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Construction Forecast Update 10-16-20

UPDATES to Construction Outlook 10-16-20 based on

  • Forecast includes US Census Aug 2020 year-to-date spending 10-1-20
  • Forecast includes Dodge September construction starts 10-15-20
  • Actual Jobs data includes BLS Jobs to Sept (12th) issued 10-2-20

This update accompanies pandemic-13-midyear-construction-outlook

Total construction starts year-to-date for 9 months through September are down 14%. Total starts have registered down -14% to -15% YTD for the last four months.

Residential new starts are down year-to-date only 1% from 2019. However, the last three months total residential starts posted the 2nd highest 3mo total in 15 years. The highest 3mo total since 2005 was for the period Dec’19-Jan-Feb’20. So two of the best 3mo periods of new residential construction starts in the last 15 years have occurred in 2020.

Nonresidential buildings starts are down 26% and non-building infrastructure starts are down 18%.

This chart shows a comparison of the cash flows predicted from new all construction starts vs the actual spending. Over time, the cash flows do a very good job of predicting where spending is headed. Note the divergence of residential in Jun-Jul-Aug 2020. Actual spending finished on avg 3%/mo higher than predicted. In 3 months the actual spending pushed 10% higher than predicted. This may be a reflection of forecasting too high an amount for delays and cancelations.

Starts CF 2015-2022 10-16-20

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

Construction jobs gained slightly in Sept, but are still down 5% (400,000) from Feb peak. Construction may experience only slight jobs improvement in 2020 (residential spending is increasing), but nonresidential buildings declines through 2021 will drive construction jobs lower over next 18 months.

Jobs are supported by growth in construction volume. We will not see construction volume return to Feb 2020 level in the next three years. This time next year, volume will be 5% lower than today, 14% below the Feb 2020 level.

This is why the construction industry will have a hard time justifying growth in jobs. After 12 years of fairly even growth in jobs vs volume, that relation broke in 2018. Volume is currently at a 5-year low, well below jobs. Declining work volume is indicating by this time next year we may be down 600,000 jobs below the Feb 2020 high.

Jobs vs Volume 2015-Jan 2022 dashed 10-16-20

The following table shows which markets have the largest (and smallest) changes in new construction starts. With the exception of residential, due to longer durations, spending in all other markets is most affected by a decline in new starts, not in this year, but in years following. Residential spending hit bottom in May, will post an increase in 2020. Nonres Bldgs spending won’t hit bottom until 2022.

A recent AGC survey of construction firms asked the question, How long do you think it will be before you recover back to pre-Covid? The survey offered “longer than 6 months” as an answer choice. My current forecast is longer than 6 years.

Some effects have not even begun to show up in the data. A 20% decline in new nonres bldgs starts in 2020 means a huge decline in spending and jobs in 2021-2022. How long before construction returns to the level it was at in Feb? 6 to 8 years.

Many nonresidential buildings have durations that last 24 to 36 months, with peak spending 12 to 18 months from now. With the drop in new starts this year, that peak spending 12 to 18 months from now will be impacted. Some nonbuilding markets have project durations that go out 5 or 6 years, so the impact of a decline in 2020 starts may be felt at least until 2025.

If construction starts in 2020 do not outperform 2020 construction spending, then starting backlog Jan. 1, 2021 will be lower. My current forecast (starts down 11%) is indicating 2021 starting backlog will be down by almost 10%. Spending declines into 2021 and remains depressed through 2023.

The last time starting backlog decreased was 2011. Starting backlog will fall 10% in 2021 and 2% in 2022. Except for residential, about 80% of annual spending comes from starting backlog.

The next table shows spending year-to-date through August (released 10-1-20) and the spending forecast for the year. 2nd quarter construction spending activity low-point is down only 5.5% from the Feb peak. Construction spending in August YTD is up 4.2%.

Residential ytd is up 7.2%. Single Family is +3.0%, multifamily is +2.7% and renovations is Reno +15.6%. Nonresidential buildings ytd is down -0.3% and Nonbuilding Infrastructure ytd is +5.8%.

Take note here, the YTD spending for Nonresidential Buildings is currently -0.3% and my 2020 forecast shows Nonres Bldgs ending the year down -2.6%. Some forecasters are predicting spending for nonresidential buildings will end the year down much worse than -2.6% compared to 2019.

With only 4 months remaining, in order for Nonres Bldgs spending to finish down even -5%, the monthly rate of spending compared to 2019 would need to drop to -14%/mo for each of the remaining 4 months of 2020. (8mo x avg -0.3% + 4 mo x avg -14%) / 12mo = -5% total for the year. To end the year down -8%, nonres bldgs spending for the next 4 months would need to come in 25% lower than 2019. That’s “Great Recession” territory.

How unlikely is this to occur? The greatest monthly declines in 2020 so far are July and August in which the monthly rate of spending dropped -3% to -4% compared to same month 2019. Essentially, for nonresidential buildings spending to end the year down -5%, the bottom would need to drop out of the nonresidential markets, beginning back on Sept 1 and continuing for the final 4 months of the year.

Not sayin’ it can’t happen. This is 2020!

Pandemic #11 – June Construction Spending Update

Construction Spending thru June year-to-date is still UP 5% over Jan-Jun 2019.

Here’s the Census Release of June Construction Spending census.gov/construction/c

Q2 2020 spending is down 4.8% from Q1 2020. Prior to the Pandemic impact, Q2 was predicted to be up 1% over Q1. So, then the drop is -5.8% from the initial forecast.

Comparing 2020 spending to 2019 shows a different story. Q1 2020 is up 9.5% vs Q1 2019. Q2 2020 is up 1.2% vs Q2 2019.

The monthly rate of spending, seasonally adjusted (saar), has declined every month since the Feb peak. For 3 months Jan, Feb, Mar, the saar of spending stayed within 0.25% of the peak. Now in June, the saar is down -6%. Most of the decline was in April, -3.5%. May dropped <2% mo/mo, and June declined <1%.

Residential year-to-date (ytd) spending is up almost 8% over 2019 (80% of that is renovations). In fact, SF+MF is up ytd only 2.8%, while renovations, which went from 33% of the market last year to 36% of the market now, is up 18% ytd. Residential has more downside due to reduction in new starts before resuming growth next year. While the 2nd half of 2019 increased at an average rate of 1%/month, The 2nd half of 2020 will decline by an average 0.5%/month. Residential spending for 2020 is forecast to finish flat to down 1%.

Non-building Infrastructure sector ytd is up 7% over Jan-Jun 2019. Biggest mover is the Power market up 17% ytd. Every market but Conservation is up ytd. Non-building spending is forecast to close out 2020 up 6% over 2019 with strength in Power and Highway.

Nonresidential Buildings spending ytd is level with 2019. Big movers up are Comm/Rtl up 6.7% and Public Safety up 42%.

The construction sector did not experience a massive loss of spending from project shutdowns in Q2. Q2 was down 5%-6% from the pre-pandemic forecast. Jun is down only 0.7% from May with half of all markets posting monthly gains.

AIA Consensus Forecast Nonresidential Bldgs Construction Spending to decline 8.1% for 2020. Is there even a path to get there? In the 1st 6mo ytd is up 0.25%. What would nonres bldgs need to post yoy in the 2nd half to end the year down 8.1%? Spending would need to post declines every month (yoy) for the next 6mo at a rate of -16.7%/month. However, the worst decline in Q2 was only -3.2%. It’s not likely at all that Nonres Bldgs spending will fall to that extent.

Here’s an example of the path it would take to get to the AIA Consensus Forecast for Commercial/Retail. The AIA 2020 Forecast is down 7.7%. But year-to-date Comm/Rtl is up 6.7%, a spread of 14.4%. (I’ll remind you again, it’s almost all warehouses). To drop 14.4%, from 6.7% in the 1st 6 months, to end down -7.7% at year end, the monthly rate in the 2nd half would need to be -28.8% each month. That’s not very likely.

For the next 6 months my yoy forecast for Nonres Bldgs spending is up 0.4%.

The BIG question here is, How much of the decline in Q2 was delays and how much was canceled permanently? There is no good report available that defines the total value of work stoppages and work cancellations.

Q2 spending was down 5%-6% from the pre-pandemic forecast. If all of that was work canceled, and therefore we keep those monthly yoy declines of 5%-6% for the rest of the year, then we could see 2020 spending for Nonres Bldgs finish down 2.5% to 3%. But it is not even suspected that all of the Q2 decline was work canceled. Expect most of that was work delayed. Therefore, 2nd half should perform better than Q2 and the forecast for Nonres Bldgs for 2020 is flat to up 1%.

The forecast now has 6 months of actual spending and 6 months remaining of forecast based on new construction starts and backlog. Cash flow forecast from backlog is reduced by delays and cancellations. This forecast projects about 20% for delays and about 2% for cancellations. Also new starts are forecast to drop about 10% in 2020.

The Starts cash flow model has predicted the spending pretty well. The forecast side shows residential has not yet hit bottom, but will grow after Q3 into 2021, while nonresidential buildings falls for the next 12 months.

