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5-1-17 Updated construction spending forecast for 2017. Actual spending is included through March data, first release 5-1-17. Forecast spending includes predictions based on Dodge Data & Analytics (DDA) construction starts through March, released 4-21-17.
Reference Construction Economic Outlook 2017 posted January 2017
5-1-17 Update Overview
Construction Spending in March posted a seasonally adjusted annual rate (SAAR) of $1,218 billion, down 0.2% from February. February was revised UP by 2.3%, and March data is still subject to revisions, usually upward, the next two months. January was revised UP 1.6% from the initial release.
The 1st release of spending is always being compared to a previous month and a previous year that have already been revised, almost always up. Upward revisions to monthly construction spending in 2016 have been as high as 3.4% and for the year average 1.1%/mo. In the last 48 months, the 1st report of construction spending was down vs the prior month 20 times. The initial value was subsequently revised UP 47 times. After revisions, only nine months were down compared to the prior month.
Total Construction Spending for Q1’17 is 3.5% higher than I predicted in my initial 2017 forecast posted 1-7-17. Construction spending growth from Q4’16 to Q1’17 gives 2017 the 2nd best quarter to quarter start in 10 years, just shy of 2014 which posted the best spending growth since 2005. Nearly all the greater volume in spending over my original 2017 forecast is in residential construction, which, for the last four months, has posted much stronger new starts and spending than anticipated based on DDA projections.
Year over year total spending:
- Jan17r/Jan16 = 4.7%
- Feb17r/Feb16 = 5.5%
- Mar17/Mar16 = 3.6%
Based on history, it is likely that Mar17 will get revised UP. (note: with the 2nd release of March spending, the Mar17 year-over-year value was revised up from yoy 3.6% to 5.0%. The initial Apr17 yoy value was posted as up 6.7% from Apr16. Year-to-date total through April is up 5.8% over 2016, and that will most likely be revised higher.)
Total construction spending in 2017 is now forecast to finish at $1,263 billion, an 8.5% increase vs 2016, supported by a 4th consecutive year of strong performance in nonresidential buildings and a very strong start in residential spending. The SAAR of spending will range from near $1.2 trillion in January to $1.3 trillion in the 4th quarter.
A significant indicator for 2017 construction spending performance is that 2017 year-to-date (YTD) spending is up 4.9% compared to a very strong 1st quarter 2016. In the 2nd quarter 2016 spending dropped and did not return to the Feb-Mar 2016 level until Sept-Oct 2016. In 2017, although growth will slow (but still remain positive) in the 2nd quarter, by Sept-Oct spending will be 5% higher than March. The six months Apr-Sept 2017 compared to the same period 2016 will show growth of more than 8%.
The SAAR of spending on a “current dollar” basis (before adjusting for inflation) is now at an all-time high, just barely eclipsing the highs of early 2006. By the 4th quarter of 2017 spending will be 5% above the previous 2006 highs on a “current dollar” basis. However, on a “constant dollar” basis (adjusted for inflation) we are still 13%-14% below peak spending, perhaps five more years away from the real inflation adjusted 2006 peak.
The SAAR of Residential construction spending increased 6% in the last 3 months. It is up 5.3% from Q4’16 to Q1’17. March YTD (=Q1 2017 total) is up only 8.5% from Q1 2016, because Q1 2016 was exceptionally strong. I’m forecasting residential construction 2017 growth of 8% to 10%. Residential spending in 2017 is forecast at $512 billion, 10.2% higher than 2016.
Total Nonresidential construction spending is up 2% Q1’17 vs Q4’16 and up 2.5% vs Q1’16. Predicted cash flows indicate a strong growth pattern for 2017. I expect total nonresidential spending to finish the year up 7%. Nonresidential construction is better understood by looking at the parts, buildings and infrastructure.
Construction spending for Nonresidential Buildings in Q1’17 is up 1.6% vs Q4’16 and up 6.6% vs Q1’16. The most recent 3-month average seasonally adjusted annual rate (SAAR) is $427 billion, now less than 4% below the previous peak of $444 billion in 2008. By midyear 2017 the SAAR will reach a new all-time high and at year-end it will be near $460 billion.
Nonresidential buildings 2017 starting backlog on January 1, 2017 was 47% higher than at the start of 2014, the beginning of the current growth cycle. Spending within the year has two sources; that generated from new starts within the year and that generated from starting backlog. For nonresidential buildings, spending within the year from starting backlog has increased every year since 2014 and in 2017 it will be 42% higher than 2014.
