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The goal has always been to share information. It takes readers to make that happen. Well, here’s what you, my readers, have done for this blog.
2016 was a start-up year. The blog had only 7,000 visitors for the year that produced 14,000 views. It wasn’t until the blog became established that more visitors began to view more articles. The number of visitors and article views grew exponentially after that.
Total visitors in 2017 averaged about 2000/month, but in 2018 grew from 2000/month at the beginning of the year to 5000/month by year end. So far in 2019 though mid-May this blog has had over 30,000 visitors.
In 2019 so far, this blog gets on average about 1500 visitors/week that view about 3000 articles/week.
Total views of all articles in 2017 averaged 5000/mo, in 2018 – 8000/mo and in 2019 ytd – 12000/mo. By the end of June 2019 articles on this blog will have received 250,000 views.
By far the most popular articles are those on the subject of construction inflation and the economic forecast. In fact, the inflation articles, simply through the number of hits from google searches, have garnered a top page link from google search for construction inflation.
In January 2019, more than 8,000 visitors generated 17,000 views. The 2019 Economic Forecast Summary had more than 3,000 views and the Inflation Index Tables more than 4,000 views. This blog now gets more visitors and more views per month than I got per year when when I worked for and my reports were published and distributed by a major national construction firm. I believe that success is supported by quality content and web presence.
Inflation Tracking and Forecast 2017 – 50 views a day, 2019 – 150/day
Starts/Backlog/Spending Forecast 2017 – 10 views a day, 2019 – 50/day
Thanks to all of you who make writing worth the effort. Please keep reading. edz
When assessing or tracking the pricing affect of tariffs on construction materials, you need to understand that the Producer Price Index (PPI) does not include imports (imports are not produced in the US) or tariffs. See items 4 and 24 in the FAQ provided by the Bureau of Labor Statistics. Construction PPI changes reflect pricing decisions domestic producers make on domestic products in reaction to tariffs on imported products. Tariffs have big impact on domestic prices.
The price change we see in the PPI for construction materials reflects the domestic material prices of ALL other domestically produced materials used in the industry. While tariffs may affect only 10% of products used in the industry the PPI shows us the domestic producers reaction applied to the other 90%.
For example: Steel tariffs of +25% applied only on imported steel, affected only 30% (the imported share) of steel used in US. However the PPI shows us that all other domestically produced steel in the US and used in construction increased in price between 12% and 22% in 2018. Prices of domestic steel have receded somewhat, now ranging from +7% to +13%. But the point is that tariffs caused a price increase also in domestic steel.
The cost of ALL DOMESTIC steel mill products (of all types) produced in the US increased 18% in 2018 after the steel tariffs were imposed. That is domestic producers pricing response in reaction to tariffs. Tariffs impacted pricing decisions on all domestically produced products, not just the imported products. The increase has since receded but is still up 10%. Consumers pay the price.
For the two years 2017-2018, the Total All Construction posted Revenue +9.8%, Volume after adjusting for inflation +0.3%, and total Jobs +7.6%.
Breaking out these numbers by sector,
Nonresidential Buildings — Revenue +5.9% Volume -3.1% Jobs +8.2%
Non-building Civil — Revenue +3.8% Volume -3.6% Jobs +10.0%
Residential Buildings — Revenue +17.1% Volume +5.6% Jobs +8.2%
Similar to a pattern that occurred in the pre-recession spending boom, jobs growth is more closely matched to revenue growth than it is to real volume growth. Overall, for the last two years, construction jobs growth far outpaces construction volume growth.
In the nonresidential sectors, while revenue was positive, after spending is adjusted for inflation, real volume was down 3% to 4%. Yet jobs increased 8% to 10%.
Residential spending (revenue) was up 17%, but after inflation real volume was up only 5.6%. Residential jobs increased 8%. If we look at residential since 2011 we see persistent growth in volume greater than jobs. But all residential jobs are not captured.
When we look at Nonresidential Buildings we see jobs growth far exceeds volume growth. However, there are some jobs related to residential work that are captured in the nonresidential jobs number, any work on high-rise residential buildings performed by contractors whose company is generally classified as nonresidential, particularly structural, and it is impossible to break out those jobs.