Starts CF 2015-2022 8-11-20

Currently, the outlook for total construction spending in 2020 is up 1% to 2%. Prior to March the forecast was 6%, so the forecast, although still up 1-2%, has fallen about 5%.

Both Residential and Nonresidential Buildings are forecast within +/- 1% of 2019. Non-building Infrastructure is forecast up 6%-7%.

Currently, inflation in 2020 is expected to range about 3%-4%. If total construction spending grows only 1%-2%, real growth in volume (spending after inflation) is falling. For 2020 and 2021, volume is down. That will not support jobs growth.

Jobs vs Volume 2015-Jul 2021 8-4-20

Mid-August this forecast will be updated with input from Dodge midyear construction starts. See Pandemic #12 for Jobs & Starts Update

2020 Construction Economic Forecast – Jan 2020

Construction Analytics 2020 Construction Economic Forecast

This January, 2020 Construction Economic Forecast addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Backlog, Spending or Revenue, and Volume. New Construction Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Spending adjusted for Inflation differentiates between Revenue and Volume. Backlog can be referenced to assess expected future Volume and Spending. Cash flow 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

Click here for a downloadable PDF of 2020 Construction Economic Forecast Feb 2020

Click here for a downloadable PDF of SUMMARY – 2020 Construct Econ Forecast 2020

Summary of 2020 Construction Outlook

Total of All construction spending in 2019 is forecast to decrease -0.2% to $1.305 trillion. For 2020, spending increases by 4.6% to $1.365 trillion.

Spend Forecast 2018-2022 1-21-20

Nonresidential Buildings construction spending is forecast to finish 2019 at $455 billion, level with 2018. For 2020 the forecast is a gain of 3% to $467 billion. Educational and Commercial/Retail held down gains in 2019. Office (which includes data centers) and Lodging gained 7% each. Office, Healthcare and Educational all support growth in 2020.

Residential construction spending forecast is down 5% to $521 billion in 2019 and up 6% to $552 billion in 2020. New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, growth in 2019 slowed to less than inflation. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. 2020 volume is forecast to increase 2%.

Non-building Infrastructure construction spending is forecast to increase 7% to $329 billion in 2019 and 5% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

Spend Sector monthly 2015-2021 2-10-20

Spending data for the previous two years gets revised in July of the following year. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2019 spending is down -0.2% to $1.305 trillion, that will most likely increase to a net gain.

In their October annual report, Dodge Data forecast 2019 construction starts to total $809 billion, down 1% from 2018. However, starts are always revised up in the following year. In just the last three years, nonresidential starts have been revised up by 7.5%/yr and residential starts by 2.4%/yr. I expect revisions will show 2019 starts increased by 3% to 4% over 2018. However, even with revisions, 2019 starts will post the slowest annual growth since 2011.

Dodge Data and Analytics new construction starts for November 2019 advanced to the highest seasonally adjusted annual rate ever, resulting in the three months Sep-Oct-Nov 2019 posting the highest 3-mo average ever, 10% higher than the total average for 2018.  Several long duration projects started, so a lot of the spending from these new starts will occur in 2021-2022. Dodge is forecasting 2020 starts down 4%. This forecast includes only 1% to 2% growth in new starts for 2021-2022.

Starting backlog, which increased 5% leading into 2020 is currently at an all-time high, up 20% since 2017. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. More than 20% of all spending in 2020 is from projects that started more than 3 years ago. 

While a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years. Current indications are that 2020 backlog will be up 4% for residential work, 6% for nonresidential buildings and 7% for infrastructure work.

  • Starts increased 8%/yr. in 2016 and 2017, but only 4% in 2018.
  • Starts are forecast to decline slightly in 2019 and 2020.
  • Spending increased 9%/yr. from 2012 to 2016, then slowed to 4%/yr. in 2017 and 2018.
  • Spending declined 1% in 2019 and is forecast up 4% for 2020 and 1% in 2021.
  • Backlog reaches a post-recession high in 2020, up 20% from 2017, up 100% from 2013.

Since early 2018, jobs have been increasing while construction volume is declining. A declining volume of work does not support jobs growth. When volume of work decreases, jobs should also decrease. If jobs increase, then it results in more workers to produce the same amount of work. In other words, productivity is declining. This could result in one or more of these outcomes:

  • Labor demand on hiring drives labor cost up by unexpected amounts.
  • New labor coming into the workforce has less experience, lowering productivity.
  • Contractors cannot meet schedules, extending project duration.
  • Contractors work overtime to meet schedules, adding cost.

All scenarios either extend project duration or drive up the cost of projects or both, which could lead to some unforeseen inflation.

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. Residential and Nonresidential Buildings inflation indices developed by Construction Analytics are final cost selling price indices.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work.

This link points to comprehensive coverage of the topic inflation. Click Here for Link to a 20-year Table of 25 Indices

This link points to articles related to the Construction Outlook for 2020. Click Here for Link to Construction Economic Outlook 2020

 

Some Signs Ahead – Economic Indicators

The following reports can be accessed by clicking on the hyperlinks provided.

AIA Consensus January 2020 Construction Forecast is a semi-annual survey of construction economists’ projections for future nonresidential buildings spending. The January 2020 Consensus report of expectations for nonresidential construction shows predicted growth for 2020 at 1.5%. All major markets show growth expectations between -2% and +4%. Office, Healthcare and Education are projected to gain 3% to 3.9%. Commercial/Retail, Lodging and Amusement/Recreation are expected to fall 1.3%-1.9%.

Architectural Billings Index (ABI) measures monthly work on the boards in architectural
firms. It is a nine to twelve month leading indicator to construction. Index values above 50 show increasing billing revenues, and below 50 indicates declining revenues. All ABI indices were above 50 from Jan. 2017 through Jan. 2019. However, from Jan. 2018 through 2019, contrary to the index, spending posted the largest drop in six years.

Dodge Momentum Index (DMI) is a monthly measure of nonresidential projects in
planning, excluding manufacturing and infrastructure. It is a leading indicator of specific nonresidential construction spending by approximately 12 to 15 months. This plot moves the DMI ahead to show when the index would have an affect on construction spending. The DMI is indicating a slow decline in new spending for the 1st half of 2020 but then a rapid increase in the 2nd half. From July 2019 onward, the DMI does not agree with the Starts Cash Flow which is a forecast of  the movement in the spending forecast.

DMI Starts Spend 2015-2021 1-15-20

Producer Price Index indices for 2019 materials average Inputs to construction in 2019 posted a gain of only 1.5%. up 2.1% for nonresidential buildings and up only 0.9% for residential. However, selling price indices for nonresidential buildings and nonresidential trades averages 4% with Industrial buildings, warehouses and schools all over 4.5%. The difference between these indices is the combined affect of labor cost and contractor margins which are not tracked in the PPI inputs.

FMI Q4 2019 Nonresidential Construction Index (NRCI) is 50.4, the lowest reading in eight years. The NCRI is a diffusion index based on a survey of opinions submitted by nonresidential construction executives. With only one slight bump up in Q2 2019, it dropped every other quarter since Q2 2018. Construction spending has been lower every quarter since Q2 2018. Construction spending in 2018 and 2019 declined to the two lowest years since 2011.

Institute for Supply Management (ISM) Non-Manufacturing Index (NMI) Report
for December 2019 is a better indicator of activity in the construction industry than the
ISM manufacturing report. The NMI measures economic activity in 13 industries
(including construction) not covered in the manufacturing sector. The December NMI is
55.0, above 50 for 126 consecutive months, indicating continued economic growth.
Construction shows growth in business activity and increased backlog. Construction shows slower deliveries but no change in prices paid. Construction reports contractors in short supply. A comment from a construction respondent, “While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures.”

 

Construction Starts > Cashflow > Backlog > Spending

One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on inflation.

Construction starts data is needed to predict spending or the level of market activity. This provides insight into market costs and inflation. To predict spending activity from new construction starts, the starts data must be spread over time using appropriate cash flow curves. On average about 20% of new construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in year three or later. Applying an expected duration for all starts depending on market type to produce a forecast cash flow from starts data, the expected pattern of spending is developed.

The starts data is a survey. As in any survey, starts data captures a share of the total market or a portion of all construction spending, on average about 60% of all construction. The easiest way to understand this is to compare total annual construction starts to total annual spending. National starts from 2016 to 2019 range from $750 billion/year to $800 billion/year, while spending in this period ranges from $1,200 billion/year to $1,300 billion/year. From this comparison we can see starts captures a share of about 60% of the total market. 

This table shows Office starts in 2016 did not drive up spending in 2017, the 2nd year, when most spending occurs. Manufacturing had two huge years of growth in starts but very little growth in spending the following years. The cash flow curves for starts determine when spending occurs. The forecast shows Office spending up 9% in 2020 and Manufacturing up 10% in 2021.

