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The AIA Midyear Consensus solicits the nonresidential buildings construction spending forecast from a number of firms and publishes those results and the Consensus average. The table posted here includes all the AIA forecasts and Construction Analytics 7-2-21 forecast.
Also included in this table is the year-to-date (ytd) actual spending through May. With 5 months of actual data, that ytd result should sway any forecast for any market estimate of year end result. A review of several years of history over all markets shows there are very few instances in the historical data where year end performance swings by more than 10% from ytd at month 4 or 5. Normal variances for about 80% of instances are in the range of 3% to 5%. So with few exceptions, at 5 months into the year, we could estimate year end will be within +/-5% of year-to-date. And yet, there are many instances in these forecasts that are outside that expected range.
The question is, can we determine, how accurate are these forecasts? Some rudimentary checks and balances, and some simple proportional math, provide the answer.
If you forecast a construction spending mrkt to finish 2021 at -30%, but the ytd after 5 months is -5%, the next 7 months would need to average near -50% to get to -30%. With the change in the yoy rate less than -3%/mo, it can’t happen.
If you forecast a construction spending market to finish 2021 at +3.5%, but the ytd after 5 months is -11%, the next 7 months would need to average +14% above Jun-Dec 2020 to get there. That’s a 25%/mo swing from the current rate that would need to hold steady for 7 months.
Likewise, If you forecast a construction spending market to finish 2021 at +11%, but the cum ytd after 5 months is -3%, the next 7 months would need to average +21% above Jun-Dec 2020 to get there. That’s a 24%/mo swing from the current rate for 7 months. Swings like that just don’t happen.
Another market with a glaring example, this time in almost every forecast. Lodging forecasts in the AIA Consensus range from -14% to -20%, with one wild estimate at -43%. Construction Analytics forecast for Lodging is -26%. The year-to-date is -27%. Well, from April to December 2020, spending fell at a rate of 4%/month. In the 1st 5 months of 2021, spending has been down slightly, still hovering near the December low. There are no indications that spending is poised for a rebound. In fact the forecast calls for spending to continue falling through 2021. The current monthly rate of spending averages -25%/mo from 2020. In order to hit any of the forecasts between -14% and -17%, the current rate of spending would need to flip by 15 to 20 percentage points for all of the remaining 7 months of 2021. Spending would need to increase at a rate of 2.5% per month for the next 7 months. This is a good time to remind everyone that Lodging construction starts last year dropped 45%, so the trend is down, not up. Current indications are that spending will decline 9 out of the next 12 months.
The forecasts in this Consensus report have numerous examples like those above. Nonresidential Bldgs actual ytd for the 1st 5 months is -10.5%. Consensus forecast for 2021 is -3.9%. The next 7 months each would need to avg +1% over 2020 to get there. The monthly rate of spending is currently -6% to -10% below 2020 and has fallen 13 of the last 15 months. That’s not going to flip to +1% immediately and stay at that level for 7 months.
The argument cannot be used that monthly data should not be compared to 2020 because of the rapid decline due to shutdowns skewing all the data. That did not occur in nonresidential buildings. Nonres bldgs spending declined 5% in April, but then it averaged a steady -1.5%/mo decline for the remainder of 2020. As of May 2021, spending is right where it was in December, still 16% lower than March 2020. There are no huge down months in 2020 to which 2021 spending would be compared resulting in a large increase to year-to-date percent.
At midyear, the ytd values give some indication of how the year will end. There are a few examples in historical data in which a market did swing by 10% or more from midyear to year-end, but there is less than 10% chance of a market varying by more than 10% and more than an 80% chance markets vary by only 3% to 5%. Rarely does -2% become +8% or +7% become -3%.
The averages suggest that a 5mo ytd value of -10.5% would end the year somewhere between -5.5% and -15.5%.
Compare Construction Analytics current construction spending forecast to the most recent forecasts by FMI and ConstructConnect.
Construction Analytics (CA) and ConstructConnect (CCon) forecasts include year-to-date spending. FMI report is titled 2021 2nd quarter edition, but also states based on 4th quarter 2020 actuals.
Both FMI and CCon forecasts have not yet been updated to include 2019 and 2020 revisions released on 7-1-21.
Construction Analytics forecast includes 2019 and 2020 revisions and includes May ytd spending.
Spending Total Put-in-place Forecasts for 2021 range from $1,422 billion (FMI) to $1,574 billion (CCon). Construction Analytics (CA) forecast is $1,526 billion. This is quite a wide spread. Here’s a few of the major differences:
Residential CA = $741 bil, FMI = $627 bil, CCon = $728 bil
Educational CA = $99 bil, FMI = $103 bil, CCon = $108 bil
Healthcare CA = $48 bil, FMI = $49 bil, CCon = $53 bil
Power CA = $110 bil, FMI = $120 bil, CCon = $137 bil
Transportation CA = $56 bil, FMI = $54 bil, CCon = $65 bil
The FMI forecast for residential appears to not yet have been updated to reflect record spending from October through May. I’d expect that will soon be updated. Residential spending year-to-date (ytd) is up 23% and has averaged a seasonally adjusted $740bil for the past 7 months. For the remainder of the year it’s expected to decline about 0.5%/month, but residential spending will still finish 2021 well over $700 billion.