It is difficult to square the consistent jobs growth in excess of volume growth with the long ongoing narrative of jobs shortages. I suppose it could be argued that it is a “skilled” jobs shortage, a lack of workers with the needed experience. But we would have to look back to the period 2000-2004 to find a time when jobs growth was balanced with volume growth. There are several other articles on this blog documenting the variance back to 2000.
Here’s a link to a twitter thread on the May release of the April Jobs report showing the differences for the last 12 months.
A brief explanation added to answer the question of the difference between Spending (or Revenue) and Volume.
If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you hire support staff to support 7% growth in revenues, you would be grossly over-staffed. Inflation adds nothing to business volume. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending (revenue) minus inflation.
If a contractor is building houses that last year cost $250,000 to build a 2500sf house, but this year it cost $275,000 to build the same house on the lot next door, the volume did not change. Both sets of dollars represent the cost of the same house, but the most recent house cost 10% more due to inflation. It does not take any more workers to build the house this year than it did last year. Inflation changed the dollars of revenue that changed hands, but inflation added nothing to business volume.
Volume is measuring the amount of work completed, not the cost of the work completed. This blog post compares the number of jobs added to the amount of work added. Adjusting for inflation removes the variable of cost.
Census released March spending today and from my point of view the numbers are showing a surprise downward shift. Nonresidential Buildings and Non-building Infrastructure both showed upward movement as expected but Residential spending posted the eight decline in nine months.
Construction Spending for March posted at $1.282 trillion, 1.5% below (my) expectations. Nonresidential increased BUT Residential is down 2% from Feb. Jan was revised down 4.6% and Feb revised down 5.6%.
Residential spending is now 8% below March 2018. The decline is about half in single family and half in renovations. Multi-family spending is up 11% year/year.
The only monthly gain in residential spending since July 2018 is in Dec, but in the nine months Jul to Mar spending is down 10%. Q1 2019 spending has dropped back to a level of Q1 2017. This is pushing my 2019 residential spending forecast into a decline, 1st decline since 2010.
I’ve posted reasons why I expect upward revisions to residential spending, but I question if revisions can turn around the current 10% decline from last July. It now looks like residential construction spending will NOT post any gains in 2019. That’s more serious than it first appears, since spending needs to increase at least 4% to 5% just to counter inflation. In other words, if residential spending in 2019 posts a 2% decline, real residential volume after inflation would decline by 6% or 7%.
In real volume, after adjusting for inflation, residential construction spending, as of March, is down 12.5% year over year. That hasn’t happened since 2009. Perhaps revisions will recover half that decline, but not all. Contrary to the decline in real volume, in the last year residential construction jobs are UP 3.5%.
Manufacturing currently appears stronger than it is expected to finish the year. Up 6% year-to-date and up 10% from last March, we could see those gains fall off over the next 6 months. Backlog is still very strong, but the schedule of cash flows from old jobs will lead to several months of moderate declines. Initial forecast was for 2% growth in 2019. Current expectations are that manufacturing will finish the year up between 2% to 4%. 2020 will be an extremely strong growth year.
Office spending, similar to manufacturing, could post several months of moderate declines. In fact, my forecast shows office spending declines in 6 out of the next 7 months and finishes the year at the same monthly rate of spending as we are at now. Office is up 8.4% ytd but I expect the year to finish up 4% or less. Initial forecast was up 6% for 2019. New starts in 2018 were up 11% but most of that spending will benefit 2020 when I expect to see growth of 6%.
Commercial spending is currently down 4.8% ytd and 7% lower than last March. It will move slightly lower before it improves, finishing the year down only 1% to 2%. 2020 may not get more than a 1% gain.
Educational spending will finish 2019 much stronger than current spending but the year will only make slight gains over 2018. Current spending is up 5.5% ytd over 2018 but that will taper off. However, the strong activity in the 2nd half of 2019 will lead to substantial growth in 2020.
More notes will be added in the coming days as I review all other markets in the spending report.
I’ve read a few news articles that proclaimed charitable donations to Notre Dame may not be enough to cover the cost to rebuild the damaged cathedral roof. One article on Bloomberg news stated, “The cost might well run as high as 8 billion euros”.
I think it’s time some news sources engage with a professional architect, engineer and cost estimator before writing these articles. 8 billion Euros is enough to spend an astronomical amount to repair the damage!
One World Trade Center is the most expensive building built in the U.S. It cost $4 billion. It measures 3.5 million square feet (SqFt).
