Home » Forecast

Category Archives: Forecast

Pandemic Impact #5 – Restarting Construction

4-18-20

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

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

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

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

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

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

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

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

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

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

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

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

Pandemic Impact on Construction – Recession in 2020?

Pandemic Impact on Construction – Part 2

Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #4 – Construction Jobs Recovery

 

 

Pandemic Impact #4 – Construction Jobs Recovery

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

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

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

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

NAHB 4-15-20 Builder Confidence Posts Historic Decline

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

U.S. manufacturing output posts largest drop since 1946

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Pandemic Impact #3 – Jobs Lost, Inflationary Cost

4-9-20

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

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

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

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

See Pandemic Impact #7 for an update on Jobs Lost

Jobs Recession Scenario thru 2021 4-11-20

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

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

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

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

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

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

 

Will Construction Experience Inflation or Deflation?

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

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

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

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

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

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

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

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

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

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

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

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

 

 

Pandemic Impact #2 – Canceled vs Delayed

 

3-31-20

Pandemic Impacts – Part 2 – Delayed Jobs vs Canceled Jobs

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

See Also Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost 4-9-20

Construction spending for February will be released tomorrow. It will not show any impacts yet from Coronavirus shutdowns. We will see the first indications of impact when March spending gets released on May 1st.

 

There will be two distinct and very different impacts reflected in the construction starts, spending and jobs numbers. 1st will be project delays. These are projects that were put on temporary hold for a month or several months. These have an immediate impact of reducing current activity. But at some point activity resumes. 2nd will be canceled projects due to companies that lost revenues and curtailed capital spending.

Consider an example: A delayed project that has 10 months remaining to completion gets put on hold for 3 months, Mar, Apr and May. If it resumes in June, the end date, instead of finishing in December 2020 as the original schedule indicated, gets pushed out to March 2021. Most of the spending still occurs in 2020 with only the final 3 months going into 2021. The months of Mar, Apr and May experience large reductions in spending, but 2020 experiences only a small reduction in spending for the final 3 months of closeout that get pushed in 2021. That adds a small amount to spending in 2021. Big reduction in Mar, Apr, May spending. Small reduction in 2020 spending. Small increase in 2021 spending.

Now consider the example of a canceled project: Companies that lost revenues due to shutdowns will quickly begin to reassess plans for capital expenditures. Some projects planned for a new start in 2020 or 2021 will be canceled. Companies will need to regain solid footing before reestablishing plans for expansion and growth. For every 10% drop in new construction starts, total construction spending drops by $125 billion, spread over a period of approximately 3 years. A 20% drop in new starts is a $250 billion drop in new spending. On average 20% of the lost spending occurs in the 1st year, 50% in the 2nd year and 30% in the 3rd year. Canceled projects have a dramatic impact on the construction industry, and the greatest impact (except for residential projects which have a shorter duration) is not felt in the first year, it’s felt in the second year.

Each loss of $1 billion of spending in any given year equates to a loss of 5000 jobs in that year. That’s 5000 job-years. A loss of $1 billion in spending in one month would be a loss of 60,000 jobs for a month.

A 10% drop in new construction starts, or $125 billion over three years, could be spread out in this manner: down $25 billion in year 1: down $62.5 billion in year 2 and down $37.5 billion in year 3.  In the 1st year, we could see a loss of 125,000 jobs. But in the 2nd year, jobs are down over 300,000, so an additional 175,000 jobs are lost. In year 3 jobs are down only 187,000, less of a decline than in year 2, so we start to recover jobs. The average jobs loss is 200,000 jobs for 3 years.

Current spending is about $120 billion per month in the most active months, less in winter months. A delay of 10% of current workload, about $12 billion in a single month, would temporarily sideline 12 x 60000 = 720,000 jobs for one month, a massive disruption in a month. If the delay goes for two months, the average job loss for the year would show up as equivalent to 720,000 / 12 x 2 = 120,000 jobs for 1 year.

Jobs delayed due to work delayed would eventually be added back at a later point in time. Not that more jobs get added, but that the end-date of the project gets pushed out, so jobs delayed up front get pushed later, with some perhaps pushed into next year. 

Pandemic Impact on Construction – Recession in 2020?

This analysis attempts to develop the resulting impact of a construction recession scenario caused by the current Covid-19 pandemic. The scenario presented does not assume a catastrophic failure of the U.S. economy, but does assume a large drop in construction activity in 2020 and 2021.

This analysis generates spending cash flows from current and assumed reduced new construction starts to then determine how spending may affect future construction activity.

Impact of Pandemic on Construction

Analysis of a Recession Scenario 2020-2022

by Ed Zarenski  3-20-20

The change around us is happening so fast, in my opinion, no one is ready for what comes next.

The world is struggling to get the upper hand in a pandemic, travel is coming to a near halt, stock markets are down 30% in a month, universities have sent students home, schools and businesses are closed until further notice, events all around the country are being canceled and people are being instructed to stay home and limit social contact.

We won’t get the first hard data of Coronavirus impacts on the construction industry spending and jobs until reports released in first week in May which will cover jobs mid-March thru mid-Apr and spending for March. The first hint at what we might expect regarding slowdown could be the Dodge construction starts for March which comes out around Apr 20. But spending and jobs from work in backlog coming out in the May reports could be better 1st indicator.

Firms that manufacture goods used in construction may be closed temporarily, so they are producing less. Shipping of products on world markets has slowed or stopped completely. Materials supplies will soon be affected. Construction projects will most likely experience delays. Product shortages, delivery delays and shutdowns will drive up costs and extend project schedules.

Projects in planning may be canceled due to drop in demand, decline in capital or slowdown in economy. Retail stores may cancel expansion, educational facilities may delay starting new construction, transportation facilities may postpone later phases of long planned growth.

As I sit here writing this, the city of Boston this morning announced that ALL non-essential construction projects are to shut down today. That’s nearly all projects. Boston accounts for $22 billion/year in construction spending, 80% of all construction in the state of Massachusetts, 60% of all work in MA-CT-RI, 50% of all New England. This affects well over 100,000 jobs.

Also, the San Francisco Bay area has been directed to shelter-in-place, essentially shutting down all nonessential construction work. This impacts approximately 200,000 construction jobs and amounts to about double the volume of work as Boston.

We can expect more locations to issue directives such as these in the near future.

How Can We Measure the Effects Due to Covid-19 Impacts?

Let’s first establish the baseline. The starting baseline is my current construction spending and backlog forecast for 2020-2021 which includes 2019 total spending and new construction starts through February. There is considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

The best indicator of future construction activity is the sum of the projected monthly cash flows generated by all the construction starts that have been recorded.

This plot shows the correlation between projected cash flow from starts and actual spending.

Starts CF 2015-2022 3-17-20 BASELINE
baseline forecast

Recession What If? Starting Baseline 

To begin, we can look at the current forecast of new starts, backlog and spending.

Construction Starts in 2018 were up 4% and prior to that were up 10%/yr. 2019 starts including revisions are up 4%. 2020 starts are forecast down 4%. Current Backlog is up 30% in the last 4 years, at all-time high. Although spending is forecast up only 4%/yr. the next two years, spending is at an all-time high.

Residential construction starts peaked in 2018. Starts in 2019 are level yoy, but have been flat or in moderate decline since mid-2018. Spending is forecast up 5% in 2020 but down 1% in 2021.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Starts have moved sideways or in slight decline since mid-2018. 2019 starts are down 9% from 2018. Spending is forecast up 3% in 2020 and 2021.

Infrastructure starting backlog, by far the most robust, has increased 15%/year for the 3 years 2018-2020. Spending is forecast up 6% in 2020 and up 8% in 2021.

It is important to understand when spending from backlog occurs. Average cash flow curves for nonresidential work show about 15%-20% of spending from new starts occurs in the year started and about 40%-50% occurs the following year. 80% of all nonresidential spending in any given year is from backlog. If new starts drop by 10%, that has only a 1.5% to 2% impact on total spending in the first year. The following year spending would be down 4% to 5%.

