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Spending Summary Construction Forecast Fall 2017

12-2-17

Summary

Total construction spending in 2017 will reach $1,236 billion, an increase of 4.2% over 2016. Residential spending is above 10% growth for the 5th consecutive year.

Year-to-date construction spending growth through October is 4.1%.

Residential leads construction spending growth in 2017 for the seventh consecutive year, up 10.6%. My Nonresidential Buildings forecast has been lowered since July but finishes the year up 2.8%. Only Non-building Infrastructure will not improve over 2016, down 3.7% for the year. However, Non-building Infrastructure has been at an all-time high for the previous two years.

Spend ALL 2011-2018 12-3-17

This forecast is down slightly since July due to reductions in both nonresidential buildings and non-building infrastructure. Educational, Office, Power and Highway, four of the five largest markets which together make up half of all nonresidential spending, were all lowered.  Some of these markets are prone to very large post-annual upward revisions and that has the potential to add to 2017 spending when those revisions are released in July 2018. In the July 2017 revisions, Power spending for 2016 was revised up by 10%.

History shows spending has been revised up 51 times in the last 55 months. I wouldn’t be surprised to see future revisions smooth out spending in unusually low periods (April and July) and increase total 2017 spending above this forecast. I suspect revisions in July 2018 may show 2017 spending as high as $1,250 billion. The average post-annual total spending revision for the last four years is +3%, although the total revision to 2016 was only 2.2%.

None of the spending detailed in this analysis includes any projections of potential work from future infrastructure stimulus.

Total construction spending in 2018 is currently forecast to reach $1,334 billion, an increase of 8.0% over 2017. For the first time since pre-recession, Non-building Infrastructure will lead all spending with potential to increase by 10% growth over 2017.

Non-building Infrastructure is forecast to lead 2018 spending with an increase of 10.2% due to very large projects in Power and Transportation. Nonresidential Buildings growth is strong for 2018, forecast up 9.3%. Residential spending in 2018 slows to only 5.7% growth after six years averaging 13%/year.

Total spending will reach a new high in 2018 for the third consecutive year. However, in constant $ adjusted for inflation, spending is just back to the level of 2008. The all-time constant $ high was reached in 2005. Adjusted for inflation, 2018 will still be 12% below that level. At current rates of growth, we would not eclipse the previous high before 2022.

Spend Summary 2017-2018 Oct 2017 12-2-17

Growth of 8% in 2018 or $100 billion in construction spending demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction volume. Construction jobs have never increased by 500,000 in one year. However, $100 billion in added spending is not the same as $100 billion in volume, and jobs grow based on volume. Although spending will increase 8%, construction inflation has been hovering near 4.5% to 5% for the last five years. Real volume growth in 2018 after inflation is expected to be just over 3% or $40 billion. That would mean the need, if there are no changes in productivity, is to add about 200,000 additional workers in 2018, a rate of jobs growth that is well within reach since that is below the average jobs growth for the last seven years.

Residential Buildings Spending

Total Residential spending in 2017 will finish at $523 billion, up 10.6% from 2016. Residential spending is above 10% growth for the 5th consecutive year.

Residential spending was expected to dip between May and October due to a low volume of work contributed from starts cash flows. The actual data shows, after reaching a seasonally adjusted annual rate (saar) of $536 billion in March, the high for the year, spending dropped 3% to 4% to as low as $515 billion saar three times and has averaged only $520 billion saar from April through October. New starts in Q1’17 reached an 11-year high, so I expect the rate of spending to increase at year end. Residential work will close out the year with 10.6% growth, the 5th consecutive year over 10%. Average growth the last six years is 13%/year.

Residential spending is 50% single family, 13% multi-family and 37% improvements.

Residential Improvements has posted 18% growth year-to-date. Single Family spending is up 9% while multi-family is up only 4%. That is compared to 2016 when improvements for the year finished up 10%, SF up 4% and MF up 5%. Census does not include flood damage repairs in improvements but does include full flood damaged structure replacements in improvements.

Total residential spending in 2018 slows to a forecast of $553 billion, only 5.7% growth over 2017.

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike Nonresidential, backlog does not contribute nearly as much to Residential spending within the year. New Residential starts in Q1’17 reached an 11-year high. Residential starts are at a post-recession high.

Residential spending will reach a 12-year high in 2018. Adjusted for inflation, all years from 1996 through 2007 were higher. Inflation adjusted spending is still 30% below the all-time high reached in 2005.

Spend Sector 2015-2018 12-3-17 

Nonresidential Buildings Spending

Total Nonresidential Buildings spending in 2017 will come in at $420 billion, up only 2.8% from 2016.

Commercial/Retail is expected to finish the year with +13% growth and Lodging +9%. An unexplained surprise was Office, which by early indicators was predicted to show large gains in spending. Two independent sources reported new office starts in 2016 up 25% to 30%. Starting backlog coming into 2017 was near or at an all-time high. Spending was forecast to jumped at least 20% in 2017. Instead, spending posted declines from May to September and is now forecast to finish with only a 4% gain. This market accounts for the single largest miss in my forecast posted in Feb 2017.

The only major nonresidential building in decline this year is Manufacturing. Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Spending stayed close to that level in 2016. Based on cash flows from starts, spending was expected to decline in 14 of the last 18 months. It declined in 11 of those months. We are at the point of turn-around with only one monthly decline predicted in the next three months and no spending declines expected next year. For 2017, Manufacturing new starts are up 35%.

Spend Nonres Bldgs 2017-2018 Oct 2017 12-2-17

Nonresidential Buildings starts in the six months from Aug 2016 to Jan 2017 posted the (then) highest amount of new starts since Jan-Jun 2008, also the year Nonresidential Buildings spending peaked. Then new starts in the six months Apr-Sep 2017 just surpassed both those previous peak highs.

Nonresidential Buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle. Starting backlog has increased for five years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for five years at an average 9%/year.