Starts vs Spending Cash Flow 1-27-20 shorter

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

Backlog at the beginning of the year or new starts within the year does not give an indication of spending within the year. New starts within any given year could contribute spending spread out over several years. Total cash flow in the year, or spending, could include cash flow from projects that started or entered backlog years ago. An increase in backlog could represent a level rate of market activity, but for a longer duration.

Cash flow provides the best indicator of how much and when spending will occur. Cash flow from all previous starts gives a prediction of how spending will change monthly from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.

 

New Construction Starts

Total of all construction starts increased every year from 2010 through 2019. Average growth from 2012 to 2017 was 8%/year. New starts slowed to +2% in 2018 and are forecast up +1% in 2019 and +2% in 2020. Backlog is still up leading into 2020 but after that starts and backlog are forecast to remain below 2% gain or decline over the next few years. Total spending has only slight gains in 2021 and 2022.

CF Forecast Total All Markets Table National 1-27-20

Nonresidential Buildings starts (excluding Terminals) increased every year since 2010. Only Manufacturing declined slightly in 2017. Commercial/Retail declined 6% in 2018. Commercial, Lodging and Amusement posted declines in 2019. The last three years (adjusted) starts are up only 2% to 3% per year. 

Backlog for Office Buildings and Lodging is up 100%+ since 2016. Office includes data centers. Commercial/Retail backlog is down 14% in the last two years. Spending is still up 4% in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

75%-80% of all Nonresidential Buildings spending within the year will be generated from projects that were booked in starting backlog at the beginning of the year.

CF Forecast Nonres Bldgs Table National 1-27-20

Non-building Infrastructure two markets with the largest share of new starts are Highway/Bridge and Transportation. Transportation terminals and rail starts are up 35% in the last three years, but backlog has doubled because a large portion of those starts is very long duration projects.

CF Forecast NonBuilding Table National 1-27-20

Non-building Infrastructure starts can be erratic with a long pattern of up then down years. Starts (including Terminals) gained only 4% in 2019 but are at an all-time high. Even though starts gain less than 2% in 2020, backlog peaks in 2021. Spending increases are in the 5% to 8% range at least for the next two years. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years. Spending in recent years has been boosted by Transportation terminals and Highway projects.

Most of the residential spending in any year is cash flow from new starts. For short duration residential spending, single-family residential and renovations work, approximately 75% of spending in the year comes from project starts within the year.

CF Forecast Residential Table National 1-27-20

For long duration residential spending, typical of multifamily residential, approximately 50%-55% of the spending occurs in the year of the start, 35%-40% in the next year and only 5%-10% occurs two years out.

  • 75% to 80% of short duration Residential spending within the year will be generated from projects that are recorded as new starts within the year.
  • 50% to 55% of long duration Multifamily Residential spending within the year will be generated from projects that are recorded as new starts within the year.

Dodge releases its first forecast of next year’s starts every year in the 4th quarter. Dodge initial forecast for 2019 starts was $808 billion, no change from 2018. Starts are currently at $818 billion and will be subject to more 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 2020.

Revisions for the last 8 years averaged more than +6%/yr., with most of the upward revision in nonresidential buildings. However, for the last 3 years revisions added only 4%. Revisions to nonresidential buildings have been greater than 7%/year for the last 3 years, non-building revisions average 8%/yr and residential revisions average 2.4%/yr. Therefore, 2019 starts growth is very likely under-reported.

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 at least 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 was affected by starts from 2016 and residential growth from starts in 2017. This also means that nonresidential spending growth in 2020 is still being affected by starts from 2017.

The Estimated Spending plot below is an index. The plot shows greater accuracy in the cash flow forecast when the slope of the predicted cash flow and actual spending plot lines move in the same direction at the same slope. 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 is accurately predicting the spending.

The light green line for nonresidential buildings spending estimated from starts cash flow shows smooth spending, even though actual monthly starts can be erratic. The actual spending often follows close to the pattern estimated from cash flows.

Starts CF 2015-2022 1-18-20

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 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

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.

Nonresidential Buildings starting backlog at the beginning of 2020 reached an all-time high. 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 2020 is up 60% in 5 years.

CF Forecast Nonres Bldgs Table National 1-27-20

Non-building Infrastructure starting backlog at the beginning of 2020, up 10% from 2019, reached an all-time high. Some of this is very long-term work that started construction in 2016-2017 and it will contribute spending for the next several years. In fact, about half of all spending in 2020 comes from projects that started prior to Jan 2019. 2021 Backlog is forecast to increase 9%. Backlog is up 25% in the last 3 years. 

CF Forecast NonBuilding Table National 1-27-20

Residential starting backlog, unlike nonresidential, does not contribute nearly as much short-term residential spending within the year. 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. 

CF Forecast Residential Table National 1-27-20

The plot below shows that backlog has been increasing since 2011-2012. Many projects in backlog extend out several years in the schedule to support future spending, so backlog growth in not an indicator that tracks directly yr/yr with spending. Without any new construction starts in 2020 or beyond, current backlog at the start of 2020 would still contribute some spending for the next 6 years until all the projects in backlog are completed.

Start Backlog Res Starts 1-27-20

For Nonresidential Buildings, 68% of 2020 Backlog will get spent within the 1st year. 27% of 2020 Backlog will get spent next year. 2020 backlog will last for 58 months.

For Non-building Infrastructure, 53% of 2020 Backlog will get spent within the 1st year. 32% of 2020 Backlog will get spent next year. 2020 starting backlog will last for 72 months

For Residential construction, 95% of 2020 Backlog will get spent within the 1st year. 2020 backlog would run out in 18 months. Residential construction is far more dependent on new construction starts. If no new work started, the backlog workload would run out quickly.

How much of the spending forecast is supported by starting backlog. For all construction, 62% of 2020 total spending comes from starting backlog. If no new work starts after December 2019, then only 24% of the 2021 spending forecast would be supported from 2020 starting backlog.

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 previous starts still in backlog plus cash flow from new starts supports a 2020 spending forecast of $1,365 billion, an increase of 4.6% over 2019. Dodge initial November 2019 forecast for construction starts in 2020 is $776 billion, down 4% from 2019. However, subsequent revisions may increase that a few percent.

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. The highlighted examples below, Office and Manufacturing, show starts is not a good indicator of expectation for spending. 

Starts vs Spending Cash Flow 1-27-20 shorter

Note that new manufacturing starts were up 29% in 2017 and 26% in 2018, yet 2019-2020 spending is forecast to increase only 3%. This is due in part to the share of market captured in the starts survey having increased, but also to very large projects that started but that have much longer than normal duration to complete, therefore moving the largest monthly cash flows further out into the future.

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.

Starts vs Spending 2011-2019 1-27-20

Spending

Total of All construction spending is forecast to increase 0.2% to $1.305 trillion in 2019, 4.6% to $1.365 trillion in 2020 and 0.9% to $1.377 trillion in 2021.

Spend Forecast Sectors 2016-2022 1-27-20

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.

 

Residential Buildings Spending

Residential construction spending is forecast down -4.6% to $521 billion in 2019, but strong new starts in Q4 increases spending by 6.0% to $552 billion in 2020. A 5% decline in 2020 new starts lowers spending in 2021 by -3.79% to $532 billion.

New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential monthly rate of spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, there was no overall growth in 2019. 

Residential spending average growth from 2011 through 2017 was 12%/year. Although spending increased 2.7% in 2018, growth was less than inflation of 4.3%, therefore 2018 volume after inflation decline by 1.5%. In 2019 residential spending decreased 4.5%. After accounting for 3.6% inflation, real volume decreased by 7.8%. Residential construction volume in 2019 posted the largest volume decline in 10 years. 2020 volume is forecast to increase only 2%.

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

CF Forecast Residential Table National 1-27-20

Total residential new starts for the last 3 months and the last 6 months posted the highest rates of growth since 2006. Growth for 2019 is initially down -2.5%, but that is because 2018 has already been revised up by 2.1% and 2019 is yet to be revised. Revisions are usually up. Dodge predicted 2019 starts would fall 5%, however my current forecast is a drop of only 1.3%. 2020 starts are forecast up 2.6%.

CF Forecast Residential MFonly Table National 1-27-20

Residential current$ spending reached a 12-year high in 2018 of $580 billion but that was still far below the 2006 peak of $690 billion. In constant$, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant$, 2018 spending is still 28% below the 2005 peak. As of Dec 2019, constant$ spending is 37% below the 2005 peak.

Spend current vs constant Residential 2020 2-10-20

 

Nonresidential Buildings Spending

Nonresidential Buildings construction spending for 2019 is forecast to finish at $455 billion, up only 0.3% from 2018. Spending is forecast to increase 2.9% to $467 billion in 2020 and 1.2% to $473 billion in 2021. Healthcare, Educational and Office (which includes data centers), support the 2020 forecast. There is downward pressure the next two years from slowdowns in Amusement/Recreation, Commercial/Retail and Lodging.

Spend Forecast NonresBldgs 2016-2022 1-27-20

Current$ spending for Nonresidential buildings reached a monthly high of $470 billion in mid-2018 but then fell slightly and remained between $450 and $460 billion in 2019. Both 2018 and 2019 totals averaged new annual high marks just slightly above 2008. Average annual 2019 spending grew only 0.3% from 2018. 2020 is forecast up 2.9%.

