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Midyear 2022 Spending Forecasts Compared

How we doin?

In the AIA Midyear Consensus, eight firms provided forecasts for Nonresidential Bldgs markets spending for 2022. Their forecasts for 2022 are summarized here. Construction Analytics midyear forecast is included for comparison. Who is closest, who’s not? The year-to-date (YTD) value is through September 2022. I’ll update after final spending for 2022 is posted in Feb. 2023, and then revised in July. The Sept YTD data was released Nov.1st. I’ve included my current (Nov) forecast for 2022 to the left of the table.

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 +21% Residential +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.

SPENDING BY SECTOR CURRENT $ AND INFLATION ADJUSTED CONSTANT $

Nonres Bldgs new starts last 2yrs (2021-2022) are up 50%. Spending next 2yrs is forecast up 22%.

Nonbldg starts 2022-23 are forecast up 50%. Spending 2023-24 forecast up 20%.

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 updated 11-16-22:
  • 2020 Rsdn Inflation  4.6%, Nonres Bldgs 2.7%, Nonbldg Infra -0.3%
  • 2021 Rsdn Inflation 13.3%, Nonres Bldgs 6.6%, Nonbldg Infra 7.8%
  • 2022 Rsdn Inflation 14.9%, Nonres Bldgs 11.4%, Nonbldg Infra 12.0%
  • 2023 Rsdn Inflation 5.9%, Nonres Bldgs 4.5%, Nonbldg Infra 3.8%

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 $

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.

Construction Jobs and Spending Briefs 4-1-22

Construction Jobs report for Mar 2022 shows total jobs up 19,000 from Feb

Rsdn jobs +7,600, Nonres Bldgs +6,300, Civil +5,000

Although construction jobs increased by 19,000 in March, total hours worked dropped by 1.8% from Feb, so total workforce output is down.

It’s real hard to compare construction jobs growth by sector. If you work for a concrete firm or structural steel firm, with firm doing primarily nonresidential work, but you are out there putting in concrete or steel for a high-rise multifamily buildings, your job is still classified as nonresidential.

Jobs are up 82,000 year-to-date, 1.1% from Dec, but that’s also up 3.5% from ytd 2021. With the latest quarter at +1.1%, jobs are increasing at a rate of 4%/year. But inflation adjusted spending, building activity, is expected up only 2.5% in 2022, after dropping -2% in 2021. Jobs increased 2.5% in 2021.

2022 spending started the year at the highpoint. I expect a slow decline in monthly spending in all sectors of 2% over the 2nd half. That provides no support for jobs growth.

Construction jobs have nearly returned to pre-pandemic levels. The problem with construction jobs having returned to pre-pandemic levels is the level of inflation adjusted construction volume of activity that is needed to support those jobs is still 5% below Feb 2020 and 13% below the 2006 peak. So since Feb 2020, jobs are back to that level, but volume is not so productivity has dropped by 5%.

Construction Spending is up +10.4% year-to-date (in 2 months!) mostly driven by +15.5% ytd Residential.

A plot of residential construction spending inflation adjusted. Taking out inflation shows volume of building activity. Perhaps the trend in residential is strong enough to keep going.

Total spending is up +4% in 3mo since Nov 2021 (and 10% ytd-2mo), but I don’t expect this rate of growth to hold. However, this and any other changed data inputs revises my 2022 spending forecast.

Examples of big changes since initial forecast:

Manufacturing spending has increased so much in Jan-Feb, (up 35% ytd) that even if the next 10 months finish flat year/year, Mnfg will still finish up 5% for 2022.

Residential new starts for the latest 3 mo, Dec-Jan-Feb, avg is as high as any quarter last year. Nearly all of this spending occurs in 2022.

Construction buildings cost inflation over the last 4 years is up 25%. Labor cost, wages up 15% & productivity down 7%, is up 22%. But labor is 35% of total building cost so 22% x 35% = labor is 8% of that total 25% building cost inflation. Fully 1/3 of construction inflation over last 4 years went into workers pockets.

Construction Inflation 2022 – Tables Plots updated 11-16-22

The most watched indicators of the rate of inflation are the costs of various construction materials and the labor needed to install them. However, the level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation.

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 submit bids on more work and bid margins may be higher. The level of activity has a direct impact on inflation.

This analysis is national level data.

2-10-22 See the bottom of this post to download a PDF of the complete article.

update 5-3-22 This article AND the attached PDF downloadable document have been updated to include 1st qtr 2022 inflation updates.

update 5-8-22 This article AND the attached PDF downloadable document have been updated to include changes in inflation in PPI factors.

update 8-12-22 See Summary. Revisions to 2022 inflation.

update 9-19-22 SEE INDEX TABLES AND PLOTS updated to Q2 2022. Note these tables and plots are updated here in the blog post only. Original article attached IS NOT updated.

update 11-16-22 PPI INPUTS table and FINAL DEMAD table for October updated 11-16-22.

End of updates

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 then 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.

Summary

A significant impact of the pandemic on construction is the loss of spending due to the massive reduction in nonresidential construction starts in 2020. Those lower starts reduced nonresidential construction spending in 2020, but more-so in 2021, and in some markets will extend lower spending into 2022 and 2023. The most unexpected change was that residential spending continues a strong increase.

  • 2020 new starts declined -7%. Res +6%, Nonres Bldgs -18%, Nonbuilding -15%.
  • 2021 new starts increased +18%. Res +22%, Nonres Bldgs +18%, Nonbuilding +8%.
  • Forecast 2022 starts are up +11%. Res +10%, Nonres Bldgs +18%, Nonbuilding +2%.

Nonresidential construction volume appears now will experience only slight dip mid-2022, the maximum downward pressure from the pandemic is past. Total All Volume, spending minus inflation, is expected to again reach the same bottom in mid-2022 as in 2021. That should impact jobs, but we haven’t seen jobs react to volume losses as would be expected. Jobs growth without volume growth to support those jobs is a productivity decline, increasing inflation.

Spending for 2021 is up 8%, but nonresidential buildings spending is down 4%. Almost all gains in 2021 spending are due to the 23% gain in residential.

Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, the recession years of 2009 and 2010. That was at a time when business volume dropped 33% and jobs fell 30%. During two years of the pandemic recession, volume reached a low down 8% and jobs dropped a total 14%. But we gained back far more jobs than volume. That means it now takes more jobs to put-in-pace volume of work. That increases inflation.

No one predicted 2021 construction inflation. In Jan 2021, I predicted Inflation for nonresidential buildings near 4% and Residential inflation at 5% to 6%. Looking back, we now see nonresidential buildings inflation is 7%, the highest since 2006-2007 and residential inflation is 13%, the highest since 1977-1979, in part driven by the highest rates of increase in materials on record.