Residential spending is far more dependent on new starts than backlog. Only about 30% of residential spending comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total spending by 7% in that year.

Recession Scenario

When a recession occurs, new construction starts would be substantially reduced. Although some projects will be canceled or delayed mid-schedule, most projects already in construction would move on to completion. Most of the cut back comes from a reduction in new starts.

In the great recession, residential starts dropped 70% from 2005 to 2009, down from $400 billion to $110 billion.  Nonresidential Buildings starts dropped 35% from 2008 to 2010. Nonbuilding starts fell only 6% in 2009. Total All Spending declined 30% from $1.160 trillion in 2006 to $788 billion in 2011.

Regardless what may lead to a construction recession, in this case a global pandemic, it is the current high amount of work in backlog that will work hard to mute its effect.

No analyst had been indicating huge declines in new construction starts within the next few years. At worst, some suggested a moderate slowdown. Prior to today, data seemed to agree with a moderate slowdown.

Although Dodge is forecasting the $ value of housing starts down 6% in 2020, Housing Starts # of units as reported by US Census in Q4 2019 are at a post-recession high, reducing the likelihood of such a decline.

Dodge 2020 forecast for new nonresidential buildings starts is down 2.5%.

This recession scenario does not assume a catastrophic failure of the economy.

It is unknown how much existing or new work might get canceled. To get an idea how a recession might impact construction spending, this analysis reduces new construction starts by 20% in 2020 and 10% in 2021 from the baseline. That’s about the average of what occurred in the great recession, although then it was far greater in residential and much less in non-building infrastructure. Only once in the last 20 years, other than the great recession, did new construction starts drop more than 5% in any sector in a year.

So initially, compared to the baseline forecast, there would be 20% less work to bid on in 2020 and 10% less in 2021. But that is not how spending, or revenues, would react. Backlog and spending schedule curves determine the impact on spending, or revenues.

Here’s the resulting change in the spending plots. Only the estimated spending to the right of the dateline changes.

Starts CF 2015-2022 3-17-20 RECESSION
RECESSION SCENARIO

Residential construction spending would drop about 14% in 2020 and then drop 13% in 2021 below the baseline scenario. Residential is far more dependent on new starts within the year for spending than on backlog. That’s why residential spending drops quicker than all other work.

Nonresidential Buildings spending ends 2020 4% lower than it would have under the baseline scenario but then drops 12% in 2021 and 10% in 2022. Backlog going into 2020 in this sector is strong and therefore, even though spending is 4% lower than baseline, 2020 still posts a spending gain of 1.5%. 2021 declines 8% and 2022 gains 1%.

Non-building Infrastructure spending ends 2020 3% lower than it would have under the baseline scenario but then drops 9% in 2021 and 10% in 2022. Non-building Infrastructure has so much work in backlog that this sector still posts a spending gain of 6% in 2020 and 1% in 2021. It declines by 2% in 2022.

The major declines in 2020 are residential since most residential spending comes from new starts within the year, but for all other work, the strength of backlog going into 2020 pushes most of the declines out to 2021 and 2022.

Total all spending would drop from the current 2020 forecast of $1.365 trillion to $1.260 trillion. In 2021 and 2022, instead of baseline spending of $1,370 trillion, it would drop to $1.230, back to the level of 2016. The losses in the Great Recession, a total drop of almost $400 billion, set construction spending growth back 12 years.

Not only did Boston shut down non-essential construction projects but also New York and California have done the same. Boston accounts for about $20 billion/year in construction spending, but NY and CA together account for about $280 billion. Let’s assume CA and NY and Boston shut down all but critically essential construction for 1 month. Let’s say that is 80% of all construction. That represents a shutdown of $20 billion of construction in one month’s time.

The difference with temporary shutdowns vs a reduction in new starts is that work shut down is delayed. It will reduce total spending in that month in 2020 but will shift the entire schedule of spending out by some number of months. Upon resuming, some will still occur in 2020, and some very likely gets pushed into 2021 or later, but eventually all of the delayed work will get completed. If 20% of all U.S. construction shut down for one month it would delay $25 billion worth of work by one month. If 20% of all 2020 U.S. construction new starts get canceled, it would reduce future workload by $250 billion, spread over the next three years. 

The magnitude of spending declines would impact the jobs situation. History shows that job declines of the same magnitude do not follow immediately with volume declines, therefore we would not see an equivalent reduction in workforce in 2020. But spending declines in 2021 and 2022 could lead to a loss of about 500,000 to 750,000 jobs. Over the course of the great recession we lost 2.3 million jobs.

You can read more about the job situation here.

To summarize:

This is a WHAT IF? Analysis.

Assumption that new construction starts drop 20% in 2020 and 10% in 2021 lower than the baseline forecast.

This would cause total construction spending to drop 8% in 2020, 12% in 2021 and 7% in 2022 from the previously established baseline forecast.

The spending declines measured in dollars, measured from the previously established baseline forecast, are: down $100 billion in 2020, down $140 billion in 2021 and down $100 billion in 2022.

This could lead to a loss of about 500,000 to 750,000 jobs for three years.

 

What this will do to the construction inflation rate is hard to predict. Typically when work volume decreases the bidding environment gets more competitive and prices go down. However, if materials shortages develop, that would cause prices to increase. Add to these issues the fact that almost every project currently under construction may be halted for a period of time, the delays may add several weeks to perhaps a month or two to the overall schedule. I think in this case the materials availability issues and schedule delays will outweigh any decline in work available for bid. I would add a minimum of 1% to all baseline inflation rates for 2020 and 2021.

“None of us have much of a sense what the economy will be in 2021.” Fed Chair Jerome Powell 12-11-19

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

See Also Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost   4-9-20

 

2020 Construction Economic Forecast – Jan 2020

Construction Analytics 2020 Construction Economic Forecast

This January, 2020 Construction Economic Forecast addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Backlog, Spending or Revenue, and Volume. New Construction Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Spending adjusted for Inflation differentiates between Revenue and Volume. Backlog can be referenced to assess expected future Volume and Spending. Cash flow provides an indication of when Volume occurs or in what year Revenues occur.

Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics

Click here for a downloadable PDF of 2020 Construction Economic Forecast Feb 2020

Click here for a downloadable PDF of SUMMARY – 2020 Construct Econ Forecast 2020

Summary of 2020 Construction Outlook

Total of All construction spending in 2019 is forecast to decrease -0.2% to $1.305 trillion. For 2020, spending increases by 4.6% to $1.365 trillion.

Spend Forecast 2018-2022 1-21-20

Nonresidential Buildings construction spending is forecast to finish 2019 at $455 billion, level with 2018. For 2020 the forecast is a gain of 3% to $467 billion. Educational and Commercial/Retail held down gains in 2019. Office (which includes data centers) and Lodging gained 7% each. Office, Healthcare and Educational all support growth in 2020.

Residential construction spending forecast is down 5% to $521 billion in 2019 and up 6% to $552 billion in 2020. New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, growth in 2019 slowed to less than inflation. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. 2020 volume is forecast to increase 2%.

Non-building Infrastructure construction spending is forecast to increase 7% to $329 billion in 2019 and 5% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

Spend Sector monthly 2015-2021 2-10-20

Spending data for the previous two years gets revised in July of the following year. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2019 spending is down -0.2% to $1.305 trillion, that will most likely increase to a net gain.

In their October annual report, Dodge Data forecast 2019 construction starts to total $809 billion, down 1% from 2018. However, starts are always revised up in the following year. In just the last three years, nonresidential starts have been revised up by 7.5%/yr and residential starts by 2.4%/yr. I expect revisions will show 2019 starts increased by 3% to 4% over 2018. However, even with revisions, 2019 starts will post the slowest annual growth since 2011.

Dodge Data and Analytics new construction starts for November 2019 advanced to the highest seasonally adjusted annual rate ever, resulting in the three months Sep-Oct-Nov 2019 posting the highest 3-mo average ever, 10% higher than the total average for 2018.  Several long duration projects started, so a lot of the spending from these new starts will occur in 2021-2022. Dodge is forecasting 2020 starts down 4%. This forecast includes only 1% to 2% growth in new starts for 2021-2022.

