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May Construction Spending Report -Changes Since Dec 2019 Forecast

7-1-19

May construction spending was posted by U.S. Census today at an annual rate of $1.294 trillion. Construction spending has averaged $1.296 trillion for the 1st five months of 2019. Year-to-date (ytd) spending is down 0.2% from the 1st five months of 2018.

Residential spending is down 8% ytd from 2019. Two thirds of that decline is in renovations which is down 15%. Single family (SF) is down 8% but multifamily (MF) is up 9%.  SF is 51% of all residential spending, MF is 15%, Reno is 34%.

Nonresidential buildings spending is up 3% ytd. Best performers ytd in nonres bldgs are Manufacturing +11%; Office +9%; Amusement/Recreation +9% and  Lodging +8%; (Public Safety is up +10% ytd, but represents less than 1% of nonres bldgs, so has little impact). Commercial is down -8%.

Non-building infrastructure is up 7% ytd. Best performers ytd in nonbldg infra are Highway +18%; Environmental Public Works (combined) +16%; Transportation +9%. Communication is down -7%.

Construction Analytics 2019 forecast for total construction spending for 2019 is now $1.339 trillion compared to $1.341 trillion forecast in December. The changes in the forecast by sector since December are: residential spending was forecast to reach $564 billion but is now projected to hit only $526 billion. Nonresidential buildings spending is now forecast to reach $456 billion, up $12 billion since December supported by increases in Educational and Manufacturing. Non-building Infrastructure spending is forecast to finish at $356 billion up $22 billion since the initial forecast. Most of the infrastructure increase is in Highway.  

Current forecast shows all three sectors improving by year end. Forecast spending for 2019 shows residential finishing down 5%, nonres bldgs up 4% and nonbldg infrastructure up 13%.

Inflation is expected between 4% and 5% in 2019. Volume is spending minus inflation. After adjusting for inflation, residential volume is expected to finish 2019 down 9%, nonres bldgs down 1% but nonbldg infrastructure up 8%.

This is the third year in which construction volume will post no significant gain. Spending in 2017 was up 4.5% and in 2018 up 5%, but after inflation, volume was up only 0.1% in 2017 and 0.2% in 2018.  Overall, total 2019 spending will finish up 2.3%, but volume after inflation will be down 2.1%.

While volume is now in the third year of no gains, jobs have increased, so far since Jan 2017 by 8%. This does not support the ongoing discussions of a labor shortage. In fact, jobs growth is exceeding construction volume.

Biggest upward revisions to my forecast since December: Educational from -4% to +6%, +$8bil; Manufacturing from -2% to +9%, +$7bil; Highway from +1% to +22%, +$19bil; Environmental Public Works from +7% to +26%, +$8bil.

Biggest downward revisions to my forecast since December: Residential from +0.5% to -5%, -$38bil; Commercial from -1% to -8%, -$8bil; Transportation from +14% to +10%, -$3bil.

Spend Forecast 2017-2018-2019-2020-2021 7-1-19

See also Notes on April 2019 Construction Spending Report which includes greater explanation of major market activity.

Bullet Points for May

Construction is cyclical in periods, not so much month over month. The 1st 5 months 2019 averaged slightly higher than the last 6 months of 2018.

Residential construction is the biggest drag on total spending right now. The current 3mo average spending is the lowest in 27 months. That will improve some over the next 12 months, but then, if the forecast for new construction starts does not improve, will head even lower for 2020.

All sectors will improve in the 2nd half of 2019 vs 1st half. Residential +3%, Nonresidential buildings +3%, Non-building Infrastructure +9%. These improvements are only enough to bring total 2019 spending to +2.3% over 2018.

Nonresidential new construction starts through 2018 are at all-time highs and are expected to set new highs again in 2019.

Although ytd spending is down 0.2% from the 1st five months of 2018, by year end ytd will climb to 2.3%. The 2nd half of 2018 was in decline while the 2nd half of 2019 is on the rise.

Non-building Infrastructure spending is the strongest it has been in many years. Indications are for a steady increase in spending completely through 2020. Highway, Transportation and Public Works are all contributing to increases.

Growth in new starts and backlog last three years: Highway starts up 33%, backlog up 42%; Transportation (since 2015) starts up 60%, backlog  up 100%; Public Works new starts up 38%, backlog up 33%. Backlog growth for these three markets all expected to increase ~25% for start of 2020.

Growth in annual spending in data going back to 2001: Highway spending for 2019-2021 best 3 yrs ever; Transportation 2018-2021 best 4 yrs ever; Public Works 2019-2020 best 2 yrs ever.

For nonresidential buildings, almost 80% of all spending in any given year is already in backlog from starts prior to that year. For non-building infrastructure it’s 85%. So come Jan. 1 2020, 80% to 85% of all nonresidential spending in 2020 is already on record in backlog. For residential it’s only 70% due to shorter duration and the dependence on more starts within the year.

Inflation has been increasing 4% to 5% per year since 2012. Construction spending needs to increase greater than inflation to add volume within the year. Total construction volume has not increased in over two years and will drop 2% in 2019.

Jobs are increasing while volume is decreasing. That’s like a factory putting on more workers to make fewer widgets.

I wouldn’t be surprised to see, within the next few jobs reports, a slowdown in total construction jobs growth but a pick up in heavy engineering jobs. If the last 5 months are an indicator, the decline may have already begun. We’ve just posted the lowest 5 months jobs growth (52k jobs) in the last 7 years.

My forecast output is dependent on all monthly cash flows from scheduled new construction starts. I rely on Dodge Data & Analytics for starts data.

This forecast does not predict a recession, however does reduce growth in new starts over the next three years. If a recession were to occur, it would substantially reduce future starts. However, the last “construction” recession started in 2006-2007 with declines in residential work. New starts in nonresidential buildings kept increasing into 2008. The “nonresidential” spending recession did not start until 2009, three years after the beginning of the residential decline.

Caution Reading the Recent 2018 Construction Spending $

3-19-19

Construction Spending for Jan was just released March 13th at $1.287 trillion saar, up 1.3% from Dec. But…

the most notable numbers in this March report are BIG REVISIONS DOWNWARD TO NOV (-2.3%) AND DEC (-2.2%), particularly to residential.

Residential revisions Nov -3.9%, Dec -4.4%.

Nonresidential revised down -0.8% in both Nov & Dec.

2018 total spending currently at $1.293 trillion, 2% below expected.

If these residential reports are correct, we have been in a residential construction spending downturn, now down 12% since last May. I predict these numbers are suspect.

Current total residential spending for 2018 in this most recent report is $545 billion, up 2.6% from 2017. But after deducting 4.4% residential inflation, that means real residential construction volume would be DOWN -1.8% for 2018. Yet, new starts in 2018 were up 6% and new residential jobs increased 3.5%.

However, in 2018 residential spending, the monthly variances from statistical rates of spending look very similar to 2006, up thru May then down 15% to year end.

Cash flow models of construction starts data from Dodge Data for residential spending spread over time indicate residential spending should be UP 3% since May, not down!

Just a reminder, we had a huge upward revision to 2015 residential spending data in July 2016. The 2018 data gets a big revision on July 1, 2019.

The monthly spending data gets revised three times after the 1st release. In the mean time, it can be compared to the statistical averages to determine if 1st reports, or even 2nd reports of spending are in line with expectations. The current Nov and Dec residential construction spending data varies from the statistical average by 3 to 4 standard deviations. That’s highly unusual!

To understand just how unusual that is, let’s compare to how rare any monthly spending varies by 2 standard deviations (StdDev) from the statistical monthly average:

Non-Builiding Infrastructure has varied by 2 StdDev only 5 times in 18 years, only once in the last 15 years, even including recessionary years.

Excluding recessionary years, Nonresidential Buildings varied by more than 2 StdDev  only 12 times in 16 years and only 4 times in the last 8 years.

In both those data sets above, only twice ever in over 400 total months of data was the variance greater than 2.5 StdDev.

Excluding recessionary years, Residential Building monthly spending exceeded 2 StdDev from the average only 10 times in 14 years, all 10 times were in the last 8 years.

Recessionary years really skew the data. Non-building Infrastructure was the only sector not affected by the recession like all other construction. Residential spending was affected the most. In the four residential recessionary years, 2006-2009, residential monthly spending (in 48 months) exceeded 2 StdDev 28 times, 19 of those times 3 StdDev or greater.

In the residential data set, 5 of the 10 non-recessionary variances over 2 StdDev were in 2018. That simply does not occur in the historical data. That’s like having your teenage son grow an inch every year from 13 to 16 but then shrinking 2 inches in year 17. The average of those 5 unusual months in 2018 was 3.5 StdDev from the statistical average, with Nov and Dec posting the greatest variances since 2009.