For Power to end up at CCon = $137bil in 2021, considering the ytd through May is already -7%, the remaining 7 months of the year would need to average up 30%. Markets don’t jump that much higher and maintain that level for the next 7 months.
The spread of Spending Put-in-place Forecasts for 2022 ranges over an even wider difference, from $1,355 billion (FMI) to $1,703 billion (CCon). Construction Analytics (CA) forecast for 2022 is $1,533 billion. This is an exceptionally wide spread with some obvious areas of attention.
2022 Residential CA = $779 bil, FMI = $567 bil, CCon = $781 bil
2022 Nonresidential Buildings CA = $421 bil, FMI = $432 bil, CCon = $474 bil
2022 Nonbuilding CA = $333 bil, FMI = $356 bil, CCon = $448 bil
note: Transportation and Communication carried in nonbuilding for like comparison.
At this time of year some firms will present midyear forecasts. My latest report is May ytd data released July 1. With the August 2nd and 6th spending and jobs releases for June we have half a year of data, I’ll base a midyear report on that. I don’t expect any big change since the May data. Not all midyear forecasts will have the same ytd data, so could vary in that respect. So, watch for the midyear forecasts!
Here’ is a link to the results of 8 firms forecasts at Midyear 2020 compared to actual revised final 2020 spending. Also here is the same firms 1st forecast for 2021 compared to actual year-to-date 2021
Join us August 30 – September 1 in Dallas TX
I will be presenting to the plenary session on Main Conference Day 1, Tuesday August 31 on the following:
The State of Construction Post-Pandemic: Revealing Trends in Demand, Supply & Cost Escalation
• Revealing the economic reality and outlook in terms of construction volume and its impact on jobs and prices
• Identifying key metrics and data sources that will give you a reliable indication of inflation for your market
• Determining the likely impact of an Infrastructure Bill and other major construction investments on market forces
The 6th annual Advancing Preconstruction 2021 conference is North America’s largest gathering of contractors, design firms and clients looking to improve coordination of the design phase. You’ll hear how to align cost, schedule and project specifications to set projects up for success.
From conceptual estimating and winning work to constructability reviews and model-based quantity take-off, you’ll discover the latest technologies and workflows across five educational tracks.
New additions for 2021 include:
- Post-pandemic outlooks with a focus on cost escalation for major markets and bidding strategies
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- Benchmarking ways to conduct design reviews and maintain quality of coordination, including with remote working
- How direct material procurement, prefabrication, IPD and other trends could radically alter preconstruction and reduce costs
Construction spending April 2021
Construction Spending is up 5.8% year-to-date (ytd), however that’s broken down into three parts, up 21.8% for residential, down -6.2% for nonresidential buildings and down -4.9% for nonbuilding infrastructure.
In the 1st 3 months of 2020, spending had reached an all-time high averaging a SAAR of $1,461 billion.
In the 1st 3 months of 2021, spending hit a new all-time high averaging a SAAR of $1,515 billion. In April, spending is now up to $1,524 billion.
But these new highs belie the situation in spending. Year-to-date, while residential is up 20%+, 14 of 16 nonresidential markets, 95% of total nonresidential market value, are down.
In Apr and May 2020, residential spending fell -6% and -5%, down a total of -11% in two months. Then residential spending increased every month for the remainder of 2020, By Dec 2020 residential spending was 24% higher than in Q1 2020. Residential spending for 2021 is forecast to end up 15.4% for the year, but (the annual rate in) Dec 2021 will be -8% lower than Dec 2020.
Nonresidential Bldgs did not follow the same magnitude of declines, down only -3.5% in April 2020 and only -0.5% in May. But Nonresidential Bldgs spending has been down 10 out of 13 months since March 2020, now down -7.5% from the avg in Q1 2020. Nonres Bldgs spending, forecast down -5.7% from current over the next eight months, is forecast to end at -6.0% for 2021.
Construction starts are leading the way to recovery, but construction spending this year, which is dependent mostly on starts from the previous year (down -22%), will remain depressed for nonresidential construction well into 2022. Recovery in backlog begins to build in a few markets in 2021. However, new nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.
Aside from residential, recovery of revenue (spending) won’t begin in earnest until 2023.
The following table shows ytd through Apr $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.
The impact of reduced starts in 2020 is starting to show up in the 2021 year-to-date results. Total Nonres Bldgs starts were down 22% in 2020, Nonbldg Infrastructure down 13%. Some of these markets will be affected by a downward trend in spending for two to three years.