Starting backlog, which increased 5% leading into 2020 is currently at an all-time high, up 20% since 2017. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. More than 20% of all spending in 2020 is from projects that started more than 3 years ago. 

While a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years. Current indications are that 2020 backlog will be up 4% for residential work, 6% for nonresidential buildings and 7% for infrastructure work.

  • Starts increased 8%/yr. in 2016 and 2017, but only 4% in 2018.
  • Starts are forecast to decline slightly in 2019 and 2020.
  • Spending increased 9%/yr. from 2012 to 2016, then slowed to 4%/yr. in 2017 and 2018.
  • Spending declined 1% in 2019 and is forecast up 4% for 2020 and 1% in 2021.
  • Backlog reaches a post-recession high in 2020, up 20% from 2017, up 100% from 2013.

Since early 2018, jobs have been increasing while construction volume is declining. A declining volume of work does not support jobs growth. When volume of work decreases, jobs should also decrease. If jobs increase, then it results in more workers to produce the same amount of work. In other words, productivity is declining. This could result in one or more of these outcomes:

  • Labor demand on hiring drives labor cost up by unexpected amounts.
  • New labor coming into the workforce has less experience, lowering productivity.
  • Contractors cannot meet schedules, extending project duration.
  • Contractors work overtime to meet schedules, adding cost.

All scenarios either extend project duration or drive up the cost of projects or both, which could lead to some unforeseen inflation.

General construction cost indices and input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects. Residential and Nonresidential Buildings inflation indices developed by Construction Analytics are final cost selling price indices.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work.

This link points to comprehensive coverage of the topic inflation. Click Here for Link to a 20-year Table of 25 Indices

This link points to articles related to the Construction Outlook for 2020. Click Here for Link to Construction Economic Outlook 2020

 

Some Signs Ahead – Economic Indicators

The following reports can be accessed by clicking on the hyperlinks provided.

AIA Consensus January 2020 Construction Forecast is a semi-annual survey of construction economists’ projections for future nonresidential buildings spending. The January 2020 Consensus report of expectations for nonresidential construction shows predicted growth for 2020 at 1.5%. All major markets show growth expectations between -2% and +4%. Office, Healthcare and Education are projected to gain 3% to 3.9%. Commercial/Retail, Lodging and Amusement/Recreation are expected to fall 1.3%-1.9%.

Architectural Billings Index (ABI) measures monthly work on the boards in architectural
firms. It is a nine to twelve month leading indicator to construction. Index values above 50 show increasing billing revenues, and below 50 indicates declining revenues. All ABI indices were above 50 from Jan. 2017 through Jan. 2019. However, from Jan. 2018 through 2019, contrary to the index, spending posted the largest drop in six years.

Dodge Momentum Index (DMI) is a monthly measure of nonresidential projects in
planning, excluding manufacturing and infrastructure. It is a leading indicator of specific nonresidential construction spending by approximately 12 to 15 months. This plot moves the DMI ahead to show when the index would have an affect on construction spending. The DMI is indicating a slow decline in new spending for the 1st half of 2020 but then a rapid increase in the 2nd half. From July 2019 onward, the DMI does not agree with the Starts Cash Flow which is a forecast of  the movement in the spending forecast.

DMI Starts Spend 2015-2021 1-15-20

Producer Price Index indices for 2019 materials average Inputs to construction in 2019 posted a gain of only 1.5%. up 2.1% for nonresidential buildings and up only 0.9% for residential. However, selling price indices for nonresidential buildings and nonresidential trades averages 4% with Industrial buildings, warehouses and schools all over 4.5%. The difference between these indices is the combined affect of labor cost and contractor margins which are not tracked in the PPI inputs.

FMI Q4 2019 Nonresidential Construction Index (NRCI) is 50.4, the lowest reading in eight years. The NCRI is a diffusion index based on a survey of opinions submitted by nonresidential construction executives. With only one slight bump up in Q2 2019, it dropped every other quarter since Q2 2018. Construction spending has been lower every quarter since Q2 2018. Construction spending in 2018 and 2019 declined to the two lowest years since 2011.

Institute for Supply Management (ISM) Non-Manufacturing Index (NMI) Report
for December 2019 is a better indicator of activity in the construction industry than the
ISM manufacturing report. The NMI measures economic activity in 13 industries
(including construction) not covered in the manufacturing sector. The December NMI is
55.0, above 50 for 126 consecutive months, indicating continued economic growth.
Construction shows growth in business activity and increased backlog. Construction shows slower deliveries but no change in prices paid. Construction reports contractors in short supply. A comment from a construction respondent, “While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures.”

 

Construction Starts > Cashflow > Backlog > Spending

One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on inflation.

Construction starts data is needed to predict spending or the level of market activity. This provides insight into market costs and inflation. To predict spending activity from new construction starts, the starts data must be spread over time using appropriate cash flow curves. On average about 20% of new construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in year three or later. Applying an expected duration for all starts depending on market type to produce a forecast cash flow from starts data, the expected pattern of spending is developed.

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

This table shows Office starts in 2016 did not drive up spending in 2017, the 2nd year, when most spending occurs. Manufacturing had two huge years of growth in starts but very little growth in spending the following years. The cash flow curves for starts determine when spending occurs. The forecast shows Office spending up 9% in 2020 and Manufacturing up 10% in 2021.

Starts vs Spending Cash Flow 1-27-20 shorter

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

Backlog at the beginning of the year or new starts within the year does not give an indication of spending within the year. New starts within any given year could contribute spending spread out over several years. Total cash flow in the year, or spending, could include cash flow from projects that started or entered backlog years ago. An increase in backlog could represent a level rate of market activity, but for a longer duration.

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

 

New Construction Starts

Total of all construction starts increased every year from 2010 through 2019. Average growth from 2012 to 2017 was 8%/year. New starts slowed to +2% in 2018 and are forecast up +1% in 2019 and +2% in 2020. Backlog is still up leading into 2020 but after that starts and backlog are forecast to remain below 2% gain or decline over the next few years. Total spending has only slight gains in 2021 and 2022.

CF Forecast Total All Markets Table National 1-27-20

Nonresidential Buildings starts (excluding Terminals) increased every year since 2010. Only Manufacturing declined slightly in 2017. Commercial/Retail declined 6% in 2018. Commercial, Lodging and Amusement posted declines in 2019. The last three years (adjusted) starts are up only 2% to 3% per year. 

Backlog for Office Buildings and Lodging is up 100%+ since 2016. Office includes data centers. Commercial/Retail backlog is down 14% in the last two years. Spending is still up 4% in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

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

CF Forecast Nonres Bldgs Table National 1-27-20

Non-building Infrastructure two markets with the largest share of new starts are Highway/Bridge and Transportation. Transportation terminals and rail starts are up 35% in the last three years, but backlog has doubled because a large portion of those starts is very long duration projects.

CF Forecast NonBuilding Table National 1-27-20

Non-building Infrastructure starts can be erratic with a long pattern of up then down years. Starts (including Terminals) gained only 4% in 2019 but are at an all-time high. Even though starts gain less than 2% in 2020, backlog peaks in 2021. Spending increases are in the 5% to 8% range at least for the next two years. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years. Spending in recent years has been boosted by Transportation terminals and Highway projects.

Most of the residential spending in any year is cash flow from new starts. For short duration residential spending, single-family residential and renovations work, approximately 75% of spending in the year comes from project starts within the year.

CF Forecast Residential Table National 1-27-20

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

  • 75% to 80% of short duration Residential spending within the year will be generated from projects that are recorded as new starts within the year.
  • 50% to 55% of long duration Multifamily Residential spending within the year will be generated from projects that are recorded as new starts within the year.

Dodge releases its first forecast of next year’s starts every year in the 4th quarter. Dodge initial forecast for 2019 starts was $808 billion, no change from 2018. Starts are currently at $818 billion and will be subject to more revisions. 

