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Down the Infrastructure Rabbit Hole. A twitter thread on construction capacity.
The infrastructure sector is only 25% of all construction spending, mostly due to the Power market. Power accounts for 33% of all infrastructure spending. Highway represents 30% and Transportation about 15%. However, Power is 80% private, Transportation 30% private.
Only 60% of all Infrastructure spending is publicly funded. Highway is about half of all publicly funded Infrastructure construction. That public subset of work in the last 25 years has grown by $20 billion/year only once and averages growth of less than $10 billion/year.
Most public work is Infrastructure, or public works projects, but some public work is nonresidential buildings. Public Safety is 100% public. Educational projects are 80% public. Amusement/Recreation Facilities (i.e.’ Convention Centers, Stadiums) is 50% public. Healthcare is 20% public.
The two largest markets contributing to public spending are Highway/Bridge (32%) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending.
Sewage/Waste Water and Water Supply add up to another 10% of the market. All other markets combined, Conservation and all other various nonresidential buildings, none more than 4% of the total, account for less than 20% of public spending.
It is rare that Nonbuilding Public Infrastructure construction spending increases by more than $10 billion in a year. Once, only once, it increased by an average of $10 billion/year for three years. Excluding recession, average annual growth is $4 billion/year.
It is rare for Total All Public Infrastructure to increase by $20 billion in a year. It has done so only ever twice. Excluding the two worst recession years, the average annual growth since 2001 is $7 billion/year.
For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 to 50,000 new construction jobs per year.
Infrastructure construction spending is near all-time highs and has been for the last several years. Public spending is 10% ($30bil) below all-time highs, the largest deficits coming from Educational, Sewage/Waste Water and Water Supply.
Either an infrastructure spending plan is used to create new work or it becomes a funding source to pay for work already planned, in which case it does not increase spending or jobs projections.
As proposed, states and municipalities would be required to come up with 80% of the funding for any new infrastructure project to qualify for 20% of funding from the federal government, potentially shifting the bond funding tax burden to states.
Alternatively, states could solicit private partnership funding, in which case what would normally be considered public assets could become privately controlled assets. This raises a whole new list of issues for discussion, not engaged here.
Infrastructure currently has the highest amount of work in backlog in history. Public work is at its 2nd highest starting backlog only to 2008. Starting backlog accounts for 80% of spending in the current year and 60% of spending in the following year.
Current levels of backlog and predicted new starts gives a projection that Public Nonbuilding Infrastructure spending will reach an all-time high in 2018 and again in 2019.
Total All Public Infrastructure in 2018 also reaches an all-time current$ spending high. However, in constant$, inflation adjusted, volume of work is still well below previous peak.
The non-building infrastructure construction sector does not have the capacity to increase spending over and above existing planned (booked and projected new starts) work by another $10 billion/year, nor does it have the capacity to add an additional 40,000 jobs per year.
Total All Public Infrastructure construction, including public works and Nonresidential public buildings, already has a growth projection near historic capacity. It cannot double that volume by another $10-$20 billion/year and add an additional 40,000 – 80,000 jobs per year.
Below is the timeline of my articles series on Infrastructure. Some of the numbers have changed slightly over the past year, but not enough to change the premise of the articles.
Total construction spending in 2017 will reach $1,236 billion, an increase of 4.2% over 2016. Residential spending is above 10% growth for the 5th consecutive year.
Year-to-date construction spending growth through October is 4.1%.
Residential leads construction spending growth in 2017 for the seventh consecutive year, up 10.6%. My Nonresidential Buildings forecast has been lowered since July but finishes the year up 2.8%. Only Non-building Infrastructure will not improve over 2016, down 3.7% for the year. However, Non-building Infrastructure has been at an all-time high for the previous two years.