Total nonresidential buildings spending in 2018 is forecast to reach $458 billion, an increase of 9.3% over 2017. Office, educational and manufacturing make up 70% of the growth.

Nonresidential Buildings will reach a new high for spending in 2018, surpassing the previous 2008 high. However, adjusted for inflation, spending is 18% below the all-time high reached in 2000.

Non-building Infrastructure Spending

Total non-building infrastructure spending in 2017 drops to $293 billion, down 3.7% from 2016.

Non-building Infrastructure spending, always the most volatile sector, dropped to yearly lows from June through September. Infrastructure construction spending in August dropped to the lowest since November 2014. However, this was predicted. Cash flow models of Infrastructure starts from the last several years show current dips in monthly spending are being caused by uneven project closeouts from projects that started several years ago.

Current backlog is at an all-time high and spending will follow the expected increased cash flows from the elevated backlog. Environmental Public Works (Sewage/Waste disposal down 16%, Water Supply down 9% and Conservation/Dams & Rivers down 7%) posted the largest declines in 2017 and accentuated the declines in the infrastructure sector. The sector is expected to increase slightly in the last quarter 2017. In recent months there are already substantial gains being posted in Conservation and Transportation.

No future growth is included from infrastructure stimulus and yet 2018 is projected to increase by 10%.

Spend Infra Jan15 to Jan19 12-2-17

Total non-building infrastructure spending in 2018 is forecast to reach $324 billion, an increase of 10.5% over 2017. My forecast for 2018 is predicting every infrastructure market will post gains, but it is the Power and Transportation markets that account for almost all the growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Spending growth in the Power market is not quite so apparent. Combined Power new starts are down for both 2016 and 2017, but the spending gains are coming from projects that started in 2015, a year in which starts were up over 120%.

Non-building Infrastructure will reach a new high for spending in 2018. This sector had posted a new high in 2015 and nearly equaled that in 2016. Adjusted for inflation, spending in 2018 will be nearly equal to the all-time highs reached in 2015 and 2016.

Spend Nonbldg Infra 2017-2018 Oct 2017 12-2-17

Public Spending

Total public spending for 2017 remains flat at $287 billion with most major public markets down for the year.

At midyear, I expected Educational and Highway to support a Public spending increase in 2017. Those gains did not materialize. A decline in Highway spending offset small gains in Educational.  By far the largest Public spending decline is in Sewer and Waste Disposal, down 16%.

Public spending hit the low for the year in July. It increased for the last three months, most recently by an 11% increase in Public Educational spending in October.  We are now near the high for the year and can expect to see another six months of growth before spending levels off in mid-2018.

Spend Public Only 2015-2018 12-2-17

When you see graphics that present Residential, Nonresidential and Public spending all on the same plot, they are not additive. Only Residential and Nonresidential can be added to reach total spending. Public is a subset of Nonresidential, composed partly of Nonresidential Buildings (~40%) and partly Non-building Infrastructure (~60%), with a slight amount of residential.

The two largest markets contributing to public spending are Highway/Bridge, 32% of total Public spending, and Educational, 25% of Public spending. The third largest market, Transportation, is only about 10% of Public spending.  Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, which accounts for 8%, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

All of Highway/Bridge is Public spending. Only 80% of Educational spending is Public and only 70% of Transportation is Public. Environmental Public Works markets are 99% Public.

Spend Public-Private 2017-2018 Oct 2017 12-2-17

Total Public spending in 2018 is forecast to reach $305 billion, an increase of 6.3% over 2017. Public spending in 2018 will reach the highest year over year growth since 2008.

Educational and Transportation will contribute equally and together account for almost 60% of the Public spending growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Educational new starts total for the last three months posted the highest quarter in at least seven years. The 2nd highest quarter was also within the last 12 months, so still contributes fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.

See this companion post for  Starts Trends Construction Forecast Fall 2017  11-8-17

After New Starts, dollars are tracked in Backlog, Backlog Construction Forecast Fall 2017  11-10-17

For more on Jobs and Workload see Construction Jobs / Workload Balance 11-7-17 

For effects of inflation see Constant Dollar Construction Growth 11-2-17

In What Category is That Construction Cost?

Seldom do two sources present information the same way!

In the construction industry, a disconnect exists in the reporting of construction starts data and spending data.  Problems may arise when data is used to perform comparisons or forecasts. New starts and backlog may be listed in one category and spending for the same markets may be listed in another.

The U.S. Census Construction Put-in-Place (Construction Spending) Release follows these definitions. I adjust all other input/forecasting data that I use to conform to these Put-in-Place definitions. Some pitfalls to be aware of:

Residential spending data is about 35% renovations and improvements that has no units associated with the dollars, so cannot be included in a comparison to housing starts.

Demolition is not included in renovations/improvements. Partial repair of flood damaged homes is NOT included in residential improvements. Full replacement of flood damaged homes is included as improvements, not new single family.

Offices includes pubic buildings such as city halls and courthouses. Also includes data centers and bank buildings but excludes medical office buildings, offices at manufacturing sites and offices at educational facilities.

Commercial includes all retail buildings, warehouses, parking lots and garages. Excludes parking at educational/healthcare facilities. Census DOES separate the costs for buildings that are mixed use retail/office/residential.

Educational, along with K-12, includes administrative offices, health centers, parking, residence halls, classrooms, labs, food service and sports/recreation facilities at colleges and universities and all associated infrastructure and maintenance facilities at the educational site. Also includes public libraries, science centers and museums.

Healthcare includes similar support and infrastructure to educational. Also includes non-manufacturing and non-educational research labs.

Amusement and Recreation includes performing arts centers, civic centers, convention centers, sports and recreation facilities not located at schools or colleges.

Transportation includes air freight and passenger terminals, runways, bus and railroad passenger terminals, light rail and subway facilities,  railroad track, railway structures and bridges, docks and marine terminals and maintenance facilities and infrastructure associated with each.