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

Revisions for the last 8 years averaged more than +6%/yr., with most of the upward revision in nonresidential buildings. However, for the last 3 years revisions added only 4%. Revisions to nonresidential buildings have been greater than 7%/year for the last 3 years, non-building revisions average 8%/yr and residential revisions average 2.4%/yr. Therefore, 2019 starts growth is very likely under-reported.

For nonresidential buildings spending, long duration jobs can sometimes have a 5 to 6-year schedule. On average most years have at least some projects start that will be under construction for at least 4 years. For an entire year’s worth of starts, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. Residential starts contribute spending into the third year. This means that nonresidential spending growth in 2019 was affected by starts from 2016 and residential growth from starts in 2017. This also means that nonresidential spending growth in 2020 is still being affected by starts from 2017.

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

The light green line for nonresidential buildings spending estimated from starts cash flow shows smooth spending, even though actual monthly starts can be erratic. The actual spending often follows close to the pattern estimated from cash flows.

Starts CF 2015-2022 1-18-20

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

 

Starting Backlog

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

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

Nonresidential Buildings starting backlog at the beginning of 2020 reached an all-time high. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2020 is up 60% in 5 years.

CF Forecast Nonres Bldgs Table National 1-27-20

Non-building Infrastructure starting backlog at the beginning of 2020, up 10% from 2019, reached an all-time high. Some of this is very long-term work that started construction in 2016-2017 and it will contribute spending for the next several years. In fact, about half of all spending in 2020 comes from projects that started prior to Jan 2019. 2021 Backlog is forecast to increase 9%. Backlog is up 25% in the last 3 years. 

CF Forecast NonBuilding Table National 1-27-20

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

CF Forecast Residential Table National 1-27-20

The plot below shows that backlog has been increasing since 2011-2012. Many projects in backlog extend out several years in the schedule to support future spending, so backlog growth in not an indicator that tracks directly yr/yr with spending. Without any new construction starts in 2020 or beyond, current backlog at the start of 2020 would still contribute some spending for the next 6 years until all the projects in backlog are completed.

Start Backlog Res Starts 1-27-20

For Nonresidential Buildings, 68% of 2020 Backlog will get spent within the 1st year. 27% of 2020 Backlog will get spent next year. 2020 backlog will last for 58 months.

For Non-building Infrastructure, 53% of 2020 Backlog will get spent within the 1st year. 32% of 2020 Backlog will get spent next year. 2020 starting backlog will last for 72 months

For Residential construction, 95% of 2020 Backlog will get spent within the 1st year. 2020 backlog would run out in 18 months. Residential construction is far more dependent on new construction starts. If no new work started, the backlog workload would run out quickly.

How much of the spending forecast is supported by starting backlog. For all construction, 62% of 2020 total spending comes from starting backlog. If no new work starts after December 2019, then only 24% of the 2021 spending forecast would be supported from 2020 starting backlog.

Cash Flow

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

Cash flow from all previous starts still in backlog plus cash flow from new starts supports a 2020 spending forecast of $1,365 billion, an increase of 4.6% over 2019. Dodge initial November 2019 forecast for construction starts in 2020 is $776 billion, down 4% from 2019. However, subsequent revisions may increase that a few percent.

There are sometimes vast differences between amounts of Starts, whether already in Backlog at beginning of year or New Starts within the year, and Cash Flow from Backlog and New Starts. The highlighted examples below, Office and Manufacturing, show starts is not a good indicator of expectation for spending. 

Starts vs Spending Cash Flow 1-27-20 shorter

Note that new manufacturing starts were up 29% in 2017 and 26% in 2018, yet 2019-2020 spending is forecast to increase only 3%. This is due in part to the share of market captured in the starts survey having increased, but also to very large projects that started but that have much longer than normal duration to complete, therefore moving the largest monthly cash flows further out into the future.

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

Starts vs Spending 2011-2019 1-27-20

Spending

Total of All construction spending is forecast to increase 0.2% to $1.305 trillion in 2019, 4.6% to $1.365 trillion in 2020 and 0.9% to $1.377 trillion in 2021.

Spend Forecast Sectors 2016-2022 1-27-20

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

 

Residential Buildings Spending

Residential construction spending is forecast down -4.6% to $521 billion in 2019, but strong new starts in Q4 increases spending by 6.0% to $552 billion in 2020. A 5% decline in 2020 new starts lowers spending in 2021 by -3.79% to $532 billion.

New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential monthly rate of spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, there was no overall growth in 2019. 

Residential spending average growth from 2011 through 2017 was 12%/year. Although spending increased 2.7% in 2018, growth was less than inflation of 4.3%, therefore 2018 volume after inflation decline by 1.5%. In 2019 residential spending decreased 4.5%. After accounting for 3.6% inflation, real volume decreased by 7.8%. Residential construction volume in 2019 posted the largest volume decline in 10 years. 2020 volume is forecast to increase only 2%.

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

CF Forecast Residential Table National 1-27-20

Total residential new starts for the last 3 months and the last 6 months posted the highest rates of growth since 2006. Growth for 2019 is initially down -2.5%, but that is because 2018 has already been revised up by 2.1% and 2019 is yet to be revised. Revisions are usually up. Dodge predicted 2019 starts would fall 5%, however my current forecast is a drop of only 1.3%. 2020 starts are forecast up 2.6%.

CF Forecast Residential MFonly Table National 1-27-20

Residential current$ spending reached a 12-year high in 2018 of $580 billion but that was still far below the 2006 peak of $690 billion. In constant$, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant$, 2018 spending is still 28% below the 2005 peak. As of Dec 2019, constant$ spending is 37% below the 2005 peak.

Spend current vs constant Residential 2020 2-10-20

 

Nonresidential Buildings Spending

Nonresidential Buildings construction spending for 2019 is forecast to finish at $455 billion, up only 0.3% from 2018. Spending is forecast to increase 2.9% to $467 billion in 2020 and 1.2% to $473 billion in 2021. Healthcare, Educational and Office (which includes data centers), support the 2020 forecast. There is downward pressure the next two years from slowdowns in Amusement/Recreation, Commercial/Retail and Lodging.

Spend Forecast NonresBldgs 2016-2022 1-27-20

Current$ spending for Nonresidential buildings reached a monthly high of $470 billion in mid-2018 but then fell slightly and remained between $450 and $460 billion in 2019. Both 2018 and 2019 totals averaged new annual high marks just slightly above 2008. Average annual 2019 spending grew only 0.3% from 2018. 2020 is forecast up 2.9%.

Spending in constant$ (inflation adjusted $) peaked in mid-2018 at $450 billion but by Dec. 2019 it’s down 10% to only $406 billion. It’s expected to remain at this level throughout 2020. Constant $ spending or real volume growth shows all years from 1995 through 2010 had higher volume than the 2020 forecast.

Spend current vs constant Nonres Bldgs 2020 2-10-20

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 6.8% to $329 billion in 2019 and 4.9% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. In 2017, transportation terminals  increased more than 100%. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

Current infrastructure backlog is at an all-time high and spending is expected to follow the increased cash flows from the elevated backlog. Transportation terminals new starts jumped 100%+ in 2017 . Starting backlog for all transportation work is the highest ever, up 100% since 2017. Transportation spending is projected to increase 20-25%/year for the next two years.

Spend Forecast Nonbldg Infra 2016-2022 1-27-20

Current$ spending for Non-building Infrastructure reached a high annual rate of $340 billion in mid-2019 but then fell slightly to only $325 billion by year end.  Spending in 2020 is expected to increase slowly from $330 billion to $350 billion. Total 2020 spending is expected to increase 5%.

Non-building Infrastructure construction spending in constant $ (inflation adjusted $) peaked at reached $330 billion in 2016, an all-time high, but then dropped to $280 billion in 2018. In 2020 it will average $300 billion. Constant $ spending or real volume growth dropped 10% in 2017-2018 but is forecast to gain 6% in 2019-2021.