Nonresidential Buildings spending in 2017 is forecast at $447 billion, 9.0% above 2016. Office spending will lead 2017 with 25%+ growth. Commercial, Lodging and Educational markets are all expected to post strong gains over 10%.
For details on Nonresidential Buildings, See Behind The Headlines – Nonres Bldgs Construction Spending and Nonresidential Bldgs 2017 Forecasts Comparisons
Construction spending for Nonbuilding Infrastructure Q1’17 is up 3.8% vs Q4’16, but down 1.8% vs Q1’16. Nonbuilding infrastructure 2017 growth is expected at about 4%-5%.
Non-building Infrastructure, following two down years, will increase by 4.8% to $305 billion. Infrastructure growth is being led by a very high volume of power generation and pipeline work, up only slightly from Q1’16, but up 10% from Q4’16. Although new infrastructure starts were down in 2016 and are expected to decline again in 2017, the amount of work in backlog at the start of 2017 is the highest its ever been and spending in 2017 is forecast at an all-time high.
For Non-building Infrastructure details see Infrastructure Outlook 2017
Private spending is the highest since Q1 2006. Public spending YTD 2017 vs 2016 is down 7% ONLY because the 1st quarter of 2016 was the highest quarter since 2010, elevated due to highway and bridge spending. Educational and Highway/Bridge, the largest two components, make up almost 60% of public spending. The quarterly average of Public spending has been increasing since Q2’16. By the end of Q2’17 YTD public spending will be up 2.5%.
For all of 2017 Private spending will increase 9%. Public spending could increase 7%, with half the gains coming from educational spending.
Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of the period. The sum of all ETC represents current backlog. While continued growth in backlog is most important, the predicted cash flow from backlog and new starts is necessary for predicting future spending.
Revenues from starting backlog account for 75%-80% of all nonresidential construction spending within the year. Not only was nonresidential starting backlog at the highest ever coming into 2017, but also spending from backlog is predicted up by 5% and 2017 new starts are predicted up 8%.
Due to the shorter duration of residential projects, nearly 70% of spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much spending within the current year. If no new work started within the year, within a matter of a few months there would be no backlog ETC left to support the industry.
Construction starts, which generate construction spending (cash flow) over the next several years, were originally reported in 2016 as up only 1% from a remarkably strong 2015. However, Jan-Feb-Mar 2016 starts have recently been revised up by a whopping 16%, and the historical trend is that every monthly value in the previous year for the last eight years has been revised up. This adds to predicted cash flow, so has an immediate affect of raising predicted 2017 spending. 2016 revisions-to-date and expected revisions are on track to raise 2016 starts up to 6% growth over 2015.
Starts that are being reported for the current year are always being compared to a previous year that has been revised up, so starts growth is always understated. So far, starts for the 1st quarter of 2017 have been much stronger than expected. Starts year-to-date are down 1.5% from the upward revised 2016 totals, however the historical revision has been in the range of 3.5% to 5%. So, the actual growth in new starts has been remarkably strong, better than forecast in October, and is adding to the basis for increased forecast in future 2017 and 2018 spending.
Headlines of construction spending declines are almost always premature.
April construction spending 1st release was issued on 6-1-17 by U. S. Census. The initial release shows April DOWN 1.4% from March, a value many news sources have reported as “construction spending is slowing”, “one of the largest drops in six years”, “an unexpected slump”, “spending continued to demonstrate substantial weakness.” I’ve written about this numerous times but it’s worth repeating again. Construction spending almost always gets revised UP in the following month after 1st release. Average revision so far in 2017 is +1.8% and for the last 18 months +1.3%. Monthly construction spending has now been revised UP every one of the last 43 consecutive months.
Headlines of construction spending declines are almost always premature.
Construction spending is almost always a miss when first posted, until it gets revised up in the following monthly report to show is it almost never a miss.
The 1st release of March construction spending came out May 1. This initial release indicates a decline of 0.2% from February. Keep in mind, all 12 monthly reports in 2016 were subsequently revised up. Nine times in the previous 14 months, the 1st report of spending was down vs the prior month. After revisions, only three months were down compared to the prior month.
In the last 48 months, the 1st report of spending was down vs the prior month 20 times. 47 times the initial value was revised UP. After revisions, only nine months were down compared to the prior month.