The only time we’ve ever seen data like that was within the recession years of 2006-2009. So, either the 2018 residential data is foretelling the beginning of another recession, or the data, particularly the Nov and Dec data, will be subject to significant revisions, in this case upward.

Starts and cash flow expectations seem to indicate the 2018 data is currently being reported too low. I expect 2018 residential data will be revised up by $10bil to $15bil. We may not have that information until July 1, 2019.

 

 

2019 Construction Economic Forecast – Nonresidential – Dec 2018

Construction Analytics 2019 Construction Economic Forecast – Nonresidential

This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.

NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018.  Most spending from these new starts will occur in 2020. This will increase the 2020 nonresidential buildings spending forecast, with the largest increase in manufacturing. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis. The biggest changes reduced residential spending for the next two years.  See the 2019 Construction Economic Forecast – Summary for the residential analysis.

This analysis was edited 12-6-18 to include that most recent starts data and the U S Census October spending data.

For a fully formatted PDF of this Nonresidential report 2019 Construct Econ Forecast – NONRES – Dec 2018 RVSD 12-6-18

Link to 2019 Construction Economic Forecast – Summary

Summary

Total of All construction spending is forecast to increase 6% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.

01e summary

Nonresidential Buildings construction spending is forecast to increase 6% to $444 billion in 2018, 0% to $443 billion in 2019 and 9% to $482 billion in 2020. The forecast for 2019 will be supported by Office (which includes data centers) and Amusement/Recreation but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.

Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.7% to $334 billion in 2019 and 10.1% to $368 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.

27 sector plot for cover

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,328 trillion, a gain of 6.5%, that will most likely increase.

Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% growth for the 3-year period 2018-2020.

Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.

 

Construction Inflation Indices

Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long-term average inflation is 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.

Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Inflation in this sector has been at 4% or higher the last four years.

Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel tariff impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.

02 inflation bars

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

These links point to comprehensive coverage of the topic inflation and are recommended reading.

Click Here for Link to a 20-year Table of 25 Indices

Click Here for Cost Inflation Commentary – text on Current Inflation

 

New Construction Starts

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

For nonresidential buildings, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. This means that nonresidential spending growth in 2019 is still being affected by starts from 2016.

The following plot show the 3-month moving average and trend line of starts for Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.

06 starts nonres bldgs

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

Starts is a survey sample of a portion of all construction, on average about 50% to 60% of all construction. This can introduce potential error when using starts to predict spending. In any survey, if sample size remains constant, let’s say at 50% of population, but survey response increases 5%/year, then output of the population should increase at 5%/year. However, if survey response increases at 5%/year but sample size is increasing at 3%/year then output of the population should increase at only 2%/year.

If starts survey sample size varies from year to year, it’s possible some of the anticipated spending growth reported by new starts may not represent growth in real volume of future work but could simply represent a change in sample size. Potential significant variations in sample size are seen in the data and may cause errors in the forecast. The detail of Education spending provides an example.

 

Starting Backlog

Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. Starting Backlog for 2019 is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 years.

08e nonres bklg

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

  • 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
  • 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.

09 start bklg plot

Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.

10e infra bklg

 

Cash Flow

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

Although new nonresidential buildings starts increased only 1.6% in 2018 note that cash flow increases by almost 8% due to a very large increase from starting backlog. To a lesser extent the same thing happens in 2019.

Non-building infrastructure starts and cash flow follows a similar pattern. In 2018 and 2019 new starts decline moderately, spending from new starts declines substantially but starting backlog and spending from starting backlog increases are so strong that total cash flow within the year continues to increase.

 

 Nonresidential Buildings Spending

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

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, fall -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Rec support the 2019 forecast but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

17e spend nonres bldgs

18 nonres bldgs plot

Nonresidential buildings construction spending in constant $ (inflation adjusted $ to base 2017) will reach $424 billion in 2018 after hitting a post-recession peak of $431 billion in 2016 and dropping to $419 billion in 2017. In 2019 constant $ spending will total $420 billion. Constant $ spending or real volume growth shows all years from 1996 through 2009 had higher volume than any years 2016-2019. Volume reached a peak near $530 billion in 2000 & 2001 and went over $500 billion again in 2008. In constant $ volume, I don’t see returning to that peak before 2023.

19 nonres cur con 

Educational

New Starts averaged YOY growth of 11%/year for the last five years. Starts from the last five months of 2017 posted the highest 5mo total in at least seven years, 13% higher than the next best 5mo. The highest and 2nd highest quarters were both within the last 15 months, so both those periods contribute fully to 2018 spending. 2017 starts will support 25% of spending in 2019. Starts are expected to finish 2018 up 5%. 2018 starts will support 50% of spending in 2019 and 20% of spending in 2020.

Bklg 01e Educ

Backlog in five years 2014-2018 increased 11%/year. It is unusual that Starts and Backlog continue to grow for five years but that growth is not reflected in actual spending. From 2013 to 2018 new starts increased 66% but spending for the period of those starts will increase only 34%. That would seem to indicate a very large volume of work is growing in backlog and spending at some point should boom and remain high for an extended period, but the cash flow model is not in agreement. A possible explanation is the sample survey of new starts has been increasing, so not all the starts growth for five years represents growth in new work. Some of the increase in starts is simply growth in sample size. Educational starts 2012-2015 averaged 50% sample size of total spending. In 2016-2018 the average sample size vs spending was 60%.

Spending is now at a post-recession high.  Spending increased 6%/year for 2015, 2016 and 2018, while 2017 increased only 1%. 2017 and 2018 are still subject to revision. Expect to see growth level off until mid-2019. Leveling at post-recession high is not a bad thing. A build-up of backlog is indicating that spending should increase substantially, but a disconnect in the analysis was noted above. Spending growth increases again in 2020.

At peak, educational represented 30% of all nonresidential buildings spending. Now it’s only 22%. That’s expected to increase slightly for the next three years.

Educational construction spending is forecast to reach $96 billion in 2018, $93 billion in 2019 and $103 billion in 2020.

 

Healthcare

Starts are at an all-time high, up almost 40% in the last 5 years. Some longer duration projects push a substantial amount of spending out to 2020.

Bklg 02e Hlthcr

Backlog increased 11% for 2017 and 8% for 2018. Backlog has been increasing unevenly and grew 30% in 4 years. Backlog increases 3% to start 2019 but is not indicating spending growth in 2019. Cash flow from backlog is indicating spending growth in 2020.

Spending has been very slow to recover, experiencing declines as recently as 2013 and 2014, hitting an 8 year low in 2014, when all other nonresidential building markets had already returned to growth. 2017 posted a gain of 4.4% but then 2018 gained less than 1%. Backlog is increasing but real spending gains won’t materialize until 2020.

Like Educational, backlog growth has been exceeding spending growth for the last few years. That would indicate spending at some point may boom and remain high for an extended period. Cash flow models indicate this may occur in 2020. Other possible explanations are; starts are overstated; cash flow curves (average 28mo) are too short in duration; projects got canceled after starts were recorded; large spending revisions could get posted in the future.

Healthcare construction spending for 2018 is forecast to finish at $42 billion, an increase of only 0.7% over 2017. Considering 4% inflation, Healthcare real volume has declined every year since 2012 with exception of 2017 which would have been flat. It will decline again in 2019 with a forecast -2.7% decline in spending. 2020 realizes the 1st big spending increase in 8 years, +14% to $47 billion.

 

Amusement/Recreation

Starts are up 13% in 2018. Although down 1% in 2017, starts increased at an average rate of 15%/yr. from 2013 through 2017. Within the past 15 months there have been five billion-dollar project starts.

Bklg 03e Amuse.JPG

Starting backlog increased 20%/yr for the last four years while spending was increasing at a rate of 10%/year. This means backlog should continue to support increased spending at least for the next few years.

Spending hit an 8 year low in 2013 but we’ve had 3 years of excellent growth of 10%/yr or more since then. 2017 spending increased only 7% and 2018 11%, but cash flow is indicating a 12% increase for 2019. This market is only 5% of nonresidential buildings spending.

Amusement/Recreation construction spending for 2018 is forecast to reach $28 billion, an increase of 12% over 2017. 2019 is forecast to increase 12% to $31 billion.

Pic Educ Hlth Amuse.jpg 

Commercial/Retail

Commercial/Retail starts have been increasing every year since 2010 but starts in 2018 are flat vs 2017 Starts are at a peak but after 5 years of 15%-20% growth/year are up only 4% in the last two years.

Commercial starts are seeing strong gains from distribution centers (warehouses which are in commercial spending). The decline in retail stores is being hidden by the increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are still up only 4% in 2018 but increased 500% from 2010 to 2017.