  • 2020 Rsdn Inflation 4.5%, Nonres Bldgs 2.6%, Non-bldg Infra Avg -0.3%
  • 2021 Rsdn Inflation 13.2%, Nonres Bldgs 6.7%, Non-bldg Infra Avg 7.5%
  • 2022 Rsdn Inflation 11.7%, Nonres Bldgs 6.3%, Non-bldg Infra Avg 5.5%

edit 8-12-22 Much more information from a number of reliable sources is now available regarding recent inflation. Among several inputs, there is a recent BLS update to the Final Demand indices. See latest PPI tables. 2022 Residential Inflation 12.8%, Nonres Bldgs 9.4%, Non-bldg Infra Avg 5.6%.

edit update 9-19-22 inputs revise 2022 construction inflation as shown here. See Tables below:

  • 2020 Rsdn Inflation  4.6%, Nonres Bldgs 2.7%, Non-bldg Infra Avg -0.3%
  • 2021 Rsdn Inflation 13.4%, Nonres Bldgs 6.8%, Non-bldg Infra Avg 7.8%
  • 2022 Rsdn Inflation 14.6%, Nonres Bldgs 9.9%, Non-bldg Infra Avg 12.0%

Cost Indices

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

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.

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.

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. The PPI is a materials cost index. Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are other examples of commonly used indices that do not capture whole building cost.

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).

Residential inflation indices are primarily single-family homes but would also be relevant for low-rise two to three story building types. Hi-rise residential work is more closely related to nonresidential building cost indices.

A nonresidential buildings index would be representative of commercial construction or hi-rise residential construction, since hi-rise residential is quite similar too commercial construction and in fact substantial portions of the building are constructed by firms classified as commercial constructors.

The Construction Analytics Infrastructure composite index is useful only for adjusting the total cost of all non-building infrastructure. Individual types of non-building infrastructure require attention to specific indices related to that type of work.

History

Post Great Recession, 2011-2020, average inflation rates:

Nonresidential buildings inflation 10-year average (2011-2020) is 3.7%. In 2020 it dropped to 2.5%, but for the six years 2014-2019 it averaged 4.4%. In 2021 it jumped to 9%, the highest since 2006.

Residential 8-year average inflation for 2013-2020 is 5.0%. In 2020 it was 5.3%. In 2021 it jumped to 14%, the highest since 1978.

30-year average inflation rate for residential and nonresidential buildings is 3.7%. Excluding deflation in recession years 2008-2010, for nonresidential buildings is 4.2% and for residential is 4.6%.

  • Long-term construction cost inflation is normally about double consumer price index (CPI).
  • 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. Six-year 2014-2019 average is 4.4%.
  • Residential buildings inflation reached a post-recession high of 8.0% in 2013 but dropped to 3.5% in 2015. It has averaged 5.3% for 8 years 2013-2020.
  • 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.

Historically, when spending decreases or remains level for the year, inflation rarely (only 10% of the time) climbs above 3%. Avg inflation for all down/flat years is less than 1%. In 2021, spending was down for nonresidential buildings and non-building. Inflation for both was over 8%.

Nonresidential buildings inflation, after hitting 5.3% in 2018 and 4.8% in 2019, fell to 2.5% in 2020, lower than the 4.5% average for the previous four years. In 2021 it was 9.0%. Nonresidential buildings spending has not kept up with inflation since 2016. Spending needs to grow at a minimum of inflation, otherwise volume is declining. Since 2016, inflation exceeded spending by almost 20%.

Nonbuilding Infrastructure inflation, from 2013 to 2017 averaged less than 1%, but then jumped to 5% in 2018 and 2019. Inflation fell to -0.2% in 2020, but jumped to 9.1% in 2021.

Residential construction inflation in 2019 was only 3.4%. However, the average inflation for six years from 2013 to 2018 was 5.2%. It peaked at 7% in 2013 but dropped to 3.2% in 2015 and 3.4% in 2019. Residential inflation is 2021 was 14.0%.

Producer Price Index (PPI) Material Inputs (which exclude labor) to new construction averaged less than 1%/yr. from 2012 to 2017. Cost decreased in 2015 and 2016, the only negative costs for inputs in the past 20 years. Input costs averaged over 5% for 2018-2020. Then in 2021 input costs soared to 22%, the highest ever recorded.

2020 Performance

Even though material input costs were up for 2020, nonresidential inflation in 2020 remained low, possibly influenced by a reduction in margins due to the decline in new nonresidential buildings construction starts (-18%), which is a decline in new work to bid on. An 18% drop in new nonresidential buildings starts within one year equals a loss of near $100 billion of spending that would occur over the next 2-4 years. Nonbuilding starts were down 15%, equivalent to a loss of $50 billion in new work that would likely have been spread over 2-5 years. Residential starts in 2020 increased 6%, adding about $35 billion in new spending spread over 2 years.

Nonresidential buildings inflation for 2020 dropped to 2.6%, the first time in 6 years below 4%. Spending fell only 1.8% but after accounting for 2.6% inflation, volume decreased 4.4%. Nonresidential volume dropped every month in 2020 after the February 2020 peak, down 19% by December, but that’s not the bottom. Declines continue into 2021.

Nonbuilding Infrastructure in 2020 posted mild deflation of -0.3% after +5% in 2019, but averaged only 2%/yr. since 2011. 2020 spending increased only 0.7%. After accounting for -0.3% deflation, volume increased 0.4%. Public infrastructure inflation, up only 1.2% in 2020 after reaching over 4% in 2018 and 2019, averaged 2.7%, since 2011.

Residential inflation averaged 4.5% for 2020. Remarkably, spending increased 15% and 2020 volume was up 10%. Residential business volume dropped 9% from the March 2020 peak to the May bottom, but then by December recovered 16% to hit a post Great Recession high, 11% above Dec 2019.

2021 Performance

Most nonresidential construction markets had a weaker spending performance in 2021 than in 2020. Approximately 40%-50% of spending in 2021 is generated from 2020 starts, and 2020 nonresidential starts ranged down 10% to 25%, several markets down 40%.

Nonresidential buildings starts fell 18% in 2020, but gained 18% in 2021. Nonbuilding starts were down 15% in 2020, then added 8% in 2021. Residential starts increased 6% in 2020 and 22% in 2021.

Nonresidential buildings spending fell 4.4% in 2021. Nonbuilding spending was down 1.1%. Residential spending was the star of the year, up 23%, the largest yearly % gain on record.Nonresidential buildings inflation in 2021 jumped to 6.7%, the highest since 2007. Non-building average inflation was 7.5%, the highest since 2008. Residential inflation in 2021 jumped to 13.2%, the highest on record back to 1967.