Monthly construction spending has been revised UP every one of the last 42 consecutive months.
The 1st release of spending is almost always being compared to a previous month and a previous year that have been revised up. Upward revisions to monthly construction spending in 2016 have been as high as 3.4% and for the year average 1.1%/mo. So, a 0.2% mo/mo decline s probably not a decline at all after revision, and there will be a revision, most likely UP.
After spending is first published it is revised in each of the two following months. Then all the values for the entire year are revised with the May data release the following year.
Some specific markets construction spending revised after 1st release (2016 data). These markets represent almost 50% of nonresidential data.
- Office revised UP 8 of 12 months (average of all 12 +1.1%)
- Commercial UP 9 of 12 avg 1.8%
- Educational UP 10 of 12 avg 1.8%
- Power UP 12 of 12 avg 3.6%
A major construction industry news source has a series of articles referencing Dodge Data New Construction Starts, first listing starts data, but then incorrectly refers to the data as construction spending and looks at the trend in values to predict if construction spending in 2017 will rise or fall. This is incorrect use of data and misrepresents Dodge Data New Starts. The starts data as it is being used isn’t a valid indicator to get a spending projection in the next year.
New Starts for 2016 is the total value of project revenues that came under contract in 2016. The values reported by Dodge are a sampling survey of about 50% to 60% of the industry. The percent change in values is very useful. The total dollar volume is not comparable to actual spending.
The entire value of a project is considered in backlog when the contract is signed. Projects booked on or before December 2016 that still have work remaining to be completed are in backlog at the start of 2017. Simply referencing total new starts or backlog does not give an indication of spending within the next calendar year, particularly for infrastructure and residential. 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. So new starts within any given year could contribute spending spread out over several years.
Backlog at the start of 2017 could include revenues from projects that started last month or as long as several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of 2017 is not the total amount recorded when that project started, but is the amount remaining to complete the project or the estimate to complete (ETC). And all of that ETC may not be spent in the year following when it started, dependent on the duration remaining to completion.
The only way to know how much of total starts or total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects that have started, over the past few years. The sum of the amounts from all projects in each month gives total cash flow in that month, or monthly spending in that year. Spending in any given month could have input from projects over the last 36 months. That’s what shows the expected change in spending.
Construction Starts provide the values entering backlog each month. Except for residential, new project starts within the year contribute a much smaller percentage to total spending in the first year than all the backlog ETC on the books at the start of the year. New residential projects contribute the most to spending within the year started because generally residential projects have the shortest duration. Residential projects started in the first quarter may reach completion before the year is over. New infrastructure projects generally have the longest duration and may contribute some share of project value to backlog spread over the next several years.
The following table clearly shows there is not a correlation between starts in any year with spending in the following year. The practice of using construction starts directly to predict spending in the following year can be very misleading in an industry that relies on data for predictive analysis to plan for 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 not a good use of data.
Dodge Data New Construction Starts is a powerful piece of data if used properly.
Headlines of construction spending declines are almost always premature.
The 1st release of January construction spending came out March 1. This initial release indicates a decline of 1% from December. Keep in mind, all 12 monthly reports in 2016 were subsequently revised up. Eight times in 2016 the 1st report of spending was down vs the previous month. After revisions, only two months were down compared to the previous month.
Monthly construction spending has been revised UP every one of the last 39 consecutive months. Since August 2013, the first report indicated a decline vs. the previous month 17 times. After revisions, there remain only seven real month/month declines in 39 months.
The 1st release of spending is almost always being compared to a previous month and a previous year that have been revised up. Upward revisions to monthly construction spending in 2016 have been as high as 3.4% and for the year average 1.1%/mo.
After spending is first published it is revised in each of the two following months. Then all the values for the entire year are revised when the May data release is issued on July 1 of the following year.
Most changes in monthly spending are predetermined.
Spending that occurs this month is generated from all the projects that are ongoing, some that started many months ago. In fact, some projects may have started three or four years ago. For instance, the largest decline in public spending this month is highway work. Although it has one of the smallest percent changes ( only -3.3% vs -12% to -16% for other markets), it is the largest share of total public spending. A very large amount work, 40% above normal, started in 2013 – early 2014. Some of that work is just now finishing. It could be seen a year ago in the cash flow models that a very large sum of work would be ending sometime in Q4’16 or Q1’17. It often occurs that the largest changes in monthly spending are driven by work ending rather than new work beginning.