In 2010, Warehouse starts were only 1/3 of Store new starts. In 2018, Warehouse starts are 25% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010. See this Bloomberg article Warehouses Are Now Worth More Than Offices, Thanks to Amazon

Bklg 04e Comm

Some big projects from a period of strong new starts growth are ending. This will slow spending after 7 years of strong growth. 2018 backlog still produces a spending increase which may finish close to +5%, but forecast shows spending slows even more to only 2% in 2019 and less than 1% in 2020.

The biggest change in Commercial/Retail in the last few years is that backlog is now more heavily weighted with warehouse projects than store projects. The mix has shifted from 60/40 stores in 2014-2015 to 55/45 warehouses in 2018-2019.

Spending dropped from the high of $90 billion in 2007 to $40 billion in 2010. It has been growing steadily since reaching bottom in early 2011 and has recovered to an annual total rate of $92 billion in 2018. Spending increased an average of 13%/year for six years from 2012 through 2017. Spending growth will be flat in 2019 and 2020 but we are currently near the all-time high. It is worth noting that the $92 billion in 2018 dollars after accounting for inflation is still 30% lower than the $90 billion of spending in 2007.

Commercial/Retail construction spending is forecast to reach $92 billion in 2018, $91 billion in 2019 and $90 billion in 2020, flat to no growth after seven strong years.

 

Office

Starts finished 2018 up 8%. In 2016 starts were up 30% and had reached similar too highs in 1998 and 2006-2007. Starts have been increasing since 2010 with the strongest growth period 2013-2016, up 25%/year. Although the rate of growth slowed in 2017 and 2018, the total amount of starts is at an all-time high. In the last 12 months there are no less than a dozen project starts valued each at over $500 million, a few of those over $1 billion. That high-volume period of starts will elevate spending through 2019 and well into 2020. Data centers are included in Office.

Bklg 05e Offc

Backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018, backlog reached a new high, up 25% over 2017. Starting backlog for 2019, up 19%, is three times what it was just five years ago. Office starting backlog 2017-2019 increased an average of 20%/year. Backlog growth should support strong spending into 2020.

Growth of only 1% in starts for 2019 and 3% increase for 2020 keeps office starts near the all-time high. Even with low growth in new starts for the next two years, the amount of work in backlog from starts on record provides growth in spending for the next three years.

Spending increased by 20%/year from 2013 to 2016, but in 2017 it turned to a 1% decline. That was unusual and unexpected since 2016 starts and 2017 backlog had both reached 10-year highs. Possible explanations might be: a very large number of projects were canceled or delayed; potential revisions to 2017 Office spending may still be pending (In July every year, the previous two years of spending gets revised); but highly probable is the sample size of starts increased dramatically in 2016 and the 30% increase in starts was not all growth in real volume but was partially just a change in sample size, therefore the spending forecast may have been significantly overstated.

Again, it is worth noting that spending in 2018, which for the first time returned to the previous highs posted in 2008, once adjusted for inflation is still about 25% lower in real volume than 2008.

Office construction spending is forecast to reach $74 billion in 2018, $79 billion in 2019 and $84 billion in 2020.

 

Lodging

Lodging posted a new high for starts in 2018, up 8% over 2017. For the period 2011-2016 starts averaged over 30%/year growth for six years. In 2017, starts declined 4% but that remained near the 2016 high. Now with a gain in 2018, those three years average very evenly. Peak starts were in 2016.

Bklg 06 Lodg

Starting backlog averaged increases of 30%/yr. from 2015 to 2017. Lodging starting backlog jumped from $7 billion/yr. in 2014 to $15 billion/yr. in 2018. It has supported similar spending growth. Lodging projects have relatively short duration and timing of starts within the year is important to spending and next-year starting backlog. Compared to most other types of nonresidential buildings, a greater than average percentage of lodging spending occurs within the year started. So, movement in starts has a greater impact on spending within the year.

Lodging spending recorded the largest drop of any market, falling 75% from $36 billion in 2008 to $9 billion in 2011. However, it also recorded the strongest rebound of any market, climbing 20% to 30% per year for the 5-years 2012-2016. In 2011, Lodging dropped to only 3% of total sector spending. It rebounded to 7% in 2017. Lodging actual spending increased 12% in 2018. It’s still not back to the previous high of $36 billion in 2008. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.

Lodging construction spending for 2018 is forecast to reach $32 billion, an increase of 12% over 2017. Spending is forecast at $31 billion for 2019 and $32 billion for 2020.

Pic Comm Offc Lodg

 

Religious and Public Safety

Spending of $11-$12 billion/year represents only 2.5% of total nonresidential building spending. In 2008-2009 it was 5% of the total. The religious building market has been declining since 2002 and is down 55% since then. Public Safety peaked in 2009 and has declined every year through 2017, down 40% from the peak. In 2018, public safety spending is increasing.

I don’t track starts or backlog for these markets. I do track monthly spending and carry a forecast in the Table of Construction Spending classified as Other Nonres Buildings.

Religious and Public Safety currently amounts to $12 billion/year. A 10% change in spending of $1.2 billion in a year would amount to only 0.2% change in all nonresidential buildings spending. This category doesn’t often change by 10% yr/yr, so it’s affect is very small.

 

Manufacturing

Manufacturing reached record high starts in 2014 and record spending in 2015, posting a 100% increase in new starts in 2014 that drove starting backlog and spending to new highs in 2015 and 2016. New starts declined 20%-30%/year for the next two years after the high in 2014 but then 2017 starts increased 27%. Now 2018 starts have increased by 18%, yet that is still 15% lower than 2014.

Starts in June came in at four times the average of all monthly starts in the last three years. October came in at three times the average. Those two months would add up to more than half of annual starts for any of the last three years. Some of these projects will still be contributing to spending in 2023.

Bklg 07e Mnfg

Starting Backlog remained equally high in 2015 and 2016, but then dropped 17% in 2017. Backlog dropped 17% in 2017 and actual spending dropped 13%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts, up 27%. This will support a spending rebound in the future but not before a temporary drop in mid-year 2019.

Spending was forecast to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Based on cash flows from starts, from April 2016 through the end of 2017 spending was expected to decline in 17 of 21 months. It did decline in 14 of those months. Over the next 30 months there are only six months have a forecast to decline, all of those between March and September 2019, all caused by uneven cash flows from very large projects either ending or pushing spending out to future years. This will hold down total spending in 2019. Although backlog for 2019 is up 40%, much of the cash flow from that will occur in 2020.

Manufacturing construction spending is forecast to reach $67 billion in 2018, $65 billion in 2019 and then jump 25% to $82 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.

 

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works project starts increased 20% in 2018 and boost spending in 2019 and 2020.

20e spend nonbldg

Non-building Infrastructure constant $ volume reached a high of $309 billion in 2015 and peaked at the all-time high of $311 billion in 2016, but then dropped to $295 billion in 2017. 2018 saw a return to $303 billion and 2019 is projected to reach $309 billion. Only twice before, 2008 and 2009, did Infrastructure exceed $300 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.

21 nonbldg cur con

Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

22 infra plot

Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Transportation spending is projected to increase 15-20%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 7%. 2019 and 2020 are forecast to increase 6% to 10%.

 

Power

Power spending as reported by U.S. Census includes infrastructure for all electric power generation plants and distribution, gas and LNG facilities and all pipelines. In the last year there were more than twenty $billion+ project starts and a dozen more projects valued over $500 million each. In 2015 pipeline starts represented less than 10% of all power starts. In 2018 year-to-date, pipelines are half of all power work started. In three years, pipeline work increased by more than $20 billion or 500%.

Starts, completions and pauses in work cause erratic movement in actual spending. Cash flow may be adversely impacted by very large projects ending or by the delay of large projects that started previously. A multi-billion-dollar nuclear power plant stopped work and large pipeline project delays after the start was recorded have adversely impacted the cash flow forecast. This impacted the spending forecast in 2017, which finished down 5%, 15% below initial projections, and again 2018 will finish 10% below initial projections for 2018 posted back in Nov. 2017.

Bklg 08 pwr.JPG

Although total power starts for 2018 are down 13%, electric / power generation is down 35% but gas/LNG and pipelines starts are up. Starts peaked in 2015-2016, but total in backlog reached a peak in 2018. However, much of this work is very long duration projects, so 2018 backlog will be providing spending at least through 2021. Spending could see 5% gains in 2019 but unless 2019 starts increase 2020 will experience a modest decline. Dodge is predicting 2019 starts will decline 3%.

Power construction spending is forecast to reach $102 billion in 2018, $109 billion in 2019 but then only $107 billion in 2020.

Power spending highlights one of the biggest shortfalls of judging expected performance based on year-to-date change. Notice in the 1st quarter of 2018, spending year-to-date (YTD) was down 8% to 10% from 2017. It is clear now that did not give a good indication of how 2018 would proceed. A better indication is provided by the trend line expected in the current year versus the trend line in the previous year. If they diverge, then early YTD changes will not give a clear indication of expected performance in the current year. An example follows. Note, SAAR data shows performance trend but cumulative NSA$ is needed to get YTD$.