2020 starts for select markets:
- Amusement -38%
- Commercial/Retail -14%
- Office -20%
- Lodging -50%
- Manufacturing -57%
- Power -38%
The greatest downward impact on spending will be felt in mid-2021. Over the next 9 months, every sector will post more down months than up months, although the declines will be most noticeable in nonresidential buildings.
For the next few months the residential year-to-date comparison will be skewed. It is going to increase due to the steep fall-off in spending back in April and May 2020. Then months of strong growth, a total +38% in 7 months in residential from May 2020 onward, with no equivalent growth increase this year, will cause ytd comparisons to decrease. So, even though residential spending is not forecast to increase any more in 2021, residential spending will peak at +25% year-to-date in the May-June data (due to the steep decline in spending in 2020) before falling back to end at +15% ytd for year end.
YTD for nonresidential buildings, currently at -6.2%, will remain near this level for the rest of the year.
The following table shows two data sets: all markets spending compared to avg 1st qtr 2020 and forecast change for next 8 months. The forecast for the remainder of 2021 showing the trend, up or down, is down for almost every nonresidential market. So while most markets recovery to positive new starts growth in 2021, spending growth lags showing the downward trend in 2021 as a result of lost starts in 2020.
This next plot changes the scale of the spending plot so the nonresidential buildings data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps immensely.
A typical batch of new construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the year gets spent in the year started, 50% in the next year and 30% in years following. Total nonresidential buildings starts in 2020 were down 22% ($100bil in spending) and nonbuilding was down 13% ($50bil). Under normal conditions, we know how much of that $150 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential starts, down now for 12 months, posted some hint of recovery in April.
If infrastructure starts don’t begin until the 2nd half of the year, only 25% to 30% (of the 1st year 20/50/30 that is based on 12mo) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in the 2nd half 2021, only 30% x 20% or only about 6% would get spent in 2021. That’s $6 billion, or less than 1% of annual construction spending.
This table shows the ytd 2021 compared to the initial forecasts by Construction Analytics and eight other firms. The ytd and the forecast for the remainder of 2021 (table above) provide insight into expected final 2021 performance. Up above I’ve compared ytd to my current forecast. Here, ytd$ is compared to all the initial forecasts for 2021.
6-4-21 Construction jobs report released. Down 20,000 jobs for May. Both March and April revised down slightly. Jobs have increased only 23,000 for the 1st 5 months of 2021. Construction is still down 225,000 from Q1 2020.
I’ve been calling for a slowdown or slight decline in jobs growth. Construction spending adjusted for inflation (constant $) is down 2% since Dec-Jan. The trend is down for the rest of the year.
Construction volume growth is falling due to huge volume of nonresidential starts (-22%) that disappeared in 2020. The affect of those lost starts, which would have had peak spending in mid-2021, is such that volume of work is declining throughout 2021.
update 6-15-21 PPI for May
Post Great Recession, 2011-2020, average nonresidential buildings CONSTRUCTION INFLATION is 3.7%. Residential cost inflation averaged over 5% for the last 8 years.
The 30-year avg inflation rate (including recession) for Nonres Bldgs is 3.5% and for Residential it’s 3.4%.
The 30-year avg inflation rate (EXCLUDING recession years) for Nonres Bldgs is 4% and for Residential it’s 4.75%.
I expect non-residential buildings construction inflation in 2021 to range between 3.2% to 3.5%, with potential to be held lower. Expect residential inflation of 7% to 8% with potential to push slightly higher.
As of March 2021, PPI for materials inputs to construction is up 12% to 14% yoy, measured to last March before the bottom dropped out. The PPI Buildings Cost Index for final cost to owner is up only 2%.
Almost every construction market has a weaker spending outlook in 2021 than in 2020. Approx. 50% of nonres spending in 2021 is generated from 2020 starts.
- Nonres Bldgs starts fell 22% in 2020.
- Nonbuilding starts were down 15%.
- Residential starts were up 6%.
While there are several reasons that construction inflation will increase, downward pressure on spending will temper construction inflation.
as of 6-15-21, May PPI report > Inputs to Nonres Constr YTD21 +13.3%. Final Demand Nonres Constr YTD21 +2.7%. Five solid months of 2021 data shows the Input costs of materials IS NOT being passed along to final cost to owner. This could change, but for now final costs of construction are holding well below input costs.
A look back at Res, Nonres and Nonbldg construction inflation over the last 30 years shows rarely has there been any substantial increase in inflation when construction spending is headed down.
- Nonres Bldgs spending 2020 -2.0%, 2021 -7.7%, 2022 -4.5%
- Nonbuilding spending 2020 +2.8%, 2021 -1.3%, 2022 -3.2%
- Residential spending 2020 +12.2%, 2021 +17%, 2022 +4.8%
Over 30 years, looking at the 3 major sectors, Res, Nonres Bldgs and Nonbldg = 90 pcs of data. 27 out of 90 times spending decreased or stayed flat for the year. Only 3 out of those 27 times when spending was down/flat did inflation come in over 3%. Avg inflation for the 27 down/flat yrs is less than 1%. For those 27 times, only 3 times were PPI Inputs less than 2%.