Some sources are saying the Notre Dame cathedral roof repair may cost more than $8 billion. The Notre Dame roof, as closely as I can determine from online data of the building, measures about 50,000 SqFt.
Just think about that.
I’m stretching my thought process to come up with a rough estimate that would cost as high as $250 million. Frankly, my rough estimate is quite a bit lower than that, and that would still be far more costly per SqFt than the most expensive building in the U.S.
I haven’t yet seen an architect / engineer estimate of the total area of the roof. I traded some emails with an architect who thought total area was 25,000 SqFt. I searched online and come up with potential area of roof at 50,000 SqFt. Here I’m using 50,000 SqFt.
I have not seen any other realistic cost estimates. But, the most expensive roof covering and roof structure I’ve ever estimated was less than $100/SqFt (in 2019 dollars).
My order of magnitude estimate (OME) (very general), for a unique, complex structure and premium roof covering could be $500/SqFt. Portions of this roof need to be quite ornate and also the estimate must include a ceiling structure. For a historical and rare roof plus inside work let’s double that estimate to $1000/SqFt. That’s 10x the cost of the most expensive roof I’ve ever estimated / built.
$1 billion would provide for $20,000/SqFt.
$8 billion would provide for $160,000/SqFt!
Even if my OME is 10x too low and I make a 10x adjustment, cost would then be $10,000/SqFt for a total cost = $500 million. That’s 100x more expensive than the most costly roof I’ve ever estimated. Frankly, I can’t come up with any conceivable scenario where it could cost that much.
footnote: 8 billion Euros is currently about $9 billion US dollars
PUBLIC WORK AND INFRASTRUCTURE SPENDING
Most public work is non-building infrastructure, or public works type projects, but some public work is nonresidential buildings. In 2018, of $301 billion in public work, $177 billion (59%) is non-building infrastructure, $118 billion (39%) is nonresidential buildings, $6 billion is residential. The public subset of work in the last 25 years has grown by $20 billion/year only twice, during the construction boom of 2006-2007.
Excluding the worst recession years, the average annual growth of all publicly funded work since 2001 is $8 billion/year. In the four best construction boom years growth averaged $20 billion/year.
The two largest markets contributing to public spending are Highway/Bridge and Educational, together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 12% of public spending. Sewage/Waste Water and Water Supply add up to another 12% of public work. All other markets combined, none more than 4% of total public work, account for only 15% of public spending.
Non-Building Infrastructure sector, at a total of $313 billion in 2018, is less than 25% of all construction spending, mostly supported by the Power market. Power accounts for 33% of all non-bldg infrastructure spending. Highway represents 30% and Transportation about 15%. However, Power is 80% private; Highway is 100% public; Transportation 70% public.
60% of non-building infrastructure spending is publicly funded. Highway is a little more than half of all publicly funded non-bldg infrastructure work. The public non-bldg subset of work in the last 25 years has grown by $10 billion/year or more three times, 2006, 2007 and 2018. In 2006-2007, Highway accounted for most of that growth. In 2018, Transportation accounted for half the growth.
Excluding the worst recession years, the average annual growth of publicly funded non-bldg infrastructure work since 2001 is $5 billion/year. In the four best construction boom years growth averaged $12 billion/year.
Nonresidential Building sector, at a total of $434 billion in 2018, is 35% of all construction spending, mostly supported by the Educational and Commercial markets. Educational accounts for 22% of all nonresidential buildings spending, commercial 20%. However, Educational is 80% public, Commercial is only 4% public.
Other nonresidential buildings that are publicly funded are: Public Safety – 100% public; Amusement/Recreation Facilities (i.e.’ Convention Centers, Stadiums) – 45% public; Healthcare – 20% public; Office – 13% public. None are more than 4% of total public spending.
Less than 30% of nonresidential buildings spending is publicly funded. Educational is 60% of all publicly funded nonresidential building. The public nonresidential building subset of work in the last 25 years has grown by $10 billion/year twice, in 2007 and 2008. Both times, Educational accounted for 75% of that growth.
Excluding the worst recession years, the average annual growth of publicly funded nonresidential building since 2001 is $4 billion/year. In the four best construction boom years growth averaged $8 billion/year.
Residential is 40% of all construction spending but only 2% of public spending.