Nonresidential buildings has the largest backlog ever.
Both Residential and Non-building Infrastructure will increase in 2017 after brief slowdowns but Nonresidential Buildings will lead construction spending in 2017, accounting for more than half of all 2017 growth. Office and commercial retail and then educational provide the most dollar volume growth in 2017.
Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current growth cycle. Current year spending from starting backlog has increased every year and in 2017 it will be up 35% over 2014. About 75% to 80% of all nonresidential buildings construction spending in 2017 will be generated by projects that are already underway (in backlog). Only 20% to 25% of all spending in 2017 will come from new projects that start in 2017.
New construction starts in the final three months of 2016, although well below the yearly highs reached in August and September, helped carry 2016 new starts to an eight-year high. Nonresidential Buildings starts for the last six months averaged the highest since the 1st half of 2008.
Jobs growth may look quite slow this year.
Jobs growth over time follows closely to volume growth, not spending growth. Real volume growth is spending minus inflation. I’m predicting 6% spending growth in 2017, but after inflation that represents less than 2% volume growth. Therefore, we may add less than 2% new jobs in 2017, or less than 140,000 new jobs. An imbalance in growth between jobs and volume does sometimes occur. In the last 25 years that annual imbalance, whether up or down, has exceeded 3% only six times. Those six years were all either construction boom years or recessions. For all the other years, the difference in growth between jobs and volume has averaged less than 1%. Whether we look at the last four-year period or the last eight-year period, jobs and volume growth have been within 2%.
This is my initial forecast for 2017. Census final revisions to Oct., Nov. and Dec. 2016 spending will not be posted until February, March and April. I will then update the 2017 forecast to reflect better input. Then, with the June 1, 2017 release of spending, Census will post revisions to all 2016 spending. The 2016 record will then be updated.
2-1-17 Updated to include Dec 2016 data
Total construction spending in 2017 will reach $1,236 billion supported by a 4th consecutive year of strong growth in nonresidential buildings. The monthly rate of spending will range from near $1.2 trillion in January to $1.3 trillion at year-end.
Nonresidential Buildings spending in 2017 will increase to $447 billion, 9.1% over 2016. The most recent 3-month average seasonally adjusted annual rate (SAAR) is $420 billion, only 5.5% below the peak of $444 billion in 2008. By midyear 2017 the SAAR will reach a new all-time high and it will finish the year near a SAAR of $460 billion. Office spending will lead 2017 with 30%+ growth. Commercial, Lodging and Educational markets are all expected to post strong gains over 10%.
For details on Nonresidential Buildings, See Behind The Headlines – Nonres Bldgs Construction Spending and Nonresidential Bldgs 2017 Forecasts Comparisons
Non-building Infrastructure, following two down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets. In the most recent quarter spending began to recover from 2016 lows posted in August and September. 2017 will be a record year for Infrastructure spending supported by spending generated from the Fixing America’s Surface Transportation Act and potentially the Water Resources Development Act.
For Non-building Infrastructure details see Infrastructure Outlook 2017
Residential will increase only moderately to $485 billion, adding 4.8% over 2016. That follows on three years of substantial growth averaging 17%/year. More than any other sector residential work is more dependent on new starts within the current year to generate spending, approximately two thirds of all spending within the year.
Office building new starts through August were up only 6% year-to-date but starts in September reached the highest in years. The 2016 starts finished at +37% providing the highest amount of work in backlog going back at least 8 years. Lodging starts in 2016 finished up nearly 40%, Healthcare up 20% and Amusement/Recreation up 35%.
Power project starts dropped 30% in 2016 but from the highest amount of starts on record in 2015. In addition, power had very strong starts in late 2014. All of those very strong starts in late 2014 and all of 2015 are still ongoing in backlog and will contribute to positive spending in 2017. Almost half of all the spending in 2017 is generated from projects that started in 2014 and 2015.
See Also 2016 Construction Spending 1-3-17
U. S. Census posted November construction spending 0.9% higher than October and 4.1% higher than November 2015. Year-to-date spending through November is 4.4% higher than 2015.
With only one month to go, 2016 is predicted to finish at $1,166 billion, up 4.8% from 2015. December spending is projected to come in at an annual rate near $1,200 billion. At this point, in order for total 2016 spending to drop below $1,160 billion, December would need to fall 6% below November, a magnitude of change that simply does not occur from month to month.
Current monthly spending is at a 10 year high and on a current dollar basis (before adjusting for inflation) is exceeded in all historical spending by only 5 months at the peak spending in early 2006. By the 2nd quarter of 2017 spending will reach all-time highs on a current dollar basis. On a constant dollar basis adjusted for inflation we are still several years below peak spending.
Revised spending for September is 1.25% higher than original posted on 11-1-16 and for October is -0.1% lower than original posted 12-1-16. However, October data is still pending revision again on 2-1-17 and is expected to increase. In the last 3 years every month has been revised up from the original amount posted. 2016 monthly revisions year-to-date average +1.3%.
The table included here shows the predicted total 2016 spending compared to 1st 2016 estimates and current 2016 estimates provided from my data = CA (Construction Analytics) and from CMD (ConstructConnect) and FMI.
October construction spending put-in-place was released today by U.S. Census. This report includes the first revision to September data and the 2nd revision to August.
October spending 1st release came in at $1.172 billion, 0.5% higher than September which was revised up 1.4% to $1.166 billion from the 1st release of $1.150. August was revised up 2.1% to $1.166 billion from the 1st release of $1.142.
I predicted October spending would come in at $1.190 billion. Once revisions to October data are posted in Nov and Dec, we may reach that $1.190 billion forecast. Revisions have averaged over 1.4%/mo this year and 1.5%/mo for the last 4 months.
Average spending for the last 3 months is $1.169 billion, the highest three-month average since May-Jun-Jul 2006.
Year-to-date (YTD) spending is up 4.5% over last year, but this may go even higher once the revisions are in. There is now no doubt that we’ve clearly passed a previously forecast dip in spending that bottomed in Apr-May at $1.142 billion. The last 5 months of spending are all up from the low point and the trend is pointing higher.
My forecast for total spending in 2016 is $1,168 billion, up 5% from 2015. I expect 7.6% growth in 2017.
Residential spending is up 5.5% ytd and is on track to reach a 2016 total of $468 billion, +6.4% over 2015. Last year, peak spending was in September, then residential spending dropped slightly in Q4 2015. This year I expect 2016 spending to peak in Q4, so we should see ytd performance get better as we approach year end. Cash flow from new starts indicates growth of 9% in 2017 spending.
Total Nonresidential spending is up 3.8% ytd, on track to finish 2016 with total spending at $700 bil, up 4.2% over 2015. Almost all the 2016 growth is in nonresidential buildings, not infrastructure. For the 4mo period Jul-Oct 2016, compared to the same 4mo in 2015, all nonresidential spending is up only 1.7%, but the spending trends are not apparent unless we separate nonresidential buildings from non-building infrastructure. For Jul-Oct 2016, compared to the same period a year ago, nonresidential buildings spending is up 7.6% and non-building infrastructure is down 5.4%.
Nonresidential Buildings spending is up 8.2% ytd through October, led by Office, Lodging and Commercial Retail markets. We should finish 2016 up 8.1% with a total at $409 billion vs. $379 billion in 2015. Total sector growth for the last three years is 35%. I’m predicting 2017 spending for Nonresidential Buildings will increase 7.5%, led by Educational and Office spending.
We are currently at what may be 2016 peak nonresidential buildings spending. I’m expecting nonresidential buildings spending to stall or drop 1.5% to 2% over the next few months before resuming growth. This drop may be in large part due to uneven starts from the end of 2014 and beginning of 2015, a period when starts were abnormally high, that are now finishing and dropping out of the monthly spending values. Usual normal growth patterns in starts do not fill the void left when abnormally high volume of projects finish.
Non-building Infrastructure spending is down 1.2% ytd. Infrastructure spending in 2016 will total $291 billion, down less than 1% from 2015. Spending predicted from Dodge Data Starts predicted this drop. Negative drivers are Transportation, contributing -0.9% to overall decline, Sewage/Waste Disposal -1.0% and Water Supply -0.4%. Power, the largest infrastructure market at 33% of total, is up 1.4% ytd so adds about +0.5% to offset some of the declines. Highway/Street, 31% of infrastructure, is up only slightly. Growth resumes in Q1 2017. Although new starts in 2016 will finish down 10%, starts in 2015 were so high that 2016 will still be a good volume of new starts. Predicted spending from starts is indicating 2017 will be a record year for spending on infrastructure, up 7% from 2016.
Public spending is down 1.5% ytd, on track to finish 2016 with total spending at $285 billion, down 1.4% from 2015. Public spending will rebound in 2017, up 6.5%.
Educational spending is 80% public and 20% private. Education accounts for 25% of public work. Educational is by far the largest building type in public work. All the remaining building types contribute only 2% to 4% each.
60% of all public work is infrastructure. Highway/Street accounts for 31% of all public work. Transportation facilities is 11% of public work, Sewage and Waste Water 9% and Water 4.5%.
The biggest drivers of performance in public markets by far are Highway/Street and Educational spending. Highway/Street spending reached all-time highs from Dec 2015 to March 2016 but is currently 10% below that level and will end 2016 down 1% from 2015. In public markets educational is only up 5% ytd, but in October experienced the largest monthly increase in the public sector.
REVISIONS AND YEAR/YEAR COMPARISONS
Census construction data is always revised in the following two months after initial release. Census revises data and incorporates more data from additional sources to update spending values. Census updates all the values for the previous year, usually with the May data release (on July 1) the following year.
For the 1st nine months of 2016, seven of nine times the first release of spending showed a decline vs the previous month. After revisions, the values show no declines vs the previous month. The last 36 months of data shows there were 16 Census releases that originally showed a decline vs the previous month. After revisions there were no mo/mo declines in the last 36 months. Revisions in 2016 have averaged 1.4%/mo and 1.5%/mo for the last 4 months.
In 2015, spending peaked in the months of July, August and September, then dropped slightly and remained flat for the last quarter of the year. This 2015 pattern, along with the issue of revisions noted above, is one of the reasons comparisons of 2016 to same month last year was low for August and September. A growth trend is now in place. Expect this month vs same month last year for the remainder of 2016 to come in near or above +5%.
10-20-16 Starts Point to Robust 2017 Spending
September data for construction put-in-place was released today. Year-to-date (YTD) spending is up 4.4% over last year. With September first data release at $1,150 bil SAAR, this seems to establish that we’ve clearly passed a forecast dip in spending that bottomed in April and May. We’ve now had 4 months of spending up from the previous quarter and all up from the same respective months in 2015.
One thing that stands out in the data; so far every month in 2016 construction spending has been revised upwards after the first data release, by an average of +1.2%. Checking back to Jan 2014, all but once spending was revised up after the first number released.
For the 1st eight months of 2016, six of eight times the first comparison of spending showed a decline this month vs previous month. After revisions, the final values show only one month/month comparison was down.
June data which appeared quite low at first has now been revised up by +1.8% (+$21bil saar), with most of the June revision in nonresidential buildings. Most of the July revision was to residential spending. The last three months of construction spending on average have been revised up by +1.5% each.
So, even though the first print shows September down -0.4% from August, historical data would indicate we could expect September to get revised up, perhaps by 1%+ which would result in September finishing higher than June, July or August. Of course, there is always the chance it might get very little increase, and August could still get revised.
Residential spending is up 5.7% ytd and is on track to finish 2016 at $470bil, +6.6% over 2015. Last year, peak spending was in September, then residential spending dropped slightly in Q4 2015. This year I expect 2016 spending to peak in Q4, so we should see ytd performance get better as we approach year end. Cash flow from new starts indicate growth of 9% in 2017 spending.
Total Nonresidential spending is up 3.6% ytd, on track to finish 2016 at $700 bil, up 4.2% over 2015. Almost all the 2016 growth is in nonresidential buildings, not infrastructure.
For the 3rd quarter 2016, compared to the same quarter in 2015, nonresidential spending is up only 1%, but the spending patterns are not apparent unless we separate nonresidential buildings from non-building infrastructure.
For the 3rd quarter 2016, compared to a year ago, nonresidential buildings spending is up 7% and non-building infrastructure is down 6%.
Nonresidential Buildings spending is up 8% ytd through September, led by Office, Lodging and Commercial Retail markets. We should finish 2016 up 8% with a total at $410 billion vs. $379 billion in 2015. Total sector growth for the last three years is 35%. I’m predicting 2017 spending for Nonresidential Buildings will increase 8%, led by Educational and Office spending.
The market share percent of total nonresidential buildings for each market is:
educ=22%, mnfg=19%, comm=18%, offc=17%, hlthcr=10%, lodg=7% and amus/rec=5%.