Spending in constant$ (inflation adjusted $) peaked in mid-2018 at $450 billion but by Dec. 2019 it’s down 10% to only $406 billion. It’s expected to remain at this level throughout 2020. Constant $ spending or real volume growth shows all years from 1995 through 2010 had higher volume than the 2020 forecast.

Spend current vs constant Nonres Bldgs 2020 2-10-20

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 6.8% to $329 billion in 2019 and 4.9% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. In 2017, transportation terminals  increased more than 100%. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

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

Spend Forecast Nonbldg Infra 2016-2022 1-27-20

Current$ spending for Non-building Infrastructure reached a high annual rate of $340 billion in mid-2019 but then fell slightly to only $325 billion by year end.  Spending in 2020 is expected to increase slowly from $330 billion to $350 billion. Total 2020 spending is expected to increase 5%.

Non-building Infrastructure construction spending in constant $ (inflation adjusted $) peaked at reached $330 billion in 2016, an all-time high, but then dropped to $280 billion in 2018. In 2020 it will average $300 billion. Constant $ spending or real volume growth dropped 10% in 2017-2018 but is forecast to gain 6% in 2019-2021.

Spend current vs constant Non-bldg Infra 2020 2-10-20

 

Public Infrastructure and Public Institutional

Just 60% of all Non-building Infrastructure spending, about $194 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

About 30% of all Nonresidential Buildings spending, about $134 billion, is publicly funded, mostly Educational. Nonresidential buildings spending makes up just over 40% of Public spending.

  • Infrastructure = $328 billion, ~25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $194 billion. Private Infrastructure = $134 billion.
  • Power and Communications are mostly privately funded infrastructure.

 

  • Nonresidential Buildings is 30% public (mostly institutional), 70% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $110 billion, mostly Education ($80b).

 

Spend PubPriv 2019 totals detail 2-10-20

Public Infrastructure + Public Institutional = $300 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

The two largest markets contributing to public spending are Highway/Bridge (33% of total public spending) and Educational (27%), together accounting for 60% of all public construction spending. At #3, Transportation is only 13% of public spending. Environmental Public Works combined makes up 17% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation account for about 3%-4% each.

Highway is 100% public and Public Works 99%. Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20%. 

Public Starts and Backlog

The Public markets with the largest share of growth in new starts the last two years are Transportation and Public Works. Transportation terminals and rail starts are up 30% in the last three years, but backlog has doubled because a large portion of those starts is very long duration projects. Public works starts are up 20% and backlog is up 40%. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years.  

CF Forecast PUBLIC Table National 1-27-20

Public spending backlog is up an average 9%/year for the last three years. Some of this is very long-term work that started construction in 2016-2017 and it will contribute spending for the next several years. 40% of all public spending in 2020 comes from projects that started prior to Jan 2019. Backlog is up 25% in the last 3 years and is forecast to increase another 9% to start 2021. 

Public Spending

Total public spending for 2019 is projected to finished up 8% at $332 billion. Every major public market is projected to finish up in 2020. By far, the largest Public spending increases measured in dollars for 2020 are Transportation, Highway and Educational.

Spend Forecast PubPriv 2016-2022 1-27-20

Public work construction spending in constant $ (inflation adjusted $) reached $318 billion in 2016, short of the highs reached in 2002 and 2008. Constant$ value work then dropped to $300 billion in 2017 and has been level through 2019. In 2020 it will increase only 1%.

Spend current vs constant Infrastr PUBLIC 2020 2-10-20

Construction Inflation

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Most spending for residential comes from new starts in the year.

2020 starting backlog is up 5.5% across all sectors. However, while a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years.

Residential new construction starts in 2019 (number of units started) gained 4% over 2018. In 2018, starts dropped every quarter after Q1, but then increased every quarter in 2019 and closed out the 2nd half of 2019 at 9% higher than the average of the previous six quarters. New starts measured in dollars dropped slightly in 2019. Spending from new starts fell 5% in 2019 but is forecast up 6% for 2020. Residential construction volume (spending after inflation) in 2019 dropped 8%, the largest volume decline in 10 years. Volume in 2019 dropped to a 4-year low. A volume gain of 2% in 2020 leaves residential still at a 4-year low.

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.

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.

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.

Consumer Price Index (CPI), tracks changes in the prices paid by consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should not be used to adjust construction pricing.

Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that do not capture whole building cost.

Producer Price Index (PPI) Material Inputs (which excludes labor and margins) to new construction increased +4% in 2018 after a downward trend from +5% in 2011 led to decreased cost of -3% in 2015, the only negative cost for inputs in the past 20 years. Input costs to nonresidential structures in 2017+2018 average +4.3%, the highest in seven years. Infrastructure and industrial inputs were the highest, near 5%. But input costs for 2019 are coming in at less than +1%. Material inputs accounts for only a portion of the final cost of constructed buildings.

Materials price input costs in 2019 slowed to an annual rate of less than 1%.  

Labor input is currently experiencing cost increases. The National construction unemployment rate was recently posted below 4%, the lowest on record with data back to 2000.  The average has been below 5% for the last 18 months. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. An unemployment rate this low signifies a tight labor market. This may cause contractors to pay premiums over and above normal wage increases to keep valued workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data, so aren’t easily tracked. Lack of experienced workers and premiums to keep labor drive labor cost increases higher than wage growth.

Although many contractors report shortages due to labor demand, labor growth may slow due to a forecast 2019-2020 construction volume decline. We might see a labor growth decline lag spending/volume decline.

When construction activity is increasing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price (for nonresidential buildings only). The average annual growth for all these indices over the past five years is 4.7%/year. For the last two years, average nonresidential buildings inflation is 5.3%.

  • Long-term construction cost inflation is normally about double consumer price index (CPI).
  • Average long-term nonresidential buildings inflation excluding recession years is 4.2%.
  • Average long-term (30 years) nonresidential construction cost inflation is 3.5% even with any/all recession years included.
  • In times of rapid construction spending growth, nonresidential construction annual inflation averages about 8%. Residential has gone as high as 10%.
  • Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. It has averaged 4.2% for the last 4 years.
  • Residential buildings inflation reached a post-recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.8% for the last 5 years.
  • Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/supplier margins.
  • When construction volume increases rapidly, margins increase rapidly.
  • Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. Typically, large declines in volume are accompanied by declines in inflation. Forecast residential inflation for the next three years is level at 3.8%.

A word about Hi-Rise Residential. Most of the cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. On the contrary, this type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, a more appropriate index to use for hi-rise residential construction is the nonresidential buildings index.

Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years. Spending needs to grow at a minimum of 4.4%/yr. just to stay ahead of construction inflation, otherwise volume is declining. Spending slowed dramatically in 2019. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years.

Several Nonresidential Buildings Final Cost Indices averaged over 5% per year for the last 2 years and over 4% per year for the last 5 years. Nonresidential buildings inflation totaled 22% in the last five years. Input indices that do not track whole building cost would indicate inflation for those five years at only 12%, much less than real final cost growth. For a $100 million project escalated over those five years, that’s a difference of $10 million, potentially underestimating cost.

Notice in this next plot how index growth is much less for ENR BCI and RSMeans, both input indices, than for all other selling price final cost indices. From 2010 to 2019, total final price inflation is 110/80 = 1.38 = +38%. Input cost indices total only 106/85 = 1.25 = +25%, missing a big portion of the cost growth over time.

 Nonresidential Buildings Selling Price Indices vs Input Indices

BCI 2010-2020 Firms 12-9-19

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stayed flat from 2015-2017, then increased 15% in 2018-2019. The IHS Pipeline and LNG indices increased 4% in 2019 but are still down 18% since 2014. Coal, gas, and wind power generation indices have gone up only 5% total since 2014. Refineries and petrochemical facilities dropped 10% from 2014 to 2016 but regained all of that by 2019. BurRec inflation for pumping plants and pipelines has averaged 2.5%/yr since 2011 and 3%/yr the last 3 years.

Anticipate 3% to 4% inflation for 2020 with the potential to go higher in rapidly expanding Infrastructure markets, such as pipeline or highway.  This link refers to Infrastructure Indices.

 Construction Analytics Building Cost Index

BCI 2005-2022 12-9-19

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart of the range of all other nonresidential building inflation indices. Bars represent the predicted range of inflation from various sources with the solid line showing the composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation of less than 1%, the actual inflation is following a pattern of growth above 4%. The low end of the predicted range is almost always established by input costs (ENR BCI is plotted), while the upper end of the range and the actual cost are established by selling price indices.

 Construction Analytics Nonresidential Buildings Cost Index

vs Range of Input Indices

Inflation Range 1993-2020 plot vs ENR 1-18-20

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation since 2018.

Reference Inflation PCT 12-17-19

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.