Some sources of design or new construction starts data carry terminal buildings as institutional buildings or other public nonresidential buildings, but Census caries the building cost of all terminals grouped in with the non-building infrastructure costs of Transportation. Some sources carry public buildings such as city halls and courthouses as Public Safety but Census carries cost data for public buildings such as city halls and courthouses in Offices. Some sources classify laboratories as commercial and warehouses as industrial/manufacturing but Census includes warehouses in Commercial and labs, depending on use, can be either Educational, Healthcare or Manufacturing.

Similar discrepancies may exist when comparing starts or spending to indexes, such as the Architectural Billings Index, which broadly classifies projects as commercial, institutional or residential. Some resources classify Amusement/Recreation as institutional and some as commercial. Labs are sometimes classified as commercial but in many cases are included in educational or healthcare, both institutional.

As you can see, there are several instances where the data are often mixed up. From the point of view of the forecaster, initial input data cannot always be used directly to forecast or match spending output. Some manipulation of the data is required to make input and output match. For example: I move starts for terminals from nonresidential buildings to non-building infrastructure Transportation, so that really changes my totals by sector.

What does your source for data take into consideration? Know your data!

 

 

Ahead of the Sept Construction Spending Forecast

10-25-17

On November 1, September construction spending will be released. The September spending release is always a solid turning point for the 2017 forecast. Here’s a few facts leading into the forecast which will incorporate this data and be posted soon after the 11-1-17 spending release.

2017 construction spending will come in at $1,250 billion, up 5.5% from 2016.

Largest $ contributors to growth in 2017 spending: Residential $56b, Commercial Retail $12b, Office $6b.

Largest $ declines in 2017 spending: Manufacturing -$8b, Public Works -$6b.

Total construction spending averaged 8%/yr growth last 6 yrs (2014 & 2015 at 11%). Expect 6% in 2018, 5% in 2019

Construction spending on Infrastructure leads growth for the next 3 years and it has nothing to do with an infrastructure spending bill.

Infrastructure spending in 2018 is led by Power and Transportation markets.

Most of the 2018 spending in the Power market will be generated from starts in 2016. Equally strong 2017 starts will generate most of the Power spending in 2019.

Public construction spending in 2018 will reach highest yr/yr growth rate in over 10 years powered by Educational spending.

Commercial/Retail spending in 2018 slows but most other nonresidential buildings still show strong growth, especially Office and Educational.

Residential spending slows to a crawl after more than 100% growth in last 6 years. Currently predicting only 5% to 6% growth over next 2 years.

Residential spending may change during the year because, while spending in all other markets is dependent on starting backlog, residential spending is primarily dependent on new starts within the year

Largest $ contributors to growth in 2018 spending: Power $22b, Office $15b, Educational $10b, Transportation $5b.

Largest $ declines in 2018 spending: none greater than -$2b.

 

Nonresidential Buildings and Infrastructure construction will both hit new all-time highs for starting backlog in 2017 and 2018. Both will see a 9% increase in spending in 2018.

Backlog incld Res Starts 2005-2018 10-26-17

Infrastructure construction spending never dropped due to the recession as much as Nonresidential Buildings or Residential.

Nonres Bldgs dropped 35% from $438bil in 2008 to $284bil in 2011.

Residential dropped 60% from $630bil in 2005 to $252bil in both 2010 and 2011.

Infrastructure declined only 8% from $274bil in 2009 to $251bil in 2011. It rebounded to $305bil in 2015, a new high.

Nonres Bldgs spending is just 3% below the previous high but residential is still 16% below 2005.

 

In constant$, adjusted for inflation, Nonres Bldgs peaked at $537bil in 2000 and Residential peaked at $755bil in 2005.

Nonres Bldgs is still 21% below the inflation adjusted peak. Residential is still 30% below.

Infrastructure reached an inflation adjusted peak in 2009 at $300bil. It hit a new high in 2016 at $313bil and in currently down 6% from that high. It will set a another new high in 2018.

Spend current vs constant INFRA 1993-2018 plot 10-25-17

Watch for the new 2017-2018 Spending Forecast to be posted within the week after the September data is released 11-1-17.

These other recently posted articles also have information relative to the 2017-18 forecast

Is Infrastructure Construction Spending Near All-Time Lows?

Construction Starts and Spending Trends 2017-2018

 

So, About Those Posts “construction spending declines…”

You know those articles you’ve been seeing, “Worst year for construction spending since 2010″, well there’s some truth to that, BUT

2017 is the 6th year of the expansion. It has slowed, but… Here comes the BUT!

10-4-17 – Construction numbers are at all-time highs! Slowing or not, activity is very strong. Looking behind the headlines, here’s what we see;

Residential construction spending is slowing the most, from +11% in 2017 to only +2% in 2018 after six years averaging 13%/yr. Nonresidential buildings spending this year just kept up with the rate of inflation (4%), none-the-less, it’s at record highs. It doubles that rate of growth to 8% in 2018. Non-building infrastructure, down 2% in 2017, next year expect growth of 10%+, coming from long duration jobs.

The real performance numbers in Infrastructure are completely hidden. Spending was near flat for three years. But during that time, contrary to every other sector which experienced inflation of 15%, Non-building Infrastructure experienced deflation of 7%. (Gee, didn’t I read somewhere that activity within a sector is a primary driver of inflation?) Anyway, flat spending means volume really increased by 7% during that time. Spending by itself never tells the whole story!

There were some expected dips in spending recently, Manufacturing, Power, Highway, and there will be more in early 2018. BUT, there are also expected boosts in spending, Office, Commercial/Retail. Some of these already have matched up with the forecast, and there are more to come in 2018, Power, Transportation.

All Nonresidential Backlog is at record highs.