An estimator must differentiate between “added quality” and inflation. Added components or increased level of finish are not inflation, but are picked up in the estimators increased unit costs. Inflation captures higher labor, mtrl, margin costs for same level of build out.
Granite counters and Italian tile floors vs PLam counters and vinyl floor coverings is an increase in quality, not inflation. Increased SqFt is an increase in quantity, not inflation.
7-21-21 June PPI data will probably drive up inflation cost in this report. SEE PPI as of June 2021
Download the full Inflation Report here
Economists should be talking about this. While residential starts and spending are at all-time highs, nonresidential buildings starts have been down for months and spending is still declining.
Since Apr 2020 and now through March 2021, Nonresidential Bldgs construction starts, for 12 months, have averaged down 25%+ compared to Q1 2020. Recent Q1 2021 is still down 22% from Q1 2020.
A full year of nonres bldgs starts generates over $400 billion in spending. With starts down 25% for the past 12 months, that’s a loss of over $100 billion in spending that would have occurred over the next 1 to 3 years.
Spending follows as starts move, only later, so spending will fall.
Actual nonresidential buildings construction spending has been down 10 of the last 12 months. Now in Mar 2021 it is at its low point, 9% lower than Q1 2020. The forecast for the remainder of 2021 is down near 1%/month.
A simple model built to show when starts have maximum impact on spending indicates by Dec 2020 Nonres Bldgs construction spending put-in-place would be 10% lower than Q1 2020. Spending was actually 9% below Q1 2020. So the model seems to be on track.
This table sets Feb 2020 starts to a baseline of 10.0. All other starts afterwards are entered at the percentage of actual $ starts that month compared to Feb 2020, so 8.30 in March of 2021 represents starts for Mar 2021 were 83% of Feb 2020. A lost start is negative spending. So, instead of thinking of the peak month of spending, that becomes the month of greatest loss. Those months near the middle of the schedule, are highlighted here.
Dodge is forecasting new construction starts for nonres bldgs will increase ~4% in 2021 and ~10% in 2022. That means starts in 2021 will still be 20% lower than Q1 2020 and starts in 2022 will still be 12% lower. This has major implications.
Even at 10%/yr growth in new starts in 2022, 2023 and 2024, Nonres Bldgs Starts would not return to pre-pandemic level until mid 2024. If starts remain lower than Feb 2020 through 2023, then spending will remain lower than Feb 2020 through 2024.
That model, that’s on track so far, shows maximum impact from reduced 2020 starts will occur in Q2-Q3 2021. But what about 2021 starts? Negative impact continues longer than the # of months starts remain lower than Q1 2020. We now have 12 months of starts still averaging 22% below Q1 2020, so even when we begin to improve, we are measuring from a new base 22% down. For each lower month the greatest negative impact in spending is 10-12 months later. That loss of spending is shown in the following chart for Nonres Bldgs Spending.
By the end of 2021, Nonres Bldgs construction spending put-in-place is forecast to be almost 20% lower than Q1 2020. If the Dodge forecast of 4% growth in starts for 2021 is correct, then, even though 2021 had growth, it’s off the bottom, and 21 months of starts will have averaged down 22% from Q1 2020.
Nonresidential Bldgs construction spending follows as starts go. If starts are down, future spending will be down.
Nonresidential Buildings spending $ put-in-place will not return to pre-pandemic levels before 2024 or 2025.
How can you tell if your preferred construction economic forecast is on track to finish the year as predicted?
For comparison, in the following link I’ve collected initial 2021 construction spending forecasts from nine different sources. Measuring Forecasting Methodology & Accuracy
As of 5-3-21, three months of actual data are in. The first step is to compare that current actual data to the predictions. The next step is to use a bit of math to answer the question, Can we get there from here?
First let’s look at Lodging. In the AIA initial 2021 Outlook, ABC forecast -13% and Moody’s forecast -52%. Current spending year to date through March is -25%. Are either of these forecasts achievable?
Lodging construction starts dropped 11% in 2019 and dropped another 50% in 2020. The seasonally adjusted annual rate (SAAR) of spending fell from $33bil in Q1 2020 to $24bil in Q1 2021, down 27%. The current rate of spending is coming in between 25%-30% below same month last year (yoy).
Now do the math.
Look at the ABC forecast for lodging. To finish the year down -13%, monthly spending needs to average -13% for all 12 months of 2021. 12 months x -13% = -157. But 3 months, down cumulatively 25%, are already known. 3 months x -25% = -75. What would need to occur for the last 9 months to reach a total 2021 spending down -13%?