Average post-recession growth in public infrastructure + public institutional jobs is about 40,000 jobs per yr. Maximum growth in a year was 60,000 jobs. Growth of $10 billion in spending in a year supports about 40,000 new jobs.
All public work in the last 25 years has grown by $20 billion/year only twice. The average annual growth of all publicly funded work since 2001 is $8 billion/year. In the four best construction boom years growth averaged $20 billion/year.
Total All Public Infrastructure construction, including non-building public works and nonresidential public buildings, already has 2019 and 2020 growth projections at historic capacity of +$20 to +$30 billion/year. Historically, even in the construction boom years of 2005-2008, we have never exceeded that growth volume, especially by another $10-$20 billion/year, nor added an additional 40,000-80,000 jobs per year above the average 40,000 or the maximum 60,000 jobs in a year.
Any government funding intended to increase public infrastructure construction would most likely be limited by industry growth rates to at best no more than $10-$20 billion a year.
The above Marketwatch article links to a twitter thread I posted that summarizes Infrastructure limitations in a nutshell.
See also these articles for much more analysis on Infrastructure
New Construction Starts data represents a share or a portion of all construction, on average about 60% of all construction. Dodge Data starts totaled approximately $740 billion and $785 billion for 2016 and 2017. Total construction spending was $1,246 billion in 2017 and $1,300 billion in 2018. What happens if within individual markets the share of information collected in the starts data is not constant from year to year?
Office starts increased by an average of 20%/year from 2012 to 2015. Spending increased by 20%/year from 2013 to 2016. But then in 2016, starts increased 31% and spending in 2017 turned to a 1% decline. 2018 spending gained only 10%. That was unusual and unexpected since 2016 starts indicated a very large increase in spending the following year.
Growth in starts can signify one of two things; future growth in spending, or growth in capturing a larger share of the market. To find share of market captured, starts need to be compared to the cash flow over the time for which those starts will be spent. Typical cash flows predict 20% gets spent in the year started, 50% in the following year and 30% in the 3rd year.
For the period 2011-2015, office starts compared to the value of cash flow over the next 3 years stayed within a range of 45% to 50% of total spent. For 2016 starts, the share of starts compared to cash flow of those starts jumped to 60%. In other words, the growth in spending in 2017 and 2018 did not correspond to the huge growth in starts in 2016. The 31% growth in 2016 starts did not produce future growth in spending but may have mostly represented growth in capturing a larger share of the market.
Analysis shows similar activity in Transportation starts versus spending and to a lesser extent is several other markets.
Construction Starts Data can vary year to year as a share of total market activity. Commonly used to predict future spending, the share of market captured in the starts data, if not consistent, can skew any use to forecast spending. Starts share of market must be analyzed before starts can be used to forecast future spending.
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Construction Spending for Jan was just released March 13th at $1.287 trillion saar, up 1.3% from Dec. But…
the most notable numbers in this March report are BIG REVISIONS DOWNWARD TO NOV (-2.3%) AND DEC (-2.2%), particularly to residential.
Residential revisions Nov -3.9%, Dec -4.4%.
Nonresidential revised down -0.8% in both Nov & Dec.
2018 total spending currently at $1.293 trillion, 2% below expected.
If these residential reports are correct, we have been in a residential construction spending downturn, now down 12% since last May. I predict these numbers are suspect.
Current total residential spending for 2018 in this most recent report is $545 billion, up 2.6% from 2017. But after deducting 4.4% residential inflation, that means real residential construction volume would be DOWN -1.8% for 2018. Yet, new starts in 2018 were up 6% and new residential jobs increased 3.5%.
However, in 2018 residential spending, the monthly variances from statistical rates of spending look very similar to 2006, up thru May then down 15% to year end.
Cash flow models of construction starts data from Dodge Data for residential spending spread over time indicate residential spending should be UP 3% since May, not down!
Just a reminder, we had a huge upward revision to 2015 residential spending data in July 2016. The 2018 data gets a big revision on July 1, 2019.
The monthly spending data gets revised three times after the 1st release. In the mean time, it can be compared to the statistical averages to determine if 1st reports, or even 2nd reports of spending are in line with expectations. The current Nov and Dec residential construction spending data varies from the statistical average by 3 to 4 standard deviations. That’s highly unusual!