Spend current vs constant Non-bldg Infra 2020 2-10-20

 

Public Infrastructure and Public Institutional

Just 60% of all Non-building Infrastructure spending, about $194 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

About 30% of all Nonresidential Buildings spending, about $134 billion, is publicly funded, mostly Educational. Nonresidential buildings spending makes up just over 40% of Public spending.

  • Infrastructure = $328 billion, ~25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $194 billion. Private Infrastructure = $134 billion.
  • Power and Communications are mostly privately funded infrastructure.

 

  • Nonresidential Buildings is 30% public (mostly institutional), 70% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $110 billion, mostly Education ($80b).

 

Spend PubPriv 2019 totals detail 2-10-20

Public Infrastructure + Public Institutional = $300 billion, 23% of total construction spending.

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

See also Publicly Funded Construction

See also Down the Infrastructure Rabbit Hole

24 pub prv share

The two largest markets contributing to public spending are Highway/Bridge (33% of total public spending) and Educational (27%), together accounting for 60% of all public construction spending. At #3, Transportation is only 13% of public spending. Environmental Public Works combined makes up 17% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation account for about 3%-4% each.

Highway is 100% public and Public Works 99%. Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20%. 

Public Starts and Backlog

The Public markets with the largest share of growth in new starts the last two years are Transportation and Public Works. Transportation terminals and rail starts are up 30% in the last three years, but backlog has doubled because a large portion of those starts is very long duration projects. Public works starts are up 20% and backlog is up 40%. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years.  

CF Forecast PUBLIC Table National 1-27-20

Public spending backlog is up an average 9%/year for the last three years. Some of this is very long-term work that started construction in 2016-2017 and it will contribute spending for the next several years. 40% of all public spending in 2020 comes from projects that started prior to Jan 2019. Backlog is up 25% in the last 3 years and is forecast to increase another 9% to start 2021. 

Public Spending

Total public spending for 2019 is projected to finished up 8% at $332 billion. Every major public market is projected to finish up in 2020. By far, the largest Public spending increases measured in dollars for 2020 are Transportation, Highway and Educational.

Spend Forecast PubPriv 2016-2022 1-27-20

Public work construction spending in constant $ (inflation adjusted $) reached $318 billion in 2016, short of the highs reached in 2002 and 2008. Constant$ value work then dropped to $300 billion in 2017 and has been level through 2019. In 2020 it will increase only 1%.

Spend current vs constant Infrastr PUBLIC 2020 2-10-20

Construction Inflation

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Most spending for residential comes from new starts in the year.

2020 starting backlog is up 5.5% across all sectors. However, while a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years.

Residential new construction starts in 2019 (number of units started) gained 4% over 2018. In 2018, starts dropped every quarter after Q1, but then increased every quarter in 2019 and closed out the 2nd half of 2019 at 9% higher than the average of the previous six quarters. New starts measured in dollars dropped slightly in 2019. Spending from new starts fell 5% in 2019 but is forecast up 6% for 2020. Residential construction volume (spending after inflation) in 2019 dropped 8%, the largest volume decline in 10 years. Volume in 2019 dropped to a 4-year low. A volume gain of 2% in 2020 leaves residential still at a 4-year low.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

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

Selling Price is whole building actual final cost. Selling price indices track the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor margins or overhead and profit.

Consumer Price Index (CPI), tracks changes in the prices paid by consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should not be used to adjust construction pricing.

Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that do not capture whole building cost.

Producer Price Index (PPI) Material Inputs (which excludes labor and margins) to new construction increased +4% in 2018 after a downward trend from +5% in 2011 led to decreased cost of -3% in 2015, the only negative cost for inputs in the past 20 years. Input costs to nonresidential structures in 2017+2018 average +4.3%, the highest in seven years. Infrastructure and industrial inputs were the highest, near 5%. But input costs for 2019 are coming in at less than +1%. Material inputs accounts for only a portion of the final cost of constructed buildings.

Materials price input costs in 2019 slowed to an annual rate of less than 1%.  

Labor input is currently experiencing cost increases. The National construction unemployment rate was recently posted below 4%, the lowest on record with data back to 2000.  The average has been below 5% for the last 18 months. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. An unemployment rate this low signifies a tight labor market. This may cause contractors to pay premiums over and above normal wage increases to keep valued workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data, so aren’t easily tracked. Lack of experienced workers and premiums to keep labor drive labor cost increases higher than wage growth.

Although many contractors report shortages due to labor demand, labor growth may slow due to a forecast 2019-2020 construction volume decline. We might see a labor growth decline lag spending/volume decline.

When construction activity is increasing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price (for nonresidential buildings only). The average annual growth for all these indices over the past five years is 4.7%/year. For the last two years, average nonresidential buildings inflation is 5.3%.

  • Long-term construction cost inflation is normally about double consumer price index (CPI).
  • Average long-term nonresidential buildings inflation excluding recession years is 4.2%.
  • Average long-term (30 years) nonresidential construction cost inflation is 3.5% even with any/all recession years included.
  • In times of rapid construction spending growth, nonresidential construction annual inflation averages about 8%. Residential has gone as high as 10%.
  • Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. It has averaged 4.2% for the last 4 years.
  • Residential buildings inflation reached a post-recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.8% for the last 5 years.
  • Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/supplier margins.
  • When construction volume increases rapidly, margins increase rapidly.
  • Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. Typically, large declines in volume are accompanied by declines in inflation. Forecast residential inflation for the next three years is level at 3.8%.

A word about Hi-Rise Residential. Most of the cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. On the contrary, this type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, a more appropriate index to use for hi-rise residential construction is the nonresidential buildings index.

Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years. Spending needs to grow at a minimum of 4.4%/yr. just to stay ahead of construction inflation, otherwise volume is declining. Spending slowed dramatically in 2019. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years.

Several Nonresidential Buildings Final Cost Indices averaged over 5% per year for the last 2 years and over 4% per year for the last 5 years. Nonresidential buildings inflation totaled 22% in the last five years. Input indices that do not track whole building cost would indicate inflation for those five years at only 12%, much less than real final cost growth. For a $100 million project escalated over those five years, that’s a difference of $10 million, potentially underestimating cost.

Notice in this next plot how index growth is much less for ENR BCI and RSMeans, both input indices, than for all other selling price final cost indices. From 2010 to 2019, total final price inflation is 110/80 = 1.38 = +38%. Input cost indices total only 106/85 = 1.25 = +25%, missing a big portion of the cost growth over time.

 Nonresidential Buildings Selling Price Indices vs Input Indices

BCI 2010-2020 Firms 12-9-19

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stayed flat from 2015-2017, then increased 15% in 2018-2019. The IHS Pipeline and LNG indices increased 4% in 2019 but are still down 18% since 2014. Coal, gas, and wind power generation indices have gone up only 5% total since 2014. Refineries and petrochemical facilities dropped 10% from 2014 to 2016 but regained all of that by 2019. BurRec inflation for pumping plants and pipelines has averaged 2.5%/yr since 2011 and 3%/yr the last 3 years.

Anticipate 3% to 4% inflation for 2020 with the potential to go higher in rapidly expanding Infrastructure markets, such as pipeline or highway.  This link refers to Infrastructure Indices.

 Construction Analytics Building Cost Index

BCI 2005-2022 12-9-19

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart of the range of all other nonresidential building inflation indices. Bars represent the predicted range of inflation from various sources with the solid line showing the composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation of less than 1%, the actual inflation is following a pattern of growth above 4%. The low end of the predicted range is almost always established by input costs (ENR BCI is plotted), while the upper end of the range and the actual cost are established by selling price indices.

 Construction Analytics Nonresidential Buildings Cost Index

vs Range of Input Indices

Inflation Range 1993-2020 plot vs ENR 1-18-20

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation since 2018.

Reference Inflation PCT 12-17-19

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

Reference Inflation INDEX 12-17-19

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

A word about terminology: Inflation vs Escalation. These two words, Inflation and Escalation, both refer to the change in cost over time. However escalation is the term most often used in a construction cost estimate to represent anticipated future change, while more often the record of past cost changes is referred to as inflation. Keep it simple in discussions. No need to argue over the terminology, although this graphic might represent how most owners and estimators reference these two terms.

