Inflation 2011-2017

The PPI tables published by the Bureau of Labor Statistics do include several line items that represent Final Trades Cost or Whole Building Cost. Those PPI items don’t give us any details about the producer price or retail price of the materials used, but they do include all of the contractors costs incurred, including markups, on the final product delivered to the consumer, the building owner. I would note however that those line items in the PPI almost always show lower inflation than final Selling Price inflation indices developed separately from the PPI. Follow this link to table of inflation values which includes the PPI final cost for trades and buildings. 

Construction Managers responsible for working with the client to manage project cost, part of which includes preparing a full building cost estimate, should not rely on PPI values as an indication of inflation. Selling price inflation indices are more appropriate indices to use to adjust project costs.

It is always important to carry the proper value for cost inflation. Whether adjusting the cost of a recently built project to predict what it might cost to build a similar project in the near future, or answering a client question, “What will it cost if I delay my project start?”, the proper value for inflation (which differs by sector and differs every year) can make or break your estimate.

Contractors responsible for a particular building material, although the PPI Inputs will not track market conditions sale prices from producer to the contractor, can get some indication of whether material prices are rising or falling. Contractors should be aware of PPI trends to interpret the data throughout the year.


  • 60% of the time, the highest increase of the year in the PPI is in the first quarter.
  • 75% of the time, two-thirds of the annual increase occured in the first six months.
  • In 25 years, the highest increase for the year has never been in Q4.
  • 60% of the time, the lowest increase of the year in the PPI is in Q4.
  • 50% of the time, Q4 is negative, yet in 25 years the PPI was negative only four times.

So when you see monthly news reports from the industry exclaiming, “PPI is up strong for Q1” or “PPI dropped in the 4th Qtr.” it helps to have an understanding that this may not be unusual at all and instead may be the norm.


PPI Construction Materials Inputs Index 2-20-18

Indicators To Watch For 2018 Construction Spending?

I’ve read several articles recently describing, Why 2018 could be a boom year for construction spending. Several reasons being given to support a potential boom, when we look a little deeper, actually may not be good indicators at all to predict the trend for a strong year in 2018. In my Fall Forecast  I do predict 8% growth in 2018 construction spending, but let’s take a look at what gets us there.

Data that doesn’t tell us much about the future trend in construction spending.

Jobs increased in 2017 up 35% over 2016. In 2017 construction added 210,000 jobs, growth of 35% over 2016, but in 2016 jobs growth decreased by 55% from 2015. 2016 growth was the lowest in 5yrs. In 2013 jobs growth increased by 85% and in 2014 by 71%, but in 2015 and 2016 jobs growth slowed. Yet 2015 was one of the best construction spending years on record. And in 2017, jobs growth increased over 2016 but spending growth slowed. The direction of jobs growth is not an indicator of the future trend in spending.

Nov 2017 spending was higher than expected, and YTD is up 4.2%. This is a slippery slope. Actually we won’t know any particular monthly spending until several months after the initial release. All monthly spending values are subject to revision three times after initial release.  However, residential spending is higher than expected for the YTD and nonresidential buildings spending is below expectations for YTD. But more importantly, construction spending normally fluctuates. For instance, in the 2nd half of 2015, spending was down 4 out of 6 months, lower than forecast three times, posting a total decline of 2.5%. Yet 2015 finished the year up 10%. Then, in the 1st half of 2016, spending was up 5 out of 6 months, far exceeding forecast 3 times, posting a total increase of 6% in 6 months. 2016 finished up 6.5% for the year. Neither half performance predicted final results within the year or the forecast for the future. Furthermore, after inflation, 2017 spending is currently flat with 2016$, so all we are seeing in the 4.5% spending growth in 2017 is inflation. Current and past spending is not an indicator of the future trend in spending.

What data does give an indication of the future trend in construction spending?

Construction Starts (Dodge Data & Analytics DDA), Backlog, Cash flow from Starts, the Architectural Billings Index (ABI), The Dodge Momentum Index (DMI) and New Residential Permits and # of Units Construction Starts all give an indication of the future trend in spending.

Residential Permits and # of new units started gives a fairly immediate indication of residential activity. The ABI gives an indication of nonresidential building to start construction about 9 months out and the DMI about 12 months out. The ABI and DMI give some indication as to whether future starts will increase or decrease. DDA Starts give an indication of the percent growth in future work, but not when the spending will occur, so cannot be used directly to predict spending. A good example is the new start for airport terminal work recorded as a new start in 2017 at $4 billion. But it may take 5 or 6 years to complete that $4 billion project and only cash flow will show the impact on spending.