YOY trend Power example 11-28-18.JPG

YOY Power trend data 11-28-18

Power posted the highest spending for 2017 early in the year, then declined in the 2nd half. In 2018, the beginning of the year posted the lowest rate of spending for the year, increased through June, then stayed higher in the 2nd half. The YTD percent growth compared to 2017 has been increasing throughout the year. Higher spending in the 2nd half 2018 compared to the lowest values of the year in late 2017 will boost year-to-date spending every month through year end. Although YTD spending through August is up only 2%, I expect the total for the year will finish up 6%. Even if power spending declines 1% per month for the remainder of the year it will still finish up 5% over 2017.

 

Highway/Street/Bridge

Highway starts hit an all-time high in 2017 and are forecast to climb another 8% in 2018. This model is predicting starts growth will slow or level off after 2018.

Bklg 09e HiWay

Starting backlog increased 30% in the last 3 years and will increase another 14% leading into 2019. This long duration backlog is going to provide for a large increase in spending but not until late 2020 and even more-so into 2021.

Spending in 2018 did not increase in tandem with backlog, because the share of spending within the year from projects that started 1 or 2 years before began to decline. In 2020 and 2021, the share of spending within the year from projects that started 2, 3 and 4 years before is increasing.

Highway construction spending is forecast to reach $92 billion in 2018, $93 billion and then jump to $105 billion in 2020. 2021 may see an increase of 10% in spending.

 

Transportation

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not account that airports include not only land-side terminals but also air-side runway work and rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work.

Terminals and rail starts reached record high in 2017, both up 120% after a 35% increase in 2016. Spending in 2018 is forecast to finish up more than 20%. Starting Backlog increased 22% in 2017 then jumped 95% in 2018. However, Transportation sample size of new starts potentially increased 30%, far more than any other market. A large portion of the 2017 increase in starts is expected to be change in sample size. This model adjusts 2017 starts down by 20%. Still, most of that backlog spending will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. In the last 24 months there have been sixteen $billion+ new project starts and seven $500million+ new starts.

Bklg 10e Trans

2018 total starts are 100% higher than any other year prior to 2017. Starting Backlog skyrocketed from $15 billion in 2016 to $55 billion for 2019. Backlog will support spending for several years to come. Keep in mind, when a $4 billion project first gets recorded in starts, that is the general contract. Many subcontracts will be awarded by the general contractor over the next few years.

Based on predicted cash flows from starts, spending is expected to increase at least into mid-2021.  2018-2019-2020 should see increases of 15% to 20%/year. Dodge is forecasting 2019 starts will stay close to the elevated levels of 2017 and 2018. I’m predicting starts in 2019 will decline from 2018 simply due to the huge volume of new work that started in the last two years. Even with that, backlog could set a record high in 2020.

Transportation construction spending is forecast to reach $55 billion in 2018, $62 billion in 2019 and $75 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.

 

Environmental Public Works

Environmental Public Works includes sewerage projects, Water supply and Conservation, or Dams, water resource and river/harbor projects. New starts for all these type projects declined from 2014 through 2017. Then all showed gains in 2018 and the forecast is more gains in 2019. All of these projects are public spending and saw no real gains in spending from 2010 through 2017. With the projected increases in starts in 2018 and 2019, spending is now forecast to increase the next three years to a new high by 2020.

Bklg 11e PubWrks

Public Works construction spending is forecast to grow 9% to reach $43 billion in 2018, $46 billion in 2019 and $56 billion in 2020.

 

Communications

Starts data for communications is not regularly reported. Total starts for the year is always recorded well after year end. A moderate forecast is included for future starts growth the next two years.

Actual spending is erratic, up 10% one year down 3% the next then up 25% followed by 2% growth. 2018 should finish down 1% after a 12% gain in 2017. The forecast shows a 5% decline in 2019 and flat spending into 2020.

Bklg 12e Commun

Communication construction spending was up 12% in 2017 and finished at $24.8 billion The forecast for 2018 is down 1% to $24.5 billion. Expect $23 billion in 2019 and $23 billion in 2020.

 

For a PDF of this Nonresidential report 2019 Construct Econ Forecast – NONRES – Dec 2018 RVSD 12-6-18

 

Link to 2019 Construction Economic Forecast – Summary

2019 Construction Economic Forecast – Summary – Dec 2018

Construction Analytics 2019 Construction Economic Forecast

This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.

NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018.  Most spending from these new starts will occur in 2020. U.S. Census construction spending for October posted large reductions to several months of residential spending. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis, by far most of the 2019 and 2020 changes are significant reductions in residential spending. See the 2019 Construction Economic Forecast – Nonresidential for detail on all nonresidential and non-building markets

This analysis was edited to include the most recent starts data and the U S Census October spending data.

For a fully formatted PDF of this Report click

2019 Construction Economic Forecast – Summary – Dec 2018

 

Link to the 2019 Nonresidential Forecast Report

2019 Construction Economic Forecast – Nonresidential – Nov 2018

 

Summary

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.

01e summary

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.

Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.

27e sector plot for cover

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,321 trillion, a gain of 6.0%, that will most likely increase.

Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% new starts growth for the 3-year period 2018-2020.

Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.

 

Construction Inflation Indices

When construction is very actively growing, 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.

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

Revenue is spending but real volume is spending minus inflation. Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long-term average inflation is 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.

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.

Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Spending needs to grow at a minimum of 4.7% just to stay ahead of construction inflation. Inflation in this sector has been at 4% or higher the last four years.

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.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index, Beck Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price of nonresidential buildings only. The individual average annual growth for all these indices over the past 4-years is 4.6%/year.

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 tracks material cost at the producer level, not prices or bids at the contractor as-built level.

Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that DO NOT represent whole building costs yet are commonly used to adjust project costs. The ENRBCI tracks a limited market basket of labor and materials. RSMeans holds the quantity of materials and labor for a building constant. Neither index addresses contractor margins. However, they are useful in that they also publish input cost indices from many cities. This provides a reference to compare those cities to the national average, but still, only for a limited basket of labor and materials. Neither gives any indication of the level of market activity in an area.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for six years from 2013 to 2018 is 5.7%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and currently is near 5.5% in 2018. Anticipate national average residential construction inflation for 2018 at least 5.5 % to 6%.

Nonresidential Buildings indices have averaged 4% to 4.5% over the last five years and have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically has led to accelerated inflation.

There are clear signs of increasing construction activity and a tightening construction labor market.  The national construction unemployment rate recently posted below 4%, the lowest on record with data back to 2000. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. The average has been below 5% for the last 18 months. An unemployment rate this low potentially signifies labor shortages. The Job Openings and Labor Turnover Survey (JOLTS) for construction is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.  Labor shortages cause contractors to pay premiums over and above normal wage increases to keep workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data.

Recent news of tariffs has extended beyond just steel. I calculated a 25% tariff on raw steel would add 1% to the cost of nonresidential steel buildings. Hi-rise residential buildings, if building is structural steel, would fall in this category. Wood framed residential impact would be small. A 25% increase in mill steel could add 0.65% to final cost of building just for the structure. It adds 1.0% for all steel in a building. If your building is not a steel structure, steel still potentially adds 0.35%. 

Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.

02 inflation bars

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation in 2018. Notice during that same period seldom did any input indices climbed above 3%.

03 inflation pct

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

04 inflation index

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

These links point to comprehensive coverage of the topic inflation and are recommended reading.

Click Here for Link to a 20-year Table of 25 Indices

Click Here for Cost Inflation Commentary – text on Current Inflation

 

Current$ vs Constant$

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

The current Nonresidential buildings forecast of spending growth at 6.0% for 2018 would suggest that after inflation, nonresidential buildings construction volume is growing slightly.  So expect volume growth in 2018, but next year 4.3% inflation and no spending growth is signaling a volume decline in 2019.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Nonresidential jobs increased by 27% during that period, 15% greater than volume growth.

Residential spending increased by 110% since 2010, but after inflation, real residential volume increased by only 57%. Jobs increased by only 37%, 20% short of volume growth.

When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007. In 2005 constant $ volume reached a peak at $1,450 billion. At current rates of growth, we would not eclipse the previous high before 2022.

05 current constant

Spending in current $ is 14% higher than the previous 2006 high spending.

Volume after adjusting for inflation is still 14% lower than the previous 2005 high volume.

 

Jobs and Volume

The period 2011-2017 shows both spending and jobs growth at or near record highs.

A spending forecast of 6.6%+ in 2018, or an increase of $83 billion in construction spending, demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction “volume”. But construction jobs growth seems to closely follow growth in spending. Construction jobs have increased by 400,000 in a year only four times in the last 50 years, each time accompanied by one of the four highest spending growth increases in 50 years. However, $80 billion in added spending is not the same as $80 billion in volume, and jobs needed is based on volume.