Inflation Escalation with text

This link points to comprehensive coverage of the topic inflation and is recommended reading. Click Here for Link to a 20-year Table of 25 Indices

 

Current$ vs Constant$ – Spending vs Volume

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

Nonresidential buildings spending increased 3.3% in 2017, 4.4% in 2018 and 0.3% in 2019. But nonresidential buildings inflation for those three years was 3.7%, 5.0% and 5.0%. Nonresidential volume therefore declined for three consecutive years by a total of 5.5%. The current nonresidential buildings forecast spending growth is 3%/yr or less for the next three years. With inflation near 4%, that would suggest inflation adjusted nonresidential buildings construction volume is declining.

Residential spending increased from 2011 through 2017 by average growth of 13%/year.  With average residential inflation during that period of 5%/year, inflation adjusted residential volume increased by 8%/year. That changed in 2018. 

Residential spending increased only 2.7% in 2018 and dropped 4.6% in 2019. Residential inflation for 2018 and 2019 was 4.3% and 3.6%. Residential volume therefore declined by 1.6% in 2018 and 8% in 2019. Current residential forecast spending growth is +6% in 2020 but then -3.7% in 2021. With inflation just under 4%, that indicates inflation adjusted residential construction volume will grow only 2% in 2020 but may drop 7% in 2021.

In 2018 and 2019, total construction volume declined 6%. Residential volume declined 10%. Construction spending forecast for 2020 is $1,365 billion, an increase of 4.6% from 2019. But 2020 inflation is forecast at 4%. So, after inflation real volume growth in 2020 is forecast up less than 1%. It’s down 1.4% for nonresidential buildings but up 2% for residential.

Spend Sector 2015-2021 1-4-20

Nonresidential Buildings will post declines in volume in 2020 & 2021. Non-building Infrastructure volume will increase 1% in 2020 and 4% in 2021. If residential starts hold as forecast at only 1% to 2% growth, residential volume will decline sharply by 7% in 2021 after a moderate 2% gain in 2020. Overall, total construction volume has declined in 4 out of the last 6 quarters and is forecast to drop slightly in 3 of 4 quarters in 2020.

The plot below, comparing inflation adjusted constant dollars with current spending dollars for all construction, clearly shows that although spending is at an all-time high, volume is down the last two years and is lower than all years from 1998 through 2008. 

Spend current vs constant 2019 1-22-20

Spending after adjusting for inflation shows volume never got closer than 13% less than the previous 2005 high. Currently, volume is 17% lower than the 2005 peak.

 

Jobs and Volume

Construction requires about 5,000 workers for a year for every added $1 billion in construction “volume”. But construction jobs growth seems to closely follow growth in spending. Construction jobs have increased by 400,000 in a year only four times in the last 50 years, each time accompanied by one of the four highest spending growth increases in 50 years. However, spending is not the same as volume, and jobs needed is based on volume.

Construction added 1,400,000 jobs in the 5 years 2014-2018, an average of 280,000 jobs/year. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Although 2020 spending will increase 4.6%, construction inflation has been hovering between 4% and 5% for the last five years. Real volume growth in 2020 after inflation is expected to be only 0.6% or only $7 billion. That would mean the need, if there are no changes in productivity, is to add only about 35,000 additional jobs in 2020.

But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 50% since Jan. 2011 with 35% inflation. Nonresidential volume increased by only 15%. Jobs increased by 27%, 12% in excess of volume growth.

Residential spending increased by 125% since Jan. 2011, but after 40% inflation, real residential volume increased by 85%. Jobs increased by only 40%, 45% short of volume growth.

There are a few reasons why residential construction labor might not be compared easily to residential spending; 

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

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

Jobs should follow volume growth, yet history shows that in non-recessionary periods, even with volume declining, jobs usually continue to increase, but perhaps at a slower rate.

From 1997 to 2004, it took 4800 jobs to put-in-place $1 billion of construction in one year. By 2008 that increased to 5500 jobs to do $1 billion of work in one year. It remained level at 5500jobs/$1 billion/yr until 2016. In 2018 it jumped to 5800 jobs and in 2019, 6100 jobs, the highest ever recorded.   

There has not been any volume growth in the last two years to support jobs growth. In constant$, there was no volume growth in any sector in 2018. In 2019 only Non-building Infrastructure shows 2% growth. Total construction volume is down 1.4% in 2018 and 4.4% in 2019. 

In the last two years, spending increased only 2.5%, but construction inflation totaled 9%, therefore, real volume declined by more than 6%, yet jobs increased by 7.5%. From 2006 to 2017, jobs and volume growth were nearly equal. Since 2017, volume and jobs growth is diverging. Construction volume has been declining while jobs have been increasing. That can’t be sustained. 

This plot shows predicted 2020 jobs growth of 1.5% or just over 100,000 jobs. Since volume is forecast to gain less than 1%, any jobs growth in 2020 beyond 1% will increase the disparity between jobs and volume growth. The disparity has been increasing since early 2018. It’s a 15% difference right now. Within a year that could be 20%.

Jobs vs Volume 2015-2020 monthly 1-10-20

By resetting the baseline of this next plot to 2006, the year of the last major divergence in jobs growth vs volume, it shows all other years from 2007 to 2017 were pretty well-balanced growth. With the exception of 2006 and now 2018-2019, for almost every year from 1997 to 2019 jobs grew pretty closely aligned with volume. A big 15% spread occurred in 2006, then growth remained balanced through 2017. The spread now is near the same as it was in 2006.

See post for development of this plot Expect Construction Jobs Growth to Slow in 2020

Jobs vs Volume 1991-2020 2006 deficit reset 11-19-19

Volume declines will drive jobs to slower growth. We had 6 years of annual growth of 250,000-300,000/yr. Jobs increased by only 150,000 in 2019. In 2020, growth may be lower to 100,000.

Construction jobs growth slowed substantially the last two quarters. I  predicted jobs growth would slow because volume growth had already been declining since early 2018 when volume reached a peak of $1,300 billion. Volume is now $1,200 billion, down 8% in 22 months.  After 6 years of jobs increasing at an average 280,000/year, jobs are up only about +150,000 in 2019, but only +70,000 in the last 8 months. The rate of jobs growth is now the slowest in 7 years. I expect this trend to continue.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that labor cost growth will add to inflation.

Jobs trailing 12mo growth 2013-2020 1-10-20

The plot of jobs growth shows current growth rate is below an annual rate of 150,000 jobs/year and it is expected to remain there through 2020, potentially dipping as low as 100,000.

I’d be surprised if jobs start to decline, but that certainly could be envisioned and it would help explain away some of the disparity in growth shown on the Jobs/Volume plot up above.

 

Predicted Reliability of Construction Forecasting

For any future forecast month, the most information is in hand the month before. Assessing the amount of actual data (jobs in backlog) versus the amount of predicted data gives an indication of how much weight can be placed on the forecast. Obviously, the balance of actual data versus predicted data gets less the further out in time we view the forecast.

For Nonresidential work, most of the spending in any given year comes from projects already in backlog. For nonresidential forecasting, 80% of all the spending in the year comes from projects in backlog. Only 20% of spending in the year is generated from new project starts within the year.

For Residential work, most of the spending in any given year comes from new project starts within the year. Only about 30% of the spending in the year comes from projects already in backlog.

The total amount of work in backlog supports 98% of the forecast in the following month for nonresidential and 94% of the forecast for residential. The amount of known work that will generate spending in the month 12 months out from the forecast date is only 80% for nonresidential work. It’s only 30% for residential work.

For the period only 12 to 24 months out from the forecast date, actual nonresidential data drops from 80% to 30%. Residential actual data drops from 30% to zero.

For all markets combined, accounting for the weighted averages of residential and nonresidential work, once all construction starts are reported to include the data as of Dec. 2019, the 2020 forecast includes 78% actual data and 22% predicted data. The 2021 forecast includes only 40% actual data from starts that have been booked.  All the rest of the 2021 forecast is predicted.

