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While everyone else is talking about May construction spending versus April, the most important change taking place in the spending report every July 1st is the fact that, every year, with the release of May construction spending data on July 1, Census revises the data for all months going back the previous two years. Rarely have revisions been lower.
Census Construction Spending July 1, 2018 data revisions:
2017 increased by $12bil, +1.0%. Most notable was a +2.5% increase to unusually low April 2017. 2017 revisions were mostly residential, up $7.5bil, +1.5%
2016 also revised up, by $6bil, +0.5%, mostly in Nonresidential Bldgs.
Nonresidential Bldgs were revised up in both 2016 & 2017. Healthcare up by ~4%/yr both years. Power revised down by ~4% both years.
Jan, Feb & Apr 2018 spending were reduced, Mar was revised up. Jan-Apr 2018 total was reduced by $2.6bil, -0.7%. Biggest move was -5% to Nonresidential Bldgs. Commercial -15%, Mnfg -5%, Office -4%, Public Safety -18%, Communication +6%
Primary reason YTD dropped from 7.6% last month to 4.3% this month is because $6bil was added to JFMA 2017. Happens every year with this Revs issue.
More to come.
Construction Spending for April is up 1.8% from March and up 6.6% Year-to-date (YTD) from 2017. Both Feb. and Mar. were revised up slightly.
YTD$ Jan-Apr 2018 vs 2017 > Residential +8.7%, Nonresidential Buildings +6.0%, Nonbuilding Infrastructure +3.7%. Public +7.6%, Private +6.3%.
Spending in current $ has reached a new high of $1,310 billion surpassing the previous high spending from 2006. But after adjusting for inflation, constant $ shows volume is still 13% below the 2005 peak.
Census is reporting a 1.8% mo/mo gain from March. I am not seeing such a huge jump in April construction spending over March. My data shows very slight growth from Mar to Apr, possibly because my SAAR factor produces a much higher SAAR for March than the Census factor. The Census factor, which appears unusually low in March, lowers March (to a decline) and increases April growth.
Year-to-date indicators are often a better indicator of a growth trend than mo/mo comparisons. But, YTD can be deceiving. When both years being compared have similar slope to spending growth, YTD works well. But if one year has a declining slope and the other year an increasing slope, YTD values can vary widely from expected annual total yr/yr growth.
For example, Manufacturing shows YTD growth from 2017 is down 4.1% through April. Monthly spending in 2017 trended down most of the year starting at the highest, $74bil in Q1 2017, dipping as low as $61bil in Dec. For 2018, just the opposite trend is taking place. 2018 started in Jan at a rate of $65bil and is projected to finish the year at $72bil.
This means YTD comparisons for 2018 vs 2017 will start out at the lowest percent change for the year (-4.1%) and finish with 2018 values increasing and 2017 values decreasing. By the 4th quarter the mo$2018/mo$2017 could reach +20%. That diverging trend will continually move the average YTD up such that, for the first half of the year, YTD gives no clear indication of the expected annual performance.
Similar patterns, or at least partially similar patterns, can be found in Office, Educational, Power and Amusement/Recreation.
Overall, this indicates construction spending will experience an improving picture through the year. I’m predicting total YTD performance will increase every month into the 4th quarter. From April to September 2017, total monthly spending was declining. In 2018, for this same period, spending is predicted to increase every month. This will result in rapidly increasing YTD percents during this period. YTD will increase from 6.6% in April to 9% in the 3rd quarter. Even if spending were to realize no additional gains in 2018, the YTD% would still increase from now into the 4th quarter, because 2017 values declined.
The latest data comes in as expected, so does not appreciably change my outlook. I’m still forecasting 8% to 10% growth across all sectors and I expect 2018 will reach a total $1,350 billion in spending.
The outlook is particularly strong for Residential, Educational, Amusement, Office and Transportation. Transportation may exceeding 25% growth. Highway/Bridge and Healthcare growth will be limited.
MORE TO COME
Construction Spending March down 1.7% from Feb, BUT, Feb was revised UP by 2.6%, 2nd largest mo/mo revision in 7 years.
Today is 2nd upward revision to January construction spending, now up 2.5% from original issue. Jan/Feb 2018 up 6% from Jan/Feb 2017
Should you be worried that construction spending for March was reported down 1.7% from Feb. No! Not unusual for 1st report of monthly construction spending to come in down. It’s normal. Current unadjusted monthly value is ALWAYS being compared to a (most always upwardly) revised value.
Last 5 years the 1st release of spending was reported down 25 times from the previous month. 20 of those were later revised up. The 1st report of spending has been revised up 55 times in the last 60 months.
Residential construction spending Q1 2018 UP 5% from Q4 2017, up 8% from Q1 2017
Looks to me like the rapid growth in MF occurred in 2014-2016, Still had minor growth in early 2017 but rate of growth had slowed dramatically. Essentially, no growth at all since Q2 2017. MF trend seems flat to down. I see all RSDN trend slowing, potentially down in 2019.
Keep in mind, Rsdn inflation has averaged over 5.5%/yr for last 5 years. If residential spending is not increasing greater than 5.5%/yr, then real volume is declining.
Nonresidential Bldgs construction spending Q1 2018 up 5%+ over Q1 2017.
Why is Manufacturing construction spending down YTD vs Q1 2017, when I’m predicting 14% gain this year? Because Q1’17 was the high for 2017 and dropped 13% by year end, whereas Q1 2018 is the low for the year, expecting 16% growth by year end.
Public Safety, +19% ytd is the biggest percent gainer in Nonresidential Bldgs spending, but has a very small share of total $ spending. The biggest $ gainers are Commercial, +$1.8bil, Lodging and Healthcare both at +$0.8bil.
Infrastructure construction spending Q1 2018 up only 1.5% from Q1 2017, held down by power -6% and highway -3%, two largest markets. Transportation up 21%.
Environmental Public Works, comprised of the following, is up 12 % from Q1’17. Conservation up 25%. Water Supply up 10%. Sewage Waste Disposal up 8%.
Although I’m forecasting only 4% growth in the Power market, it is down YTD vs Q1 2017 for the same reason as Manufacturing. Q1’17 was the high for 2017 and dropped 6% by Q4 2017, whereas Q1 2018 is the low for the year, expecting 11% growth by year end.
Transportation construction spending posted the largest $ growth in Q1 2018 of any market, up nearly $2bil over Q1 2017. Year-to-date, Trans is up 21% over 2017. In my 2018 Forecast, I forecast Transportation to gain 35% in 2018 over 2017. YTD will increase over next 6 months. The next two quarters in 2018 will show continuous growth vs 2017 in which April through Sept posted no growth over Q1’17.
I’ve been forecasting 25% to 35% growth in Transportation spending since November. Other analysts projections range between -1% to +7%, $8bil lower than my forecast. 2017 new starts more than doubled from 2016, due to several very large terminal and rail projects. Also 2016 is still contributing an out-sized share of work to 2018 spending. The elevated rate of growth in Transportation spending will extend into 2019.
Public Construction Spending in Q1 2018 is up 6.7% from Q1 2017. Single largest $ gain is Transportation, up $0.9bil. As a group, Environmental Public Works is up 12%, up $1bil. Public Office and Educational are each up $0.5bil. This is the best growth in public spending since 2015vs2014 and is better than any other quarter back to 2008.
Brief notes on spending, starts, backlog, jobs and inflation from March and April tweets.
Nonresidential construction spending is not decelerating in 2018. Will see best growth since 14% in 2015.
Residential construction spending is slowing to +7% growth in 2018, after 6 consecutive years of strong growth averaging 13%/year.
Non-building Infrastructure forecast growth of 8% in 2018, potential to hit a new all-time high due to very large projects in Power and Transportation.
Public construction spending in 2018 is forecast to reach $307 billion, an increase of 8% over 2017, the best growth in 10 years. Educational and Transportation will contribute equally and together account for more than half of the Public spending growth in 2018.
In Oct 2016 and again in Feb 2017, I forecast Manufacturing spending would fall 13% in 2017 after hitting peak spending in 2015 from massive growth in new starts in 2014. At that time, the AIA consensus forecast (average of seven analysts) was that spending would increase +0.4%. By July the consensus had been revised to average -6.6%. I updated my forecast to -11.8%. Based on cash flows, from April 2016 through the end of 2017 I expected spending to decline in 17 of 21 months. It declined in 14 of those months. Manufacturing spending finished 2017 down 11.9%.
In Fall 2017, I predicted Manufacturing construction spending would increase +9% in 2018. However, through March, total construction starts for Manufacturing over the last 12 months would count as the 2nd highest year on record. Therefore I’ve recently revised my forecast up to +13% spending in 2018. I’m now expecting double digit % spending growth in both 2018 & 2019. The January 2018 AIA consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 spending will decline. My data shows increases in starts and backlog indicate large gains.
Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 24% in two years.
Nonresidential Bldgs 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% with 2018 spending forecast up 9%. Institutional accounts for 52% of 2018 construction spending growth, Commercial 27%, Industrial 21%.