This forecast is down slightly since July due to reductions in both nonresidential buildings and non-building infrastructure. Educational, Office, Power and Highway, four of the five largest markets which together make up half of all nonresidential spending, were all lowered. Some of these markets are prone to very large post-annual upward revisions and that has the potential to add to 2017 spending when those revisions are released in July 2018. In the July 2017 revisions, Power spending for 2016 was revised up by 10%.
History shows spending has been revised up 51 times in the last 55 months. I wouldn’t be surprised to see future revisions smooth out spending in unusually low periods (April and July) and increase total 2017 spending above this forecast. I suspect revisions in July 2018 may show 2017 spending as high as $1,250 billion. The average post-annual total spending revision for the last five years is +2.3%. The total revision to 2016 was only 2.2%.
None of the spending detailed in this analysis includes any projections of potential work from future infrastructure stimulus.
Total construction spending in 2018 is currently forecast to reach $1,334 billion, an increase of 8.0% over 2017. For the first time since pre-recession, Non-building Infrastructure will lead all spending with potential to increase by 10% growth over 2017.
Non-building Infrastructure is forecast to lead 2018 spending with an increase of 10.2% due to very large projects in Power and Transportation. Nonresidential Buildings growth is strong for 2018, forecast up 9.3%. Residential spending in 2018 slows to only 5.7% growth after six years averaging 13%/year.
Total spending will reach a new high in 2018 for the third consecutive year. However, in constant $ adjusted for inflation, spending is just back to the level of 2008. The all-time constant $ high was reached in 2005. Adjusted for inflation, 2018 will still be 12% below that level. At current rates of growth, we would not eclipse the previous high before 2022.
Growth of 8% in 2018 or $100 billion in construction spending demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction volume. Construction jobs have never increased by 500,000 in one year. However, $100 billion in added spending is not the same as $100 billion in volume, and jobs grow based on volume. Although spending will increase 8%, construction inflation has been hovering near 4.5% to 5% for the last five years. Real volume growth in 2018 after inflation is expected to be just over 3% or $40 billion. That would mean the need, if there are no changes in productivity, is to add about 200,000 additional workers in 2018, a rate of jobs growth that is well within reach since that is below the average jobs growth for the last seven years.
Residential Buildings Spending
Total Residential spending in 2017 will finish at $523 billion, up 10.6% from 2016. Residential spending is above 10% growth for the 5th consecutive year.
Residential spending was expected to dip between May and October due to a low volume of work contributed from starts cash flows. The actual data shows, after reaching a seasonally adjusted annual rate (saar) of $536 billion in March, the high for the year, spending dropped 3% to 4% to as low as $515 billion saar three times and has averaged only $520 billion saar from April through October. New starts in Q1’17 reached an 11-year high, so I expect the rate of spending to increase at year end. Residential work will close out the year with 10.6% growth, the 5th consecutive year over 10%. Average growth the last six years is 13%/year.
Residential spending is 50% single family, 13% multi-family and 37% improvements.
Residential Improvements has posted 18% growth year-to-date. Single Family spending is up 9% while multi-family is up only 4%. That is compared to 2016 when improvements for the year finished up 10%, SF up 4% and MF up 5%. Census does not include flood damage repairs in improvements but does include full flood damaged structure replacements in improvements.
Total residential spending in 2018 slows to a forecast of $553 billion, only 5.7% growth over 2017.
Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike Nonresidential, backlog does not contribute nearly as much to Residential spending within the year. New Residential starts in Q1’17 reached an 11-year high. Residential starts are at a post-recession high.
Residential spending will reach a 12-year high in 2018. Adjusted for inflation, all years from 1996 through 2007 were higher. Inflation adjusted spending is still 30% below the all-time high reached in 2005.
Nonresidential Buildings Spending
Total Nonresidential Buildings spending in 2017 will come in at $420 billion, up only 2.8% from 2016.
Commercial/Retail is expected to finish the year with +13% growth and Lodging +9%. An unexplained surprise was Office, which by early indicators was predicted to show large gains in spending. Two independent sources reported new office starts in 2016 up 25% to 30%. Starting backlog coming into 2017 was near or at an all-time high. Spending was forecast to jumped at least 20% in 2017. Instead, spending posted declines from May to September and is now forecast to finish with only a 4% gain. This market accounts for the single largest miss in my forecast posted in Feb 2017.
The only major nonresidential building in decline this year is Manufacturing. Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Spending stayed close to that level in 2016. Based on cash flows from starts, spending was expected to decline in 14 of the last 18 months. It declined in 11 of those months. We are at the point of turn-around with only one monthly decline predicted in the next three months and no spending declines expected next year. For 2017, Manufacturing new starts are up 35%.
Nonresidential Buildings starts in the six months from Aug 2016 to Jan 2017 posted the (then) highest amount of new starts since Jan-Jun 2008, also the year Nonresidential Buildings spending peaked. Then new starts in the six months Apr-Sep 2017 just surpassed both those previous peak highs.
Nonresidential Buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle. Starting backlog has increased for five years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for five years at an average 9%/year.
Total nonresidential buildings spending in 2018 is forecast to reach $458 billion, an increase of 9.3% over 2017. Office, educational and manufacturing make up 70% of the growth.
Nonresidential Buildings will reach a new high for spending in 2018, surpassing the previous 2008 high. However, adjusted for inflation, spending is 18% below the all-time high reached in 2000.
Non-building Infrastructure Spending
Total non-building infrastructure spending in 2017 drops to $293 billion, down 3.7% from 2016.
Non-building Infrastructure spending, always the most volatile sector, dropped to yearly lows from June through September. Infrastructure construction spending in August dropped to the lowest since November 2014. However, this was predicted. Cash flow models of Infrastructure starts from the last several years show current dips in monthly spending are being caused by uneven project closeouts from projects that started several years ago.
Current backlog is at an all-time high and spending will follow the expected increased cash flows from the elevated backlog. Environmental Public Works (Sewage/Waste disposal down 16%, Water Supply down 9% and Conservation/Dams & Rivers down 7%) posted the largest declines in 2017 and accentuated the declines in the infrastructure sector. The sector is expected to increase slightly in the last quarter 2017. In recent months there are already substantial gains being posted in Conservation and Transportation.
No future growth is included from infrastructure stimulus and yet 2018 is projected to increase by 10%.
Total non-building infrastructure spending in 2018 is forecast to reach $324 billion, an increase of 10.5% over 2017. My forecast for 2018 is predicting every infrastructure market will post gains, but it is the Power and Transportation markets that account for almost all the growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Spending growth in the Power market is not quite so apparent. Combined Power new starts are down for both 2016 and 2017, but the spending gains are coming from projects that started in 2015, a year in which starts were up over 120%.
Non-building Infrastructure will reach a new high for spending in 2018. This sector had posted a new high in 2015 and nearly equaled that in 2016. Adjusted for inflation, spending in 2018 will be nearly equal to the all-time highs reached in 2015 and 2016.
Total public spending for 2017 remains flat at $287 billion with most major public markets down for the year.
At midyear, I expected Educational and Highway to support a Public spending increase in 2017. Those gains did not materialize. A decline in Highway spending offset small gains in Educational. By far the largest Public spending decline is in Sewer and Waste Disposal, down 16%.
Public spending hit the low for the year in July. It increased for the last three months, most recently by an 11% increase in Public Educational spending in October. We are now near the high for the year and can expect to see another six months of growth before spending levels off in mid-2018.
When you see graphics that present Residential, Nonresidential and Public spending all on the same plot, they are not additive. Only Residential and Nonresidential can be added to reach total spending. Public is a subset of Nonresidential, composed partly of Nonresidential Buildings (~40%) and partly Non-building Infrastructure (~60%), with a slight amount of residential.
The two largest markets contributing to public spending are Highway/Bridge, 32% of total Public spending, and Educational, 25% of Public spending. The third largest market, Transportation, is only about 10% of Public spending. Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, which accounts for 8%, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.
All of Highway/Bridge is Public spending. Only 80% of Educational spending is Public and only 70% of Transportation is Public. Environmental Public Works markets are 99% Public.
Total Public spending in 2018 is forecast to reach $305 billion, an increase of 6.3% over 2017. Public spending in 2018 will reach the highest year over year growth since 2008.
Educational and Transportation will contribute equally and together account for almost 60% of the Public spending growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Educational new starts total for the last three months posted the highest quarter in at least seven years. The 2nd highest quarter was also within the last 12 months, so still contributes fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.
See this companion post for Starts Trends Construction Forecast Fall 2017 11-8-17
After New Starts, dollars are tracked in Backlog, Backlog Construction Forecast Fall 2017 11-10-17
For more on Jobs and Workload see Construction Jobs / Workload Balance 11-7-17
For effects of inflation see Constant Dollar Construction Growth 11-2-17
Infrastructure work does not normally grow in leaps and bounds.
Seldom does infrastructure construction spending grow by more than $10 billion in a year. Rarely does it grow by more than $20 billion.
Currently at about $300 billion a year, infrastructure represents only about 25% of all construction spending. The infrastructure sector is comprised of the longest duration type projects such as energy, highway/bridge, transportation terminals, railway and water/waste water resource development. It is not unusual for projects to take four to five years to reach completion.
Increasing new construction starts by $40 billion for new infrastructure work in any given year on average might add only $8 to $10 billion in spending in each of the next four or five years. To increase spending by $10 billion a year we would need to increase new starts by $40 billion every year. We’ve only ever come close to adding $40 billion in new starts once, in 2015.
In 2015, new infrastructure starts increased by $38 billion or 27%, due to an increase of $13 billion in new power generation plants and an increase of $21 billion in new LNG plants and port facilities. That will keep infrastructure spending growth elevated throughout 2018 and 2019. Measuring a total increase of 250% in power projects, that is a scenario unlikely to be duplicated in coming years.
2017 spending comes from: 10% 2014 starts; 35% 2015; 35% 2016 and 20% new starts in 2017.
Although new infrastructure starts were down in 2016 and are expected to decline again in 2017, the amount of work in backlog at the start of 2017 is the highest its ever been and spending in 2017 is forecast near the all-time (2015) high. Spending in 2018 from backlog will increase again and 2018 will hit another all-time high. There are no annual declines in spending predicted for the next four years. Some very large public infrastructure projects that started in 2014, 2015 and 2016 still contribute large amounts to spending in 2017 and well into 2018.
Increasing infrastructure spending by $10 billion a year would require adding about 35,000 to 40,000 new construction jobs per year. To accommodate all growth since the recession bottom, this sector averaged adding only 20,000 new jobs per year. Current spending growth is predicted to add $40 billion in work over the next three years and this will absorb all new heavy engineering jobs growth. The non-building infrastructure sector does not have the capacity at this time to increase spending by another $10 billion/year over its current growth rate, nor does it have the capacity to add an additional 40,000 jobs per year.
This summary of current projected spending does not include any future infrastructure work that might be generated from a proposed $1 trillion spending plan.
It is important to note here that 90% of all work in the power sector is private work. Only 60% of infrastructure work is publicly funded. However, some nonresidential building is publicly funded.
Public spending is not all public works projects.
Most public work is infrastructure, or public works projects. However, not all infrastructure is public work. The power market is the largest infrastructure market. But, already noted above, power work is mostly private. So the market responsible for one third of all infrastructure work is 90% private. Educational projects, typically considered nonresidential buildings, are 80% public and 20% private.
The two largest markets contributing to public spending are highway/bridge (32%) and educational (25%), together accounting for 57% of all public spending. The next largest market, transportation, is only about 10% of public spending.
Highway/bridge work fluctuates the most with large monthly swings up or down. However, 4 out of 5 times over the last 12 years, any large monthly move up or down was accompanied by a partially offsetting opposite move the following month. Highway spending hit an all-time high in 2015 and again in 2016.
Two of the three largest annual growth increases ever recorded in public spending were driven by educational spending. In the third largest growth year, highway just barely edged out educational spending for the top spot.
If educational work were to be considered part of future infrastructure expansion, then the maximum capacity to increase public infrastructure spending obviously increases. Together with other public works projects this could potentially provide a large enough market base to increase public infrastructure spending by $10 billion a year over and above the growth already in backlog or anticipated. But most of the added work would need to be to the education market. Even with potentially adding educational market work to the infrastructure expansion plan, the hope of expanding infrastructure spending by another $10 billion/year remains difficult at best.
Any increase to future work needs to be considered as over and above the spending growth patterns already due to work in backlog and new starts anticipated. This plot of predicted public spending does not include any future infrastructure work that might be generated from a proposed $1 trillion spending plan. About 80% of all spending in 2017 is already in backlog. About 50% of all the spending from Jan. 2018 through Jan. 2020 will already be in backlog by Jan. 2018.
The following article is an extension of this discussion Calls for Infrastructure Problematic
updated 2-16-17 edited to include 2016 year-end total$ public vs private
The two largest components of Public Construction Spending, by far, are Highway/Bridge/Street and Educational Buildings. These two markets have more impact on the magnitude of public spending than any other markets. All of Highway ($90bil) is public spending. About 80% ($70bil out of $88bil) of Educational buildings is public spending. Together they add up to 55% of all public construction spending.
The next three largest public markets in order are: 70% of Transportation ($30/$42bil); all of Sewage/Wastewater ($22bil) and all of Water Supply ($12bil). These three markets account for only about 22% of public spending. Eight remaining markets, none larger than 3.5% of the total public sector, combined make up ~20% of total public spending. Five of those eight, Office, Health care, Public Safety, Amusement and Power, each account for $8 to $10bil and each is 3% to 3.5% of Public work.
Public Construction Spending average for the first six months of 2016 was the highest since 2010 and is up 10% from the Q4’13-Q1’14 low point.
Public spending finished 2016 down 0.8% from 2015, but that is down from a near six-year high, so spending is still strong. It is still -9% below its 2009 peak.
The biggest mover to total public spending this year is educational spending. Public educational spending in 2016 is up 4.7%. Because it represents 25% of all public spending, it has a net impact of moving total public spending up +1.2%, greater impact than any other market.
Public commercial spending is up 24% but has only a 1% market share of public work so moves public spending by only +0.24%. Power is down -20% but at a share of only 3% moves public spending by only -0.6%. Public components of office, public safety, sewage/waste disposal and water supply are all down by a combined -7%. At a combined market share of 18% that nets a -1.26% reduction in total public spending.
Public spending peaked in 2009 when Educational buildings spending was at its highest. Highway spending has been at or near its peak for the last 16 months but that, with current educational spending, which is still more than 20% below its peak, has not been enough to carry public spending to new highs.
Expected spending predicted from new construction starts gives a much better picture for 2017.
Highway/Bridge/Street starts in 2015 finished just shy of a 6-year high (in 2013) but 2016 was down 13% from 2015. On average 2015+2016 starts are still 5% higher than 2014. Highway projects are long duration, so very good starts from the end of 2014 and the beginning of 2015 will still contribute strong spending well into 2017. Highway spending is expected to finish up slightly over 2016.
Educational new starts in 2016 finished the year up 11%, posting a 4th consecutive annual increase and educational spending for 2017 should finish up 10%.
Transportation spending in 2017 should increase 6%.
Overall, total public construction spending in 2017 is predicted to grow by 8% to 9%, the first substantial growth since 2007, reaching new highs in the 2nd half. Educational spending will take the lead in 2017 public work. Historically, public spending increases by less than 10% per year.