Three years out from the current date the reliability of the forecast is dependent entirely on economic outlook and the predictive methodology of the analytic tools, not on actual data. It’s important to know, when you are looking at a forecast that projects three years out past the current year, there may be no “actual” data in that forecast.

Reliability of Data 10-2-18

 

Questions regarding this analysis can be addressed to: Edward R. Zarenski – Construction Economics Analyst – Construction Analytics – edzarenski@gmail.com – 401-330-6152

Data used in this report is accessed from the following data sources:

Construction Analytics Economics Reports  https://edzarenski.com/

Construction Analytics Inflation https://edzarenski.com/2016/10/24/construction-inflation-index-tables-e08-19/

Associated General Contractors of America AGC https://www.agc.org/learn/construction-data/construction-data-producer-prices-and-employment-costs

Dodge Data and Analytics Construction Starts  https://www.construction.com/news

Engineering News Record  https://www.enr.com/

Mortenson https://www.mortenson.com/cost-index

Rider Levitt Bucknall  https://www.rlb.com/en/index/publications/?geolocation=americas

RSMeans data from Gordian https://www.rsmeans.com/landing-pages/2019-rsmeans-cost-index.aspx

S&P/Case-Shiller U.S. National Home Price Index  https://fred.stlouisfed.org/series/CSUSHPINSA

Turner  http://www.turnerconstruction.com/cost-index

U.S. Census Construction Spending https://www.census.gov/construction/c30/release.html

U.S. Census Housing Construction Index https://www.census.gov/construction/nrs/pdf/price_uc.pdf

U.S. Department of Labor Bureau of Labor Statistics https://www.bls.gov/ppi/ppinrbc.htm

U.S. Department of Labor Bureau of Labor Statistics Construction Labor U. S. https://www.bls.gov/iag/tgs/iag23.htm

 

Click here for a downloadable PDF of 2020 Construction Economic Forecast Feb 2020

Click here for a downloadable PDF of SUMMARY – 2020 Construct Econ Forecast 2020

Construction Spending Forecasts for 2020 Do Not Support Jobs Growth

1-31-20

A current article and several others, based on a sentiment survey, state that there will not be enough construction workers to support growing construction activity next year. I dispute that claim. 

Construction is in demand – but who’s going to do all the work?

I’ve been writing about the disparity in jobs growth exceeding construction activity growth for more than two years. Construction activity has NOT been increasing to support jobs growth.

Spend Sector Constant2017 monthly 2015-2021 1-31-20

2020 Construction Spending Increases, but Volume is Down

Expect Construction Jobs Growth to Slow in 2020

To Support Construction Jobs, We Need Volume

There are other construction forecasts that support my argument. It’s important to point out that my forecast is the HIGHEST for 2020. So, just keep in mind, if you consider any other forecast, the condition gets worse.

Seven of the eight firms that provided a forecast for the AIA Consensus Forecast are lower than Construction Analytics forecast for nonresidential work in 2020. AIA Consensus > marked slowdown for nonresidential building

ConstructConnect’s forecast is lower than my forecast for all sectors ConstructConnect’s Winter 2019-20 Put-In-Place Construction Forecasts

FMI’s forecast is lower for all sectors FMI U.S. Engineering and Construction Outlook: Third Quarter 2019 Report

Overall, Construction Analytics 2020 forecast shows a volume gain of 0.6%. Spending increase 4.6%, but average inflation is 4%. Therefore volume increases only 0.6%. That would support growth of about 50,000 jobs. Residential and Non-building Infrastructure show slight gains in 2020 but Nonresidential buildings volume is in it’s 4th year of decline.

ConstructConnect shows a total spending increase of 1.9% and FMI shows a total spending increase of 1%. Both show a slight gain in volume in at least one sector, but with expected inflation of around 4%, both would indicate an overall decline in volume and a decline in jobs.

Spending needs to increase greater than inflation to realize an increase in volume. If volume does not increase, there is no support to add jobs.

Summary of 2020 Construction Outlook

Construction Analytics 2020 Construction Economic Forecast – Jan 2020  (Excerpt from the complete economic report)

For the full report see 2020 Construction Economic Forecast – Jan 2020

 

Summary of 2020 Construction Outlook

Total of All construction spending in 2019 is forecast to decrease -0.2% to $1.305 trillion. For 2020, spending increases by 4.6% to $1.365 trillion.

Spend Forecast 2018-2022 1-21-20

Nonresidential Buildings construction spending is forecast to finish 2019 at $455 billion, level with 2018. For 2020 the forecast is a gain of 3% to $467 billion. Educational and Commercial/Retail held down gains in 2019. Office (which includes data centers) and Lodging gained 7% each. Office, Healthcare and Educational all support growth in 2020.

Residential construction spending forecast is down 5% to $521 billion in 2019 and up 6% to $552 billion in 2020. New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, growth in 2019 slowed to less than inflation. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. 2020 volume is forecast to increase 2%.

Non-building Infrastructure construction spending is forecast to increase 7% to $329 billion in 2019 and 5% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

Spend Sector 2015-2021 1-5-20

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2019 spending is down -0.2% to $1.305 trillion, that will most likely increase to a net gain.

In October, Dodge Data forecast their 2019 construction starts to total $809 billion, down 1% from 2018. However, starts are always revised up in the following year. In just the last three years, nonresidential starts have been revised up by 7.5%/yr and residential starts by 2.4%/yr. I expect revisions will show 2019 starts increased by 3% to 4% over 2018. However, even with revisions, 2019 starts will post the slowest annual growth since 2011.

Dodge Data and Analytics new construction starts for November 2019 advanced to the highest seasonally adjusted annual rate ever, resulting in the three months Sep-Oct-Nov 2019 posting the highest 3-mo average ever, 10% higher than the total average for 2018.  Several long duration projects started, so a lot of the spending from these new starts will occur in 2021-2022.

Dodge is forecasting 2020 starts down 4%. This forecast includes only 1% to 2% growth in new starts for 2021-2022.

Starting backlog, which increased 5% leading into 2020 is currently at an all-time high, up 20% since 2017. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. More than 20% of all spending in 2020 is from projects that started more than 3 years ago. 

While a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years. Current indications are that 2020 backlog will be up 4% for residential work, 6% for nonresidential buildings and 7% for infrastructure work.

  • Starts increased 8%/yr. in 2016 and 2017, but only 4% in 2018.
  • Starts are forecast to decline slightly in 2019 and 2020.
  • Spending increased 9%/yr. from 2012 to 2016, then slowed to 4%/yr. in 2017 and 2018.
  • Spending declined 1% in 2019 and is forecast up 4% for 2020 and 1% in 2021.
  • Backlog reaches a post-recession high in 2020, up 20% from 2017, up 100% from 2013.

Since early 2018, jobs have been increasing while construction volume is declining. A declining volume of work does not support jobs growth. When volume of work decreases, jobs should also decrease. If jobs increase, then it results in more workers to produce the same amount of work. In other words, productivity is declining. This could result in one or more of these outcomes:

  • Labor demand on hiring drives labor cost up by unexpected amounts.
  • New labor coming into the workforce has less experience, lowering productivity.
  • Contractors cannot meet schedules, extending project duration.
  • Contractors work overtime to meet schedules, adding cost.

All scenarios either extend project duration or drive up the cost of projects or both, which could lead to some unforeseen inflation.

General construction cost indices and input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects. Residential and Nonresidential Buildings inflation indices developed by Construction Analytics are final cost selling price indices.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work.

This link points to comprehensive coverage of the topic inflation. Click Here for Link to a 20-year Table of 25 Indices

This link points to articles related to the Construction Outlook for 2020. Click Here for Link to Construction Economic Outlook 2020

 

Construction Volume Growth

For the last three years 2017-2018-2019, construction spending increased 8%, but inflation was 14%. Volume DECREASED 6%. BUT Jobs increased 11%. This ought to leave some people concerned. In this plot of monthly data since 2015, the shaded box shows the period of concern, 2017-2019.