12 x -13% = -157 minus 3 x -25% = -75, therefore -157 minus -75 = -82. In the remaining nine months, Lodging would need to fall a cumulative 82%, or 82/9 = an average of 9%/month.
Well, the current rate of spending is down 25% yoy and construction starts the previous two years are down 60%. Cash flows seem to indicate spending will not increase this year. There is little hope of seeing an increase in monthly spending in 2021. Since new starts are less than half of only two years ago, spending is unlikely to increase from a monthly rate down 25% to a monthly rate down only 9% for the next nine consecutive months. Therefore this forecast is unlikely to play out. The ABC forecast is too optimistic.
Now let’s look at the Moody’s forecast for lodging. To finish the year down -52%, monthly spending needs to average -52% for all 12 months of 2021. 12 months x -52% = -624. But 3 months, down cumulatively 25%, are already known. 3 months x -25% = -75. What would need to occur for the last 9 months to reach a total 2021 spending down -52%?
12 x -52% = -624 minus 3 x -25% = -75, therefore -624 minus -75 = -549. In the remaining nine months, Lodging would need to fall a cumulative 549%, or 549/9 = an average of 61%/month.
Well, the current rate of spending is down 25% yoy and construction starts the previous two years are down 60%. Cash flows are indicating monthly spending will drop 3% to 4% per month this year. Spending would need to decline 61-25=36% in one month and stay at that rate for the remainder of the year, OR, spending would need to start falling at a rate of 12%/month and continue 12% lower every month for the remainder of the year. By December, spending would be down over 100%, so this is not even feasible. Therefore this forecast cannot play out. The Moody’s forecast is far too pesimistic.
Second, let’s look at Manufacturing. In the AIA initial 2021 Outlook, ABC forecast +6.5% and Moody’s forecast -3.4%. Current spending year to date through March is -9%. Are either of these forecasts achievable?
Manufacturing construction starts dropped 10% in 2019 and dropped another 57% in 2020. The seasonally adjusted annual rate (SAAR) of spending fell from $78bil in Q1 2020 to $71bil in Q1 2021, down 10%. The current rate of spending is coming in between 7%-11% below same month last year (yoy).
Look at the ABC forecast for manufacturing. To finish the year up +6.5%, monthly spending needs to average +6.5% for all 12 months of 2021. 12 months x +6.5% = +78. But 3 months, down cumulatively 9%, are already known. 3 months x -9% = -27. What would need to occur for the last 9 months to reach a total 2021 spending up+6.5%?
12 x +6.5% = +78 minus 3 x -9% = -27, therefore +78 minus -27 = +105. In the remaining nine months, Manufacturing would need to gain a cumulative 105%, or 105/9 = an average of +12%/month.
Well, the current rate of spending is down 9% yoy and construction starts the previous two years are down 67%. Cash flows seem to indicate spending will continue to drop at a rate of 2% to 3% per month this year. There is little hope of seeing an increase in monthly spending in 2021. Since new starts are down 67% from two years ago, spending is unlikely to increase from a monthly rate down 9% to a monthly rate up 12%, a swing of 21%, for the next nine consecutive months. Therefore this forecast is highly unlikely to play out. The ABC forecast is far to optimistic.
Now let’s look at the Moody’s forecast for manufacturing. To finish the year down -3.4%, monthly spending needs to average -3.4% for all 12 months of 2021. 12 months x -3.4% = -41. But 3 months, down cumulatively 9%, are already known. 3 months x -9% = -27. What would need to occur for the last 9 months to reach a total 2021 spending down +3.4%?
12 x -3.4% = -41 minus 3 x -9% = -27, therefore -41 minus -27 = -14. In the remaining nine months, Manufacturing would need to fall a cumulative -14%, or -14/9 = an average of -1.5%/month.
Well, the current rate of spending is down 9% yoy and construction starts the previous two years are down 67%. Cash flows are indicating monthly spending will drop 2% to 3% per month, every month this year. Spending would need to begin falling at a rate of only -1.5%/month and continue -1.5% lower every month for the remainder of the year. A decline of 67% in starts over the previous two years solidifies a rate of decline beyond that at near 3%/month. This scenario would depend on cutting the rate of decline in half for the remainder of the year, but the lack of starts in previous years provides no help to achieve that goal. The Moody’s forecast is too optimistic.
It’s in your best interest to know how to assess the plausibility of forecast components before you question an analysis that varies widely from your preferred forecast. It may be your preferred forecast that is way off.
The American Institute of Architects Architectural Billings Index
The Dodge Momentum Index
The Associated Builders and Contractors Construction Backlog Indicator
These three construction leading indicators are often referenced. Do you reference any of these indices? Do you know what the index represents?
The American Institute of Architects Architectural Billings Index, ABI, is a diffusion index, measuring work on architectural firms’ drawing boards, measured as above 50 if increasing and below 50 if decreasing. The index is comprised of survey responses from firms representing 45% institutional work, 40% commercial work and 15% residential work. The index is said to lead commercial construction spending by 11 months and institutional construction spending by 7 months. BUT, the correlation is this, the ABI is compared to “the percent change in year over year construction spending”.