Backlog incld Res Starts 2007-2018 10-2-17

Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2017 and again in 2018.  For four years, from 2010 to 2013, all nonresidential backlog remained fairly constant. Since then, backlog for infrastructure is up 30% and for buildings it’s up 60%. (75% to 80% of nonresidential spending within the year comes from backlog at the start of the year. For residential, 70% of spending comes from new starts within the year.) Buildings will hit spending records in both 2017 and 2018. Infrastructure spending will hit a new high in 2018.

Ignoring for the moment that comparing any month to the same month last year can be grossly misleading as to the direction the markets are headed (for reasons explained in other recent posts on this blog), 2017 total spending growth is the lowest % yr/yr growth since 2011 (not 2010). Does that make it “worst”?

Spending will gain +5.6% in 2017, the least gain in six years. Last year was +6.5%, 2013 was +6.6%. The average for the last six years is +8%. So 2017 is the worst. Pretty damn good worst!

August Construction Spending 10-2-17

Data released 10-2-17

Preliminary Report August Construction Spending

August construction spending was posted today at $1.218 trillion, up 0.5% from the 1st revision to July.

  • Residential spending is up 0.5% from July, up 12.3% YTD.
  • Nonresidential Buildings spending is up 1.8% from July, up 4.5% YTD.
  • Non-building Infrastructure is down 0.5% from July, down 3.4% YTD.

Year-to-date through August posted at $806 billion, up 4.7% from same period 2016.

What you should know – Revisions:

Since the bottom of the recession in January 2011, through June 2017 (78 months), spending vs the prior month was 1st reported down 42 times. Values were revised up 64 times, but not all months turned positive. After revisions, spending was down vs the prior month fewer than 20 times.

Monthly values are revised the next two months after initial release. Spending has been revised UP 15x in last 18 months. The average revision in following two months is +1.0%. This table shows the growth before and after revisions this year. Notice, spending was 1st reported down vs the prior month 5 times through June. After revisions spending is down only twice.

Spend Revs small table August 10-2-17

All values for the year are revised again in following May data report. The final revision has been UP 49 of the last 53 months. Average post-annual revision 2016 +2.2%; 2015 +4.3%; 2014 +4.4%. The average post-annual revision for the last 4 years is just over 3%.

Year-over-year and year-to-date comparisons of construction spending are generally understated by about 2% to 3% until the final revision of spending data is posted in May the following year.

Year-to-date construction spending through August is posted at $806 billion, up 4.7% from same period 2016. However, the post-annual revision has already been applied to all months in 2016. The same revision will not be applied to 2017 data until May 2018 data is published next year, so current YTD is always understated. Based on post-annual revisions for the last 4 years, adjustments range between +2% and +4%. The most recent six months has averaged +2.4%. So YTD 2017 spending will very likely increase and could be in the range of 6% to 8%.

Market Specific Revisions

Specific markets vary both higher and lower than the average revision. For example Power has been revised on average +10%, while Educational was revised less than 2%. Highway and Transportation revisions have averaged less than 1% over the last 18 months.

Construction Spending Revisions After 1st Release Through August Data:

Every month this year except April has been revised UP. The April data looks like such an anomaly (largest monthly decline since the recession) that I expect next May we will see April get revised up by +1% to +1.5%. July data gets revised next month and I expect to see an additional +1% to +1.5%.

  • Total Construction UP 49 of last 53 months, avg 3.7%/mo.
  • Total Construction UP 17 of last 19 months, avg 2.5%/mo.
  • Residential revised UP 30 of last 31 months, avg 6.8%/mo.
  • Residential UP 18 of 19 avg 3.6%/mo.
  • Commercial UP 18 of 19 avg 5.7%
  • Educational UP 13 of 19 avg 1.7%
  • Power UP 19 of 19 avg 10.7%
  • Commercial/Retail May +6.7%, June +3.8%, July +3.7%
  • Lodging May +4.3%, June +0.2%, July +1.4%
  • Educational May -0.7%, June +3.4%, July -1.8%
  • Transportation May +3.5%, June +2.1%, July -1.8%

Spending Forecast

2017 construction spending is expected to reach $1,252 billion, up 5.6% from 2016. Average annual rate of spending will increase to $1,300 at year end. I wouldn’t be surprised to see future revisions to Mar-Apr-May spending smooth out that erratic period and add to total $ 2017.

In my forecast, I rely on the revision data by market to add a conservative adjustment for expected normal revisions.

My current Forecast has spending year-to-date through August  up nearly 6% over 2016. Spending in the 2nd half 2017 will increase 1.5% to 2% over the 1st half 2017 and will increase more than 5% over the 2nd half 2016.

  • All sectors have already hit spending lows for the year and will increase 4% to 8% over the next six months.
  • Infrastructure will finish the year with totals down 2%, but the annual rate of spending could potentially increase 8% from July to year end. 2018 shows 11% growth.
  • Nonresidential Buildings may finish up 5% in 2017, the sixth consecutive year of growth. For 2018 expect 8% growth.
  • Residential spending will be up nearly 12% for 2017, the sixth year over 9%. Spending growth in 2018 slows to 2%.
  • Backlog and the share of spending within the current year from that backlog is at an all-time high for nonresidential buildings and non-building infrastructure.
  • Public work for 2017 will finish down 1.5%. By far the largest public spending declines are in Environmental Public Works, especially Sewer and Waste Disposal.
  • Public spending is headed for a sizable rebound in 2018, up 9%.
  • Every large Public category is forecast to show solid growth from the 4th qtr 2017 through all of 2018.
  • This analysis does not include any spending projections from an infrastructure investment bill.
  • Largest declines 2017; Manufacturing -11% ytd; Environmental Public Works -16% ytd.
  • Largest increases 2017; Office +10% ytd; Commercial +16% ytd; Residential +13% ytd.

Spend Sector 2015-2018 10-3-17

See this article Construction Starts and Spending Trends 2017-2018 for more on spending trends

 

 

Construction Starts and Spending Patterns

9-26-17

Construction Starts and Spending trends may not be apparent unless you look deep into the last few years of data.

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.