To understand just how unusual that is, let’s compare to how rare any monthly spending varies by 2 standard deviations (StdDev) from the statistical monthly average:
Non-Builiding Infrastructure has varied by 2 StdDev only 5 times in 18 years, only once in the last 15 years, even including recessionary years.
Excluding recessionary years, Nonresidential Buildings varied by more than 2 StdDev only 12 times in 16 years and only 4 times in the last 8 years.
In both those data sets above, only twice ever in over 400 total months of data was the variance greater than 2.5 StdDev.
Excluding recessionary years, Residential Building monthly spending exceeded 2 StdDev from the average only 10 times in 14 years, all 10 times were in the last 8 years.
Recessionary years really skew the data. Non-building Infrastructure was the only sector not affected by the recession like all other construction. Residential spending was affected the most. In the four residential recessionary years, 2006-2009, residential monthly spending (in 48 months) exceeded 2 StdDev 28 times, 19 of those times 3 StdDev or greater.
In the residential data set, 5 of the 10 non-recessionary variances over 2 StdDev were in 2018. That simply does not occur in the historical data. That’s like having your teenage son grow an inch every year from 13 to 16 but then shrinking 2 inches in year 17. The average of those 5 unusual months in 2018 was 3.5 StdDev from the statistical average, with Nov and Dec posting the greatest variances since 2009.
The only time we’ve ever seen data like that was within the recession years of 2006-2009. So, either the 2018 residential data is foretelling the beginning of another recession, or the data, particularly the Nov and Dec data, will be subject to significant revisions, in this case upward.
Starts and cash flow expectations seem to indicate the 2018 data is currently being reported too low. I expect 2018 residential data will be revised up by $10bil to $15bil. We may not have that information until July 1, 2019.
Feb 26, 2019
Since the bottom of the construction recession year 2011, through 2018 construction spending has increased 67%. During that time construction volume has increased only 32%. All the rest was inflation.
Construction spending is not the only factor for business growth planning. The adjustment for Inflation is the most important factor.
If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending minus inflation.
Look at the data to the left of the vertical line through 2006. Notice in the bottom plot in the years 2004 and 2005 there is very high spending but very low volume. In 2006 spending was up 4% but real volume declined 3%. For those three years inflation totaled nearly 30%. On the top plot you can see the cumulative effect of several years of high inflation. From 2000 to 2006 spending increased 45% but volume barely moved at all. During this period jobs increased by about 15% and even that outpaced volume. Businesses watched as spending increased 45% in seven years. They increased staff by 15%, but real volume was flat. Heading into the recession construction dollars on the books had been increasing for years but volume was stagnant and companies were top-heavy with jobs.
Addressing the current period 2011 through 2018, if you base business growth on your annual revenue growth, or spending, rather than using inflation adjusted dollars, your forecast for business growth over this eight year time period would be more than double actual volume growth.
Notice the blue bars for annual spending growth in 2017 and 2018 at approximately 4% and 5% respectively. But look at the black lines superimposed on those bars that reflect real volume growth after inflation. There has been only 1% real volume growth in the last two years. Yet jobs increased 8% in two years. Most of the growth in spending is inflation dollars, not real volume growth. Inflation does not support jobs growth.
For 2017-2018 residential spending increased 17% but volume was up only 7%. Nonresidential buildings spending up 6.5% but volume was down 2.5%. Non-building infrastructure spending was up 4% but volume was down by 3%. Inflation across these sectors totaled 7% to 10% for these two years.
Construction jobs, now over 7,400,000 have been over 7,300,000 since summer 2018. The last time jobs were over 7,300,000 was mid-2005 through early 2008, at which point the recession abruptly caused the loss of over 700,000 jobs within 10 months and more than 2 million jobs over the next three years. Jobs are now only 5% lower than the previous high of 7,700,000 in 2006-2007. But construction volume is still 15% below peak constant $ volume reached in early 2006. So the current situation of jobs growth rate exceeding volume growth is worse than it was leading into the last recession.
For 2019 I expect residential and nonresidential buildings to experience a slight decline in volume. I do not yet see a recession as volume picks up again in 2020, but nonresidential construction jobs in particularly have been increasing faster than volume for several years. Part of that is explained by some nonresidential workers are used to build residential space (hi-rise structure). When the next downturn hits, the potential need to cut nonresidential construction jobs may be quite painful.