Year over year percent change can provide skewed results. If last year construction spending was on a slow decline every month, and this year spending is level from month to month, that would show up as a continually increasing year over year percent growth. Because year over year spending percent is increasing, it could be misinterpreted that current year spending is growing, but it is flat. In another example, if last year construction spending was slowly increasing every month, and this year spending is slowly increasing every month at the same rate of growth, that would show up as no growth in year over year spending, but actual month to month spending is slowly increasing. Year over year spending can be influenced by last year activity as much as current activity and may not show the current trajectory in spending.
The Dodge Momentum Index, DMI, measures the earliest known indication of projects in planning. This includes only projects that are actually in design. The index is comprised of gathered results for nonresidential projects, excluding megaprojects and excluding manufacturing. The index is said to lead nonresidential construction spending by 12 months. However, it’s individual components could lead Institutional spending by 15 months and Commercial spending by 7 months. We see that the ABI refers to the point in time when the project is already under design and that leads spending by 7 to 11 months. It would be expected that the Dodge index has a longer lead time. As an indicator of early planning Dodge excludes projects that are about to go out to bid, preserving the intent of a leading indicator.
The Associated Builders and Contractors Construction Backlog Indicator, CBI, attempts to measure the work in backlog, or growth in the value of work on contractor’s books. It measures the current month of total remaining value of projects in backlog divided by the previous fiscal 12 months total revenues, times 12. The resulting output is reported in months of current backlog. Of course, projects have varied schedules to completion that may take many more months if not years to complete, so contractors may not run out of work in the few months indicated by the CBI. This index also may be influenced by something that occurred a year ago that may not reflect the current activity. What this index really measures is the current backlog percentage of previous fiscal year revenues, just skip the part that multiplies that percent time 12. It provides no indication of expected annual revenues.
Construction starts, although a general indicator that construction spending may be poised to grow (or fall), can also be misinterpreted. Construction starts refers to a total project value at a point in time, the start date. For nonresidential construction, all projects that started prior to the beginning of a year will account for at least 80% of all spending within that upcoming year. Construction spending is that total project value spread out over the project scheduled duration from start to finish. Construction starts may be increasing, but rather than resulting in increased monthly spending, those starts may represent lower monthly spending but longer duration contracts. Increases in new starts does not always indicate an increase of monthly spending, but may instead represent lower monthly spending for a longer duration into the future.
All of these indices do not correlate directly to construction spending. To forecast construction spending, a cash flow schedule of all construction starts must be prepared. In any given month, spending on construction includes some monthly portion of spending from all projects that started in all previous months but that have not yet reached completion. A cash flow schedule of all monthly construction starts is the best indicator that directly forecasts construction spending.
Construction Analytics prepares estimated cash flow schedules from Dodge monthly reports of new construction starts and exclusively uses cash flow to forecast future construction spending. The cash flow schedule also allows to directly calculate the estimate to complete backlog in current $.
Know what an index represents before you put all your faith in following that index to develop your forecast.
Since the beginning of the Pandemic we’ve known there will be declines in construction spending due to #1: Projects halted and temporarily on hold, and #2: a huge reduction in the amount of new construction starts. That’s the easy part. The difficult part is calculating how much within the spending decline due to each cause is being counted in the most recent actual spending and the current forecast.
Although we may never know precisely, this is an attempt to identify how much of the declines in spending are due to #1 and #2. We can set up a model to calculate declines from lost new construction starts (#2), but no source is tracking the amount of projects put on hold (#1), for how long and how many of those projects become permanently shut down.
By comparing the amount of spending declines caused by lost starts to actual spending declines, we get a difference that could be identified in part as being caused by spending declines due to projects temporarily shut down. But that will have a distinct pattern to it. Initially we should see actual spending declines were greater than would have been caused by just the loss of starts, so the difference would be negative. Eventually, projects that were on hold start back up and we should see actual spending declines are not as great as the losses from new starts would indicate. This is caused by a revenue from a few months of previously on-hold projects extending the delayed spending to a later (current) point in time.
Finally, after all on-hold projects have restarted and been reabsorbed into monthly spending, the impact of delayed projects diminishes and the percent spending declines calculated by the loss of new construction starts should more closely reflect the actual declines in spending.
The following cash flow model may not be precise, but it is accurate in its representation of impact caused by lost new starts, and therefore allows to make the comparison noted above. This is strictly for nonresidential buildings.
HINT: Large view, Right Click on table – Open in a New Tab. Thank me later.