Power market starts and spending provides a good example. Power starts peaked in 2015 at an all-time high, up 142% from 2014 and more than the prior two years combined. Yet Power spending was down 6% in 2015 and up only 3% in 2016. This happened because Power starts were also at an all-time high in 2012, just below the 2015 level, and those starts drove 2014 spending to an all-time high, but then tapered off in 2015. Those peak starts from 2015 will still be contributing spending for several years to come, long beyond typical jobs, and that drives up typical spending growth because it adds more than typical number of months that contribute spending.

Power starts dropped 11% in 2016 and continue to drop in 2017. Year-to-date and year over year comparisons to 2016 show Power starts down in all respects. For the 1st six months of 2017, Power starts are down four out of six months compared to same month in 2016 and year-to-date through June is down a total 20%.

Even though Power starts have been declining since the 2015 high point, Power had several periods with an exceptionally high value of new starts, some of these periods 2x to 3x the normal rate of growth and a year or two longer duration than typical; late 2014, Jan-May 2015, Feb-Jun 2016 and again in Feb-Jul 2017. When we have old, long duration jobs that are still contributing to monthly spending, spending goes up. A large share of the cash flow or monthly spending from all those exceptional starts will occur in 2018 and 2019. Those jobs will elevate Power spending 15% to 20% in 2018 and also in 2019.

  • Pattern of cash flows from construction starts is indicating substantial acceleration in spending over next six months in all sectors, perhaps most notable in infrastructure.
  • Infrastructure jobs from 2014 with longer than average duration will continue into 2018. These break the average balanced cycle of one month of old jobs ending for every new month of jobs starting. That will increase spending in 2018.

This simplified example shows what happens to monthly spending growth when a long duration job first influences spending past the typical duration and then when it ends. In the example here, starts grow at 1% per month and have a typical duration of 5 months. One month has an unusually large project start that will last for 10 months. A typical month of spending has cash flow from 5 months of starts, but the long duration project creates 6 months of cash flows for the period beyond typical duration.

Notice what happens and when it occurs. When the large project starts it has no unusual affect on spending. When it first extends beyond typical duration, it has a massive +20% growth effect on spending, even though starts had only been increasing at 1%/month for the previous 5 months. When it ends it has a similar downward effect, again, even though starts had been increasing at 1%/month.

Spending growth (or declines), both when an extra large job causes it to increase and then when the extra job ends, is almost entirely influenced by the long duration project, not by normal monthly starts growth rate.

Starts vs Spending Example 9-27-17

2017 construction spending is expected to approach $1,250 billion, up 6% from 2016. Average annual rate of spending is going to increase 5% from $1,240 to $1,300 at year end. I wouldn’t be surprised to see future revisions to Mar-Apr-May spending smooth out that erratic period and add to total $ 2017.

  • All sectors have already hit spending lows for the year and will increase 4% to 8% over the next six months.
  • Infrastructure will finish the year with totals down 2% to 3%, but the annual rate of spending could potentially increase 8% from July to year end. 2018 shows 10% growth.
  • Nonresidential Buildings are up 4% in 2017, the sixth consecutive year of growth. For 2018 expect 8% growth.
  • Residential spending will be up more than 10% for 2017, the sixth year over 9%. Spending growth in 2018 slows to 5%.

Starts CF 9-27-17

2017 construction starts through August total $482 billion, down 1% compared to revised 2016. If 2017 gets revised as expected, even by only 4%, it will show +3% growth over 2016, but we won’t see that growth in the data until next year.

  • Starts revisions for the period 2008-2015 averaged +5.8%/yr. For the period 2012-2015 revisions averaged +4.0%.
  • The smallest revision to starts data since 2008 was +3.5%/yr. 2016 year-to-date through August revisions are +11%.
  • Previous year starts are always revised upwards. Therefore, current year starts year-to-date growth is always understated.
  • Starts have been increasing at an average rate of 11%/year for the last 5 years.
  • After revisions, I expect 2017 will be the highest amount of new construction starts in 13 years.

Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. However, a few months of exceptional 2015 starts will elevate 2018 spending and late 2016 starts will elevate 2019 spending.

Office spending, down slightly (temporarily) due to timing of completions from old jobs, is on track to reach 10% growth in 2017. Starts have been increasing since 2010 with the strongest growth period of new starts from Sept 2016 through June 2017. So, for the next 10 months we may see year/year comparisons negative, but that high volume of starts from Sept 2016 to June 2017 is going to elevate spending in 2018 and 2019.

Commercial spending early reports for June and July are both well below that predicted by starts cash flows and may be prone to substantial revisions. Commercial spending revisions have been up 17 of last 18 months an average of 6.0%/month. (10-2-17 Commercial spending was revised up by 4% for both June and July) Commercial starts have been increasing every year since 2010.

Educational has seen a slow but steady growth in new starts since 2012. Current dip in spending are not expected to continue. Cash flow from starts is indicating a steady climb in spending from now through the end of 2018.

Healthcare starts from 2015 are ending unevenly, rather than smoothly, causing temporary dips in spending. Growth resumes by Sept-Oct.

Transportation Terminal starts in the first three months of 2017 were more than three times higher than any three-month period in the previous five years. While this helped turn 2017 spending positive, 2017 is still affected by uneven starts from two to three years ago holding down gains in the 2nd half. Transportation will show only a 1% gain in 2017 but  double digits gains in 2018. The high volume of 2017 starts has the most affect on 2019 spending.

Highway spending in 2018 will benefit from a scenario exactly as described above in the cash flow chart. Projects that started in 2015 but that have unusually long duration will contribute spending in 2018 beyond the duration that typical projects have ended. It is not recent new starts but old ongoing projects that will increase 2018 spending by 6%.

Public Works cash flow from starts has been indicating declines in spending since last summer. In fact, declines in public works spending (down 20% YTD in Sewage Waste Disposal) is the biggest drag on Infrastructure spending in 2017. However, now spending declines are expected to turn to growth in the 2nd half 2017 and continue growth through 2018.