Office construction spending 2016 growth will be 20%+, now greater than 20%/yr for three consecutive years. At 17% market share, by far it is the largest contributor to nonresidential buildings spending growth in 2016, contributing +3.7% growth.
Lodging is expected to finish 2016 up 26% and has averaged greater than 25%/yr growth for four years. But lodging has only 7% market share, so contributes only +1.8% growth to nonresidential buildings.
Commercial Retail is up 9% with 18% market share and so contributes +1.6% to overall nonresidential buildings growth. For the three-year period 2012 to 2014, commercial averaged 14% growth.
Educational spending, up 5% at 22% of the market, contributes +1.1% to overall nonresidential buildings growth in 2016. Educational spending should finish 2016 up 6%.
Manufacturing buildings present a unique situation in 2016. Manufacturing is down -2.4% ytd. At 19% market share, that reduces total nonresidential buildings growth by -0.5%. On the surface, manufacturing is lowering total nonresidential buildings growth. Although manufacturing spending is down, it’s still very high, so it’s impact should not be viewed as negative to the overall sector. Spending increased 50%+ in 2014 & 2015. Spending in 2016 will still be the 2nd highest year on record, down only slightly from 2015 but still more than 30% higher than 2014 and more than 50% higher than 2013.
Educational spending is 80% public and 20% private. In public markets educational is only up 4% ytd, but in private markets it’s up 10%. Private spending is driving total educational to $89 billion for 2016, up 6% from 2015. 2016 will be the best year since 2008. 2017 may reach 7% to 8% growth.
60% of all public work is infrastructure. Education accounts for 25% of public work. Educational is by far the largest building type in public work. All the remaining building types contribute only 2% to 4% each.
We are currently at what I expect could be the 2016 nonres bldgs spending peak, with very little gains across Jul-Aug-Sep-Oct. Nonres bldgs spending may flatten or drop for several months before resuming the climb. This drop may be in large part due to uneven starts from the end of 2014 and beginning of 2015, a period when starts were abnormally high, that are now finishing and dropping out of the monthly spending values. Usual normal growth patterns do not fill the void left when abnormally high volume of projects finish.
Nonbuilding Infrastructure spending is down 1% ytd. Cash flows from starts predicted this drop. The biggest negative drivers are Transportation, Sewage/Waste Disposal and Water Supply, each contributing more than 0.5% to the total decline. Power, the largest infrastructure market at 33% of total, is up 4% ytd so adds +1.33% to growth, tempering some of the declines. Spending in 2016 will reach $292 billion, down less than 1% from 2015. Growth resumes in Q1 2017.Although new starts in 2016 will finish down 10%, starts in 2015 were so high that 2016 will still be a good volume of new starts. Cash flows from all existing starts are predicting 2017 will be a record year for spending on infrastructure, up more than 6% from 2016.
My forecast for total spending in 2016 is $1,170 billion, up 5% from 2015. I expect 8% growth in 2017.
See also this post from October Starts Point to Robust 2017 Spending
updated 2-16-17 edited to include 2016 year-end total$ public vs private
The two largest components of Public Construction Spending, by far, are Highway/Bridge/Street and Educational Buildings. These two markets have more impact on the magnitude of public spending than any other markets. All of Highway ($90bil) is public spending. About 80% ($70bil out of $88bil) of Educational buildings is public spending. Together they add up to 55% of all public construction spending.
The next three largest public markets in order are: 70% of Transportation ($30/$42bil); all of Sewage/Wastewater ($22bil) and all of Water Supply ($12bil). These three markets account for only about 22% of public spending. Eight remaining markets, none larger than 3.5% of the total public sector, combined make up ~20% of total public spending. Five of those eight, Office, Health care, Public Safety, Amusement and Power, each account for $8 to $10bil and each is 3% to 3.5% of Public work.
Public Construction Spending average for the first six months of 2016 was the highest since 2010 and is up 10% from the Q4’13-Q1’14 low point.
Public spending finished 2016 down 0.8% from 2015, but that is down from a near six-year high, so spending is still strong. It is still -9% below its 2009 peak.
The biggest mover to total public spending this year is educational spending. Public educational spending in 2016 is up 4.7%. Because it represents 25% of all public spending, it has a net impact of moving total public spending up +1.2%, greater impact than any other market.