Reference Inflation INDEX 12-17-19

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

A word about terminology: Inflation vs Escalation. These two words, Inflation and Escalation, both refer to the change in cost over time. However escalation is the term most often used in a construction cost estimate to represent anticipated future change, while more often the record of past cost changes is referred to as inflation. Keep it simple in discussions. No need to argue over the terminology, although this graphic might represent how most owners and estimators reference these two terms.

Inflation Escalation with text

This link points to comprehensive coverage of the topic inflation and is recommended reading. Click Here for Link to a 20-year Table of 25 Indices

 

Current$ vs Constant$ – Spending vs Volume

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%.

Nonresidential buildings spending increased 3.3% in 2017, 4.4% in 2018 and 0.3% in 2019. But nonresidential buildings inflation for those three years was 3.7%, 5.0% and 5.0%. Nonresidential volume therefore declined for three consecutive years by a total of 5.5%. The current nonresidential buildings forecast spending growth is 3%/yr or less for the next three years. With inflation near 4%, that would suggest inflation adjusted nonresidential buildings construction volume is declining.

Residential spending increased from 2011 through 2017 by average growth of 13%/year.  With average residential inflation during that period of 5%/year, inflation adjusted residential volume increased by 8%/year. That changed in 2018. 

Residential spending increased only 2.7% in 2018 and dropped 4.6% in 2019. Residential inflation for 2018 and 2019 was 4.3% and 3.6%. Residential volume therefore declined by 1.6% in 2018 and 8% in 2019. Current residential forecast spending growth is +6% in 2020 but then -3.7% in 2021. With inflation just under 4%, that indicates inflation adjusted residential construction volume will grow only 2% in 2020 but may drop 7% in 2021.

In 2018 and 2019, total construction volume declined 6%. Residential volume declined 10%. Construction spending forecast for 2020 is $1,365 billion, an increase of 4.6% from 2019. But 2020 inflation is forecast at 4%. So, after inflation real volume growth in 2020 is forecast up less than 1%. It’s down 1.4% for nonresidential buildings but up 2% for residential.

Spend Sector 2015-2021 1-4-20

Nonresidential Buildings will post declines in volume in 2020 & 2021. Non-building Infrastructure volume will increase 1% in 2020 and 4% in 2021. If residential starts hold as forecast at only 1% to 2% growth, residential volume will decline sharply by 7% in 2021 after a moderate 2% gain in 2020. Overall, total construction volume has declined in 4 out of the last 6 quarters and is forecast to drop slightly in 3 of 4 quarters in 2020.

The plot below, comparing inflation adjusted constant dollars with current spending dollars for all construction, clearly shows that although spending is at an all-time high, volume is down the last two years and is lower than all years from 1998 through 2008. 

Spend current vs constant 2019 1-22-20

Spending after adjusting for inflation shows volume never got closer than 13% less than the previous 2005 high. Currently, volume is 17% lower than the 2005 peak.

 

Jobs and Volume

Construction requires about 5,000 workers for a year 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, spending is not the same as volume, and jobs needed is based on volume.

Construction added 1,400,000 jobs in the 5 years 2014-2018, an average of 280,000 jobs/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.

Although 2020 spending will increase 4.6%, construction inflation has been hovering between 4% and 5% for the last five years. Real volume growth in 2020 after inflation is expected to be only 0.6% or only $7 billion. That would mean the need, if there are no changes in productivity, is to add only about 35,000 additional jobs in 2020.

But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 50% since Jan. 2011 with 35% inflation. Nonresidential volume increased by only 15%. Jobs increased by 27%, 12% in excess of volume growth.

Residential spending increased by 125% since Jan. 2011, but after 40% inflation, real residential volume increased by 85%. Jobs increased by only 40%, 45% short of volume growth.

There are a few reasons why residential construction labor might not be compared easily to residential spending; 

  • 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 undocumented labor is not counted, and it’s primarily residential.

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

Jobs should follow volume growth, yet history shows that in non-recessionary periods, even with volume declining, jobs usually continue to increase, but perhaps at a slower rate.

From 1997 to 2004, it took 4800 jobs to put-in-place $1 billion of construction in one year. By 2008 that increased to 5500 jobs to do $1 billion of work in one year. It remained level at 5500jobs/$1 billion/yr until 2016. In 2018 it jumped to 5800 jobs and in 2019, 6100 jobs, the highest ever recorded.   

There has not been any volume growth in the last two years to support jobs growth. In constant$, there was no volume growth in any sector in 2018. In 2019 only Non-building Infrastructure shows 2% growth. Total construction volume is down 1.4% in 2018 and 4.4% in 2019. 

In the last two years, spending increased only 2.5%, but construction inflation totaled 9%, therefore, real volume declined by more than 6%, yet jobs increased by 7.5%. From 2006 to 2017, jobs and volume growth were nearly equal. Since 2017, volume and jobs growth is diverging. Construction volume has been declining while jobs have been increasing. That can’t be sustained. 

This plot shows predicted 2020 jobs growth of 1.5% or just over 100,000 jobs. Since volume is forecast to gain less than 1%, any jobs growth in 2020 beyond 1% will increase the disparity between jobs and volume growth. The disparity has been increasing since early 2018. It’s a 15% difference right now. Within a year that could be 20%.

Jobs vs Volume 2015-2020 monthly 1-10-20

By resetting the baseline of this next plot to 2006, the year of the last major divergence in jobs growth vs volume, it shows all other years from 2007 to 2017 were pretty well-balanced growth. With the exception of 2006 and now 2018-2019, for almost every year from 1997 to 2019 jobs grew pretty closely aligned with volume. A big 15% spread occurred in 2006, then growth remained balanced through 2017. The spread now is near the same as it was in 2006.

See post for development of this plot Expect Construction Jobs Growth to Slow in 2020

Jobs vs Volume 1991-2020 2006 deficit reset 11-19-19

Volume declines will drive jobs to slower growth. We had 6 years of annual growth of 250,000-300,000/yr. Jobs increased by only 150,000 in 2019. In 2020, growth may be lower to 100,000.

Construction jobs growth slowed substantially the last two quarters. I  predicted jobs growth would slow because volume growth had already been declining since early 2018 when volume reached a peak of $1,300 billion. Volume is now $1,200 billion, down 8% in 22 months.  After 6 years of jobs increasing at an average 280,000/year, jobs are up only about +150,000 in 2019, but only +70,000 in the last 8 months. The rate of jobs growth is now the slowest in 7 years. I expect this trend to continue.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that labor cost growth will add to inflation.

Jobs trailing 12mo growth 2013-2020 1-10-20

The plot of jobs growth shows current growth rate is below an annual rate of 150,000 jobs/year and it is expected to remain there through 2020, potentially dipping as low as 100,000.

I’d be surprised if jobs start to decline, but that certainly could be envisioned and it would help explain away some of the disparity in growth shown on the Jobs/Volume plot up above.

 

Predicted Reliability of Construction Forecasting

For any future forecast month, the most information is in hand the month before. Assessing the amount of actual data (jobs in backlog) versus the amount of predicted data gives an indication of how much weight can be placed on the forecast. Obviously, the balance of actual data versus predicted data gets less the further out in time we view the forecast.

For Nonresidential work, most of the spending in any given year comes from projects already in backlog. For nonresidential forecasting, 80% of all the spending in the year comes from projects in backlog. Only 20% of spending in the year is generated from new project starts within the year.

For Residential work, most of the spending in any given year comes from new project starts within the year. Only about 30% of the spending in the year comes from projects already in backlog.

The total amount of work in backlog supports 98% of the forecast in the following month for nonresidential and 94% of the forecast for residential. The amount of known work that will generate spending in the month 12 months out from the forecast date is only 80% for nonresidential work. It’s only 30% for residential work.

For the period only 12 to 24 months out from the forecast date, actual nonresidential data drops from 80% to 30%. Residential actual data drops from 30% to zero.

For all markets combined, accounting for the weighted averages of residential and nonresidential work, once all construction starts are reported to include the data as of Dec. 2019, the 2020 forecast includes 78% actual data and 22% predicted data. The 2021 forecast includes only 40% actual data from starts that have been booked.  All the rest of the 2021 forecast is predicted.

Three years out from the current date the reliability of the forecast is dependent entirely on economic outlook and the predictive methodology of the analytic tools, not on actual data. It’s important to know, when you are looking at a forecast that projects three years out past the current year, there may be no “actual” data in that forecast.

Reliability of Data 10-2-18

 

Questions regarding this analysis can be addressed to: Edward R. Zarenski – Construction Economics Analyst – Construction Analytics – edzarenski@gmail.com – 401-330-6152

Data used in this report is accessed from the following data sources:

Construction Analytics Economics Reports  https://edzarenski.com/

Construction Analytics Inflation https://edzarenski.com/2016/10/24/construction-inflation-index-tables-e08-19/

Associated General Contractors of America AGC https://www.agc.org/learn/construction-data/construction-data-producer-prices-and-employment-costs

Dodge Data and Analytics Construction Starts  https://www.construction.com/news

Engineering News Record  https://www.enr.com/

Mortenson https://www.mortenson.com/cost-index

Rider Levitt Bucknall  https://www.rlb.com/en/index/publications/?geolocation=americas

RSMeans data from Gordian https://www.rsmeans.com/landing-pages/2019-rsmeans-cost-index.aspx

S&P/Case-Shiller U.S. National Home Price Index  https://fred.stlouisfed.org/series/CSUSHPINSA

Turner  http://www.turnerconstruction.com/cost-index

U.S. Census Construction Spending https://www.census.gov/construction/c30/release.html

U.S. Census Housing Construction Index https://www.census.gov/construction/nrs/pdf/price_uc.pdf

U.S. Department of Labor Bureau of Labor Statistics https://www.bls.gov/ppi/ppinrbc.htm

U.S. Department of Labor Bureau of Labor Statistics Construction Labor U. S. https://www.bls.gov/iag/tgs/iag23.htm

 

Click here for a downloadable PDF of 2020 Construction Economic Forecast Feb 2020

Click here for a downloadable PDF of SUMMARY – 2020 Construct Econ Forecast 2020

Construction Spending Forecasts for 2020 Do Not Support Jobs Growth

1-31-20

A current article and several others, based on a sentiment survey, state that there will not be enough construction workers to support growing construction activity next year. I dispute that claim. 

Construction is in demand – but who’s going to do all the work?

I’ve been writing about the disparity in jobs growth exceeding construction activity growth for more than two years. Construction activity has NOT been increasing to support jobs growth.

Spend Sector Constant2017 monthly 2015-2021 1-31-20

2020 Construction Spending Increases, but Volume is Down

Expect Construction Jobs Growth to Slow in 2020

To Support Construction Jobs, We Need Volume

There are other construction forecasts that support my argument. It’s important to point out that my forecast is the HIGHEST for 2020. So, just keep in mind, if you consider any other forecast, the condition gets worse.

Seven of the eight firms that provided a forecast for the AIA Consensus Forecast are lower than Construction Analytics forecast for nonresidential work in 2020. AIA Consensus > marked slowdown for nonresidential building

ConstructConnect’s forecast is lower than my forecast for all sectors ConstructConnect’s Winter 2019-20 Put-In-Place Construction Forecasts

FMI’s forecast is lower for all sectors FMI U.S. Engineering and Construction Outlook: Third Quarter 2019 Report

Overall, Construction Analytics 2020 forecast shows a volume gain of 0.6%. Spending increase 4.6%, but average inflation is 4%. Therefore volume increases only 0.6%. That would support growth of about 50,000 jobs. Residential and Non-building Infrastructure show slight gains in 2020 but Nonresidential buildings volume is in it’s 4th year of decline.

ConstructConnect shows a total spending increase of 1.9% and FMI shows a total spending increase of 1%. Both show a slight gain in volume in at least one sector, but with expected inflation of around 4%, both would indicate an overall decline in volume and a decline in jobs.

Spending needs to increase greater than inflation to realize an increase in volume. If volume does not increase, there is no support to add jobs.

2020 Construction Forecast Briefs

2020 Construction Forecast Briefs

12-23-19 updated 1-4-20

updated 1-4-20 – The construction spending forecast for 2019 is revised up to $1,304 billion, still a decrease of 0.2% vs 2018. Almost all of the revision up is residential spending that was added in Oct and Sept Census spending revisions released 1-3-20.

The forecast for 2020 construction spending is $1,360 billion, up 4.5% over 2019.

Total Spending increased 9%/yr. from 2012 to 2016, then in 2017 and 2018 slowed to 4%/yr. Spending declined <1% in 2019 and is forecast up 3% to 4% for both 2020 and 2021. 

New construction starts, as reported by Dodge Data and Analytics, increased 7%/year in 2016 and 2017, but only 3% in 2018. Starts are forecast to decline slightly in 2019 and 2020.

New construction starts data captures a share of the total market or a portion of all construction spending, on average about 60% of all construction. In this analysis every market is adjusted by its own individual market share factor.

Applying the market share factors, starts are forecast up slightly in both 2019 and 2020.

Backlog reaches a post-recession high starting 2020, up 20% from 2017, up 100% from 2013. Starts and backlog growth are forecast to remain below 3%/year gain or decline over the next few years. Total spending has only slight gains in 2021 and 2022.

Backlog at the beginning of the year or new starts within the year does not give an indication of what spending will be like within the year. Backlog increases if new starts during the year is greater than spending during the year. An increase in backlog could be a level rate of market activity for a longer duration. It takes several years for all the starts in a year to be completed. Cash flow shows the spending over time. 

The best indicator of future construction activity is the sum of the projected cash flow generated by all the construction starts that have been recorded.

plots updated 1-4-20

Spending cash flow predicted from Dodge Starts and construction spending to date.

Starts CF 2015-2022 1-18-20

A what if scenario in which new construction starts drop by 10%:

On average about 20% of new nonresidential construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in future years. (For residential the spending curve is more like 70%-30%). If new starts drop by 10% this year, that has only a -2% impact on total nonresidential buildings spending for this year. It would be -5% next year, -3% after. If starts drop a second year, the same impacts occur, shifted one year out, and the total impact for both years is added.

Only about 30% of residential spending within the year comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total residential spending by 7% in that year.

Nonresidential Buildings starts (excluding Terminals) have reached a new high every year since 2009, but the last three years starts are up only 2% to 3%/year. Every market posted increases in 2017 and 2018. Only Commercial/Retail and Amusement/Recreation declined in 2019. Backlog for Office Buildings, which includes data centers, is up 100%+ since 2015. Spending is still up 4% in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

Nonresidential buildings markets advancing in 2020-2021 are Educational, Healthcare, Office and Manufacturing. Markets declining are Amusement/Recreation, Commercial/Retail and Lodging.

Non-building Infrastructure starts (including Terminals), up 4% in 2019, are at an all-time high. The two markets with the largest share of new starts are Highway/Bridge and Transportation. Transportation terminals and rail starts are up 30% in the last three years, but backlog has nearly doubled because a large portion of those starts is very long duration projects. Starts are forecast up only 1% in 2020 but backlog peaks in 2021. Spending increases are in the 6% to 8% range at least for the next two years.

Spending in recent years has been boosted by Transportation terminals, Highway and Public Works projects. Power is flat or down slightly.

Residential starts averaged 19%/year growth from 2012 to 2016 but slowed to 5%/year for 2017 and 2018. Starts declined in 2019 and are forecast to decline again in 2020.

The outlook for residential construction spending has improved slightly. Previous forecast had residential spending in 2019 down 6% and 2020 up only 2%. That’s been revised to now forecast 2019 down 4.5% and 2020 up 5%. Spending holds steady in 2021.

If spending is increasing 3%/year at a time when inflation is 5%/year, then real volume is declining. In the last two years, spending increased only 3%, but construction inflation totaled 9%, therefore

in two years, real volume declined by 6%, yet jobs increased by 7.5%.

Since early 2018, jobs have been increasing while construction volume is declining. The volume of work in the last two years does not support jobs growth.

Volume, spending adjusted for inflation in Constant 2017$

Spend Sector 2015-2021 1-4-20.JPG

Nonresidential Buildings will post declines in volume in 2020 & 2021. Residential volume gains 1% in 2020 but slips again in 2021. Non-building Infrastructure will increase volume about 3%/year. Overall, total construction volume declined in 4 of the last 6 quarters and is forecast to drop slightly in 2 or 3 quarters in 2020.

One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce margins in bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on inflation.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that will add to labor cost inflation.

Jobs vs Volume growth set to base year 2011

Jobs vs Volume 2015-2020 monthly 1-10-20

Average long-term nonresidential buildings inflation excluding recession years is 4.2%.

Average long-term (30 years) nonresidential construction cost inflation is 3.5% even with any/all recession years included.

Nonresidential buildings cost inflation for 2018 and 2019 averaged 5%. It’s predicted closer to 4.5% for 2020 and 4% for 2021.

Residential buildings cost inflation for 2018 and 2019 averaged 4%. It’s predicted at 3.75% for 2020 and 2021.

BCI 2005-2022 12-9-19

 

For more on the 2020 Forecast see these

2020 Construction Spending Increases, but Volume is Down

Expect Construction Jobs Growth to Slow in 2020

2020 Construction Spending Increases, but Volume is Down

12-10-19 updated 1-4-20

2020 Construction Forecast

Construction Spending for 2019 finishes flat for Nonresidential Buildings, Up 7% for Non-building Infrastructure and Down 5% for Residential.

Spending UNadjusted for inflation.

Spend Sector 2015-2021 1-5-20

After adjusting for inflation, we see that real construction volume is down. Only Non-building Infrastructure realizes gains in 2019 & 2020. Nonresidential Buildings Volume has been up and down since Q1 2017. Residential volume has been declining since early 2018.