(This analysis does not include any spending projections from an infrastructure investment bill).

See August Construction Spending 10-2-17 for more trends in spending.

See Starts Trends Construction Forecast Fall 2017 11-8-17 for updated trends in New Starts.

See Backlog Construction Forecast Fall 2017 11-5-17  for updated trend in Starting Backlog for 2018

Why Many Get Construction Spending Wrong

9-2-17

Construction spending for July was released yesterday, posted at $1.211 trillion, down 0.6% from an upwardly revised June. This is the sixth time in seven months of 2017 in which the initial release for monthly spending is down from the previous month. This is actually a very normal occurrence.

The 1st release of monthly spending vs the previous month has been down 15 times in the last 21 months. This may be what leads some analysts and pundits to write that construction spending is heading to recession. Nothing could be further from the truth!

For the last 21 months, in which 15 first reports showed a decline vs the previous month, 18 of the monthly values were revised up. After revisions, only five months remain down vs the previous month. Seven months are still pending further revisions, almost always up.

Construction spending is highly prone to revisions. After the 1st release it is revised each of the next two months and once again the following year. Spending has been revised UP 48 of the last 52 months, 92% of the time. The average upward revision for the last five years is +3.2%/month. In the last 52 months the upward revision averaged 3.7%.

Spend Final vs 1st print 9-2-17

Construction spending revisions after first release of data:

  • Total Construction UP 48 of last 52 months, avg 3.7%/mo
  • Total Construction UP 16 of last 18 months, avg 2.6%/mo
  • Residential revised UP 29 of last 30 months, avg 7.0%/mo
  • Residential UP 17 of 18 avg 3.8%/mo
  • Commercial UP 17 of 18 avg 6.0%
  • Educational UP 14 of 18 avg 2.2%
  • Power UP 18 of 18 avg 12.0%
  • Commercial/Retail  May +3.9%, June +2.6%
  • Lodging  May +3.8%, June +1.1%
  • Educational  May +2.8%, June +3.6%
  • Transportation  May +3.6%, June +2.3%

January through May values have already been adjusted twice in these reports. June has one more revision next month and July gets revised twice. It’s quite likely both June and July values go up. All 2017 months still get one more revision next year when the May data is released (July 1). The post-annual total revision for the last 15 mo averages +2%, close to the long term average. First release values are ALWAYS being compared to previous values that have already been revised, 92% of the time UP. So first release values almost always understate performance. Since July 1st 2017, all 2016 monthly values have been revised three times so monthly releases this year starting with May have the most understated initial % comparison year-over-year because an un-adjusted release is being compared to a 3x-adjusted value.

When judging performance of monthly spending, it is reasonable to predict spending will get revised UP from the first release. Therefore, the most immediate monthly analysis you read, if based on initial release, 92% of the time is under-stating the performance of construction spending.

Construction spending forecasting not only must rely on performance year-to-date, but also on predictive analysis of how much revision there may be to current values. As an estimate, if monthly spending is initially posted as 2% down, 18/mo.averages indicate it will end up at least +2.6% higher after revisions, so would be a positive 0.6% growth month.

A few closing points:

Construction Spending 1st release for July is $1.211 trillion. Expect this to be revised up. YTD Jan-Jun revisions are UP 1.8%. Historical revisions last 5 years predict the final July value will be up 3% from the 1st release.

Construction Spending AVG 2017 Jan-Jul YTD ($1.226tr) has reached an all-time high. We’ve now posted three consecutive quarters of spending all averaging above $1.220 trillion. Spending is on track to total $1.250 trillion for 2017, up 5.5% over 2016.

Construction Spending avg YTD = $1.226tr, is up YTD 4.7% with revisions through May. Without revisions, the 1st releases would have averaged only $1.208tr, up only 3%.

Commercial Retail, Office and Residential lead 2017 construction spending gains, all over 10%. Office spending is at a record high.

After 5 months of stalled construction jobs growth, August added 28,000 jobs and put 2017 growth back on track towards 250,000 jobs. YTD is up 135,000. March thru July added only 19,000 construction jobs. Jan+Feb added 88,000, ending a six-month period, Sep16-Feb17, that added 167,000 jobs.

Harvey related jobs will be muted by jobs lost, I suspect for at least two months. There will be a period of slack records that will take some time to see the real effects of Harvey.

Further reading on this topic

June Construction Spending – What’s Up, or Down?

Construction Spending May 2017 – Behind The Headlines

Construction Spending Almost Always Revised UP.

June Construction Spending – What’s Up, or Down?

8-2-17

Here’s some headlines this month on the June Construction Spending release: Plummets in June; Largest one month drop in 15 years; Clearly Decelerating; US Construction Spending Just Collapsed; and my personal favorite, Construction Spending Plummets to Economic Crisis Levels.

Frankly, I have much more trust in my data than to suggest we are at crisis levels.

In the latest Census construction spending report, June spending dropped 1.3% from May, but May was revised down -0.7%. The consensus of economists predicted spending would be up +0.5% (from the original May value), so the data posted is actually 2.5% below consensus estimates.

I expected May to get revised up 0.6% and the initial June release would be flat vs the revised May value. So the actual came in 2.6% below my expectation.

June construction spending was posted at $1.205 trillion, down 1.3% from May and down 2.7% from March. With the revised data, the May Year-to-date (YTD) vs 2016 was only +5.5% (not +6.1% as initially reported) and for June it’s now +4.8%.

My opinion is this preliminary June value appears suspect. This is sort of like driving a well maintained car that gets 30 mpg and all of a sudden the gauges indicate 20 mpg for the latest tankful of gas. Although the road may be a little bumpy, there does not seem to be any serious mechanical problems, so we have to ask, why did gas mileage drop so much?