Care must be taken to use Starts data properly. It is regularly 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 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.

Cash flow is the best indicator of how much and when spending will occur. Cash flow from DDA starts gives a prediction over time of how spending from each month of previous starts will occur 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.

Index of Actual Spending and Starts Cash Flows 2015-2018 2-10-18

Of course, data highlighting demand, occupancy rates, labor and material trends and other economic factors affecting construction trends all weigh into determining future spending expectations. However, for nonresidential buildings and infrastructure approximately 75% to 80% of all spending within the year comes from starting backlog. Most economic factors that will have an affect on spending within the year are already captured in projects that have started and are in current backlog. On the other hand, new residential starts are more important. 70% of all residential spending in the year comes from new starts.

The following trend predictions are developed based on using this outline.

Starts Trends Construction Forecast Fall 2017

Backlog Construction Forecast Fall 2017

Spending Summary Construction Forecast Fall 2017

In What Category is That Construction Cost?

Seldom do two sources present information the same way!

In the construction industry, a disconnect exists in the reporting of construction starts data and actual spending data.  Problems may arise when data is used to perform comparisons or forecasts between starts and spending. New starts and backlog may be listed in one category and spending for the same markets may be listed in another.

Almost universally, reporting of construction economic actual spending data follows the U.S. Census Put-in-Place Spending format. I adjust all other construction starts input/forecasting data that I use to conform to these Census Put-in-Place definitions. Here are some pitfalls to be aware of:

The U.S. Census Construction Put-in-Place (Construction Spending) Release follows these definitions.

Residential spending data is about 35% renovations and improvements that has no units associated with the dollars, so cannot be included in a comparison to housing starts.

Demolition is not included in renovations/improvements. Partial repair of flood damaged homes is NOT included in residential improvements. Full replacement of flood damaged homes is included as improvements, not new single family. Here is Census definition of flood repairs

Offices includes pubic buildings such as city halls and courthouses. Includes data centers and bank buildings. Excludes medical office buildings, offices at manufacturing sites and offices at educational or healthcare facilities. Excludes Public Safety.

Commercial includes all retail buildings, warehouses, parking lots and garages. Excludes parking at educational/healthcare facilities.

Census DOES separate the costs for buildings that are mixed use retail/office/residential.

Educational, along with K-12, includes administrative offices, health centers, parking, residence halls, classrooms, educational research labs, food service and sports/recreation facilities at schools or colleges and universities and all associated infrastructure and maintenance facilities at the educational site. Also includes public libraries, science centers and museums.

Healthcare includes similar support and infrastructure to educational. Also includes medical office buildings, non-manufacturing and non-educational research labs.

Amusement and Recreation includes performing arts centers, civic centers, convention centers, sports and recreation facilities not located at schools or colleges.

Transportation includes air freight and passenger air terminals, runways, bus and railroad passenger terminals, light rail and subway facilities, railroad track, railway structures and bridges, docks and marine terminals and maintenance facilities and infrastructure associated with each.


Some sources of design or new construction starts data carry terminal buildings as commercial buildings, institutional buildings or other public nonresidential buildings. Census caries the building cost of all terminals grouped in with the non-building infrastructure costs of Transportation. Some sources carry public buildings such as city halls and courthouses as Public Safety but Census carries cost data for public buildings such as city halls and courthouses in Offices. Some sources classify laboratories as commercial and warehouses as industrial/manufacturing but Census includes warehouses in Commercial and Labs, depending on use, can be either Educational, Healthcare or Manufacturing.


Dodge Data New Construction Starts

Dodge includes monthly New Construction Starts for Terminals and Courthouses in Other Institutional Buildings, a Nonresidential Buildings category. The Census actual spending report includes Terminals in Transportation and Courthouses in Offices.

Although all of these still remain in Non-building Infrastructure, Dodge includes Rail, Mass Transit, Airport Runway and Pipelines in Other Public Works. Although not often mentioned by Dodge, it is assumed Communications is also included in Other Public Works.  Census includes all mass transit in Transportation, Communications is listed separately and pipelines are included in Power.


Constructconnect (CC) Construction Starts Forecast

New starts for Transportation Terminals is in a line by the same name but subtotaled in Commercial (Nonresidential Buildings) starts. Census includes Terminals in Transportation.