Although spending will increase 6.6%, construction inflation has been hovering near 4.5% for the last five years. Real volume growth in 2018 after inflation is expected to be near 2% or only $26 billion. That would mean the need, if there are no changes in productivity, is to add only about 130,000 additional jobs in 2018, a rate of growth that is well within reach. That is less than the average jobs growth for the last seven years.

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

Total spending increased 60%+ since 2010, but with 30% inflation. Real total volume since 2010 has increased by only about 30%. Jobs also increased by 30%, in balance with need. But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 50% since 2010 with 35% inflation. Nonresidential volume since 2010 has increased by only 15%. Jobs increased by 27%, 12% in excess of volume growth.

Residential spending increased by 125% since 2010, but after 40% inflation, real residential volume increased by 85%. Jobs increased by only 40%, 45% short of volume growth.

Residential construction labor cannot be directly compared to residential volume because

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

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

For more on Jobs see Construction Jobs and Residential Construction Jobs Shortages

 

New Construction Starts

New construction starts for the six months in the 1st half 2018 reached an all-time high.

New Construction Starts three-month average for May-Jun-Jul is $840 billion, all-time high.

Year-to-date (YTD) 2018 starts are currently reported as up only 2% from 2017, but 2017 starts through September have already been revised up by 9%, 10% in nonresidential buildings, 16% in non-buildings and 3% in residential. 2018 starts will not be revised until next year. Revisions have always been up.

Revisions for the last 10 years averaged more than +7%/yr., with most of the upward revision in nonresidential buildings. Revisions to nonresidential buildings have been greater than 10%/year for the last 7 years. Therefore, 2018 starts growth is very likely under-reported.

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

Dodge releases its first forecast of next year’s starts every year in the 4th quarter. Last year the first forecast for 2018 was for starts to increase 3% to $765 billion. 2018 starts, based on data as of September, could reach $806 billion, but at first appearing to show no gain from 2017. That’s because 2017 has already been revised up by $50 billion. After 2018 revisions are posted next year, 2018 starts could reach $830-$840 billion. Dodge forecast 2019 starts at $808 billion, no change from 2018. This will be subject to two upward revisions.

  • Previous year starts always later get revised upwards. Therefore, current year starts YTD growth is always understated. This analysis compensates for that.
  • New starts will generate record high starting backlog for every sector in 2019.
  • Even a low forecast for starts in 2019 produces record backlog for 2020.

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

The next two plots show the 3-month moving average and trend line of starts for Residential and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.

06 starts two plots

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

The light green line for nonresidential buildings spending estimated from starts cash flow shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows close to the pattern estimated from cash flows.

07 starts index

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

 

Starting Backlog

Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. 2019 Backlog is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 years.

08e nonres bklg

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

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

09 start bklg plot

Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.

10e infra bklg

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

11e Cashflow Forecast RSDN ALL 12-1-18

 

Cash Flow

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

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,321 billion, a spending increase of 6.0% over 2017. The forecast for 2019, based on a minimal increase in starts, is $1,341 billion, an increase of only 1.5% over 2018. Dodge initial November 2018 forecast for 2019 construction starts is for $808 billion, no gain over 2018. However, subsequent revisions may increase that a few percent.

The following table illustrates the difference between Starts and Cash flow. It shows Manufacturing Bldgs. projects in backlog as of October 2018 and predicted starts in 2018 through 2021. Note there are sometimes vast differences between amounts of Starts, whether already in Backlog at beginning of year or New Starts within the year, and Cash Flow from Backlog and New Starts.

12e mnfg bklg cashflow

Cash Flow modeling predicted a huge decline of -16% in manufacturing spending in 2017. This was in stark contrast to seven other economic analysts who predicted spending would be between -7% and +7%, for an average of +0.4% as reported in the January 2017 AIA Consensus. Manufacturing spending actually ended the year at -13.0%. Obviously, there is no correlation between a 25% increase in new starts within the year and a predicted -16% drop in spending. The actual -13% drop in 2017 spending reflects a return to normal after an unusually large volume of spending in 2015 and 2016 that was generated by a record volume of starts in 2014.

Note that new manufacturing starts were up 27% in 2017 and could be up 18% in 2018, yet 2018 spending is forecast to increase only 1.5%. This is due to projects that started several years ago but are now coming to an end. They are dropping out of the monthly cash flows and holding down 2018 spending even though starts have been up substantially for two years. This substantial volume of new starts in 2017 and 2018 will be providing a boost to spending in 2020 and 2021.

 

Spending

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019 and 6.3% to $1.426 trillion in 2020.

13e spend sectors

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

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

14 spend vs starts

 

Residential Buildings Spending

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020.

Residential spending in 2018 slows after six years of growth all over 10%/year. Average spending growth the last seven years is 12%/year. Although Residential 2019 construction spending is still increasing slightly 0.5%, growth has slowed to less than inflation of 5%. Therefore real 2019 residential volume after inflation is forecast to decline by 4%+, the largest real volume decline since 2009. In 2018 residential spending increased 5.6%, but after inflation real volume increased only a fraction of a percent.

Residential spending in 2018 is 50% single family, 13% multi-family and 37% improvements. In 2011, improvements were 48% of residential spending.

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

11e Cashflow Forecast RSDN ALL 12-1-18

Total starts for the last 6 months are the highest since 2006, but % growth has slowed considerably. New starts in 2017 which initially posted only 2% growth have already been revised up to 4%. I expect that to be revised up to 5%. Growth of 7% is expected for 2018. Slower growth is now expected after 5 years (2012-2016) of starts increasing at an average 20%/year. Multi-Family Residential spending is more dependent on backlog.

15e Cashflow Forecast RSDN MF ONLY 12-1-18

Residential spending hits a 12-year high in 2018. Residential spending reached a current $ peak of $630 billion in 2005. 2018 pending is still 10% below that peak. In constant $, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant $, 2018 spending is still 27% below the 2005 peak.

16 res nonres plot

 

Nonresidential Buildings Spending

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

17e spend nonres bldgs

18 nonres bldgs plot.JPG

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached as high as $440 billion in 2017 but averaged only $419 billion in 2017. In 2018 it will reach a high of $430 billion but average only $424 billion. The yearly average recently peaked at $431 billion in 2016. Constant $ spending or real volume growth shows all years from 1996 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $ 2018 is still 20% below that 2000 peak.

19 nonres cur con

 

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works had strong 20% growth in 2018 starts and Highway starts hit a new high in 2018.

20e spend nonbldg

Non-building Infrastructure construction spending in constant $ (inflation adjusted $) reached $311 billion in 2016, an all-time high, but then dropped to $296 billion in 2017. In 2018 it will reach $302 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.

21 nonbldg cur con

Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

22 infra plot

Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Transportation spending is projected to increase 20-25%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 8%. 2019 and 2020 are forecast to increase 5% to 6%.

 

Public Infrastructure and Public Institutional

Less than 60% of all Non-building Infrastructure spending, about $170 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

About 25% of all Nonresidential Buildings spending, about $110 billion, is publicly funded, mostly Educational. Nonresidential buildings spending makes up almost 40% of Public spending.

  • Infrastructure = $300 billion, ~25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $170 billion. Private Infrastructure = $130 billion.
  • Power and Communications are privately funded infrastructure.
  • Nonresidential Buildings is 25% public (mostly institutional), 75% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $100 billion, mostly Education ($70b).

23 pub prv spend.JPG

 

Public Infrastructure + Public Institutional = $280 billion, 23% of total construction spending.

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

See also Publicly Funded Construction

See also Down the Infrastructure Rabbit Hole

24 pub prv share

Public Spending

Total public spending for 2018 is projected to finished up 9.5% at $320 billion. Every major public market is projected to finish up for 2018. By far, the largest Public spending increases for 2018 are Highway, Transportation, Sewer and Waste Disposal and Water Supply.

25e pub prv sectors

The two largest markets contributing to public spending are Highway/Bridge (32% of total public spending) and Educational (25%), together accounting for nearly 60% of all public construction spending. At #3, 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, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20% public. Power is about 6% public, along with few other smaller shares.

Public spending hit a 4-year low in mid-2017. It has been increasing since then and is now near an all-time high. I’m expecting to see strong growth through 2020.

Due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 growth are Educational (+15%) and Transportation (+35%), with a combined total forecast 20% growth in public spending.

Current levels of backlog and predicted new starts gives a projection that Public Non-building Infrastructure spending will reach an all-time high in 2018 and again in 2019.

26e pub bklg

For a Full Formatted PDF of this Report click

2019 Construction Economic Forecast – Summary – Dec 2018

 

Link to the 2019 Nonresidential Forecast Report

2019 Construction Economic Forecast – Nonresidential – Nov 2018

Construction Spending July 2018

9-4-18

U. S. Census posted Construction Spending for July at a seasonally adjusted annual rate (SAAR) of $1,315 billion, up only 0.1% from May.