The April decline and the Apr-May-June decline are the single largest monthly and 3-month total non-recessionary declines on record. We would need to look at recession data to find similar declines. Spending drops like this just don’t normally occur, especially when cash flow patterns from starts predict 4% growth during the 3-month period. That’s a 6.7% miss over 3 months.

The largest declines in the June Seasonally Adjusted Annual Rate (SAAR) construction spending were Highway and Educational, together 60% of the total monthly decline. (There are other markets with greater mo/mo% declines, however most of those markets have a very small share of the total spending so don’t amount to much).  Almost all of the largest declines are public work. In fact, the initial June release shows every public market declined. However, all ten other public markets together don’t equal half of the declines generated by these two major markets. Furthermore, for the past 3 months Highway spending shows a decline of 12.5%, and Educational spending is down 7.6% in 4 months. A review of data back to 2005 shows neither of these markets have ever had any periods where they’ve experienced declines of this magnitude. These would be record declines if they stick. Market trend data simply is not indicating to expect record declines at this time. So I consider these data suspect.

Construction spending initial release is always preliminary data. The June value, released August 1st, will be revised in each of the next two reports and then once again next year when all 2017 data is reviewed. The average revision to June spending data over the last 4 years (similar growth years to current expectations) is +4.8%.

Spend Final vs 1st print 8-3-17

There are three more opportunities for revision to the June data and two more to the May data. We will have a much better idea what really happened on October 1st, but we won’t know the final outcome until the final 2017 revision on July 1, 2018.

So, what data seems to indicate a trend contrary to current declines? The last 12 months of Dodge Data new starts for nonresidential buildings are the highest since 2008 and they peaked from August to October. Residential starts, at their highest since 2006, peaked from December’16 to March’17. Backlog is at an all-time high. There is no indication here that spending will plummet.

Also, one month of Educational or Highway new starts each generate about $250 to $300 million per month in spending, for the next 24 to 36 months. Normally, with some variation, we have the current month of new starts coming into backlog and one month of old starts ending. Since starts have been normal or high recently, the spending declines posted in June would imply that we’ve lost two to three months of backlog from current spending. Again, there are no indications that we have an extreme imbalance or a canceling of backlog.

Most of the nonresidential spending occurring right now is from projects that started between mid 2015 and the end of 2016. Nonresidential buildings projects that started in 2015 or earlier still make up one third of the spending in the 1st half of 2017. Non-building infrastructure projects that started in 2015 and earlier contributed 50% of spending in the 1st half of 2017. Residential projects have shorter duration so most spending is from more recent jobs, but we hit a 10 year peak in new residential starts just a few months ago. All sectors have fluctuations in spending and have down months but the index of long term cash flows out to completion shows normal backlog and spending growth across every sector.

Index of Actual Spending and Starts Cash Flows 2015-2018 8-2-17

I’m inclined to expect substantial upward revisions to June construction spending in the next two releases. No other data supports a big June drop.

Keep in mind, current construction spending is always being compared to previous months revised spending and growth is almost always being understated. Monthly spending has been revised UP 45 times in the last 48 months. All previous months and all 2016 data have been revised several times. The average revision to ALL spending data over the last 4 years is +3.9%/month. Since January 2016, the average revision is +3.0%/month. The average revision to June spending data over the last 4 years is +4.8%.

June data is un-adjusted preliminary data. Many of the news articles declaring construction spending was a miss are based on this preliminary data which very often gets revised away in following months. For example, The 1st 6 months of 2016 have already been revised up, three times each, by a total of 2.5%. All the months YTD in 2017 still have pending revisions. June 2017 vs June 2016 shows a percent growth of only +1.6%, but June 2016 has already been revised up by 4.7% and June 2017 has not yet been revised at all. June 2017 has a 90% chance of being revised up.

I predict after all the revision are in we will see that June spending did not drop to a low of $1.205 trillion, but that it was closer to $1.250 trillion.

Nonres Bldgs Construction Spending Midyear 2017 Forecast

7-24-17

The AIA recently published the Nonresidential Buildings Consensus Forecast Midyear 2017 report. The consensus of seven firms projects spending growth for nonresidential buildings at 3.8% for 2017 and 3.6% for 2018. The largest growth in the AIA forecast for any building type for both years is 10% for 2017 Retail & Other Commercial. The highest reported total annual prediction from any firm is 4.4% for 2017 and 5.5% for 2018. AIA Midyear Consensus Report July 2017

Construction Analytics forecast for nonresidential buildings construction spending growth is +7.3% for 2017 and +10.7% for 2018. Growth in 2016 was 7.5%. 

Year-to-date (YTD) spending for the 1st 5 months of 2017 is up +5.2%, led by Office and commercial, both near 15%. Estimate-to-complete (ETC) for the final 7 months is forecast at +8.1%. Total spending for Nonresidential Buildings in 2017 is forecast to increase 7.3% = $438 billion.

Compare Consensus 2017 July Forecast 7-26-17

If spending were to slow to 3.8% growth for 2017, since YTD growth is already 5.2%, the rate of growth in the final 7 months would need to fall to only 2.4%. However, the predicted cash flow from construction starts shows very strong spending growth in the 2nd half 2017 and into 2018. Nonresidential Buildings construction starts for the last 12 months posted the highest average since 2007-2008. This is helping boost spending.

Outside of recession years, nonresidential buildings construction spending for the year dropped below 4% annual growth only twice in 24 years, since data has been tracked. In fact, right now spending needs to grow at 4.5% just to stay ahead of construction inflation. So any forecast of spending growth below 4.5% actually might suggest that construction is not expanding, but is contracting. All indications are that there are no recessionary effects right now and economic activity does not suggest we are headed for a non-recession low spending for nonresidential building construction. I don’t expect spending to drop to 4% growth for the next three years.

The pattern of nonresidential buildings construction starts for the last 30 months is indicating spending increases in the 2nd half of 2017 and is setting up 2018 for the highest ever starting backlog and record spending. Even if starts crash to zero growth for the remainder of the year, 2017 spending would drop by less than 1% and we still begin 2018 with record backlog.