This cash flow schedule tracks reduced starts from 2019 through 2020. All other previous months are considered at 100% of the pre-pandemic high in Feb 2020. This sample uses $10bil/mo of new starts as 100%, the high in the 1st quarter, carried out over a 20mo schedule. If the rate of starts were to remain constant at $10bil/mo, then the spending would also remain constant at $10bil/mo. The amounts carried for all months 2019 and 2020 represent the percentage of actual starts recorded, measured as a percent of previous high, the 1st quarter 2020, so $6.6 bil in May is 66% of the pre-pandemic highpoint, February, which here is $10bil.
Notice although starts are forecast to increase about 5% each in 2021 and 2022, that percent growth is measured from the very low starts in 2020. Nonresidential Buildings starts in 2020 dropped 24%. We need 31% growth to get back to the Feb 2020 high. That will take several years.
With the onset of reduced starts in April 2020, spending began to fall, but only a few percent. The cumulative impact to spending of all reduced starts will be months later than the initial impact. Cash flow shows maximum impact is ~50% to 60% out in time of each individual schedule. The spending in any given month includes input from starts in 20 different months. It’s when a month lines up with all the inputs from reduced starts months that spending reaches its lowest.
In April 2020, we had loses from only one month of new starts which were down 39%. The cash flow schedule declines in the 1st month indicated that spending would drop 0.9% that month. The spending decreases from the next six months of losses in new construction starts indicated spending would drop approximately an additional 1% per month for six months; so down 1% after one month, down 2% after two months, 3% after 3 months, etc.
As expected, actual spending did not follow the pattern set forth by loss of new starts only. In the 1st month, spending actually dropped 3.9%, the difference that month being 3% between what was predicted from lost starts vs actual spending. Nonresidential Buildings Spending actually declined by approx. 4%/month for the 1st four months of the Pandemic, while the losses expected and identified from lost starts increased from 1% to 2%, 3% and 4%. With spending declining at a rate greater than loss of starts would indicate, we have some information to associate with the other cause of decline, delayed projects.
This greater negative performance eventually reached a balance point when actual losses equaled that predicted by lost starts. That would be expected if projects that were temporarily halted were restarted. And just beyond the balance point actual spending, in this case forecast spending, declines are not as great as would be predicted by lost starts. This would occur as the remaining schedule to finish halted projects added some spending to future months that was not in the expected cash flow schedule.
So, to recap, it’s easy to show the cash flow schedule predicting spending reductions caused by loss of starts in the schedule. Also, projects put on hold would show excess spending declines, not otherwise predictable, in the early months and would show unexpected spending increases later.
That’s exactly what the above model shows.
The subtotal line titled MONTHLY SPENDING of $ is construction spending per month, the sum of the contributions from the cash flow of all the still ongoing projects. That shows when greatest impact from lost starts occurs. The low point in spending can be measured in months from the initial event, April 2020. But the combined effect extends well beyond the initial event (reduced starts) which started in April but so far have lasted 10 months. This is why maximum impact of reduced spending for nonresidential buildings stretches over a long period in 2021-2022.
The bottom row shows the difference between Actual spending and predicted spending from starts. That difference behaves exactly as would be expected from projects that stopped spending and then resumed spending later.
The percent spending losses from on-hold projects amounted to no more than a 3%/month loss falling to a 1% loss in spending after six months. From month 10 through month 15, Jan 2021 to June 2021, spending increases 3%/month to 5%/month due to delayed projects resuming spending and completion later than originally scheduled.
So, why don’t we see spending increases from the completion of any delayed/resumed projects?
The spending increases due to resuming delayed projects is far less than the reduction in spending from loss of starts in 2020. By the 10 month, Jan 2021, spending declines attributed to lost starts in 2020 measured 11% decline compared to Feb 2020. By the 15th month, Jun 2021, spending will be down 17% due to lost starts. Delays were never down/up more than 3%/5% in a month.
The magnitude of spending declines from loss of starts in 2020 is three to four times the magnitude of losses, then gains, due to shifting of spending due to delays. The maximum (diminishing) negative impact of delays lasted six or seven months and fell from 3% to 0%. The positive (resumed spending) impact also last for six or seven months. The impact from lost starts reaches a maximum at a point approximately 10 to 12 months (to project scheduled midpoint) after the start. As long as starts are down from Feb 2020, the deepest impact will be 10 to 12 months beyond the last month of reduced starts. Starts in Dec and Jan are still down 20% from Feb 2020. Lower new starts in 2020 cause severe negative impact to spending in 2021 that may reach a maximum impact from May to Dec 2021. For each month that starts continue to come in substantially lower than Feb 2020, that will extend the end of maximum negative impact a month beyond Dec 2021.
Declining spending does not support jobs growth.
Don’t be fooled by the upturn in January nonresidential buildings construction spending.
The greatest negative impact created by the loss of nonresidential buildings new starts from Apr 2020 to Oct 2020 has not yet hit spending and jobs in this sector. Expect both spending and jobs to decline steadily throughout 2021. My current forecast shows monthly spending down on average 1%/month for 9 out of the remaining 11 months in 2021. Dec 2021 SAAR (seasonally adjusted annual rate) will be 10% below Dec 2020, 18% below Q1 2020.