Volume, spending adjusted for inflation in Constant 2017$

Spend Sector 2015-2021 1-4-20

I’m predicting Nonresidential Buildings will post declines in volume in 2020 & 2021. Residential gains 1% in 2020 but slips again in 2021. Non-building Infrastructure will increase at about 3%/year. Overall, total construction volume declined in 4 of the last 6 quarters and is forecast to drop slightly in 2 or 3 quarters in 2020.

Volume declines drive labor to slower growth. We had 6 years of 250,000-300,000 annual growth. Jobs will increase only 150,000 in 2019. In 2020, it could be lower to 100,000.

After 2006, and all the way to 2017, jobs and volume growth were pretty equal. Since 2017 there is a divergence forming. That can’t be sustained. 

Jobs vs Volume growth set to base 2006

Jobs vs Volume 1991-2020 2006 deficit reset 11-19-19

See the Jobs analysis here Expect Construction Jobs Growth to Slow in 2020

The plot below shows the predicted spending from modeling Dodge data new construction starts. Overlaying this plot is the actual census spending. You can see the actual value follows pretty closely to the predicted. None of this data is adjusted for inflation.

Spending predicted from Dodge Starts and actual spending to date.

Starts CF 2015-2022 1-18-20

Healthcare and Office are strong markets in 2020, as well as Highway, Transportation and Public Works. Backlog is strongest for Non-building Infrastructure leading into 2021. In the three years since 2017, backlog in Transportation is up 80%, Environmental Public Works up 40%. Within nonresidential buildings, Office backlog is up 60%, Educational is up 15% and Healthcare up 25%. Commercial Retail is the only market with a decline in backlog over this  three year period, down 15%.

Table of Spending by Market Type. updated 1-4-20

Spend Forecast 2018-2022 1-4-20

A reminder, You can’t interpret new construction starts directly to backlog or spending. Starts growth is one thing, but starts data requires cash flow modeling to get spending. Why are Transportation starts for 2018+2019 down 35% but both 2019 and 2020 spending are up? Because in 2017, the year before the data in this table, starts were up 75% and much of that was very long duration work, some that potentially has peak spending 3 to 4 years out, so is still adding a boost to 2020 spending and backlog.

Starts Backlog Spending 11-19-19 VG HW slide

 

For more on the 2020 Forecast see these:

2020 Construction Forecast Briefs

Expect Construction Jobs Growth to Slow in 2020

 

 

 

 

Construction Starts > Cashflow > Backlog > Spending

The path from construction starts to spending is not direct and not quite as simple as you might think. Spending is the market activity measure that drives all construction economics, so that’s where we need to get too. With an appropriate modeling technique we can get from new starts to predicted spending in a few steps.

Starts CF 2015-2020 11-27-19

New Construction Starts (construction starts referred to here is Dodge Data & Analytics New Construction Starts) is excellent data for forecasting. The following forecast is entirely developed from starts data. No actual spending is incorporated into this forecast. The purpose is to show that using the data properly can produce an accurate forecast.

The starts data is a survey. As in any survey, starts represents a portion of new construction activity. Study shows the survey size varies with each market from about 40% to 70% of actual. Starts data captures a share of the total market or a portion of all construction, on average about 60% of all construction.

The easiest way to understand this is to compare total annual construction starts to total annual spending. National construction starts from 2016 to 2019 range from $750 billion/year to $800 billion/year, while spending in this period ranges from $1,200 billion/year to $1,300 billion/year. From this we see starts data captures a share of about 60% of the total construction market.

The total starts survey averages about 60% of the actual market. In this analysis every market is adjusted by its own individual market share factor. The adjusted starts represent the full amount of starts that would generate the full amount of spending.

To predict spending activity from new construction starts, the starts data must be spread over time using appropriate cash flow curves. On average about 20% of new construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in years three and four. The cash flow curves used in this model are specific to each market type and can vary from the average. 

Applying a market survey factor to develop full magnitude of spending and an expected duration for all starts, depending on market type, to produce a forecast cash flow from starts data, the predicted pattern of spending is developed. The factors have been shown to produce a reliable prediction of total future market activity.

Forecast Summary Table National 10-14-19

Backlog at the beginning of the year or new starts within the year does not give an indication of spending within the year. New starts within the year could contribute spending spread out over several years. Total cash flow in the year, or spending, could include cash flow from projects that started or entered backlog years ago.

Backlog increases if new starts during the year is greater than spending during the year. However, an increase in backlog does not necessarily indicate there will be an increase in market activity. An increase in backlog could represent a level rate of market activity, but for a longer duration.

Cash flow provides the best indicator of how much and when spending will occur. Cash flow from all previous starts gives a prediction of how spending will change monthly from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Total of all national construction starts increased every year since 2008. New starts slowed to +2% in 2018 and are forecast at a potential decline of 0.2% in 2019. Backlog is still up leading into 2020 but after that starts and backlog are forecast to remain flat or decline over the next few years. Total spending declines in 2022. However, as the next tables will show, work distribution is uneven with residential declining and nonresidential up.

Forecast Total All Markets Table National 10-14-19

Nonresidential Buildings starts (excluding Terminals) reached a new high every year since 2009. The last three years starts are up 3% to 4% per year. Every market posted increases in 2017 and 2018. Only Commercial/Retail declined in 2019. The largest increases over the last two years were Educational and Office Buildings. Spending is still strong in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

75%-80% of all Nonresidential Buildings spending within the year will be generated from projects that were booked in starting backlog at the beginning of the year.

CF Forecast NonResidential Table National 10-14-19

Nonbuilding Infrastructure markets total spending amounts to only about 70% of nonresidential buildings markets. The largest infrastructure markets are Highway/Bridge and Power but the largest increases in new starts recently are in Transportation (including all terminals) and Environmental Public Works. Transportation starts are up 25% in the last last three years and backlog to start 2020 is up 80%. Public Works starts are up 22% and backlog is up 30%

Nonbuilding Infrastructure starts can be erratic with a long pattern of up then down years. Starts (including Terminals) gained only 2% in 2019 but that is only low because Power, the largest market overall saw starts decline by 7%. Total infrastructure starts are at an all-time high.

CF Forecast NonBuilding Table National 10-14-19

Infrastructure backlog peaks in 2020 and remains high into 2021. Spending increases are in the 6% to 8% range at least for the next two years. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years. The largest spending increases in 2020 are in Transportation and Highway projects.

The Residential table shows that most of the spending in any year is cash flow from new starts. For short duration residential spending, single-family residential and renovations work, approximately 75% of the spending occurs in the year of the starts and 20% in the following year.

Forecast Residential Table National 10-14-19

For long duration residential spending, typical of multifamily residential, approximately 50%-55% of the spending occurs in the year of the start, 35%-40% in the next year and only 5%-10% occurs two years out.

Only 25% (for short duration SF and Reno) to 50% (for longer duration MF) residential spending within the year comes from work that was booked in backlog at the beginning of the year. The performance of residential spending in the year is very much dependent on new starts.

The level of activity has a direct impact on inflation. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013. Residential construction spending dropped an unexpected 6% in 2019 and after adjusting for inflation that is a 10% decline in construction volume. Typically, large declines in volume are accompanied by declines in inflation. National average residential construction inflation for 2019 is now at 3.8%. 2020 is forecast at 3.75%.

Nonresidential Buildings indices have averaged 4.4% over the last five years and have reached over 5% in the last three years. But spending slowed dramatically in 2019. This forecast indicates spending in most nonresidential buildings markets will gain little in 2019, the slowest rate of growth post-recession. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years. Strong gains in spending historically has led to accelerated inflation. National average nonresidential buildings construction inflation for 2019 is now at 4.8%. 2020 is forecast at 4.2%.

Construction Statistics – Behind The Headlines

Examples of how commonly reported construction data can often be misused – Construction Spending and Construction Starts

 

Construction Grew $41 billion, 3.3%, from 2017 to 2018

An increase in construction spending is often referred to as growth for the industry, but that is incorrect. Construction spending measures the change in the dollar value of work performed, not the volume of work performed.

Crate of Apples

The difference between spending (or revenue) and volume can be explained by a simple example, the Crate of Apples. A farm stand sold a crate of apples last year for $100. Costs have gone up. Today the same size crate of apples sells for $110. Farm stand revenues increased 10%, but the amount of business volume did not increase. Volume of sales is still one crate of apples. All the increase in revenue was inflation.

The $41 billion increase in construction spending from $1.266 trillion in 2017 to $1.307 trillion in 2018 is a 3.3% increase. However, construction inflation for that period averaged 4.7%. Construction inflation adds only cost, not volume, to the amount of work. Construction spending is measured in current dollars, actual dollars spent within the year in the value that year. Construction volume is measured in constant dollars, adjusted for inflation, so any and all years can be compared to each other.

Real construction volume adjusted for inflation actually decreased 1.4% from 2017 to 2018.

Total Construction volume, after accounting for inflation, has been down for five of the last six quarters. Construction volume peaked from Q1 2017 to Q1 2018, is now down 6% from the 2018 peak.

Spend current vs constant 2019 10-3-19

Construction volume is not directly reported. It is not a commonly referenced industry measure reported in the news. But it is a more important indicator of activity in the industry than spending. Volume is found only through analysis of spending and inflation data.

