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Prelim 2023 Construction Spending Outlook

2-2-23

Total construction spending in 2023 will increase only 4.6% over 2022. Nonresidential Buildings will lead construction spending in 2023.

The last three years, 2020, 2021 and 2022, total spending increased 7.8%, 8.5% and 10.2%. However, inflation in 2021 and 2022 was greater than spending, so real construction volume declined nearly 5% total those two years.

The rate of construction spending in 2023 will be influenced predominantly by a 38% increase in new nonresidential building starts in 2022. In fact, even more meaningful, Nonres Bldgs new starts, in 2nd half 2022, averaged 68% higher than any other 6mo period in history. Total spending forecast for Nonres Bldgs in 2023 is $602bil, an increase of 15.8% over 2022.

Non-building Infrastructure will post the 1st year of sizable gains since 2019, forecast at $400bil, up 9.6% in 2023. In 2022, Highway and Public Utilities posted strong gains of 9.0% and 16.5%, but those gains were offset by a 9.0% decline in Power. For 2023, Highway and Transportation recorded the strongest starts in five years. All markets post spending gains, with Highway up 12.0%, Transportation up 15.0% and Public Utilities up 11.5%.

Residential new starts stalled in 2022 at zero growth and are expected to do the same in 2023. After three years of gains totaling 64%, expect residential spending to decline 4% in 2023. Single Family (47% of rsdn) spending peaked in April and since is down eight consecutive months, down 20%. Multi-family (15% of rsdn) is up 11 consecutive months, now up 19% from January 2022. Renovations (38% of rsdn) is up 25% for the year, but have been up only five months this year. Only multi-family is currently trending up. 75% of all gains in multi-family occurred in the 4th quarter.

NOTE: The 2-1-23 Census spending release is the 1st release to capture Dec data and therefore all months in 2022. The 3-1-23 release will revised both Dec and Nov. The 4-1-23 release will revised Dec. And the 7-1-23 release will revised any/all months needing further revision in both 2021 and 2022. Historically, revisions are predominantly UP.

The annual rate of spending in all nonresidential buildings markets increased from Q1 to Q4 2022 and also Q4 spending in every market was higher than the average for 2022. Heading into 2023, nonresidential buildings markets start out the year with the annual rate of spending 8% higher than 2022. Although there are a few moderate dips in spending in some markets during the year, every market adds growth in 2023.

See Behind The Spending Forecasts for a table showing the annual rate of spending for each market in the 4th qtr compared to the 2022 average. This shows the rate of spending starting out 2023.

Starting out the year with an annual rate of spending already averaging 8% greater than 2022, coupled with 38% growth in new starts in 2022, most of which will be spent in 2023, produces the strongest year of growth in nonresidential buildings spending since 2007.

Much more to come.

Look Back at 2022 Construction Spending Forecasts

2-1-23

Initial Year end construction spending for 2022 is out today. This is when I compare my forecast for 2022 spending to all my prior monthly forecasts during the year AND I compare my midyear forecast prepared in May-June to the forecasts published at midyear in the AIA Consensus Construction Forecast. You can judge how I’ve measured up to forecasts thru the year.

This 1st table shows just the sum total in each sector for each monthly forecast I produced during the year. This year was quite unique in that new construction starts for nonresidential work increased by 60% in the 2nd half of the year, a magnitude of increase never before experienced. No one could have predicted that.

In this table I compare the actual for 2022 to the September forecast. My data analysis of 20 years of input shows that a particular set of months through and including September has forecast the end of year spending within 1.5% for nonresidential and within 2% for residential. You can see with the initial data for 2022 that the Sept forecast was within 3.2% for residential and within 2.0% for Nonres Buildings. Nonbuilding Infrastructure came in under the 1.5% threshold.

This next table is shows my midyear forecast for total 2022 spending compared to the forecasts published in the AIA Midyear 2022 Consensus. I’ve highlighted in green the closest estimate to the actual end-of-year spending report. In red is the worst forecast at midyear. This is the 3rd consecutive year that I’ve beat all the forecasts in the AIA Consensus. In fact, looking back at 2015-2019 there are several other years in which I beat out the AIA Consensus estimates.

I’m including this next plot because it shows the accuracy of my nonresidential forecasts when comparing my cash flow forecast amount to the actual spending amount. It has proven to be pretty accurate over the years.

Behind The Spending Forecasts

Let’s look at Nonresidential Buildings Construction Spending Forecasts for 2023.

Two things to look at when developing a forecast: What is the current rate of spending (SAAR)?, and, What has been the recent activity in new starts (new contract awards)?

Most of the spending from new starts (all starts in total from Jan thru Dec) occurs in the year following the start. A reasonable spending estimate (across a large volume of work) is 20:50:30. So, for the sum total of all starts in the year, 20% gets spent in the 1st year (the year started), 50% the 2nd year and 30% the 3rd year. So approximately 50% of all new starts last year gets spent this year. In other words, the most influential factor on the rate and trajectory of spending this year (barring something such as a pandemic or a recession) is starts from last year.

Here is my current baseline data:

  • Construction spending for 2022 in the 2-1-23 release is $520 billion, up 11.6%
  • Construction Starts (per Dodge) up ~38% in 2022, up 15% in 2021 and forecast down 10% in 2023.
  • Current rate of spending (SAAR avg in Q4) is $560 bil, increasing $5bil-$10bil/month.

The increasing rate of spending makes sense, since starts were up so much in 2021 and 2022, and starts in the prior year is the greatest influence on rate of spending in the current year. Average nonres bldgs spending for 2022 is $520bil and the Q4 rate of spending is $562bil. The current rate of spending (SAAR in Dec) is 8% higher than the 2022 total spending and is increasing.

If something happened to stall spending right now at the current rate, it is at an annual rate of $562 billion, 8% higher than the average from 2022. So, as we begin 2023, we should expect 2023 total spending will be at a minimum 8% higher than 2022. Since the current rate of spending is increasing, we could reasonably expect 2023 spending at a minimum 8% higher than the 2022 average. This is a solid starting point for forecasting 2023 since this is already on record.

I prepared this following table to show the starting annual rate of spending for all of the markets, in particular the nonresidential buildings markets. As of Q4 2022, or the starting point for 2023, we see a few markets are only 3% to 5% above the 2022 average and a few are considerably higher. Also included in this table is the percent growth in new starts in 2022 for each market.

Let’s use an example: The Educational market, in Q4, or as we begin 2023, has monthly spending at a rate 4.9% greater than 2022. Starts increased 8% in 2022, so there will be a slight to moderate increase to spending in 2023. If spending growth stalls at the current rate, it will finish 2023 at 4.9% over 2022. The only way it should fall to less than that in 2023 is for some decline in some months in 2023 to less than the current rate of spending in Q4. Since all markets have substantial new starts to feed 2023 spending, all markets should post spending in 2023 higher than Q4 2022.

The rate of spending in 2023, being influenced predominantly by a 38% increase in starts in 2022, is projected to continue increasing throughout 2023. The monthly cashflow of the starts $ from all previous years that still generate spending in 2023 is what determines the rate of change in spending. My forecast has nonresidential buildings spending increasing steadily from a rate of $570 billion in January to $625 billion in December.

What data supports my forecast? Spending is already, in Oct-Nov-Dec, 8% higher than the average for 2022, so we begin 2023 at a rate of spending up a minimum 8% higher than the average for 2022. The average for 2023 could fall below the current 8% IF we were to experience some unforeseen negative occurrence in the coming months. I don’t foresee that happening. In 2022 we realized the largest ever one-year increase in new starts, up 38%. Starts were also up in 2021, up 15%. The monthly rate of spending is up 12 of the last 14 months, has increased for 6 consecutive months and is up 10% in the last 6 months. The rate of spending is predicted to increase 10 out of 12 months in 2023, a total increase of 11% over the year. Barring any unforeseen negative occurrence, the trajectory in the rate of spending is increasing and 2023 spending will finish well above the 8% advantage on record at the beginning of the year.

My total forecast for Nonresidential Buildings spending in 2023 is $602 billion, an increase of 15.8% over 2022.

The AIA Consensus Construction Forecast, December 2022 predicts only a 5.8% increase in spending for nonresidential buildings in 2023. Five of the nine forecasts provided in the Consensus Forecast are below the 5.8% consensus average. Only two forecasts are higher than 8% which is the projected minimum growth as we begin 2023, as explained above. As we begin the year with data, as of December, already at a rate 8% greater than the average for 2022, and with record new starts indicating an increasing spending rate, how is a forecast developed lower than that? What’s behind those spending forecasts?

This article was updated on 2-2-23 from November data to December data for clarity and to include the table showing Q4 data. Overall, the premise has not changed.

Self-Checking Forecast

Two plots track how construction forecast matches up to actual spending. The light line is the monthly growth predicted by my forecasting. The same color dark line is the actual spending. The changes in Residential dominate the 1st plot, so the 2nd plot is just Nonresidential to improve the scale.

One comment about the Residential plot: Starts, which are needed to create the forecast, may not have accounted for the extreme inflation, so spending could have easily grown to 5% to 10% higher than the starts would have forecast. Notice the similarity between the two residential plots. Although the forecast is not at the same magnitude as the actual spending, it is still predicting the slope, the change in spending. Jul20 to Jan21 is where the plots varied.

Nonresidential forecasts vs actuals compare really well. By the end of 2020, my model was predicting a low point in nonresidential buildings spending out in the 2nd half of 2021. Nobody else predicted that bottom. The Starts Cashflow model does a good job of predicting spending.

Construction Year-End Spending Forecast Dec’22

A few brief comments. More comments to follow

See also Construction Briefs Nov’22

With only one month to go and eleven months in the year-to-date spending, we should see very little variance from the Forecast for 2022, which is expected to finish up 10.1% at $1,791 billion. Residential spending will finish up 13.4% even though it’s posted declines in six of the last eight months and is down 13% since March. Nonresidential Buildings spending, expected to finish up 10.9%, is being driven by Commercial Retail (up 20%, in this case Warehouses) and Manufacturing, which will finish the year up over 35%. Non-building Infrastructure finishes the year up only 1.9% due to a large drop off in Power spending. Highway and Public Utilities helped offset some of the Power decline.

Total construction spending for 2023 is forecast to increase +5.1%. Residential -2%, Nonres Bldgs +15%, Nonbldg +8%.

Some high $ items: Comm/Rtl +16%, Manufacturing +35%, Highway +11%, Transportation +16%, Pub Utilities +12%.

Residential starts in 2021 were up +21% to a lofty new high. But starts are forecast flat in 2022 and 2023. Spending grew 44% in the last 2yrs, but inflation was 30% of that 44%. With zero growth in starts forecast for 22-23, residential spending struggles to keep up with inflation. Residential spending will post a decrease of 2% in 2023. If inflation is 5%, that’s an 7% loss of business volume. Midyear there is potential for 6 consecutive down months.

Nonres Bldgs new starts last 2yrs (2021-2022) are up 50%. Spending next 2yrs is forecast up 20%.

Nonresidential Bldgs starts in Sept dropped 23% from August and yet still that was the 3rd highest month ever. July and August were 2nd and 1st. October starts added another 9% over Sept., taking over the 3rd best spot. Even though November dropped 25% from Oct., Nov. starts are still higher than the 1st half 2022 average.

Construction starts for Nonresidential Bldgs posted each of the last 4 months thru October higher than any months ever before. The avg of last 4 months is 33% higher than the avg of the best previous 4 mo ever (even non-consecutive).

Growth in Manufacturing construction starts for 2022 far surpasses growth in any other market, up over 150% year-to-date. Spending for Manufacturing Bldgs is expected to increase more than 30% in 2023. This seems high after already increasing 35% in 2022, but when taking into consideration that the expected spending for 2023 is only 15% higher than where we stand already in Q4 2022, it seems much more reasonable.

Backlog as we begin 2023 is up 16% over 2022, all nonresidential.

Inability to expand staff fast enough to match spending growth may limit some spending to lower than forecast.

Nonbuilding Infrastructure starts for 2022-23 are forecast up 37%. Spending 2023-24 is forecast up 20%. Starts since July are up 50% over the 1st half 2022 average. Highway/Bridge/Street starts increased almost 25% in 2022 and are forecast to increase 20% in 2023. Highway spending is up 9% in 2022, then increases 11% in 2023. A bigger spending increase of 16% occurs in 2024. Transportation starts will drop more than 30% in 2023, but that comes after a 100% increase in 2022. Transportation spending will jump 16% in 2023. Public Utilities, Sewer-Water-Conservation, collectively will post 60% growth in starts for 2021-22-23. Spending for this group increases 45% for 2022-23-24.

Construction Briefs Nov’22

Construction is Booming. Well, OK, construction is setting up to be booming in 2023-2024. New construction starts for Sept are down 19% from August and yet starts are still near the highest levels ever. Sept is 4th highest total starts ever, all four of the highest ever months of new starts are in 2022. July and Aug were the two highest months of new starts ever. Total growth in starts over 2021-2022 > Nonres Bldgs +50%, Nonbldg Infra +40%, Residential (all in ’21) +22%.

STARTS

Construction Spending will not be participating in a 2023 recession. Except, residential might. Residential starts in 2021 were up +21% to a really high new high. But starts are forecast flat in 2022 and 2023. Spending grew 44% in the last 2yrs, but inflation was 30% of that 44%. With zero growth in starts forecast for 22-23, spending struggles to keep up with inflation. Residential will post only an increase of 3% in 2023 spending, but midyear there is potential for 6 consecutive down months.

See also Construction Year-End Spending Forecast Dec’22

SPENDING BY SECTOR CURRENT $ AND INFLATION ADJUSTED CONSTANT $

Nonresidential Buildings new starts last 2yrs (2021-2022) are up 50%. Spending next 2yrs (23-24) is forecast up 21%.

Nonbldg starts 2022-23 are forecast up 38%. Spending 2023-24 forecast up 20%.

In 2023, it’s Nonresidential Buildings leading growth. In 2024, it will be Nonbuilding Infrastructure leading spending growth. Both are expected to grow more than the inflation index, so there will be real volume growth to report.

Residential construction (Dodge) starts since Jan 2021 have posted 17 out of 21 months of the highest residential starts ever posted. The 5 highest months ever are all in 2022.

Nonresidential Bldgs starts in Sept dropped 23% from August and yet still that was the 3rd highest month ever. July and August were 2nd and 1st.

Construction starts for Nonresidential Bldgs posted each of the last 4 (consecutive) months thru October higher than any months ever before. The avg of last 4 (consecutive) months is 33% higher than the avg of the best previous 4 mo ever (even non-consecutive). Growth in Manufacturing construction starts for 2022 far surpasses growth in any other market, up over 150% year-to-date.

Construction Spending Sept total up 0.2% from Aug. Aug & Jul were revised up 1.1% & 1.3%. Total spending YTD thru Sept’22 is up 11.4% from Sept’21. MAJOR movers; Mnfg up 16% since Jun. Jul & Aug were revised up 7.4% & 8.4%. Highway is up 9% since June. Jul & Aug were revised up by 4.0% & 4.4%.

SPENDING FORECAST

Total construction spending for 2022 is on track to increase +11.1%. Residential +16.8%, Nonres Bldgs +9.5%, Nonbldg +0.5%.

Comm/Rtl +18% Mnfg +32% Power -8% Pub Utilities +14%.

Current and predicted Inflation SEE Construction Inflation at Year-End 2022

Inflation adjusted volume is spending minus inflation.

Total volume for 2022 falls 1%. Rsdn +3%, Nonres Bldgs -1%, Nonbldg -9%.

Total volume for 2023 is up 1%. Rsdn -3%, Nonres Bldgs +8%, Nonbldg +2%.

SPENDING TOTAL ALL $ CURRENT $ AND INFLATION ADJUSTED CONSTANT $

Overall Construction Spending is up 15% since the onset of the pandemic, but, after adjusting for 25% inflation, volume is down 10%. Residential jobs are near even on track with volume, but Nonres and Nonbldg have volume deficits of approx 20-25% vs jobs.

  • Feb 2020 to Aug 2022
  • Resdn spend +42%, vol +6.5%, jobs +7%
  • Nonres Bldgs spend -8%, vol -24%, jobs -3%
  • NonBldg spend -7.5%, vol -24%, jobs +1%
JOBS VS CONSTRUCTION VOLUME VS SPENDING (VOL = SPENDING MINUS INFLATION

Labor Shortage? Jobs should track volume, not spending growth. Vol = spending minus inflation. Volume is down while jobs are up. If the same production levels ($ put-in-place per worker) as 2019 were to be regained, theoretically, nonresidential volume would need to increase 20% with no increase in nonresidential jobs. I don’t expect that to occur, therefore, productivity will remain well below that of 2019.

LABOR PRODUCTIVITY

Over the next year or two, there could be several billion$ of construction spending to repair hurricane damaged homes in Florida. That spending will NOT be reported in Census spending reports. Renovations to repair natural disaster damage are not recorded in construction spending. Construction spending to replace homes entirely lost to damage IS reported in Census spending, but is reported as renovations/repair, not new SF or MF construction.

RESIDENTIAL SPENDING SF-MF-RENO CURRENT $ AND CONSTANT $

Construction Spending thru Aug’22

Construction Spending year-to-date thru August is up 10.9% and is on track to finish the year up 10.1%. Leading gainers for 2022 forecast are Manufacturing spending up 23%, Commercial/Retail up 17% and Residential with a 2022 forecast up 16%. Nonres bldgs are forecast up 7.8%. Nonbuilding Infrastructure is held to a forecast loss of 0.3% due to nearly a 10% drop in Power but offset by a 16% gain in Sewer/Water/Conservation. Every nonresidential building category thru August year-to-date inched closer to both my midyear forecast and my current annual forecast. This plot shows the spending forecast from starts cashflow vs actual spending to date. Starts cashflows do a good job of predicting spending. starts-cf-index-nonres-2015-2022-10-3-22 Significant changes since my 9-1-22 forecast: Residential up $11bil 1.3%, Manufacturing up $6bil up 8%. Residential construction spending is down 3.5% from the most recent peak in Mar 2022. It is on track to finish the year up 16%. Residential construction starts, $ as measured by Dodge, JJA 3mo avg is down 10% from the peak in the previous 3mo. But that peak qtr, MAM, is up 5% from the total in 2021 which was up 22% from 2020. Avg starts for the last 20 months has remained above the former high in 2005. spending-ytd-2022-plus-markets-2021-2023-10-3-22 Nonresidential Buildings Construction spending is on track to finish the year up 8% powered by a 23% increase in Manufacturing spending and a 17% increase in Commercial/Retail spending. Nonresidential Bldgs new starts are projected to finish up 22% in 2022. spend-all-monthly-current-2018-2023-10-3-22 Total ALL Nonresidential construction spending, buildings and nonbuilding, is down 2.8% from the most recent peak in March 2022, but is up 5.2% year over year. Total Nonresidential spending is on track to finish the year up 4%, led by a 7.5% annual increase in Nonres Bldgs. but held back by a 9% drop in Power, 30% of the non-building total. Spending took a downturn in April but this is expected to turn up after September. Most of the downturn is due to residential. By October all sectors are forecast to post gains. spend-sector-monthly-current-2018-2023-10-3-22 The difference between these two plots is INFLATION, which adds nothing to the volume of work. The CONSTANT$ plot is like the volume of business that takes place. The Spending plot shows the $ that changed hands to conduct that business volume.

Midyear 2022 Construction Data

8-16-22

Construction Spending data updated 8-16-22, actual Year-to-Date through June, Census issued 8-1-22.

Forecast based on starts through July. Residential starts peaked in Feb-May 2022. Residential starts in July are down 15% from the highs reached in the 1st five months of 2022. Nonresidential Bldgs annual rate of starts reached a remarkable new high in July, almost 50% higher than the average of the 1st six months of 2022, and 30% higher than the previous single-month high in 2018. Non-Building starts for July reached 125% higher than the average of the 1st six months of 2022, and 50% higher than the previous high in 2019.

Watch for future revisions in Manufacturing Starts data. Through July, Mnfg starts are up 180% over the same seven months in 2021. It won’t be up 180% at year end. This may not yet be fully reflected here. This will add to spending mostly in 2023 and 2024. Also watch Power/Utilities which posted a 60% gain in the 1st seven months over same period in 2021.

Keep in mind, only time will tell how much of those huge gains in Mnfg and Power starts are a real increase in the amount of new work started or how much of that gain reflects an increase in the share of the market captured in the starts survey. Over the past 10 years, Dodge total starts data captured amounts to only about 40% to 50% of the final spending amount for these two markets.

Construction Starts forecast updated to 8-16-22

Construction Backlog forecast 8-16-22

After a two-year slowdown in backlog growth in 2021 an 2022, growth resumes in 2023 and 2024. Nonresidential Buildings leads in 2023, Nonbuilding leads in 2024.

Watch for this temporary decline in spending over the next few months. Some lower months of residential starts over the past nine months reduces residential spending from May to Sept 2022 before it returns to growth. More moderate declines in Nonres Bldgs and Nonbuilding also contribute to the downturn. Declines generally turn into gains by Q4 2022.

Much of the gains in spending in 2022 and 2023 reflects the very large increases in inflation. Spending after inflation, or volume of work, shown below, declines for all nonresidential in 2022 and declines for Nonbuilding and residential in 2023.

Residential volume peaked in Q1 2022 but will not return to that level until 2025. Both Nonresidential Buildings and Nonbuilding Infrastructure volume peaked in Q1 2020. Neither returns to that level before 2026.

Volume of work (spending minus inflation, or Constant $) has been dropping for several months and will continue to drop for several more months. But jobs have been increasing. Over the long term these two data sets should move in tandem, not in opposition. As greater separation between these two occurs, with jobs over volume, the productivity factor for the amount of work put-in-place per job worsens. That is a hidden factor adding to inflation.

See the PPI post for details on 2022 PPI data.

This month the July update to the Final Demand indices reflects that this index barely moves for two months, then in the third month, when Census performs a contractor survey to update the index, it moves 80% to 90% of the index value for the three months. The same has been true looking back over all recent quarters. Takeaway: the Final Demand indices cannot be used monthly. Essentially, these should be considered a quarterly index. Here I’ve calculated Q2 and Q1xQ2. You can 4x or 2x those results to get an annual rate, but I suspect most of the increase is already in this year, so Q3 and Q4 I’d expect to be lower than Q1 and Q2.

2021 Forecasts Comparison to 2021 Year-end Results

How did we do?

These colorful tables show the 2021 construction spending forecasts from 8 firms published in the January 2021 and July 2021 AIA Consensus Outlook. Construction Analytics (my forecast) Beginning year and Midyear forecasts are included for comparison. The actual spending year end published by U.S. Census on 2-1-22 is included. Forecast are highlighted in bright green (Best), dull green (2nd best) and red (worst).

FMI’s forecast is modified to move Transportation and Communication into the nonbuilding category to conform with other forecasts and also to conform with how Census reports these items. Other Nonres Bldgs is the total of Religious (15% of $) and Public Safety (85% of $) combined. Not all firms provide forecasts for residential or nonbuilding infrastructure.

All too often, forecasts are published but no one looks back to see how the actual results compared to the estimates. Also, looking at the Jan 2021 and Jul 2021 forecasts, you can see if and by how much each firm revised their estimate for the year.

This is the initial Census release of actual 2021 data. Results always get revised with the release of May data (July 1) in the following year. On July 1, 2022, any significant revisions to 2021 actual spending data will be revised and these table will be reissued.

Forecast at the Beginning of 2021

Forecast at MIDYEAR 2021

Construction Analytics (my forecast) didn’t fare so well in the 2021 Beginning of year forecast, but then did quite well in the Midyear forecast. My forecasts are based on cash flow of Dodge forecast of construction starts. When starts get revised, my forecast gets revised. Dodge revised the forecast of 2021 starts substantially after the beginning of the year, so that revised my forecast.

Below is the same data for AIA Midyear Outlook 2020 and my respective forecast at that time. My midyear forecast in 2020 had more best estimates than all other forecasts combined. Although it should be noted, no one got residential even close in 2020, I just happened to be least wrong.

Forecast at MIDYEAR 2020

A word on averages. Generally, the more inputs to an average, the closer the average will be to accurate. But it’s probably worth your while to take a look at the spread between forecasts on any particular line item. When you see 7 out of 8 estimates within a tight range of 5 points, and then one varies by 30 pts., it might be a good idea to question the validity or throw out the outlier.

Also, recognize that the Midyear forecast is a much different animal than the Beginning of Year forecast. At midyear, we already have 5 or 6 months of actual data to influence the value of the forecast at the end of the year. If we have 6 months of actual data that is already UP 10% year-to-date, and a forecast predicts the year will end DOWN 10%, each of the final 6 months of the year would need to come in at -30%. I wrote about that in detail several times last year. See https://edzarenski.com/2021/10/01/construction-spending-update-10-1-21/

Construction Forecast 2022 – Jan22

Spending and Volume updated 1-4-22. Jobs updated 1-7-22

1-28-22 See the bottom of this post for a link to download a PDF of the complete article.

See the link at end for full report updated 2-11-22 to include year-end data.

5-6-22 The complete article has been updated and is here

Construction Forecast 2022 Update 5-6-22

The construction data leading into 2022 is unlike anything we have ever seen. Construction starts were up in 2021, but backlog leading into 2022 is down. That is not normal. Backlog is rarely down and usually when starts have been down the previous year. In this case the starts declined in 2020, but that 2020 decline was so broad and so deep, even with an increase in starts in 2021, backlog to start 2022 has not yet recovered (to the start of 2020). Spending for 2021 was up 8%, but after adjusting for inflation, real volume after inflation was down. Last time that happened was 2006 and 2002, the only two other times that happened in the last 35 years. Let’s have a look at all the data that sets up 2022.

New Construction Starts for 2022, as reported by Dodge Data and Analytics, are forecast up +5% total for the year. Residential starts will be up +2%, but that is on top of a +33% gain over the previous two years. Nonresidential Bldgs starts will be up +8%, just recovering to pre-pandemic levels. Nonbuilding starts are forecast up +8%, still -6% below 2019.

Construction Backlog leading into Jan 2022 vs Jan 2021 is up only +1%, but it’s still down 8% vs Jan 2020. Residential backlog is up +21%, but Nonresidential Bldgs backlog is up only +2%, still down -14% from the start of 2020 and Non-Building backlog is down -8% yoy, now -17% below the start of 2020.

Nonresidential Bldgs starting backlog for 2022 is still down -14% from the start of 2020 and Non-Building backlog is now -17% lower than the start of 2020. That could weigh on spending for several years.

(Construction Analytics measures Backlog at the start of the year vs backlog at the start of the previous year. This is different than the ABC Backlog indicator, which measures current month’s backlog compared to previous year’s total revenue).

Backlog at the beginning of the year or new starts within the year does not give an indication of what direction spending will take within the year. Backlog is increasing if new starts during the year is greater than spending during the year. An increase in backlog could immediately increase the level of monthly spending activity, or it could maintain a level rate of market activity, but spread over a longer duration. In this case, there is some of both in the forecast. It takes several years for all the starts in a year to be completed. Cash flow shows the spending over time.

Spending for 2021, with 11 months actual in year-to-date, is forecast up +7.9%. However, that can be misleading. Residential spending for 2021 is up 22% while Nonresidential Bldgs is down -5% and Non-Bldg is down -1%.

In almost every data release this year, Census has revised the previous month upwards. That has been adding to my forecast throughout the year.

Spending includes inflation which does not add to the volume of work.

My current and predicted Inflation rates:

  • 2020 Residential 5%, Nonres Bldgs 4.8%, Nonbldg Infra Avg 4.5%
  • 2021 Residential 14.2%, Nonres Bldgs 6.8%, Nonbldg Infra Avg 7.8%
  • 2022 Residential 7%, Nonres Bldgs 4.5%, Nonbldg Infra Avg 3.7%
  • There is greater chance for rates to move up than down.

After adjusting for inflation, total volume in 2021 is down -2.5%. Residential volume for 2021 is up +7.4% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8.1%.

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. Since 2010, Construction Spending is up over 100%, but after adjusting for inflation, Volume is up only 28%. Jobs are up 41%.

Jobs average over the year 2021 increased +2.3%. Volume was down -2.5%

Spending Forecast for 2022 is expected to increase +3.0%. Residential spending for 2022 is forecast up +5.7%. Nonresidential Bldgs forecast is up +3.5%. Non-Bldg forecast is down -3.6%.

Some of the biggest impacts to nonresidential buildings spending are: Warehouses, 60% of Comm/Retail, new starts are up 50% since Jan 2020. Comm/Retail could post the largest gains in 2022 nonres bldgs spending. Lodging starts even with 24% growth in 2022, are still down 50% from Jan 2020. Manufacturing starts dropped over 50% in 2020 but gained nearly all of that back in 2021. Manufacturing spending in 2022 should return to the level of 2019.

Many construction firms judge their backlog growth by the remaining estimate to complete of all jobs under contract. The problem with that, for example, is that Nonresidential Buildings spending (revenues) are expected to grow +3.5% in 2022, but after adjusting for inflation the actual volume of work is down about -1%. By this method, in part, these firms are accounting for an increase in inflation dollars passing through their hands. Spending includes inflation, which does not add to the volume of work.

Total volume for 2022 is forecast down -2.5%. After adjusting for inflation, Residential volume for 2022 is forecast down -1%. Nonresidential Bldgs volume is also forecast down -1% and Non-Bldg volume is forecast down -7%.

The Non-Building Infrastructure spending forecast for 2022 is more affected by a drop of -17% in starts in 2020 (2020 starts would have generated 30% of 2022 spending) than by any increase in starts in 2022 (which would generate only 15% of 2022 spending).

Non-building construction starts recorded 18 months (from April 2020 through September 2021) averaging 16% below the Q3’19-Q4’19 average of starts. Non-building Infrastructure Backlog beginning 2022 is down -17% from Jan 2020, the largest two-year drop on record. Non-building Infrastructure Spending has declined in 15 of the last 21 months.

Why is spending still down in Non-building? Here’s a few notes on construction starts that drive spending.

Power starts for the 3yr period 2020-2022, even with 11% growth in 2022, are expected to average 33% lower compared to 2017-2019. Transportation starts for the 3yr period 2020-2022 are expected to average 40% lower compared to 2017-2019. These two make up 50% of the Non-bldg sector and we could see spending remain depressed in both for the next two years.

Highway starts through 2020 are up 15% in 3 years. But spending in 2019 through 2021 has remained constant. This might be an example of adding new starts but it doesn’t show in spending because work is spread out over many years, or this could be indicating no real change in volume but a change in share of total market being captured in the starts.

On average about 20% of new nonresidential buildings 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%).

Nonresidential Buildings construction starts recorded 12 consecutive months (from April 2020 through March 2021) at 20% or more below the Q4’19-Q1’20 average of starts. Nonres Bldgs spending has posted 17 of the last 21 months down and is still down 13% from Feb 2020.

Construction Analytics has been forecasting these drops in Nonresidential spending since August of 2020.

In constant (inflation adjusted) dollars, as of Nov. 2021, Nonres Bldgs spending is 20% below the Feb 2020 peak. The bottom is expected in mid-2022.

Below is the Non-building plot, inflation adjusted. Both these plots show there has been no increase since Feb 2020 in volume of nonresidential or non-building work to support jobs growth, and there is little to no help in 2022.

If new construction starts in 2022 post an add of $100 billion in new starts for infrastructure, only about $20 billion of that would get put-in-place in 2022. The cash flow schedule for that $100 bil of new starts would extend out over 3 or 4 years. Most of that $100 bil would get spent in 2023 and 2024.

Current Final Demand pricing for Nonres Bldgs and Trades is highest on record. Prices support high inflation this year and next. Do not expect inflation to turn to deflation in 2022 or any time in the near future. The only time in 50 years that construction experienced deflation was in the period 2008 to 2011. At that time conditions were 10x worse than now.

1-7-22 Construction Jobs growth

2021 Dec21 vs Dec20 Rsdn+75k, Nonres Bldgs +61k, Nonbldg +24k

but annual averages tell a much different story

AVG21 vs AVG20 Rsdn+153k(+5.3%), Nonres Bldgs +28k(+0.8%), Nonbldg +9k(+0.9%)

Dec vs Dec simply compares jobs at 2 points in time, without the benefit of what occurred in the other 11 months of the year, so does not tell us what took place over the year. The annual average gives a much clearer indication of jobs growth over the year because it accounts for the peaks and dips of all 12 months during the year.

Jobs average over the year 2021 increased +2.3%. After adjusting for inflation, total volume in 2021 is down -2.5%. Residential volume for 2021 is up +7.4% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8.1%.

If jobs are increasing faster than volume of work, productivity is declining. For example, nonres bdgs volume declined 11%, but nonres bldgs jobs increase 0.8%. That’s a 12% swing in productivity. Since labor is about 35% of the cost of a project, if productivity declines by 12% Then inflation rises by 12% x 35% = 4%. The most recent year drop in volume, while jobs increased, added 4% to nonres bldgs inflation for the year.

If jobs are increasing faster than volume of work (a negative impact) can we tell if it’s production employees or supervisory employees? BLS reports ALL construction jobs (~7.5million) and Production jobs (~5.5million). The difference between these two data sets is supervisory employees.

Looking at the average number of construction jobs in the last 4 years, the average of 2021 jobs vs the average of 2017 jobs, production jobs increased +5%, but supervisory jobs increased +12%.

Looking at 2021 vs 2019, in the past 2 years, production jobs decreased by -1.5%, but supervisory jobs increased +1.7%. During this period spending increased +3.5%, but after adjusting for inflation, volume declined -9%.

In 2011, supervisory jobs was 24% of all construction jobs. Now it is 35%. Growth in supervisory jobs has had a greater negative impact than production jobs on the spread between jobs and volume.

Jobs and Volume of work growth should move in tandem.

If jobs grow faster than volume, productivity is declining. When these plot lines grow wider apart with jobs on top, that is a sign of productivity decline. That’s part of inflation.

And finally, here’s one of the markers I use to check my forecast modeling, my forecasting performance tracking index. The light plot line is forecast predicted from my modeling. The dark plot line is actual construction spending. Even after any separation in the indices, the plots should move at the same slope. Almost without fail, the forecast model, estimated spending from cashflow, predicts the changes in direction of actual spending.

See the full report updated 2-11-22 to include year-end data.

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