Public commercial spending is up 24% but has only a 1% market share of public work so moves public spending by only +0.24%. Power is down -20% but at a share of only 3% moves public spending by only -0.6%. Public components of office, public safety, sewage/waste disposal and water supply are all down by a combined -7%. At a combined market share of 18% that nets a -1.26% reduction in total public spending.
Public spending peaked in 2009 when Educational buildings spending was at its highest. Highway spending has been at or near its peak for the last 16 months but that, with current educational spending, which is still more than 20% below its peak, has not been enough to carry public spending to new highs.
Expected spending predicted from new construction starts gives a much better picture for 2017.
Highway/Bridge/Street starts in 2015 finished just shy of a 6-year high (in 2013) but 2016 was down 13% from 2015. On average 2015+2016 starts are still 5% higher than 2014. Highway projects are long duration, so very good starts from the end of 2014 and the beginning of 2015 will still contribute strong spending well into 2017. Highway spending is expected to finish up slightly over 2016.
Educational new starts in 2016 finished the year up 11%, posting a 4th consecutive annual increase and educational spending for 2017 should finish up 10%.
Transportation spending in 2017 should increase 6%.
Overall, total public construction spending in 2017 is predicted to grow by 8% to 9%, the first substantial growth since 2007, reaching new highs in the 2nd half. Educational spending will take the lead in 2017 public work. Historically, public spending increases by less than 10% per year.
A common headline we see when Census releases monthly figures for Total Construction Spending is “Spending Unexpectedly Declines Mo/Mo.” Here’s why that is almost always misleading. Construction spending gets revised, UP, usually. So, the first number released is generally low.
U S Census report for August Construction Spending released October 3 posts August at a seasonally adjusted annual rate (SAAR) of spending at $1.142 billion, down 0.7% from July and this reduces the year-to-date (YTD) spending from +5.6% last month to now only +4.9% higher than the same 8 months of 2015.
- Construction Spending for Nonresidential Buildings Aug vs July UP 0.4%, 6th monthly increase this year. YTD is UP 8.2% from 2015.
- Construction Spending for Nonbuilding Infrastructure Aug vs July DOWN 2.2%, 5th monthly decline this year. YTD is DOWN 0.4%.
- Construction Spending for Residential Aug vs July DOWN 0.2%, Only 2nd monthly decline this year. YTD is UP 6.2%.
Comparisons using the first print of data almost always reflect a lower mo/mo or yr/yr growth rate than the final actual result because the first print “unadjusted value” is being compared to previous month or last year “adjusted values.” Construction spending, from 1st release to last revision of data, has been revised upward every month since August 2013. That would indicate the first reports of an “unexpected decline” almost always get revised up in following months.
The latest spending release is pending revision for the next two months and then the whole year gets one (usually final) revision in the middle of next year. Sometimes there is a second annual revision the following year.
Total construction spending, from 1st release to last revision of data, has been revised upward in the last 32 months by an average of +2.3%/month. However, the average revisions for the last 12 months have averaged only +1.3%/month. Sometimes the 1st revision is down then the 2nd up. Downward revision is rare. The very strong historical trend is for upward revisions after the first release of monthly data.
Some examples of revisions:
- Total construction spending over the last 12 months has been revised UP 10 of 12 times. The average of all revisions is +1.3%/month. Monthly revisions have ranged from -0.5% up to +3.4%.
- Office spending has been revised UP 4 of 7 times in 2016. The average revision is nearly flat but revisions have ranged from -3% to +6.5%.
- Commercial spending has been revised UP 4 of 7 times in 2016. The average revision is +1.1%/month. Revisions have ranged from -1.5% up to as high as +8% for a particular month.
- Residential spending has been revised UP 6 of 7 mo in 2016. The average revision is 2.1%/month. Monthly revisions have ranged from -1.6% to +7.5%
- Power Infrastructure has been revised UP 6 of 7 times in 2016. The average revision is +4.7%/month. Revisions have been as high as 9% for a particular month.
For 2016, final data won’t be published until July 2017, but so far through July, monthly revisions have reversed 4 out of 5 initial mo/mo declines to increases.
For all of 2013, 2014 and 2015, the average month/month growth rates increased from an initial reading of +0.14% to a final reading of +0.76%.
For all of 2014 and 2015, the average year/year growth rates increased from an initial reading of +8.1% to a final reading of +10.8%.