Jobs vs Volume 2015-2020 monthly 1-10-20

And average job openings was 70,000+ the last two years. The only other time a divergence like this has ever occurred is the years leading into the last recession.

Spend-Volume-Esc-Jobs 1-10-20

In 2004-2005-2006, spending increased 30%, but inflation was 28%. Volume increased only 2%. BUT Jobs increased 13%. And job openings increased 20,000/yr. After 15 years of near balanced growth, by the end of 2006 jobs growth exceeded volume growth by 15%. In the next 10 years that disparity never corrected.

Jobs vs Volume 1991-2020 2006 deficit 11-19-19

We can reset the zero baseline to 2006 to see what has happened since 2006.

From 2007 through 2017, jobs and volume were balanced. Since then, the plot below for 2017-2019 looks exactly like 2004-2006 above. So this could raise concern, because,

Jobs vs Volume 1991-2020 2006 deficit reset 11-19-19

if we have just experienced a period in which jobs and volume have been nearly in balance (2007-2016), then if the volume of work is no longer increasing, there is no support for adding jobs. Remember, we started this period with 15% excess jobs, but after 10 years, we swallowed that lump.

This plot is the same data as the first plot, only annually vs monthly. This plot of annual data since 2011 shows not much out-of-balance from 2011 to 2017. The shaded box shows the period of concern, 2017-2019.

Jobs vs Volume 2011-2020 1-10-20

I had been predicting that jobs growth would slow and it has since Q4 2018. The plot below shows the average jobs growth rate for the preceding 12 months. The rate of jobs growth is now at a seven-year low. It could go lower. It probably should go lower, but nonresidential volume declines in 2020 while residential volume increases slightly, so there is a net growth. Non-building infrastructure work is expected to have strong spending  and volume in the next two years due to years of backlog growth.

Jobs trailing 12mo growth 2013-2020 1-10-20

In almost 30 years of data, only six years are way out of balance, 2017-18-19 and 2004-05-06. Current data sure does not indicate there is a lot of construction work out there in need of additional workers. And if jobs are still growing, it certainly does not indicate there should be an increase in job openings, because volume is decreasing. In fact, by all measures, it should indicate job losses.

1-17-20 Job Openings dropped from a recent average near 350,000 to 214,000 in Nov.

The deficit created in the last three years, a 17% disparity in jobs vs volume growth, is similar to the 15% deficit in 2006, preceded by a long period of jobs and volume growth in balance, then going quickly and hugely out-of-balance. That has major implications for labor cost inflation and productivity which could affect schedules, and that’s not the kind of inflation easily tracked in wages. But it’s real.

SEE ALSO

2020 Construction Spending Increases, but Volume is Down

Expect Construction Jobs Growth to Slow in 2020

To Support Construction Jobs, We Need Volume

Construction Jobs and JOLTS

 

 

 

2020 Construction Forecast Briefs

2020 Construction Forecast Briefs

12-23-19 updated 1-4-20

updated 1-4-20 – The construction spending forecast for 2019 is revised up to $1,304 billion, still a decrease of 0.2% vs 2018. Almost all of the revision up is residential spending that was added in Oct and Sept Census spending revisions released 1-3-20.

The forecast for 2020 construction spending is $1,360 billion, up 4.5% over 2019.

Total Spending increased 9%/yr. from 2012 to 2016, then in 2017 and 2018 slowed to 4%/yr. Spending declined <1% in 2019 and is forecast up 3% to 4% for both 2020 and 2021. 

New construction starts, as reported by Dodge Data and Analytics, increased 7%/year in 2016 and 2017, but only 3% in 2018. Starts are forecast to decline slightly in 2019 and 2020.

New construction starts data captures a share of the total market or a portion of all construction spending, on average about 60% of all construction. In this analysis every market is adjusted by its own individual market share factor.

Applying the market share factors, starts are forecast up slightly in both 2019 and 2020.

Backlog reaches a post-recession high starting 2020, up 20% from 2017, up 100% from 2013. Starts and backlog growth are forecast to remain below 3%/year gain or decline over the next few years. Total spending has only slight gains in 2021 and 2022.

Backlog at the beginning of the year or new starts within the year does not give an indication of what spending will be like within the year. Backlog increases if new starts during the year is greater than spending during the year. An increase in backlog could be a level rate of market activity for a longer duration. It takes several years for all the starts in a year to be completed. Cash flow shows the spending over time. 

The best indicator of future construction activity is the sum of the projected cash flow generated by all the construction starts that have been recorded.

plots updated 1-4-20

Spending cash flow predicted from Dodge Starts and construction spending to date.

Starts CF 2015-2022 1-18-20

A what if scenario in which new construction starts drop by 10%:

On average about 20% of new nonresidential construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in future years. (For residential the spending curve is more like 70%-30%). If new starts drop by 10% this year, that has only a -2% impact on total nonresidential buildings spending for this year. It would be -5% next year, -3% after. If starts drop a second year, the same impacts occur, shifted one year out, and the total impact for both years is added.

Only about 30% of residential spending within the year comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total residential spending by 7% in that year.

Nonresidential Buildings starts (excluding Terminals) have reached a new high every year since 2009, but the last three years starts are up only 2% to 3%/year. Every market posted increases in 2017 and 2018. Only Commercial/Retail and Amusement/Recreation declined in 2019. Backlog for Office Buildings, which includes data centers, is up 100%+ since 2015. Spending is still up 4% in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

Nonresidential buildings markets advancing in 2020-2021 are Educational, Healthcare, Office and Manufacturing. Markets declining are Amusement/Recreation, Commercial/Retail and Lodging.

Non-building Infrastructure starts (including Terminals), up 4% in 2019, are at an all-time high. The two markets with the largest share of new starts are Highway/Bridge and Transportation. Transportation terminals and rail starts are up 30% in the last three years, but backlog has nearly doubled because a large portion of those starts is very long duration projects. Starts are forecast up only 1% in 2020 but backlog peaks in 2021. Spending increases are in the 6% to 8% range at least for the next two years.

Spending in recent years has been boosted by Transportation terminals, Highway and Public Works projects. Power is flat or down slightly.

Residential starts averaged 19%/year growth from 2012 to 2016 but slowed to 5%/year for 2017 and 2018. Starts declined in 2019 and are forecast to decline again in 2020.

The outlook for residential construction spending has improved slightly. Previous forecast had residential spending in 2019 down 6% and 2020 up only 2%. That’s been revised to now forecast 2019 down 4.5% and 2020 up 5%. Spending holds steady in 2021.

If spending is increasing 3%/year at a time when inflation is 5%/year, then real volume is declining. In the last two years, spending increased only 3%, but construction inflation totaled 9%, therefore

in two years, real volume declined by 6%, yet jobs increased by 7.5%.

Since early 2018, jobs have been increasing while construction volume is declining. The volume of work in the last two years does not support jobs growth.

Volume, spending adjusted for inflation in Constant 2017$

Spend Sector 2015-2021 1-4-20.JPG

Nonresidential Buildings will post declines in volume in 2020 & 2021. Residential volume gains 1% in 2020 but slips again in 2021. Non-building Infrastructure will increase volume about 3%/year. Overall, total construction volume declined in 4 of the last 6 quarters and is forecast to drop slightly in 2 or 3 quarters in 2020.

One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce margins in bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on inflation.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that will add to labor cost inflation.

Jobs vs Volume growth set to base year 2011

Jobs vs Volume 2015-2020 monthly 1-10-20

Average long-term nonresidential buildings inflation excluding recession years is 4.2%.

Average long-term (30 years) nonresidential construction cost inflation is 3.5% even with any/all recession years included.

Nonresidential buildings cost inflation for 2018 and 2019 averaged 5%. It’s predicted closer to 4.5% for 2020 and 4% for 2021.

Residential buildings cost inflation for 2018 and 2019 averaged 4%. It’s predicted at 3.75% for 2020 and 2021.

BCI 2005-2022 12-9-19

 

For more on the 2020 Forecast see these

2020 Construction Spending Increases, but Volume is Down

Expect Construction Jobs Growth to Slow in 2020

%d bloggers like this: