Is activity climbing or declining?  Will costs go up or down? Will we have a winter slowdown? Where are the markets headed? I read an article this morning that stated “momentum is losing steam.” Is it?

I’ve been gathering Construction economic reports for comparison and I see some predictions for 2016 that frankly are only about what I’m predicting for 2015. To be fair, there are reliable predictions that indicate growth similar to what I predict. When data was available for two thirds or better of 2015 total activity there were still predictions for how specific markets would finish the year that varied by as much as 20% to 30%. In one instance the year-to-date actual through September has already exceeded the year end estimate from one firm. Surprising, once that much actual year-to-date information is in hand that there could be that much variation.

And how will markets perform in 2016?  Here’s a few examples from a variety of sources; educational, healthcare, lodging and manufacturing all have more than one estimate for 2016 growth in the range of 0% to 4%, values that would not keep spending growth up with inflation, meaning volume would actually decline. My estimates for those markets are all 10% or higher. Variations of 10% to 15% in growth are common in the data.

So, here’s a few comments on predictions and on what to expect.

Unless something Earth-shattering happens, there is a select set of monthly data that statistically predicts the yearly outcome for total spending and market spending, within +/-1.5% for a smaller data set and within +/-1% for a slightly larger data set, but you have to wait longer to get that larger data set. It failed once in 14 years, by 1/2 of 1 percent. The same analysis can be performed individually for markets and sectors.  The potential variance increases for some markets to about +/-3%.

The Dodge Momentum Index and the AIA Inquiries index are leading indicators to potential future work.  They foretell activity in the Architectural Billings Index (ABI), which is a leading indicator to new construction starts. New starts provide the future cash flows for spending.

Spending in any given month is the sum of how much can be put-in-place generated by the cash flow from each of the project starts that got booked in the previous year or two, or three for long duration projects.  For the next month the unknown amount is only about 3% or 5% that will be generated by new starts in the most recent 30 days.  The remainder is already booked. Two months out the prediction includes 6% to 10% uncertainty, and so on.

Expect a winter slowdown. It’s not because of the weather. There may be additional repercussions if we experience severe weather, but the slowdown is predetermined because very large starts that got booked from a year to two years ago are reaching completion and dropping out of the monthly spending. Starts can be erratic.  This causes periodic fluctuations in monthly spending.  It’s normal.

Also what may not be apparent is what happens due to the difference in seasonally adjusted (SA) and not seasonally adjusted (NSA) values. Readers most often track the changes in SA values, but spending is generated from cash flow and cash flow is generated from the NSA values. Differences can be huge.  As an example, August starts with an SA of $300bil produce 50% more actual NSA dollar volume to cash flow than February starts with an SA of $300bil. This may cause erratic spending patterns.

Residential spending will slow several percent to a low point in February before resuming upward momentum to finish the year stronger than 2015. Periods of low start volumes need to work their way thru the system and this produces growth patterns with periodic dips.

Nonresidential buildings will slow only moderately in the next few months before we see 15% growth through the middle of the year, only to see another slowdown late next year, leading into a considerably slower 2017. Office new construction starts in 2015 are up 50% from 3 years ago, educational up 25% over same period. Manufacturing starts are down 70% in 2015 and that is still at the second highest ever recorded. Total spending is still strong in 2016 at 10% growth. Major contributions appear from institutional work in educational and healthcare. Office and manufacturing still provide very strong support to growth.

Infrastructure projects spending will decline for the next six months due to the ending of massive projects that started 24 to 42 months ago. There will be large advances in spending midyear before we experience another slowdown later in 2016. I’m currently predicting spending will grow less than 2% in 2016, held down by a 10% drop in Power the second largest component of infrastructure work.

Mixed within the three sectors above are Private and Public spending. Residential is about 98% private and makes up about 50% of all private work. Along with manufacturing and large portions of power, commercial/retail, office and healthcare makes up nearly 90% of all private work.  Private growth is the sum of the parts, predicted at 10%+ for 2016. Public work is all or a large portion of highway/street, educational, transportation and sewage/waste. Along with small contributions from water and a portion of power, these markets comprise 80% of all public work. Again, the sum of parts shows growth at 8% in 2016.

From the middle of Q1’16 to the end of Q3 we will register an annual growth rate of 20%, but due to the dips at the beginning and the end of the year total 2016 construction spending growth will come in at 11%. Construction spending momentum is not losing steam. We are seeing the affect of a few years of erratic growth patterns and a shift from commercial to institutional work.