CC lists Courthouse starts subtotaled in Institutional. Census carries Courthouses in Office (Commercial).

CC lists Military as a line item subtotaled in Institutional. This might include Office, Housing, Warehouse, etc., which would be carried by Census in Office, Residential, Commercial, etc., respectively.

CC lists Laboratories (Schools & Industrial) together and subtotals all labs in Commercial. Census separates labs by commercial, research and educational and carries spending in Manufacturing, Healthcare or Educational respectively which would subtotal spending in Manufacturing (industrial), or Institutional (Healthcare and Educational).

CC does not list rail or transportation separately, but does list Airport and Misc Civil (Power,etc.). This leads me to think rail is included in the line item with Misc Civil (Power, etc.). Also, CC does not list Communication, which I suspect is included in Misc Civil (Power, etc.) Already noted above is that Terminals is subtotaled in Commercial. Census carries rail, runway and terminals in Transportation and keeps Communication and Power separate from others.

CC provides an alternate table of new starts data that corresponds to a proprietary software, INSIGHT. This table of starts data reshuffles categories very far from anything that would resemble Census spending output.


The AIA publishes a twice annual Consensus Construction Forecast, comparing forecast of Nonresidential Buildings spending using inputs from seven or eight firms. Every firm but one follows a similar organization. The difference is FMI includes both Transportation and Communications in Commercial Nonresidential Buildings. I’m not aware of another other firm that reports these two categories of spending as Nonresidential Buildings. Both are typically carried as Non-building Infrastructure. That these categories include costs for projects such as rail beds, rail right-of-way civil structures, loading platforms, airfield runways and support structures, communication transmission lines and cell towers supports the more standardized inclusion of these items in Infrastructure.

Similar discrepancies may exist when comparing starts or spending to indexes, such as the AIA Architectural Billings Index, which broadly classifies projects as commercial, institutional or residential with no further definition. Some resources classify Amusement/Recreation as institutional and some as commercial. In particular, the shifting of costs between Nonresidential Buildings and Non-building Infrastructure creates a particularly meaningful disparity between spending forecasts.


As you can see, there are numerous instances where the data are often mixed up. From the point of view of the forecaster, initial input data cannot always be used directly to forecast or match spending output. Some manipulation of the data is required to make input and output match.

As an example, I move the Dodge data starts for Terminals from nonresidential buildings to non-building infrastructure Transportation, so that really changes my totals from theirs for Nonresidential Buildings to Non-building Infrastructure. My output conforms with most all others, most of whom also follow the Census PIP definitions.

What does your source for data take into consideration? Know your data!



Is Infrastructure Construction Spending Near All-Time Lows?


Is Infrastructure construction spending near all-time lows? This question is raised because I saw comments to this affect recently posted on a major national construction professional organization twitter feed.

First, this raises several other questions:

  • Exactly what construction markets are being referenced as infrastructure?
  • Does this reference include public work only, or both public and private?
  • Are educational and health care being included as infrastructure?
  • Does this reference constant inflation adjusted spending?

The construction markets typically referred to as infrastructure, in order of largest to least volume, include;  Power, Highway, Transportation, Sewage/Waste Water, Communications, Water Supply and Conservation. Sometimes also considered are Educational (3rd after Highway), Healthcare (after Transportation) and Public Safety (2nd smallest).

If only public work is included, everything changes. Most (90%+) of Power spending is private, so it represents less than 3% of public work. The largest contributors in this case are: Highway (32% of public work), Educational (25%), Transportation (11%), Sewage (8%) and Water Supply (4%). No other market is greater than 3% of public work.

And finally, is the reference to current dollars as originally spent within each year, or to constant inflation adjusted dollars, adjusting all historical expenditures to constant 2017 dollars? Any comparison to determine if real growth has occurred should be in constant dollars, in this case all adjusted to 2017.

Typical infrastructure, not including educational, healthcare or public safety, but including all public and private sector work produces this result:

Spend current vs constant INFRA 1993-2018 plot Feb 2018

However, the most likely reference is to typical public infrastructure, not including educational, healthcare or public safety. This scenario includes only the public sector work of typical infrastructure and eliminates private spending. This eliminates 90%+ of all power work, 30% of transportation and 100% of communications, in total, more than $100 billion in current dollars. This is the result:

Spend current vs constant INFRA PUBLIC 1993-2018 plot Feb 2018.JPG

In both instances, the lows, whether using current or constant dollars, occurred between 1993 and 2004. The highs are recent, all occurring from 2007 to 2016. 2017 spending dropped somewhat from 2016, but this is still prone to revision, which is always up.