Year-to-date, July construction spending is up 5.2% from the same period in 2017.

June was revised down slightly, -0.2%, and May was also revised down, -0.6%, but May remains up 1.7% from the 1st May release.

Here’s the link to the Sept. 4 release of July data 

Construction Spending for the 1st 7 months of 2018, in Current $, by Census formulas averages $1,306 billion. By my formulas the 1st 7 months average stands at $1,321 billion. Either way, this is an all-time high, well above the pre-recession high spending of $1,205 billion posted in the 1st quarter of 2006. Spending has been above the 2006 high since the 4th quarter 2016, but since 2006, no other 6-month period has averaged above $1,250 billion.  Spending is expected to total $1,335 billion for 2018.

Constant $ shows volume reached peak during the 2nd half 2005 and 1st half 2006, with  2005 posting the peak year. 2018 constant $ inflation adjusted spending is still 14% below the 2005-2006 peak.

Spend current vs constant 2018 8-2-18

Total spending year to date through June is $740 billion. Historically, 56% of annual spending occurs in the 1st 7 months. Jan, Feb and Mar are the weakest months of the year, while Jul, Aug and Sep are the strongest spending months. This would indicate a 2018 total annual spending of $1,321 billion, 1% less than my forecast.

Top performing construction spending markets 2018 year-to-date through July are Transportation +15.8%,Water Supply +14.1%,  Public Safety +13.1%, Conservation 10.3%, Lodging +10.1%, Sewage and Waste Disposal +9.1%, Residential +7.6% and Office 7.2%.

The only markets down year-to-date are Religious -11.8% and Manufacturing -7.5%. Religious building as a percent of total is so small (1/4 of 1%) it has negligible effect on total annual performance. However, Manufacturing is about 5% of total construction.

Residential, Office, Commercial/Retail, Lodging, Highway and Environmental Public Works (Sewage, Water, Conservation) are all ahead of my expectations for the 1st half of 2018.

Last month, June construction spending showed an unusual $9 billion (SAAR) monthly decline (-9.3%) in Educational spending. At that time I said, “This is several billion greater than the largest decline reported during the recession, so this looks like an anomaly in the data. There has never been a monthly decline like this in the Educational market since I’ve been tracking data, back to 2001. It is double the largest non-recession decline. I expect it will be revised up substantially at some point in the future.” That anomaly in the June data was revised up this month, erasing about half of the decline that was first reported.

Transportation is another market that appeared to be unusually low for June. Last month I said this, “Transportation (terminals and rail) new starts in 2016 increased 34% and then in 2017 increased 120%. Even with long duration cash flow spreading out the spending for big projects, my analysis still predicts Transportation spending up 30% in 2018. Year-to-date through June, Transportation spending is up only 14%. I’ve forecast it should be up 18%. That’s a total shortfall of about $1 billion (SAAR ~$12 billion), or about 7%/month, for 3 months. April, May and June spending are all below expectations.” In the July data, both May and June spending were revised UP by a total of $2 billion. With that revision Transportation spending is up 18% YTD through June, as expected. 

Manufacturing spending as of June was reported down 8.7% year-to-date from 2017. Spending through July is now down only 7.5%. I previously reported that I expect the decline to slowly turn positive in the second half of the year to finish up 2%.  Spending is currently at an SAAR just above $66 billion and expected to increase to $70 billion by December. In 2017, spending started the year above $70 billion but decreased to $60 billion by year end. Increasing values in the 2nd half 2018 compared to decreasing values in 2017 will continually increase the year-to-date performance in the 2nd half of 2018.

Power, similar to manufacturing, posted the highest spending for 2017 early in the year, then declined. In 2018, the 1st half posted the lowest spending, so the year-to-date is currently low. Increased spending in the 2nd half 2018, compared to the lowest values of the year in 2017, will boost year-to-date spending every month through year end. Although year-to-date spending through July is up only 0.7%, I expect the total for the year will finish up 8%.

Manufacturing and Power highlight one of the biggest shortfalls of judging expected performance based on year-to-date change. It is important to look at the trend line expected in the current year versus the trend line in the previous year. If they diverge, then year-to-date change will not give a clear indication of expected performance in the current year. Manufacturing data as an example follows. Note, SAAR data shows performance trend but NSA$ is needed to get YTD$.

YOY trend example 9-5-18YOY trend data 9-5-18

Public spending increased 5% in 2015, but has been depressed since since 2009. 2017 finished still 7% lower than 2009. For 2018 we should see a gain of $16 billion, +5.7% over 2017 to $308 billion, the highest finish since 2009. Highway and Street is the largest share of public work, but adds very little to 2018 gains. Educational spending makes up about 25% of all public spending gains. Public Works (Sewage/Waste Water, Water Supply and Conservation), only 14% of all public spending, accounts for about 25% of the gains this year. Public Transportation, at only 12% of public spending, accounts for $8 billion in increases in public spending, half of all the gains in public spending this year. 

Total spending has increased from an average of $1,254 billion in Q4’17 to $1,292 billion in Q1’18 to $1,321 billion in Q2’18, growth of 3.0% and 2.25% the last two quarters. I’m expecting the rate of monthly spending will be above $1,360 billion by year end. The total spending forecast for 2018 is $1,335 billion.

Residential single family spending is up 8.5% YTD. Multifamily is down 0.9%. Total residential spending is forecast to reach $570 billion in 2018, growth of 7.2% over 2017.

Nonresidential Buildings spending YTD totals $246 billion, up only 1.7% from 2017. It is being held down by Manufacturing which is currently down 7.5% from 2017. 2018 forecast is $445 billion, 6.1% growth over 2017, with best growth in Lodging 13%, Office 11% and Amusement/Recreation 9%.

Non-building Infrastructure will post the best year of growth since 2014 to reach a new all-time high at $308 billion. Transportation, by far, will show the best growth, 25% above 2017.

Spend Sector 2015-2019 9-4-18

Cash flow from backlog supports a 2018 spending forecast of $1,335 billion, a spending increase of 7.2% over 2017. The forecast for 2019, based on a modest 3% increase in new starts in 2019 is $1,400 billion, an increase of 5% over 2018. The strongest growth in spending for 2018 and 2019 is forecast to occur in Non-building Infrastructure with Transportation being by far the strongest market.

July Construction Starts Fall but 3moAvg at New High

Construction Spending June 2018

June Construction Starts Reach New Highs

 

Construction Spending June 2018

8-1-18

U. S. Census posted Construction Spending for June at a seasonally adjusted annual rate (SAAR) of $1,317 billion, down 1.1% from an upwardly revised May.  Year-to-date, June spending is up 5.1% from 2017.

May was revised UP 1.7% from the 1st release posted 7-2-18. April was revised UP 0.8%.

https://www.census.gov/construction/c30/pdf/release.pdf

Construction Spending for the 1st half 2018, in Current $, averages $1,307 billion. This is an all-time high, well above the pre-recession high spending of $1,205 billion posted in the 1st quarter of 2006. Spending has been above the 2006 high since the 4th quarter 2016. Spending total is expected to average $1,330 billion for 2018.

Constant $ shows volume reached peak during the 2nd half 2005 and 1st half 2006, with  2005 posting the peak year. 2018 constant $ inflation adjusted spending is still 14% below the 2005-2006 peak.

Spend current vs constant 2018 8-2-18

Total spending year to date through June is $620 billion. Historically, only 47% of annual spending occurs in the 1st 6 months. Jan, Feb and Mar are the weakest months of the year, while Jul, Aug and Sep are the strongest spending months. Therefore, this indicates a 2018 total annual spending of $1,328 billion. This agrees very close to my total 2018 spending forecast.

The headline from the St Louis Fed > Total construction spending fell 1.1% in June, the largest monthly drop in more than a year. Just remember, spending subsequently gets revised 3x and final vs 1st release has been revised UP 79 times in the last 84 months.

Top performing construction spending markets 2018 year-to-date through June are Transportation +14.3%, Public Safety +12.1%, Lodging +10.7%,  Water Supply +9.7%, Sewage and Waste Disposal +9.2%, Residential +8.1% and Office 6.8%.

The only markets down year-to-date are Religious -9.1%, Manufacturing -8.7% and Power -0.4%. Religious building as a percent of total is so small (1/4 of 1%) it has negligible effect on total annual performance. However, Manufacturing and Power make up about 15% of total construction.

Residential, Office, Commercial/Retail, Lodging, Highway and Environmental Public Works (Sewage, Water, Conservation) are all ahead of expectations for the 1st half of 2018.