Spend Nonres Bldgs May 2017 7-24-17

New Office construction starts for the last 12 months are the best ever recorded, on track to reach a total 50% growth over two years. Retail/Commercial starts have averaged year-over-year (YOY) growth of greater than 10%/year for the last three years. Educational starts averaged YOY growth of 8%/year for the last two years. These three markets comprise 60% of all nonresidential buildings. Healthcare starts have quietly increased to a record high over the last 12 months. Every market except manufacturing will finish 2017 with new starts totals near or at post recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. All construction starts $ data in this report references Dodge Data & Analytics starts data.

Construction spending for Commercial/Retail, Lodging and Office construction all remain very strong with 2017 total growth near 15%. Educational (+9%) and healthcare (+4%) both show sizable gains after years of little to no growth.

92% of all construction spending in 2017 is already in backlog projects.

A scenario that would have Office spending drop down to 8.9% annual growth from the track it is on today (+15.4% YTD) would require a highly improbable and unprecedented non-recessionary decline in spending in the remaining months of 2017. To grasp the enormity of the decline needed, it would take canceling 8% of all ongoing office projects or new starts for the remainder of the year would need to drop by 50%.

Spend OFFICE COMM 2017 2018 7-24-17

Educational will show an increase in YTD gains in the 3rd quarter because increasing spending in 2017 will be measured against the lowest quarter (3rdqtr) in 2016. Healthcare may not show sizable YTD gains until 4th quarter, for which 2016 reached lowest spending of the year and 2017 will reach highest.

Spend Institutional 2013-2018 8-9-17

Total nonresidential buildings spending growth accelerates to 10+% in 2018, led by institutional and office spending.

Nearly all nonresidential buildings construction starts in 2016 are still contributing to spending. Since originally posted they have been revised up by 16%. Since most spending from new starts (approximately 50%) occurs in the year following the start, early spending projections based on original posted starts $ may understate 2017 spending.

Spend Nonres Bldgs asof May17

Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure spending is quite erratic, while nonresidential buildings spending, with only slight variation, has been climbing at a strong steady pace for more than 4 years. Some analysts track nonresidential total spending, but these two sectors perform so differently it is important to break them apart to track trends. Buildings spending is up 2% from Q2’16 and up 5% YOY. In the 2nd half 2017 YOY spending is expected to reach 8% over the same months from 2016. Worthy of note is that non-building infrastructure spending, even though down slightly, just experienced two years of record highs. It will hold down the overall nonresidential total performance, but still finish 2017 near record highs.

See this article from February comparing my starting forecast compared to the Jan 2017 AIA Consensus Nonresidential Bldgs 2017 Forecasts Vary

 

Construction Spending Midyear 2017 Summary

Construction Spending Summary 7-11-17 for May Spending

Year-to-date % growth in construction spending for 1st five months and expected estimate-to-complete (ETC) % growth for remaining seven months 2017. Total % growth vs 2016 and 2017 total $.

 

Total All Construction

YTD = +6.1%, ETC = +7.0%, 2017vs/2016 = 6.7%, 2017 total = $1.266 trillion

Particular strength is evident in the long term trend for Nonresidential Buildings for which spending growth is increasing and continues into 2018.  Recently, all of 2016 spending was revised, in total up by 2%. Current 2017 values are being compared to revised 2016 values. History shows revisions have been up 45 of last 48 months. In the future, 2017 spending will most likely be revised higher. Even without that, at 6.7% total growth expected, 2017 will come in stronger than 2016. All sectors show some improvement over 2016. For 2018, Nonresidential Buildings and Infrastructure both contribute to an 7.8% forecast spending increase.

Spend Summary 2011-2018 May 2017 7-11-17

 

Spend Sector 2013-2017 7-5-17

Also See Construction Spending May 2017 – Behind The Headlines

 

Residential Buildings

YTD = +12.2%, ETC = +9.3%, 2017vs2016 = +10.5%, 2017 total = $523 billion

Residential spending YTD has been above 12% each of the 1st 5 months of 2017. It is expected to dip between May and October due to a low volume of work contributed from starts during the period Q4’15 to Q1’16. This results in a temporary dip in spending. We could see annual spending averaging only $515b to $525b from April through September. New starts in Q1’17 reached an 11 year high, so spending increases later in the year. Residential work will finish the year with 10% growth, the 5th consecutive year over 10%. Average growth the last 5 years is 14%. Spending slows to 5% growth in 2018 .

 

Nonresidential Buildings

YTD = +5.2%, ETC = +7.5%,  2017vs2016 = +7.4%, 2017 total = $438 billion

Nonresidential Buildings spending is expected to increase slightly from May through September due to an above average volume of work contributed from starts during the period Q1’15 to Q2’15. The only major nonresidential building in decline this year is manufacturing. That’s not unexpected since manufacturing spending reached an all-time high in 2015 and stayed close to that level in 2016. Commercial/Retail, Lodging and Office construction all remain very strong with growth near 15%. Educational (+9%) and healthcare (+6%) both show sizable gains after years of little to no growth. Growth accelerates to 10+% in 2018, led by institutional spending.

See Also Nonres Bldgs Construction Spending Midyear 2017 Forecast

 

Non-building Infrastructure

YTD = -3.0%, ETC = +1.4%, 2017vs/2016 = 0.0%, 2017 total = $304 billion

Non-building Infrastructure spending, always the most volatile sector, is expected to increase slightly in the 2nd half 2017. An above average volume of work in early 2015 contributed very long duration jobs that will still contribute spending in late 2017, adding to normal average duration spending. Environmental Public Works (Sewer, Water Supply and Dams & Rivers) is holding back infrastructure from gains in 2017. Declines in that group are offsetting gains in Power, Highway and Transportation. No future growth is included from infrastructure stimulus and yet 2018 is projected to increase by 7%.

 

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