To answer the question, Is Infrastructure construction spending near all-time lows? NO! Infrastructure construction spending is not at or even near all-time lows. Public sector infrastructure is lower than All infrastructure, but All infrastructure is not even near recent lows. It is near all-time highs!

Infrastructure construction spending in June-August dropped to the lowest since November 2014. However, this was not unexpected. Cash flow models of infrastructure starts from the last several years show monthly spending dips and peaks. Current dips in spending are being caused by uneven project closeouts from several years ago. The actual current backlog is at an all-time high and spending will follow the expected cash flow.

Spend Infra Jan15 to Jul18 10-10-17

Infrastructure starting backlog hit a new all-time high in 2017 and will again in 2018.  Public Infrastructure new starts reached all-time highs in 2013 and 2015 and are on track to go higher in 2017.  80% of infrastructure spending within the year comes from backlog at the start of the year and that backlog may be comprised of jobs one, two, three and even four years old.

Infrastructure spending in 2017, although down slightly from the all-time high reached in 2015 and nearly equaled in 2016, will reach a new high in 2018.

(This analysis does not include any spending projections from an infrastructure investment bill).

Highway spending is currently benefiting from projects that started in 2015 but that have unusually high value and long duration. They contribute spending well into 2018 beyond the duration that typical projects have ended.

Transportation Terminal starts in the first three months of 2017 were more than three times higher than any three-month period in the previous five years. However, 2017 spending is still affected by uneven starts from two to three years ago, holding down gains in the 2nd half. Transportation will show only a 1% gain in 2017 but produces double digit gains in 2018.

Infrastructure construction spending is near all-time HIGHS and has been for the last several years. That is not meant to indicate there is no need for infrastructure investment. I think the need is well established, particularly for public infrastructure. However, I’ve been writing about infrastructure for more than a year, pointing out the level of activity in this sector and the difficulty that will arise when we try to increase work volumes. The approach to adding new work and the discussions surrounding this approach should reference accurate data, and that should include an accurate representation of current workload and future ability to absorb more work.

For much more in-depth related to infrastructure construction see this post Infrastructure Spending & Jobs


So, About Those Posts “construction spending declines…”

You know those articles you’ve been seeing, “Worst year for construction spending since 2010″, well there’s some truth to that, BUT

2017 is the 6th year of the expansion. It has slowed, but… Here comes the BUT!

10-4-17 – Construction numbers are at all-time highs! Slowing or not, activity is very strong. Looking behind the headlines, here’s what we see;

Residential construction spending is slowing the most, from +11% in 2017 to only +2% in 2018 after six years averaging 13%/yr. Nonresidential buildings spending this year just kept up with the rate of inflation (4%), none-the-less, it’s at record highs. It doubles that rate of growth to 8% in 2018. Non-building infrastructure, down 2% in 2017, next year expect growth of 10%+, coming from long duration jobs.

The real performance numbers in Infrastructure are completely hidden. Spending was near flat for three years. But during that time, contrary to every other sector which experienced inflation of 15%, Non-building Infrastructure experienced deflation of 7%. (Gee, didn’t I read somewhere that activity within a sector is a primary driver of inflation?) Anyway, flat spending means volume really increased by 7% during that time. Spending by itself never tells the whole story!

There were some expected dips in spending recently, Manufacturing, Power, Highway, and there will be more in early 2018. BUT, there are also expected boosts in spending, Office, Commercial/Retail. Some of these already have matched up with the forecast, and there are more to come in 2018, Power, Transportation.

All Nonresidential Backlog is at record highs.

Backlog incld Res Starts 2007-2018 10-2-17

Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2017 and again in 2018.  For four years, from 2010 to 2013, all nonresidential backlog remained fairly constant. Since then, backlog for infrastructure is up 30% and for buildings it’s up 60%. (75% to 80% of nonresidential spending within the year comes from backlog at the start of the year. For residential, 70% of spending comes from new starts within the year.) Buildings will hit spending records in both 2017 and 2018. Infrastructure spending will hit a new high in 2018.

Ignoring for the moment that comparing any month to the same month last year can be grossly misleading as to the direction the markets are headed (for reasons explained in other recent posts on this blog), 2017 total spending growth is the lowest % yr/yr growth since 2011 (not 2010). Does that make it “worst”?