Do not expect any jobs growth in construction in 2021.
We all know a project takes time to build. It starts out slow, ramps up to peak spending and staffing just after the midpoint of the schedule and tapers off to completion. Peak monthly spending on a project with a 20-month schedule occurs 10 to 12 months into the schedule.
If we record a month of new starts 20% above normal, then 10 to 12 months from now spending and jobs from projects that started in that month will be 20% higher than normal. Then it stands to reason, if we record a month of new starts that is 20% BELOW normal, then 10 to 12 months from now spending and jobs from that month will be 20% lower than normal.
The greatest impact on spending, either up or down, from changes in new construction starts, occurs at the point in time when those projects would have reached peak spending, near the project midpoint.
In April 2020, new starts for nonresidential buildings fell 40% and then averaged 30% below normal for the next 6 months. If average duration of nonresidential buildings projects is about 20 months, then the loss of new starts will result in a maximum decline in spending and jobs 10 to 12 months later. (If average duration is about 24 months, then the loss of new starts will result in a maximum decline in spending and jobs 12 to 14 months later. This analysis uses 20 months).
Declines in new starts after April 2020 were large through the entire year, but during the months April through October 2020, starts averaged down 30%. Therefore, the maximum declines in spending and jobs from this period of reduced starts will occur 10 to 12 months later, from the beginning of the period to the end, from February through August 2021. Nonresidential buildings new starts in November, December 2020 and January 2021 are still down 20% from the pre-pandemic 6mo avg. high. This means spending declines will continue past August 2021, but at a slower rate of decline.
In Q1 2020, nonresidential buildings construction spending SAAR (seasonally adjusted annual rate) was $485 billion/yr. In April and May it had only dropped 3.5%. In Dec 2020 nonresidential buildings spending was $440 bil., down 10% from Q1. By May 2021, nonresidential buildings spending will only be $420 bil. By September 2021, the rate will be down to $400 billion.
Nonresidential buildings construction spending forecast in 2021 is down 11% from 2020. Spending continues to decline 6% in 2022. Inflation makes all these numbers slightly worse. If spending is down 11% at a time when inflation is up 3%, then real volume of work is down 14%. Jobs should follow in step with volume.
Nonresidential buildings spending especially will remain below the previous high at least for the next three years, probably longer. New starts in 2021 would need to ramp up by more than 40% to push 2021 spending back up to previous levels. New starts are forecast to gain only 3% to 5% for the next two years.
Nonresidential buildings (and to a lesser extent Nonbuilding Heavy Engineering) spending and jobs losses for the next year will be much greater than the gains expected due to increases in residential spending. New construction starts in 2020 for all types of nonresidential work declined by what is adjusted to a $150 billion decrease in spending. Residential increased by $35 billion. But again, the spending from those starts is spread out over time.
Nonresidential buildings volume declines of 14% project to a loss of over 400,000 jobs in 2021 and Non-building Infrastructure is projected to drop 60,000 jobs, but Residential could experience growth next year of 250,000 jobs. That could result in net annual jobs losses of 200,000. Job losses continue into 2022 with net volume declines of 4%.
Here is a sample cash flow schedule that shows when spending is impacted by changes in new starts in 2020.
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This cash flow schedule is based on reduced starts in Apr-Dec 2020. All other months are considered at 100% of the pre-pandemic rate. This sample uses $10bil/mo of new starts as 100%, the high in the 1st quarter, carried out over a 10mo schedule. If the rate of starts were to remain constant at $10bil/mo, then the spending would also remain constant at $10bil/mo. The amounts carried for April to Dec represent the actual starts recorded, measured as a percent of previous high, the 1st quarter 2020, so $6.6 bil in May is 66% of the pre-pandemic highpoint average, which here is $10bil.
With the onset of reduced starts in April 2020, spending began to fall, but only a few percent. The cumulative impact to spending of all reduced starts will be months later than the initial impact. Cash flow shows maximum impact is ~50% to 60% out in time of each individual schedule. The spending in any given month includes input from starts in 10 different months. It’s when a month lines up with all the inputs from reduced starts months that spending reaches its lowest.
The bottom line of $ is construction spending per month, the sum of the contributions from the cash flow of all the still ongoing projects. That shows when greatest impact occurs. The low point in spending can be measured in months from the initial event, April 2020. But the combined effect extends well beyond the initial event (reduced starts) which started in April but lasted until December. This is why maximum impact of reduced spending for nonresidential buildings stretches over a long period in 2021-2022.
Assuming an average duration for a particular nonresidential buildings market sector is 20 months to build, deepest losses will occur 60%x20mo or 12 months later, Apr2021, and continue to Dec2021. This duration certainly varies by building type and could vary from as short as 12 months to as long as several years. Maximum impact is always 50%-60% into the duration.
Declining spending does not support jobs growth.