June construction spending data shows an unusual $9 billion (SAAR) monthly decline (-9.3%) in Educational spending. This is several billion greater than the largest decline reported during the recession, so this looks like an anomaly in the data. There has never been a monthly decline like this in the Educational market since I’ve been tracking data, back to 2001. It is double the largest non-recession decline. I expect it will be revised up substantially at some point in the future.

Transportation is another market that appears to be unusually low for June. Because the monthly variance is not wildly out of balance it passes in obscurity. But here’s what we should see. Transportation (terminals and rail) new starts in 2016 increased 34% and then in 2017 increased 120%. Most of those projects will be completed in 3 years or less, but a number of the huge projects (no less than 15 projects ranging from $1 billion to $4 billion each) have a duration of 4 to 8 years. Even with long duration cash flow spreading out the spending for all those big projects, my analysis still predicts Transportation spending up 30% in 2018. Year-to-date through June, Transportation spending is up only 14%. I’ve forecast it should be up 18%. That’s a total shortfall of about $1 billion (SAAR ~$12 billion), or about 7%/month, for 3 months. April, May and June spending are all below expectations. I expect future revisions will increase current values. Also, we will see a big jump in year-to-date over the next three months since we are currently at an SAAR above $50 billion (and increasing) and Jul-Aug-Sep were the three lowest months in 2017, below $43 billion. Also, 2017 values were revised up 4%/month after the close of the year.

Manufacturing spending as of June is reported down 8.7% year-to-date from 2017.  That decline will slowly turn positive in the second half of the year to finish up 2%. Spending is currently at an SAAR above $65 billion and expected to increase through December. In 2017, spending started the year above $70 billion but decreased to $60 billion by year end. Increasing values in the 2nd half 2018 compared to decreasing values in 2017 will continually increase the year-to-date performance in the 2nd half of 2018.

Power, similar to manufacturing, posted the highest spending for 2017 early in the year, then declined. In 2018, the 1st half posted the lowest spending, so the year-to-date is currently low. Increased spending in the 2nd half 2018, compared to the lowest values of the year in 2017, will boost year-to-date spending every month through year end. Although year-to-date spending through June is down 0.4%, the total for the year could finish up 9%.

Manufacturing and Power highlight one of the biggest shortfalls of judging expected performance based on year-to-date change. It is important to look at the trend line expected in the current year versus the trend line in the previous year. If they diverge, then year-to-date change will not give a clear indication of expected performance in the current year.

Total spending has increased from an average of $1,254 billion in Q4’17 to $1,292 billion in Q1’18 to $1,321 billion in Q2’18, growth of 3.0% and 2.25% the last two quarters. I’m expecting the rate of monthly spending will be above $1,360 billion by year end. The total spending forecast for 2018 is $1,330 billion.

Residential single family spending is up 9% YTD. Multifamily is down ~1%. Total residential spending is forecast to reach $566 billion in 2018, growth of 6.4% over 2017.

Nonresidential Buildings spending YTD totals $207 billion, up only 1.9% from 2017. It is being held down by Manufacturing which is currently down 8.7% from 2017. Also, the anomaly in Educational spending, explained above, contributes to the current low performance. 2018 forecast is $445 billion, 6.2% growth over 2017, with best growth in Lodging 13%, Office 11% and Amusement/Recreation 9%.

Non-building Infrastructure will post the best year of growth since 2014 to reach a new all-time high at $319 billion. Transportation, by far, will show the best growth, nearly 30% above 2017.

Spend Sector 2015-2019 8-9-18

 

June Construction Starts Reach New Highs 7-25-18

 

 

Construction Spending 2016-2017 Revisions 7-1-18

While everyone else is talking about May construction spending versus April, the most important change taking place in the spending report every July 1st is the fact that, every year, with the release of May construction spending data on July 1, Census revises the data for all months going back the previous two years. Rarely have revisions been lower.

Census Construction Spending July 1, 2018 data revisions:

2017 increased by $12bil, +1.0%. Most notable was a +2.5% increase to unusually low April 2017.  2017 revisions were mostly residential, up $7.5bil, +1.5%

2016 also revised up, by $6bil, +0.5%, mostly in Nonresidential Bldgs.

Nonresidential Bldgs were revised up in both 2016 & 2017. Healthcare up by ~4%/yr both years. Power revised down by ~4% both years.

Jan, Feb & Apr 2018 spending were reduced, Mar was revised up. Jan-Apr 2018 total was reduced by $2.6bil, -0.7%. Biggest move was -5% to Nonresidential Bldgs. Commercial -15%, Mnfg -5%, Office -4%, Public Safety -18%, Communication +6%

Primary reason YTD dropped from 7.6% last month to 4.3% this month is because $6bil was added to JFMA 2017. Happens every year with this Revs issue.

More to come.

Spend Summary 2014-2020 May 2018 7-3-18

 

Starts CF 2015-2018 7-3-18.JPG

 

Construction Spending April 2018 – 6-1-18

6-1-18

Construction Spending for April is up 1.8% from March and up 6.6% Year-to-date (YTD) from 2017. Both Feb. and Mar. were revised up slightly.

YTD$ Jan-Apr 2018 vs 2017 > Residential +8.7%, Nonresidential Buildings +6.0%, Nonbuilding Infrastructure +3.7%. Public +7.6%, Private +6.3%.

Spending in current $ has reached a new high of $1,310 billion surpassing the previous high spending from 2006. But after adjusting for inflation, constant $ shows volume is still 13% below the 2005 peak.

Spend current vs constant 2018 6-1-18

Census is reporting a 1.8% mo/mo gain from March. I am not seeing such a huge jump in April construction spending over March. My data shows very slight growth from Mar to Apr, possibly because my SAAR factor produces a much higher SAAR for March than the Census factor. The Census factor, which appears unusually low in March, lowers March (to a decline) and increases April growth.

Year-to-date indicators are often a better indicator of a growth trend than mo/mo comparisons. But, YTD can be deceiving. When both years being compared have similar slope to spending growth, YTD works well. But if one year has a declining slope and the other year an increasing slope, YTD values can vary widely from expected annual total yr/yr growth.

For example, Manufacturing shows YTD growth from 2017 is down 4.1% through April.  Monthly spending in 2017 trended down most of the year starting at the highest, $74bil in Q1 2017, dipping as low as $61bil in Dec. For 2018, just the opposite trend is taking place. 2018 started in Jan at a rate of $65bil and is projected to finish the year at $72bil.

This means YTD comparisons for 2018 vs 2017 will start out at the lowest percent change for the year (-4.1%) and finish with 2018 values increasing and 2017 values decreasing. By the 4th quarter the mo$2018/mo$2017 could reach +20%. That diverging trend will continually move the average YTD up such that, for the first half of the year, YTD gives no clear indication of the expected annual performance.

Similar patterns, or at least partially similar patterns, can be found in Office, Educational, Power and Amusement/Recreation.

Overall, this indicates construction spending will experience an improving picture through the year. I’m predicting total YTD performance will increase every month into the 4th quarter. From April to September 2017, total monthly spending was declining. In 2018, for this same period, spending is predicted to increase every month. This will result in rapidly increasing YTD percents during this period. YTD will increase from 6.6% in April to 9% in the 3rd quarter. Even if spending were to realize no additional gains in 2018, the YTD% would still increase from now into the 4th quarter, because 2017 values declined.

The latest data comes in as expected, so does not appreciably change my outlook. I’m still forecasting 8% to 10% growth across all sectors and I expect 2018 will reach a total $1,350 billion in spending.

The outlook is particularly strong for Residential, Educational, Amusement, Office and Transportation. Transportation may exceeding 25% growth. Highway/Bridge and Healthcare growth will be limited.

MORE TO COME

Notes on March 2018 Construction Spending 5-2-18

Construction Economic Activity Notes 4-25-18

Construction Economics Brief Notes 3-10-18

2018 Construction Spending Forecast – Mar 2018

 

Notes on March 2018 Construction Spending

5-2-18

Construction Spending March down 1.7% from Feb, BUT, Feb was revised UP by 2.6%, 2nd largest mo/mo revision in 7 years.

Today is 2nd upward revision to January construction spending, now up 2.5% from original issue. Jan/Feb 2018 up 6% from Jan/Feb 2017

Should you be worried that construction spending for March was reported down 1.7% from Feb. No! Not unusual for 1st report of monthly construction spending to come in down. It’s normal. Current unadjusted monthly value is ALWAYS being compared to a (most always upwardly) revised value.

Last 5 years the 1st release of spending was reported down 25 times from the previous month. 20 of those were later revised up.  The 1st report of spending has been revised up 55 times in the last 60 months.

Residential construction spending Q1 2018 UP 5% from Q4 2017, up 8% from Q1 2017

Looks to me like the rapid growth in MF occurred in 2014-2016, Still had minor growth in early 2017 but rate of growth had slowed dramatically. Essentially, no growth at all since Q2 2017. MF trend seems flat to down. I see all RSDN trend slowing, potentially down in 2019.