After adjusting for inflation, total all construction volume in 2021 was down -1.1%. Residential volume for 2021 was up +10% while Nonresidential Bldgs volume was down -10% and non-building volume was down -7%. Jobs average over the year 2021 increased +2.3%. Volume was down -1.1%.

Current Inputs

U.S. Census Single-Family house Construction Index gained only 4% in 2020. The index is up 11.7% for 2021. The index has posted steady growth throughout 2021. Thru February 2022, over the last 4-5 months, the year/year rate of increase in this index has jumped from 12% yoy to 17% yoy. https://www.census.gov/construction/nrs/pdf/price_uc.pdf

Turner Construction Cost Index average annual for 2021 is up only 1.9% from 2020. That is unusually low, well below the range of 5% to 16% and the average of 9% for other nonresidential buildings indices. http://turnerconstruction.com/cost-index

Rider Levitt Bucknall nonresidential buildings index average for 2021 is up 4.8% from 2020. https://www.rlb.com/americas/

Mortenson’s cost index of nonresidential buildings data is posted through Q4 2021. The annual average inflation for 2021 is up 16% over 2020. https://www.mortenson.com/cost-index

RSMeans Nonresidential buildings index for 2021 is up 9.11%.

Engineering News Record (ENR) BCI inputs index for 2021 is up 10.0%. The BCI is up 5.3% year-to-date for the first 4 months of 2022.

Producer Price Index tables published by AGC show input costs to nonresidential buildings up about 18% for 2021. Final costs of contractors and buildings is up 5.3%. PPI Inputs for March show residential inputs up 8.2% and nonresidential buildings inputs up 12.6% ytd for 3 months. Also the average final demand increase cost for residential is up 16% and final demand cost for nonresidential bldgs is up 4.8% in the 1st quarter. https://www.agc.org/learn/construction-data

A caution here. AGC reports inflation for the year as the value reported in December of the year. Many others report the average inflation for all 12 months. These two reporting methods cannot be mixed. Construction Analytics has recently revised PPI data to reflect annual average inflation.

AGC April Construction Inflation Alert The construction industry is in the midst of a period of exceptionally steep and fast-rising costs for a variety of materials, compounded by major supply-chain disruptions and difficulty finding enough workers—a combination that threatens the financial health of many contractors. No single solution will resolve the situation.”

New construction starts reported by Dodge thru Feb are up 15% over the same period in 2021, with residential at a new high and nonresidential near the previous high. Feb 2022 total was the highest level of new starts on record. High levels of activity often lead to higher levels of inflation.

Wage offerings are increasing (up 6% in 2021), productivity is declining (down 7% in last 4 years) and there are many instances of material shortages or delays in delivery (lumber, windows, roofing, cabinets, mechanical equipment, appliances, etc.). These issues are all present now and all work to increase inflation.

PPI INPUTS table updated 11-16-22

Steel Mill Products prices are up over 100% in 2021, but steel mill products includes all kinds of steel for all uses including automobiles and appliances. Construction uses slightly less than 40% of all steel and that is predominantly fabricated structural steel.

Fabricated Structural Steel prices are up 25% in 2021.

Here’s an example of how a PPI cost change affects the total final cost of the product installed. The mill price of steel is about 25% of the final price of steel installed. The other 75% of the cost is detailing, fabrication, delivery, lifting, labor and equipment for installation and markup. What affect might a steel cost increase have on a building project? It will affect the cost of structural shapes, steel joists, reinforcing steel, metal deck, stairs and rails, metal panels, metal ceilings, wall studs, door frames, canopies, steel duct, steel pipe and conduit, pumps, electrical cabinets and furniture, and I’m sure more. Assuming a typical structural steel building with some metal panel exterior, steel pan stairs, metal deck floors, steel doors and frames and steel studs in walls, then all steel material installed represents about 14% to 16% of total nonresidential building cost. Structural Steel only, installed, is about 9% to 10% of total building cost. The other 6% of total steel cost applies to all buildings. If mill price is up 100%, then subcontractor final cost is up 25%. With all steel representing 16% of total building cost then final cost of building would be up 4%.

Steel Prices Reach Levels Not Seen Since 2008 by The Fabricator

2021 Input costs for Residential and Nonresidential Buildings is the highest on record. Materials prices support high inflation into 2022. But some sources expect gains to moderate from 2021.

PPI FINAL DEMAND updated 11-16-22

For up to data 2022 PPI see Producer Price Index PPI Tables 2022

Inflation

Could a recession bring on deflation?

Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, the recession years of 2009 and 2010. That was at a time when business volume went down 33% and jobs were down 30%. In 2020, business volume dropped 7% from February to May. By October, volume reached a low for the year, down 8%. Volume of work seemed to be recovering in the first quarter of 2021, up 3% from the October low, but then struggled most of the year. As of December 2021, volume is still down 7% from the February 2020 peak and up only 2% from the 2020 low. Jobs dropped 14%, 1,100,000+ jobs, in two months! But jobs recovered all but 3% by December 2020. As of December 2021, jobs are down 2% from February 2020 peak. We have now gained back 1,000,000 jobs. But we gained back far more jobs than volume. That means it now takes more jobs to put-in-place volume of work. That increases inflation.

Here’s a list of some 2021 indices average annual change and date updated.

  • +6.7% Construction Analytics Nonres Bldgs Mar
  • +5.4% PPI Average Final Demand 5 Nonres Bldgs Dec
  • +5.3% PPI average Final Demand 4 Nonres Trades Dec
  • +1.9% Turner Index Nonres Bldgs annual avg 2021 Q4
  • +4.8% Rider Levett Bucknall Nonres Bldgs annual avg 2021 Q4
  • +16% Mortenson Nonres Bldgs annual avg 2021 Mar
  • +11.7% U S Census New SF Home annual avg 2021 Dec
  • +7.4% I H S Power Plants and Pipelines Index annual avg 2021 Dec
  • +7.1% BurRec Roads and Bridges annual avg 2021 Q4
  • +6.0% FHWA Fed Hiway annual avg 2021 Q4
  • +9.11% R S Means Nonres Bldgs Inputs annual avg 2021 Q4
  • +10.0% ENR Nonres Bldgs Inputs annual avg 2021 Dec

Take note of the top six indices reported here. They all represent nonresidential buildings final cost. The spread is from 2% to 16%, wider than ever seen in any other year. The average of these six is 6.7%.

Future Inflation Forecast

Typically, when work volume decreases, the bidding environment gets more competitive. We can always expect some margin decline when there are fewer nonresidential projects to bid on, which typically results in sharper pencils. However, when materials shortages develop or productivity declines, that causes inflation to increase. We can also expect cost increases due to material prices, labor cost, lost productivity, project time extensions or potential overtime to meet a fixed end-date.

After adjusting for inflation, total volume in 2021 is down 1.1%. Residential volume for 2021 is up +10% while Nonresidential Bldgs volume is down 10% and Non-bldg volume is down 7%.

Total volume for 2022 is forecast up only 1.7%. After adjusting for inflation, Residential volume for 2022 is forecast up only 2%. Nonresidential Bldgs volume is forecast up 4% and Non-bldg volume is forecast down 2%.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, aside from remarkable cost increases for materials, if jobs growth continues while volume declines, then productivity declines, 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 31%. Jobs are up 41%.

Notice in this next plot how index growth for ENR BCI and RSMeans, both input indices, is much less than for all other selling price final cost indices. From 2010 to 2020, Construction Analytics total final cost inflation is 103/71 = 1.45 = +45%. Input cost indices total inflation over the same period is only 103/79 = 1.30 = +30%, missing a big portion of the cost growth over time.

Nonresidential Buildings Selling Price Indices vs Input Indices updated 9-19-22

Several Nonresidential Buildings Final Cost Indices averaged over 5%/yr. in 2018 and 2019 and over 4%/yr. from 2015 to 2019 averaging +25% inflation for 5 years. Input indices that do not track whole building cost averaged only 12% inflation for those five years, much less than final cost growth. As noted previously, most reliable nonresidential selling price indexes have been over 4% since 2014. All dropped to between 2% to 3.5% in 2020.

Current and predicted Inflation updated 11-16-22:

  • 2020 Rsdn Inflation  4.6%, Nonres Bldgs 2.7%, Nonbldg Infra -0.3%
  • 2021 Rsdn Inflation 13.3%, Nonres Bldgs 6.6%, Nonbldg Infra 7.8%
  • 2022 Rsdn Inflation 14.9%, Nonres Bldgs 11.4%, Nonbldg Infra 12.0%

Construction Analytics Building Cost Index updated 11-16-22

As of April 2022, not all nonresidential sources have updated their Q4 inflation index. A few are still reporting only 2% to 4% inflation for 2021, but several have moved up dramatically, now reflecting between +10% to +14%. One national resource is reporting only 1.9% inflation for 2021! The 2015-2023 table has been updated to include all Q1 2022 data where available. We can still expect some minor change to 2021 and future forecasts.

The tables below, from 2015 thru 2023, updates 2021 data and includes Q1’22 data when available and provide 2022-2023 forecast. The three major sector indices, highlighted, are plotted above. NOTE, in this table and these plots all indices are set to a base of 2019=100. All original data is gathered for all indices, but since all indices have different index dates (start in different years), all data is modified to a common base date, in this case 2019. That allows all indices to be easily compared. These indices are annual average index reported at midyear. All forward forecast values, whenever not available, are estimated by Construction Analytics using long-term avg.

Index Table updated 12-2-22 for older indices see Construction Inflation Index Tables + Links

How to use an index: Indexes are used to adjust costs over time for the effects of inflation. To move cost from some point in time to some other point in time, divide Index for year you want to move to by Index for year you want to move cost from. Example: What is cost inflation for a building with a midpoint in 2021, for a similar nonresidential building whose midpoint of construction was 2016? Divide Index for 2021 by index for 2016 = 111.7/87.0 = 1.284. Cost of building with midpoint in 2016 x 1.28 = cost of same building with midpoint in 2021. Costs should be moved from/to midpoint of construction. Indices posted here are at middle of year and can be interpolated between to get any other point in time.

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, stalled from 2015-2017, then increased 15% in 2018-2019. During that time, the average of non-building indices would have given +12% from 2010-2014, +13% for 2015-2017 and +10% for 2018-2019. The IHS Refinery, Petrochemical plants index fell 10% from 2014 to 2016. In that same two-year period the IHS Pipeline, LNG index fell 25%. The CA Infrastructure composite index is useful only for adjusting the grand total cost of all non-building infrastructure.

Infrastructure Table updated 12-2-22

Volume of Work – The Impact of Inflation on Jobs

Volume is spending minus inflation.

Construction Spending drives the headlines. Construction Volume drives jobs demand. Total Volume is forecast flat to down over the next 12 months. Residential dips 4% then recovers to current level, nonresidential buildings volume increases 6% and Non-building infrastructure volume will fall 7%.

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.

When spending increases less than the rate of inflation, the real work volume is declining. In 2020, Nonresidential buildings spending was down 2%, but with 2.5% inflation, so volume was down 4.5%. The extent of volume declines impacts the jobs situation. In 2021, Nonresidential Buildings jobs increased by slightly less than 1%, but construction volume was down 10%. Total all construction jobs increased by 2.3%, but construction volume was down 1.1%. Jobs are supported by growth in construction volume, spending minus inflation. If jobs increase faster than volume, that adds to productivity losses and adds to inflation. 

Many construction firms judge their business growth by the revenues passing through from all jobs under contract. The problem with that, for example, is that Nonresidential Buildings spending (revenues) are expected to grow 10% in 2022, but after adjusting for inflation the actual volume of work will be up by only 4%. By this method, in part, these firms are including in their accounting an increase in inflation dollars passing through their hands. Spending includes inflation, which does not add to the volume of work and does not support jobs growth.

Total volume for 2022 is forecast up only 1.7%. Residential volume for 2022 is forecast up 2.3%. Nonresidential Bldgs volume is forecast up only 4% and Non-bldg volume is forecast down 2.4%.

Construction Spending Current Dollars

Spending includes inflation which does not add to the volume of work. Before we can look at the effect on jobs, we need to adjust spending for inflation. The plot above “Spending by Sector” is current dollars. The sector plot below is adjusted for inflation and is presented in constant $. Constant $ show volume. Notice future residential remains in a narrow range after adjusting for inflation.

Constant $ = Spending minus inflation = Volume

Residential business volume is no stranger to hefty increases in spending and volume. In three years 2013-2015, spending increased 57% and volume was up 35%. For 2020-2021, spending increased 42% and volume was up 20%. Although residential spending remains near this elevated level for the next year, volume growth slows down in the 2nd half of 2022. Residential spending is forecast up 13% for 2022, but a forecast for 11.7% residential inflation slows volume growth to 2.3% for the year.

In January 2021, I had forecast by 3rd quarter 2021, nonresidential buildings volume would be 25% below the Feb 2020 peak. By 3rd qtr 2021 volume was down 21%. This follows the 20% decline in new starts in 2020. Most of the spending from those lost starts would have taken place in 2021. For 2022, spending is forecast to increase 10%, but inflation is forecast at 6%, resulting in volume growth of 4%.

In 2021, nonresidential buildings volume dropped 10%. Non-building volume dropped 7%. In 2022, nonresidential buildings volume should climb 4% but non-building volume falls 2.4%. In fact, the forecast shows non-building volume still drops another 4% in 2023. Although Power plants posted a massive gain in starts in 2019, declines in pipeline starts offset some of that gain. Transportation, a source of long duration projects, is also contributing to that decline. Although transportation starts were up 16% in 2021, that follows a 33% decline in starts in 2020-2021.

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

Jobs are supported by growth in construction volume, spending minus inflation. If volume is declining, there is no support to increase jobs. Although total volume for 2022 is forecast up 1.7%, with Residential volume forecast up 2.3%, Nonresidential Bldgs volume up 4% and Non-building volume forecast down 2.4%, we will not see total construction volume return to Feb 2020 level at any time in the next three years. By the end of 2023 volume is still down 3% from Feb 2020. 

Construction Jobs Growth

When we see spending increasing at less than the rate of inflation, the real work volume is declining. For example, with construction inflation increasing at 3% annually, a nonresidential building spending decline of -2% would reflect a work volume decline of 5%. The extent of volume declines would affect the jobs situation.

There is a difference comparing growth to same month last year versus comparing annual averages. For Dec’21 vs Dec’20, Residential jobs are up 75k, Nonresidential Bldgs up 61k and Nonbuilding up24k. But annual averages tell a much different story.

AVG 2021 vs AVG 2020, Rsdn+153k (+5.3%), Nonres Bldgs +28k (+0.8%), Non-bldg +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. Total labor production for the year must take into account all months. 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 -1.1%. Residential volume for 2021 is up 10% while Nonresidential Bldgs volume is down 10% and Non-building volume is down 7%. Those are remarkable nonresidential declines, not seen that deep since 2010.

If jobs are increasing faster than volume of work, productivity is declining. For example, nonresidential buildings volume declined 10%, but nonres bldgs jobs increase 0.8%. That’s a 11% swing in productivity. Since labor is about 30% to 35% of the cost of a project, if productivity declines by 11%, then inflation rises by 11% x 35%, or 3.8%. The most recent year drop in volume, while jobs increased, added 4+% to nonresidential buildings inflation for the year. But some jobs counted as Nonresidential actually work on residential construction, so the individual sector data is skewed and there is insufficient detail to count those jobs. Better to look at all volume vs all jobs.

Jobs and Volume of work growth should move in tandem, as seen in the above plot from 2011 to Jan 2018. With exception of 2006, when jobs increased by 10%, but volume dropped by 5%, a negative impact 15% spread, similar to 2018, these plot lines have been moving in tandem like this, with minor differences, back to 1992. If jobs grow faster than volume, productivity is declining (a negative impact). When these plot lines grow wider apart with jobs above volume, that is a sign of a productivity decline. That loss of productivity for the workforce is a hidden aspect of inflation, not shown in pricing or wages.

Jobs are supported by growth in construction volume, spending minus inflation. Unless volume of work increases or job growth slows, by the end of 2022, volume will be lower than today.

What does that hidden loss of productivity for the workforce look like? How can we tell the magnitude of this impact on inflation when it is hidden, not seen in wages? It shows up in this following plot, the volume of work Put-In-Place per job.

If jobs are increasing faster than volume of work, 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%.

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.

In January 2021, I had forecast We will not see construction volume return to Feb 2020 level at any time in the next three years. Well, unprecedented residential growth outperformed with 10% volume growth in both 2020 and 2021. Nonresidential and non-building volume since Feb 2020 are down 15% to 16%. Total construction volume since Feb 2020 is still down 2.5%. It is expected to fall another 3% in 2022. And the forecast still shows total construction volume from Feb 2020 down 2% by the end of 2023. That is a difficult environment to see jobs growth.

A final 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 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. This graphic might represent how most owners and estimators reference these two terms.

The U.S. Census Single-Family house Construction Index

NAHB – Prices of goods used in residential construction

The Producer Price Index tables published by AGC

AGC Inflation Alerts

Construction Analytics Construction Inflation Index Tables for indices related to Nonbuilding Infrastructure work and for many more links to sources.

See this post on my blog Construction Economic Outlook 2022

Download the complete (20 page) inflation article here, download button below

Midyear 2021 Economic Forecast Presentation

Construction Economics – An Eye on Forecasts

5-5-21

How can you tell if your preferred construction economic forecast is on track to finish the year as predicted?

For comparison, in the following link I’ve collected initial 2021 construction spending forecasts from nine different sources. Measuring Forecasting Methodology & Accuracy

As of 5-3-21, three months of actual data are in. The first step is to compare that current actual data to the predictions. The next step is to use a bit of math to answer the question, Can we get there from here?

Here’s examples:

First let’s look at Lodging. In the AIA initial 2021 Outlook, ABC forecast -13% and Moody’s forecast -52%. Current spending year to date through March is -25%. Are either of these forecasts achievable?

Lodging construction starts dropped 11% in 2019 and dropped another 50% in 2020. The seasonally adjusted annual rate (SAAR) of spending fell from $33bil in Q1 2020 to $24bil in Q1 2021, down 27%. The current rate of spending is coming in between 25%-30% below same month last year (yoy).

Now do the math.

Look at the ABC forecast for lodging. To finish the year down -13%, monthly spending needs to average -13% for all 12 months of 2021. 12 months x -13% = -157. But 3 months, down cumulatively 25%, are already known. 3 months x -25% = -75. What would need to occur for the last 9 months to reach a total 2021 spending down -13%?

12 x -13% = -157 minus 3 x -25% = -75, therefore -157 minus -75 = -82. In the remaining nine months, Lodging would need to fall a cumulative 82%, or 82/9 = an average of 9%/month.

Well, the current rate of spending is down 25% yoy and construction starts the previous two years are down 60%. Cash flows seem to indicate spending will not increase this year. There is little hope of seeing an increase in monthly spending in 2021. Since new starts are less than half of only two years ago, spending is unlikely to increase from a monthly rate down 25% to a monthly rate down only 9% for the next nine consecutive months. Therefore this forecast is unlikely to play out. The ABC forecast is too optimistic.

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Now let’s look at the Moody’s forecast for lodging. To finish the year down -52%, monthly spending needs to average -52% for all 12 months of 2021. 12 months x -52% = -624. But 3 months, down cumulatively 25%, are already known. 3 months x -25% = -75. What would need to occur for the last 9 months to reach a total 2021 spending down -52%?

12 x -52% = -624 minus 3 x -25% = -75, therefore -624 minus -75 = -549. In the remaining nine months, Lodging would need to fall a cumulative 549%, or 549/9 = an average of 61%/month.

Well, the current rate of spending is down 25% yoy and construction starts the previous two years are down 60%. Cash flows are indicating monthly spending will drop 3% to 4% per month this year. Spending would need to decline 61-25=36% in one month and stay at that rate for the remainder of the year, OR, spending would need to start falling at a rate of 12%/month and continue 12% lower every month for the remainder of the year. By December, spending would be down over 100%, so this is not even feasible. Therefore this forecast cannot play out. The Moody’s forecast is far too pesimistic.

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Second, let’s look at Manufacturing. In the AIA initial 2021 Outlook, ABC forecast +6.5% and Moody’s forecast -3.4%. Current spending year to date through March is -9%. Are either of these forecasts achievable?

Manufacturing construction starts dropped 10% in 2019 and dropped another 57% in 2020. The seasonally adjusted annual rate (SAAR) of spending fell from $78bil in Q1 2020 to $71bil in Q1 2021, down 10%. The current rate of spending is coming in between 7%-11% below same month last year (yoy).

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Look at the ABC forecast for manufacturing. To finish the year up +6.5%, monthly spending needs to average +6.5% for all 12 months of 2021. 12 months x +6.5% = +78. But 3 months, down cumulatively 9%, are already known. 3 months x -9% = -27. What would need to occur for the last 9 months to reach a total 2021 spending up+6.5%?

12 x +6.5% = +78 minus 3 x -9% = -27, therefore +78 minus -27 = +105. In the remaining nine months, Manufacturing would need to gain a cumulative 105%, or 105/9 = an average of +12%/month.

Well, the current rate of spending is down 9% yoy and construction starts the previous two years are down 67%. Cash flows seem to indicate spending will continue to drop at a rate of 2% to 3% per month this year. There is little hope of seeing an increase in monthly spending in 2021. Since new starts are down 67% from two years ago, spending is unlikely to increase from a monthly rate down 9% to a monthly rate up 12%, a swing of 21%, for the next nine consecutive months. Therefore this forecast is highly unlikely to play out. The ABC forecast is far to optimistic.

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Now let’s look at the Moody’s forecast for manufacturing. To finish the year down -3.4%, monthly spending needs to average -3.4% for all 12 months of 2021. 12 months x -3.4% = -41. But 3 months, down cumulatively 9%, are already known. 3 months x -9% = -27. What would need to occur for the last 9 months to reach a total 2021 spending down +3.4%?

12 x -3.4% = -41 minus 3 x -9% = -27, therefore -41 minus -27 = -14. In the remaining nine months, Manufacturing would need to fall a cumulative -14%, or -14/9 = an average of -1.5%/month.

Well, the current rate of spending is down 9% yoy and construction starts the previous two years are down 67%. Cash flows are indicating monthly spending will drop 2% to 3% per month, every month this year. Spending would need to begin falling at a rate of only -1.5%/month and continue -1.5% lower every month for the remainder of the year. A decline of 67% in starts over the previous two years solidifies a rate of decline beyond that at near 3%/month. This scenario would depend on cutting the rate of decline in half for the remainder of the year, but the lack of starts in previous years provides no help to achieve that goal. The Moody’s forecast is too optimistic.

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It’s in your best interest to know how to assess the plausibility of forecast components before you question an analysis that varies widely from your preferred forecast. It may be your preferred forecast that is way off.

2021 Construction Economic Forecast – Summary

Initial Construction Outlook 2021, 2-5-21, based on data from:

  • Actual Jobs data includes BLS Jobs to Jan 16th, issued 2-5-21
  • Forecast includes US Census Dec 2020 year-to-date spending as of 2-1-21
  • Forecast includes Dodge Outlook 2021 and Dec construction starts 1-19-21

SUMMARY – CONCLUSIONS

Construction Spending drives the headlines. Construction Volume drives jobs demand. Volume is spending minus inflation. Current outlook shows the most recent peak volume was 2017-2018. Total Volume is forecast to decline every year out to 2023, but Residential is rising, Nonresidential is falling.

When spending increases less than the rate of inflation, the real work volume is declining. Nonresidential buildings spending for 2020 is down -2%, but with 3% to 5% inflation, volume is down 5% to 7%. The extent of volume declines would impact the jobs situation.

STARTS – BACKLOG – SPENDING

By far the greatest impact of the pandemic on construction is the massive reduction in new nonresidential construction starts in 2020 that will reduce spending and jobs in that sector for at least the next two years. Residential continues to increase.

  • 2020 new starts declined -8%. Res +7%, Nonres Bldgs -24%, Nonbuilding -14%.
  • New starts for residential reached an all-time high in 2020. Expect up +5% in 2021.

Nonresidential construction starts in backlog at the beginning of the year provide for 75% to 80% of all spending in 2021. New starts in 2020 were down 24% for buildings and 14% for non-buildings, so backlog is down. It would be difficult to show any scenario that has these sectors up in 2021.

  • Starting Backlog for 2021 is forecast down -10%. Backlog for 2022 is forecast down -5%.

Construction has yet to experience the greatest downward pressure from the pandemic. After hitting a post-pandemic spending high in December, spending and jobs losses won’t hit bottom until 2022. Nonresidential declines outweigh Residential gains.

  • Spending forecast for 2021 is up +1.4%, but nonresidential buildings is down -11%.
  • Almost all gains in spending are due to large 12%/yr gain in residential.

The largest declines in 2021 spending are Lodging -37%, Amusement/Recreation -26%,    Manufacturing -19% and Power -15%.

PROJECT COST ESCALATION – INFLATION

  • Inflation for nonresidential buildings near 4% the next few years. Residential 5% to 6%.

VOLUME – JOBS

Construction Jobs annual average for 2020 is down 220,000 jobs. The current spending forecast is indicating that December 2020 was the highpoint for jobs. Residential jobs will be up in 2021, but Nonresidential Buildings jobs are down steep. Net jobs will be down 15 of next 18 months. Forecast 2021 net annual average jobs losses of -200,000. Nonresidential Buildings 2021 jobs losses will outweigh residential gains.

Selected slides from Feb 2021 Construction Outlook Presentation

EdZ Econ Feb 2021 SAMPLE SLIDES PDF

Read More 2021 Construction Economic Forecast

2021 Construction Economic Forecast

Initial Construction Outlook 2021, 2-5-21, based on data from:

  • Actual Jobs data includes BLS Jobs to Jan 16th, issued 2-5-21
  • Forecast includes US Census Dec 2020 year-to-date total spending as of 2-1-21
  • Forecast includes Dodge Outlook 2021 and Dec construction starts 1-19-21

This analysis utilizes Dodge Data & Analytics construction starts data to generate spending cash flow to then determine how spending may affect future construction activity.

When spending increases less than the rate of inflation, real work volume is declining. In 2020, nonresidential buildings spending is down -2%, but with 3% inflation, volume declined 5%. The extent of volume declines negatively impacts the jobs situation. A 5% decline in Nonresidential Buildings volume impacts $22 billion worth of work and more than 100,000 jobs. In 2021, spending is forecast down 11%, volume down 14%.

2021 Residential spending will climb about 13%, up $80 billion to $695 billion. Nonresidential Buildings spending is forecast to drop -11% to $410 billion, a decline of $50 billion. Non-building spending drops -2% to $343 billion, a decline of only $8 billion.

By far the greatest impact of the pandemic on construction is the massive reduction in new nonresidential construction starts in 2020 that will reduce construction spending and jobs for at least the next two years. Although nonresidential buildings spending is down only -2% for 2020, the 15% to 25% drop in 2020 new construction starts will mostly be noticed in lower 2021 spending.

New Construction Starts

Total construction starts for 2020 ended down -8%, but Nonresidential Buildings starts finished down -24% and Non-building Infrastructure starts are down -14%.

Residential starts finished the year up +7% from 2019.

Most nonresidential buildings markets and residential new starts are forecast to increase 5% in 2021. Nonbuilding starts will increase 10% in 2021.

In the Great Recession, beginning in Q4 2008, nonresidential buildings new construction starts fell 5%, then fell 31% in 2009 and 4% in 2010. Spending began to drop by Dec 2008, then dropped steadily for the next 24 months. Spending dropped 40% over that next two years. During that period, residential starts and spending fell 70%.

In 2020, nonresidential buildings starts fell 24%, but the six months from Apr-Sep, starts fell 33%. Starts are forecast to fall 4% in 2021. Nonres Bldgs spending began to decline in Aug, is now down 10% from Feb high and is forecast to drop steadily the next 20 months, for a total decline of 25%. This time around residential starts and spending are increasing.

Over the final 5 months of 2020, new Residential construction starts posted 4 of the 5 highest monthly totals since 2004-2006. Residential new starts finished 2020 at a 15-year high, with almost 50% of new activity for the year posting in the final 5 months, which will put a lot of that spending into 2021. Total 2020 residential starts are up 7%, but the average for the last 5 months is up 10% from the same period 2019. There is a large portion of 2021 spending from that last 5 months of starts, that will be up 10%.

Nonresidential Buildings new construction starts in 2020 averaged down 24%: Manufacturing -57%, Lodging -46%, Amusement/Recreation -45%, Education -12%, Healthcare -7%. Most of the spending from those lost starts would have taken place in 2021, now showing up as a major decline in spending and work volume.

Manufacturing starts in 2020 fell 57%. Manufacturing projects can have a moderately long average duration, because some projects are 4-5 years. So, projects that fell out of the business plan starting gate in 2020 caused a drop in starting backlog of -32% for 2021 and -33% for 2022. It should not be hard to see how that leads to a huge decline in construction spending the next two years. The same thing happened with Amusement/Recreation and Lodging, although lodging tends to have shorter duration, so affects mostly 2021.

Commercial/Retail starts in 2020 dropped 16%. But this group includes warehouses which finished the year up +1% and warehouses is 60% of the total market. All other Commercial/Retail ended 2020 down 35%.

Non-building Infrastructure new construction starts in 2020 averaged down -13%. Power -37%, Transportation -22%. Highway (along with residential) was the only market to gain new starts in 2020, +8%.

Power new starts fell 37% in 2020, but Power backlog has not increased since 2018. Even though Power new starts in 2021 are forecast to increase 13%, that’s not enough to push spending to positive.

Transportation starts declined -22% in 2020. But Transportation backlog increased 50% over the last three years. There is a large volume of Transportation projects currently in backlog, and although backlog does drop slightly for 2021, spending is supported by the large volume of starting backlog and a forecast for increased new starts in 2021.

The following NEW STARTS table shows, for each market, the current forecast for new construction starts. With exception of residential, spending in all other markets, due to longer schedules, is most affected by a decline in new starts, not in the year of the start, but in years following. As we begin 2021, some effects of reduced starts have not even begun to show up in the data. A 24% decline in new nonresidential starts in 2020 results in a huge decline in spending and jobs in 2021-2022.

Almost every nonresidential construction market has a weaker spending outlook in 2021 than in 2020, because approximately 50% of spending in 2021 is generated from 2020 starts, and 2020 nonresidential starts are down 24%, with several markets down 40%. Starts lead to spending, but that spending is spread out over time. An average spending curve for nonresidential buildings is 20:50:30 over three years. Only about 20% of new starts gets spent in the year they started. 50% gets spent in the next year. The effect of new starts does not show up immediately. If new nonresidential buildings starts in 2020 are down 24%, the affect that has in 2020 is to reduce spending by -24% x 20% = – 4.8%.  The affect it has in 2021 is -24% x 50% = -12%. In 2022-2023 the affect is -24% x 30% = -7.2%.

Starting Backlog

Starting backlog is the estimate to complete (in this analysis taken at Jan 1) for all projects currently under contract. The last time starting backlog decreased was 2011.

Backlog leading into 2020 was at all-time high, up 30% in the last 4 years. Prior to the pandemic, 2020 starting backlog was forecast UP +5.5%. Due to delays and cancelations, that has been reduced to +1.8%, still an all-time high. Starting Backlog, from 2011-2019, increased at an avg. rate of 7%/year.

If new construction starts are greater than construction spending in the year, then for the following year starting backlog increases. It’s when new starts don’t replenish the amount of spending in the year that backlog declines. And that is the case this year.

Total starting backlog is down -10% for 2021 and -5% for 2022. 2021 Starting Backlog is back to the level in 2018. In 2022, backlog drops to the level of 2017.

Nonresidential Buildings new starts declined by -24% in 2020 resulting in starting backlog drops -19% for 2021 and drops -9% for 2022.

For Non-building Infrastructure, a drop of -14% in 2020 starts results in a drop of 9% in 2021 starting backlog and -5% for 2022. 

Residential starting backlog for 2021 is up +12%. New starts are up 6%.

2021 backlog declines in every nonresidential market, except Highway.

80% of all nonresidential spending in any given year is from backlog and could be supported by projects that started last year or 3 to 4 years ago. 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.

Projects in starting backlog could have started last month or last year or several years ago. Many projects in backlog extend out several years in the schedule to support future spending. Current backlog could still contribute some spending for the next 6 years until all the projects in backlog are completed.

Reductions in starts and starting backlog lead to lower spending. Residential construction is going counter to the trend and will post positive results for new starts, backlog and spending for the next two years. Nonresidential buildings will experience the greatest reductions in new starts, backlog and spending through 2022.

Spending Forecast 2021

2021 Residential spending will climb about 13%, up $80 billion to $695 billion. Nonresidential Buildings spending is forecast to drop -11% to $410 billion, a decline of $50 billion. Non-building spending drops -2% to $343 billion, a decline of only $8 billion.

Most all the change in this forecast from previous is an increase to residential spending. Both recent starts and spending increased substantially since previous forecasts. When looking at Total Construction Spending for 2021, residential growth obscures the huge declines in nonresidential.

The monthly rate of spending for residential increased 33% in the 7 months from May to December. The last time we had growth like that was 1983. The last time we had rapid growth in residential work, 2013-2014 and 2004-2005, it took 2 years to increase 33%. Residential spending in Dec 2020 is 21% higher than Dec 2019.

Nonresidential Buildings spending drops -2% to -3% each quarter in 2021. Nonresidential Buildings spending as of Dec. 2020 is down 10% From Feb. 2020 and 8% from Q4 2019. By 3rd quarter 2021, nonresidential buildings spending is forecast down another 12% lower than Dec. 2020, or 20% below the Feb. 2020 peak. This tracks closely with the 24% decline in new construction starts in 2020.

Nonresidential Buildings construction will take several years to return to pre-pandemic levels. Although nonresidential buildings spending is down only -2% for 2020, the 15%-25% drop in 2020 construction starts will mostly be noticed in lower 2021 spending. Project starts that were canceled, dropping out of new backlog between April and September 2020, would have had midpoints, or peak spending, March to October 2021. Nonbuilding project midpoints could be even later. The impact of reduced new starts in 2020 is reduced spending and jobs in 2021 and 2022.

Almost every market has a weaker spending outlook in 2021 than in 2020, because of lower starts in 2020. Starts lead to spending, but on a curve. A good average for nonresidential buildings is 20:50:30 over three years. 20% of the total of all starts in 2020 gets spent in 2020 (yr1) and that represents also about 20% of all spending. 50% of the total value of 2020 starts gets spent in the following year, 2021. So, 50% of spending in 2021 is generated from 2020 starts. If starts are down 20% and 50% of spending comes from those starts, spending will be down 20% x 50% of the work.

For 2020, the biggest declines are Lodging (-14%), Manufacturing (-10%) and Amuse/Recreation (-7%). Commercial/Retail finishes up +4.2%, but this is entirely due to Warehouse, 60% of the total Commercial/Retail market. Office and Educational are down -4% and -1%. Nonresidential buildings takes the brunt of declines in both 2020 and 2021.

In 2021, every nonresidential building market is down from 2020, some markets down -10% to -20%. Educational, Healthcare and Office are all down -3% to -6%. Non-building infrastructure Power market is down -15%, but Transportation spending is up +10% due to strength in backlog from several multi-billion$ starts over the past few years.

Manufacturing projects have a moderately long duration. So, projects that fell out of the business plan caused a drop in starting backlog of -32% for 2021 and -33% for 2021. It should not be hard to see how that leads to a huge decline in construction spending the next two years. The same thing happened with Amusement/Recreation and Lodging, although lodging tends to have shorter duration, so affects mostly 2021.

A recent AGC survey of construction firms asked, how long do you think it will be before you recover back to pre-COVID-19 (levels of work)? The survey offered “longer than 6 months” as an answer choice. Less than 6 months was the right answer for residential, but my current forecast for full recovery of nonresidential buildings work is longer than 6 years.

Construction Spending drives the headlines. Construction Volume drives jobs demand. Volume is spending minus inflation. Inflation $ do not support jobs. Current outlook shows (recent) peak volume was 2017-2018. Volume is forecast to decline every year out to 2023.

Before we can look at the effect on jobs, we need to adjust spending for inflation. The plot above “Spending by Sector” is current dollars. Below that plot is adjusted for inflation and is presented in constant $. Constant $ show volume. Notice future residential remains in a narrow range after adjusting for inflation. No sector shows improvement in volume through Jan. 2023.

When we see spending increasing at less than the rate of inflation, the real work volume is declining. For example, with construction inflation at 3% annually, a nonresidential buildings spending decline of -2.1% in 2020 would reflect a work volume decline of 5.1%. The extent of volume declines would impact the jobs situation.

While 2021 Residential spending will climb about 13%, Nonresidential building spending is forecast to drop -11% and Non-building spending drops -2%.

But with 4% inflation, after inflation Residential Volume is up only 9%, Nonresidential Building is  down 15% and Non-building is down 6%.

By far the greatest decline in volume is in the nonresidential buildings sector. The greatest losses in 2020 are Lodging, Manufacturing, Amusement/Recreation and Commercial/Retail (without warehouse). In 2021, every major nonresidential building market drops in volume, with staggering 30% declines in Lodging and Amusement/Recreation. Commercial/Retail and Manufacturing will drop -13% to -15%.

Here’s the same graphic as above, but in Constant $, so it’s inflation adjusted. That provides the change in volume of work.


Volume of Work

Residential construction volume dropped 12% from the January 2020 peak to the May bottom, but has since recovered 22% and now stands at a post Great Recession high, 10% above one year ago. Although residential spending remains near this high level for the next year, volume after inflation begins to drop by midyear.

Nonresidential volume has been slowly declining and is now down 10% from one year ago. By 3rd quarter 2021, nonresidential buildings volume is forecast down another 15% lower than December, or 25% below the Feb 2020 peak. This tracks right in line with the 24% decline in new construction starts in 2020. Most of the spending from those lost starts would have taken place in 2021, now showing up as a major decline in spending and work volume.

While construction spending in 2021 is forecast up 1.3%, after inflation construction volume is expected to decline 2.5%. Residential construction spending is forecast up 13%, volume up almost 9%, but 2021 nonresidential buildings spending is forecast down -11% leading to a decline in volume after inflation of -14%. Nonbuilding Infrastructure spending in 2021 declines -2.5%, volume drops -6%.

Nonresidential buildings volume declines of 14% project to a loss of over 400,000 jobs next year and non-building infrastructure is projected to drop 60,000 jobs, but Residential could experience growth next year of 250,000 jobs. That could net annual average jobs losses to -200,000. Job losses continue into 2022 with net volume declines of 4%.

Jobs are supported by growth in construction volume, spending minus inflation. We will not see construction volume return to Feb 2020 level at any time in the next three years. This time next year, volume will be 5% lower than today, 10% below the Feb 2020 level.

Download the complete 2021 Initial Forecast here

Along with this forecast document, See these related articles

2021 Construction Economic Forecast – Summary

2021 Construction Inflation

Measuring Forecasting Methodology & Accuracy

Public/Private Construction Spending Forecast 2020-2021

Behind the Headlines – Construction Jobs in 2021

Construction Jobs 2020 down 207,000

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