Another common misrepresentation using spending data relates to jobs growth. Jobs growth is often compared to spending growth where a 3% to 4% increase in jobs from year to year is substantiated if we have a similar 3% to 4% growth in spending. However, current $ spending is not yet adjusted for inflation and does not represent growth in real volume of work. Jobs must be compared to volume. Real volume increases are represented by constant $, or construction spending adjusted for inflation.

In the last 2 years jobs have increased by about 8% but real construction volume has decreased by about 6%. In recent years, construction volume has not supported jobs growth.

Jobs vs Volume 1991-2019 10-3-19

 

Construction Starts Predict Changes in Spending

Two very important criteria must be known about new construction starts in order to properly predict spending.

1st – To predict spending from new starts, the starts data must be spread over time using an appropriate cash flow curve. A simple illustrative spending pattern for nonresidential buildings starts, or a typical cash flow curve, for total starts within a year is: 20% of the revenue gets spent in the 1st year, 50% in the 2nd year and 30% in the 3rd year. This shows predicting spending in any given year is dependent on several previous years of starts.

Starts vs Spending Cash Flow Illustrated 10-5-19

Multi-billion $ highway projects, manufacturing facilities, power projects and transportation terminals often have much longer duration cash flow curves. In other words, if your intent is to predict construction spending in 2019, you need to know what starts were at a minimum in 2017 and 2018, and in many cases back to 2016 or even 2015.

Starts spread over time with cash flow curves predict spending.

Starts CF 2015-2020 11-27-19

2nd – For new construction starts survey sample to be used to compare to itself from year to year to predict growth in spending, sample size must be known. Starts data captures a share of the total market or a portion of all construction, on average about 60% of all construction. The easiest way to see this is compare total construction starts to total spending. Starts from 2016 to 2019 range from $750 billion to $800 billion while spending in those years ranges from $1,200 billion to $1,300 billion. From this we see starts capture a share of the total market. Any time a survey of a total population is used to forecast the total, the survey share of total must be considered.  If sample size is not constant, the apparent growth in starts does not all reflect real growth in spending.

Amusement/Recreation is an example that shows starts that generate a predicted cash flow pretty well balanced with actual spending from year to year. The share of starts in the survey is fairly consistent never varying from 63% to 66% from year to year.

Starts SHARE Amuse 10-5-19

Office provides an example of variation in sample share of total. Starts generate predicted cash flow that increased substantially from 49% to 57% and remained higher compared to actual spending.

Starts SHARE Office 10-5-19

Office starts increased from $21 billion in 2013 to $50 billion in 2019. This data generates the predicted cash flow that is compared to actual spending. To predict total spending from unadjusted starts, unadjusted starts CF$ are factored up (divided by) share of total market. If the share of market captured in the survey remained constant then the predicted spending would remain close to 50%. 

CF$ Predicted/Actual shows that Cash Flow Share of actual spending was 48%-50% for several years but then jumped to 56%-57%. The predicted cash flow generated from the increase in starts is not entirely representative of an increase in spending but represents the combined value of the expected increase in spending and an increase in share of market data captured.

Starts cash flow and starts survey share of total spending are never directly known or published. These factors are found only through analysis of the data.

The Educational market data shows a similar situation as Office data. Starts generate predicted cash flow that increased substantially compared to actual spending.

Starts SHARE Educat 10-5-19

Starts data generate predicted cash flow to forecast spending. This requires tracking share of total market captured in the starts survey data to account for any growth in the market share captured vs growth in predicted spending.

 

 

Prelim 2019-2020 Construction Spending

Note 11-8-19 on September spending: Construction Spending in September is up 0.5% from August and still down 2.2% year-to-date (ytd) from 2018. Spending in Q3 averaged the same as Q1.  Qtr/Qtr spending this year has ranged +/- 1%. Total 2019 spending will be down 1%. I’m expecting 2019 Nonresidential Buildings spending up less than 1%, Non-building Infrastructure up 7% and Residential spending down 6%.

10-3-19

Construction Spending in August is down slightly from July and down 2.3% year-to-date (ytd) from 2018. Spending for the last three months has remained flat. Qtr/Qtr spending has ranged +/- 2% for the last five quarters. Total 2019 spending will be down 0.5%. I’m expecting 2019 Nonresidential Buildings spending up 1%, Non-building Infrastructure up 8% and Residential spending down 6%.

Residential construction spending, down for six consecutive quarters, is now down 11% from Q1 2018. Residential volume (spending minus inflation), also down for six quarters, is down 16% from the Q1 2018 peak.

Some markets spending totals for 2019: Lodging +11%, Office +10%, Amusement and Healthcare both +5%, Commercial/Retail -14%, Highway +11%, Power +7%, Transportation +6%, Environmental Public Works (combined) +12%.

2020 forecast Starting Backlog for Nonresidential Buildings is currently up 6% and for Non-building Infrastructure is up 9%. Strong backlog leading into 2020 will increase spending in most nonresidential markets. Exceptions are: Commercial/Retail and Power backlog will decline. Residential spending is 65% dependent on new starts but Nonresidential spending is 80% dependent on backlog.

Spend Forecast 2018-2019-2020-2021 11-19-19

Forecast growth for 2020 is welcome since real construction volume, after accounting for 4% to 5% inflation, has been down for five of the last six quarters. Annual construction inflation since 2011 has been as high as 5.8%. For the last 3 yrs it has averaged 4.6%/yr. Construction spending for the last 3 years avg. annual growth is only 2.4%. When construction spending is lower than inflation, real volume is declining. Jobs must be compared to volume.

Total construction volume after inflation (quarterly avg) reached a peak in the 1st quarter of 2017 (which was then matched again in Q1 2018) and is now down 6% from the peak. Most of the volume decline was in Residential. Only Infrastructure has seen volume gains in the last two years. We have seen jobs growth slow in the last year, but the disparity between construction volume and jobs growth is the greatest ever. I expect to see a much more significant slow down in jobs growth.

Jobs vs Volume 1991-2019 10-3-19

Backlog growth over the past two years will provide the base for Nonresidential construction spending increases in 2020. Major backlog increases from 2018 to the start of 2020 are: Educational +12%, Office +25%, Commercial/Retail -14%, Highway +16%, Transportation +45% and Environmental +23%.

The forecast for 2020 spending is total $ up 3%, but Residential spending will be flat to down slightly.

Construction Spending Forecast strength over the next 18 months is all nonresidential. Current spending seasonally adjusted annual rate (SAAR) vs SAAR at the end 2020 shows Nonresidential Buildings now at $450bil will end 2020 at $500bil and Non-building Infrastructure, now at $340 billion, will end 2020 at $375bil. Residential is now at $510bil but will move up slightly then down to finish 2020 at $500bil.

 

Starts CF 2015-2020 11-27-19

 

SEE ALSO:

Spending Revisions 9-3-19. Nonresidential Increases. Residential Slows.

Midyear 2019 Construction Spending Forecasts Compared

 

Construction Starts Cash Flow vs Spending

This plot overlays two data sources, starts cash flow and spending. For each of the three major market sectors, Residential, Nonresidential Buildings and Non-building Infrastructure, a light colored line and a dark line are plotted. The light line is the expected direction spending will move estimated from the monthly cash flows from Dodge Data construction starts data. The dark line is the movement in actual spending. All the nonresidential buildings and infrastructure data is the sum of all the markets within the sectors. This plot is not generated for each market.

Starts CF 2015-2020 8-8-19

The actual spending should follow a pattern that is similar to the direction of movement predicted by the estimated spending. If the patterns are similar, it is an indication that the forecasting tools are generally accurate. The thing to watch for is that the direction of movement was predicted accurately. For instance, the Non-building Infrastructure lines show pretty well from Jan 2017 through June 2019 that the starts data estimated the direction spending would move. To a lesser degree, Nonresidential Buildings shows correlation. Residential spending long term agrees with the estimate from starts cash flows, but spending is much more smoothed and actual spending inflection points seem to lag the estimated.

 

Reliability of Predicted Construction Forecast Data is always foremost in the thoughts of an analyst. Cash flow models provide for approximately 75% to 80% actual jobs data in the predicted spending for the forecast 12 months out. For next month’s forecast we have 96%-97% actual jobs data in the forecast, only missing jobs that start within the next 30 days. Reliability trails off each month. So, this is useful as a way to check the forecasting model. Essentially, this provides a check on the method I use for forecasting spending. It lends credence to the validity of the future forecast.

The forecast monthly changes in cash flow generated by the starts data are used to predict future spending in all Construction Analytics spending forecasts.

(note 10-3-19: major revisions to starts data cash flow substantially reduces forecast spending in both 2019 and 2020. These revisions won’t be posted until November. Largest downward revisions 2019, Residential -15, Highway -10. Largest downward revisions 2020 Residential -23, Manufacturing -10, Power -12, Highway -12) 

11-25-19 table updated

Spend Forecast 2018-2019-2020-2021 11-19-19

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