Keep in mind, Rsdn inflation has averaged over 5.5%/yr for last 5 years. If residential spending is not increasing greater than 5.5%/yr, then real volume is declining.

Nonresidential Bldgs construction spending Q1 2018 up 5%+ over Q1 2017.

Why is Manufacturing construction spending down YTD vs Q1 2017, when I’m predicting 14% gain this year? Because Q1’17 was the high for 2017 and dropped 13% by year end, whereas Q1 2018 is the low for the year, expecting 16% growth by year end.

Spend YTD Mnfg 5-3-18

Public Safety, +19% ytd is the biggest percent gainer in Nonresidential Bldgs spending, but has a very small share of total $ spending. The biggest $ gainers are Commercial, +$1.8bil, Lodging and Healthcare both at +$0.8bil.

Infrastructure construction spending Q1 2018 up only 1.5% from Q1 2017, held down by power -6% and highway -3%, two largest markets. Transportation up 21%.

Environmental Public Works, comprised of the following, is up 12 % from Q1’17. Conservation up 25%. Water Supply up 10%. Sewage Waste Disposal up 8%.

Although I’m forecasting only 4% growth in the Power market, it is down YTD vs Q1 2017 for the same reason as Manufacturing. Q1’17 was the high for 2017 and dropped 6% by Q4 2017, whereas Q1 2018 is the low for the year, expecting 11% growth by year end.

Spend YTD Power 5-3-18

Transportation construction spending posted the largest $ growth in Q1 2018 of any market, up nearly $2bil over Q1 2017. Year-to-date, Trans is up 21% over 2017. In my 2018 Forecast, I forecast Transportation to gain 35% in 2018 over 2017. YTD will increase over next 6 months. The next two quarters in 2018 will show continuous growth vs 2017 in which April through Sept posted no growth over Q1’17.

Spend Transport 5-3-18

I’ve been forecasting 25% to 35% growth in Transportation spending since November. Other analysts projections range between -1% to +7%, $8bil lower than my forecast. 2017 new starts more than doubled from 2016, due to several very large terminal and rail projects. Also 2016 is still contributing an out-sized share of work to 2018 spending. The elevated rate of growth in Transportation spending will extend into 2019.

 

Public Construction Spending in Q1 2018 is up 6.7% from Q1 2017. Single largest $ gain is Transportation, up $0.9bil. As a group, Environmental Public Works is up 12%, up $1bil. Public Office and Educational are each up $0.5bil. This is the best growth in public spending since 2015vs2014 and is better than any other quarter back to 2008.

 

2018 Construction Spending Forecast – Mar 2018

Construction Economic Activity Notes 4-25-18

4-25-18

Brief notes on spending, starts, backlog, jobs and inflation from March and April tweets.

Nonresidential construction spending is not decelerating in 2018. Will see best growth since 14% in 2015.

Residential construction spending is slowing to +7% growth in 2018, after 6 consecutive years of strong growth averaging 13%/year.

Non-building Infrastructure forecast growth of 8% in 2018, potential to hit a new all-time high due to very large projects in Power and Transportation.

Public construction spending in 2018 is forecast to reach $307 billion, an increase of 8% over 2017, the best growth in 10 years. Educational and Transportation will contribute equally and together account for more than half of the Public spending growth in 2018.

In Oct 2016 and again in Feb 2017, I forecast Manufacturing spending would fall 13% in 2017 after hitting peak spending in 2015 from massive growth in new starts in 2014. At that time, the AIA consensus forecast (average of seven analysts) was that spending would increase +0.4%. By July the consensus had been revised to average -6.6%. I updated my forecast to -11.8%. Based on cash flows, from April 2016 through the end of 2017 I expected spending to decline in 17 of 21 months. It declined in 14 of those months. Manufacturing spending finished 2017 down 11.9%.

In Fall 2017, I predicted Manufacturing construction spending would increase +9% in 2018. However, through March, total construction starts for Manufacturing over the last 12 months would count as the 2nd highest year on record. Therefore I’ve recently revised my forecast up to +13% spending in 2018. I’m now expecting double digit % spending growth in both 2018 & 2019. The January 2018 AIA consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 spending will decline. My data shows increases in starts and backlog indicate large gains.

Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 24% in two years.

Nonresidential Bldgs 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% with 2018 spending forecast up 9%. Institutional accounts for 52% of 2018 construction spending growth, Commercial 27%, Industrial 21%.

80% of all nonresidential buildings construction spending forecast in 2018 is already in backlog projects at the start of the year.

New Construction Starts are booming (need to look past the mo/mo and ytd)

  • Residential – 2 highest qtrs since 2006 in last 12 months
  • Nonres Bldgs – 3 highest qtrs since Q1 2008 in last 15 months
  • Nonbldg Infra – highet qtr since Q1 2015 peak in last 6 months.

Construction Starts data is regularly misinterpreted in common industry forecasting articles. Starts do not directly indicate changes in spending. A Forecast Cash Flow from Starts gives an indication of the rate of change in spending.

Educational new construction starts total from the last five months of 2017 posted the highest 5mo total starts in at least seven years, 13% higher than the next best 5mo. Jan 2018 monthly spending up 12% from 2017 mid-year low.

Healthcare construction starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. Spending will increase slowly.

Amusement/Rec construction starts avg of +15%/yr for 5yrs, up 30% in 2016, 5% in 2017. In last 6mo, Aug 2017 to Jan 2018, four very large billion$+ projects started, almost a year’s worth of new starts in 6mo. Backlog indicates 15%-20% spending increases for 2018 and 2019.

In 2010, Warehouse new construction starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010.

Lodging starting backlog up 13% for 2018, having already averaged increases of 30%/yr since 2015. Starting backlog jumped from $7 bil/yr in 2014 to $17 bil/yr in 2018, supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.

New construction starts for Manufacturing total for the last 12 months would count as the 2nd highest year on record. I’m now expecting double digit % spending growth in both 2018 & 2019. The consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 manufacturing bldg spending will decline.

Structural steel contract includes structural shapes, steel joists, metal deck, stairs and rails, about 10% of total building final cost.

Other steel in a building can include reinforcing steel, exterior metal wall panels, metal ceiling frames, wall studs, door frames, canopies, steel duct, steel pipe and conduit, about 6% of total building cost.

All steel (in a structural steel building) is at least 16% of total building cost. There are more hidden costs of steel in mechanical, electrical and plumbing equipment.

Raw mill steel is about one fourth the final cost of structural steel installed. A 25% increase in cost of mill steel could raise a structural steel subcontract bid price by 6.25%. At 10% of total building budget, that would raise total building cost by 0.625%.

A 25% increase in cost of mill steel could raise the other nonstructural steel costs by 6.25%. At 6% of total building budget, that would raise total building cost by 0.375%.

A 25% tariff on mill steel raises building cost inflation by at least 1%. That’s about $7.5 billion of unexpected cost inflation just in 2018.

Watch for unexpected impacts from steel tariffs, potentially adding 5% or more to total cost of bridges (plate steel). Also impacted, power industry, pipeline, transmission & communication towers, transportation.

Steel tariff could inflate the cost of the proposed $2.1 billion Gordy Howe International Bridge by $100 million. That would hurt the budget.

2018 Construction Spending Forecast – Nonresidential Bldgs construction spending in 2018 forecast to reach a new high, $459 billion, up 9% over 2017, passing the previous 2008 high. In constant $, 2018 will still be 18% below peak.

An estimator could be far off when indexing construction cost using a general cost index versus an actual selling price index.

Failure to account for the affect of inflation on the cost of construction could result in a failure to be profitable.

For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.

For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%. In 2013 it reached a 12-year high of 8%.

If you are hiring to meet your needs and you see that construction spending (revenue) has increased by 25%, do you hire to match revenue? No! Hiring requires a knowledge of volume growth, and revenue doesn’t show that. Revenue minus inflation shows volume.

Construction activity has a direct influence on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs.

Construction Jobs vs volume growth the last 5 years is nearly even, yet jobs imbalances exist within sectors. Nonresidential Buildings and Non-building Infrastructure show excess jobs while Residential shows a severe jobs deficit. But not all of the apparent deficit in residential jobs is real.

Are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.

In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This is residential space built using labor classified as non-residential commercial.

BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity.”

So, the mis-classified labor reduces the nonresidential excess and offsets a portion of the residential shortfall.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Construction added 177,000 jobs in the 4 months Nov’17-Feb’18. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Construction jobs pulled back 15k in March, but this follows the strongest month (Feb +65k) in 12 years, so not totally unexpected. I think Mar Construction jobs, (-15k), more likely a pause after Feb (+65k), strongest month in 12 years.

see also Construction Economics Brief Notes 3-10-18

and also Notes on March 2018 Construction Spending 5-2-18

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