Spending will gain +5.6% in 2017, the least gain in six years. Last year was +6.5%, 2013 was +6.6%. The average for the last six years is +8%. So 2017 is the worst. Pretty damn good worst!

Why Many Get Construction Spending Wrong


Construction spending for July was released yesterday, posted at $1.211 trillion, down 0.6% from an upwardly revised June. This is the sixth time in seven months of 2017 in which the initial release for monthly spending is down from the previous month. This is actually a very normal occurrence.

The 1st release of monthly spending vs the previous month has been down 15 times in the last 21 months. This may be what leads some analysts and pundits to write that construction spending is heading to recession. Nothing could be further from the truth!

For the last 21 months, in which 15 first reports showed a decline vs the previous month, 18 of the monthly values were revised up. After revisions, only five months remain down vs the previous month. Seven months are still pending further revisions, almost always up.

Construction spending is highly prone to revisions. After the 1st release it is revised each of the next two months and once again the following year. Spending has been revised UP 48 of the last 52 months, 92% of the time. The average upward revision for the last five years is +3.2%/month. In the last 52 months the upward revision averaged 3.7%.

Spend Final vs 1st print 9-2-17

Construction spending revisions after first release of data:

  • Total Construction UP 48 of last 52 months, avg 3.7%/mo
  • Total Construction UP 16 of last 18 months, avg 2.6%/mo
  • Residential revised UP 29 of last 30 months, avg 7.0%/mo
  • Residential UP 17 of 18 avg 3.8%/mo
  • Commercial UP 17 of 18 avg 6.0%
  • Educational UP 14 of 18 avg 2.2%
  • Power UP 18 of 18 avg 12.0%
  • Commercial/Retail  May +3.9%, June +2.6%
  • Lodging  May +3.8%, June +1.1%
  • Educational  May +2.8%, June +3.6%
  • Transportation  May +3.6%, June +2.3%

January through May values have already been adjusted twice in these reports. June has one more revision next month and July gets revised twice. It’s quite likely both June and July values go up. All 2017 months still get one more revision next year when the May data is released (July 1). The post-annual total revision for the last 15 mo averages +2%, close to the long term average. First release values are ALWAYS being compared to previous values that have already been revised, 92% of the time UP. So first release values almost always understate performance. Since July 1st 2017, all 2016 monthly values have been revised three times so monthly releases this year starting with May have the most understated initial % comparison year-over-year because an un-adjusted release is being compared to a 3x-adjusted value.

When judging performance of monthly spending, it is reasonable to predict spending will get revised UP from the first release. Therefore, the most immediate monthly analysis you read, if based on initial release, 92% of the time is under-stating the performance of construction spending.

Construction spending forecasting not only must rely on performance year-to-date, but also on predictive analysis of how much revision there may be to current values. As an estimate, if monthly spending is initially posted as 2% down, 18/mo.averages indicate it will end up at least +2.6% higher after revisions, so would be a positive 0.6% growth month.

A few closing points:

Construction Spending 1st release for July is $1.211 trillion. Expect this to be revised up. YTD Jan-Jun revisions are UP 1.8%. Historical revisions last 5 years predict the final July value will be up 3% from the 1st release.

Construction Spending AVG 2017 Jan-Jul YTD ($1.226tr) has reached an all-time high. We’ve now posted three consecutive quarters of spending all averaging above $1.220 trillion. Spending is on track to total $1.250 trillion for 2017, up 5.5% over 2016.

Construction Spending avg YTD = $1.226tr, is up YTD 4.7% with revisions through May. Without revisions, the 1st releases would have averaged only $1.208tr, up only 3%.

Commercial Retail, Office and Residential lead 2017 construction spending gains, all over 10%. Office spending is at a record high.

After 5 months of stalled construction jobs growth, August added 28,000 jobs and put 2017 growth back on track towards 250,000 jobs. YTD is up 135,000. March thru July added only 19,000 construction jobs. Jan+Feb added 88,000, ending a six-month period, Sep16-Feb17, that added 167,000 jobs.

Harvey related jobs will be muted by jobs lost, I suspect for at least two months. There will be a period of slack records that will take some time to see the real effects of Harvey.

Further reading on this topic

June Construction Spending – What’s Up, or Down?

Construction Spending May 2017 – Behind The Headlines

Construction Spending Almost Always Revised UP.

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