80% of all nonresidential buildings construction spending forecast in 2018 is already in backlog projects at the start of the year.
New Construction Starts are booming (need to look past the mo/mo and ytd)
- Residential – 2 highest qtrs since 2006 in last 12 months
- Nonres Bldgs – 3 highest qtrs since Q1 2008 in last 15 months
- Nonbldg Infra – highet qtr since Q1 2015 peak in last 6 months.
Construction Starts data is regularly misinterpreted in common industry forecasting articles. Starts do not directly indicate changes in spending. A Forecast Cash Flow from Starts gives an indication of the rate of change in spending.
Educational new construction starts total from the last five months of 2017 posted the highest 5mo total starts in at least seven years, 13% higher than the next best 5mo. Jan 2018 monthly spending up 12% from 2017 mid-year low.
Healthcare construction starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. Spending will increase slowly.
Amusement/Rec construction starts avg of +15%/yr for 5yrs, up 30% in 2016, 5% in 2017. In last 6mo, Aug 2017 to Jan 2018, four very large billion$+ projects started, almost a year’s worth of new starts in 6mo. Backlog indicates 15%-20% spending increases for 2018 and 2019.
In 2010, Warehouse new construction starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010.
Lodging starting backlog up 13% for 2018, having already averaged increases of 30%/yr since 2015. Starting backlog jumped from $7 bil/yr in 2014 to $17 bil/yr in 2018, supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.
New construction starts for Manufacturing total for the last 12 months would count as the 2nd highest year on record. I’m now expecting double digit % spending growth in both 2018 & 2019. The consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 manufacturing bldg spending will decline.
Structural steel contract includes structural shapes, steel joists, metal deck, stairs and rails, about 10% of total building final cost.
Other steel in a building can include reinforcing steel, exterior metal wall panels, metal ceiling frames, wall studs, door frames, canopies, steel duct, steel pipe and conduit, about 6% of total building cost.
All steel (in a structural steel building) is at least 16% of total building cost. There are more hidden costs of steel in mechanical, electrical and plumbing equipment.
Raw mill steel is about one fourth the final cost of structural steel installed. A 25% increase in cost of mill steel could raise a structural steel subcontract bid price by 6.25%. At 10% of total building budget, that would raise total building cost by 0.625%.
A 25% increase in cost of mill steel could raise the other nonstructural steel costs by 6.25%. At 6% of total building budget, that would raise total building cost by 0.375%.
A 25% tariff on mill steel raises building cost inflation by at least 1%. That’s about $7.5 billion of unexpected cost inflation just in 2018.
Watch for unexpected impacts from steel tariffs, potentially adding 5% or more to total cost of bridges (plate steel). Also impacted, power industry, pipeline, transmission & communication towers, transportation.
Steel tariff could inflate the cost of the proposed $2.1 billion Gordy Howe International Bridge by $100 million. That would hurt the budget.
2018 Construction Spending Forecast – Nonresidential Bldgs construction spending in 2018 forecast to reach a new high, $459 billion, up 9% over 2017, passing the previous 2008 high. In constant $, 2018 will still be 18% below peak.
An estimator could be far off when indexing construction cost using a general cost index versus an actual selling price index.
Failure to account for the affect of inflation on the cost of construction could result in a failure to be profitable.
For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.
For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%. In 2013 it reached a 12-year high of 8%.
If you are hiring to meet your needs and you see that construction spending (revenue) has increased by 25%, do you hire to match revenue? No! Hiring requires a knowledge of volume growth, and revenue doesn’t show that. Revenue minus inflation shows volume.
Construction activity has a direct influence on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs.
Construction Jobs vs volume growth the last 5 years is nearly even, yet jobs imbalances exist within sectors. Nonresidential Buildings and Non-building Infrastructure show excess jobs while Residential shows a severe jobs deficit. But not all of the apparent deficit in residential jobs is real.
Are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.
In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This is residential space built using labor classified as non-residential commercial.
BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity.”
So, the mis-classified labor reduces the nonresidential excess and offsets a portion of the residential shortfall.
Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.
Construction added 177,000 jobs in the 4 months Nov’17-Feb’18. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.
Construction jobs pulled back 15k in March, but this follows the strongest month (Feb +65k) in 12 years, so not totally unexpected. I think Mar Construction jobs, (-15k), more likely a pause after Feb (+65k), strongest month in 12 years.
3-28-18 Detail of Nonresidential Buildings construction starts, backlog and spending 2017-2018
2018 Construction Spending Forecast – Nonresidential Buildings
1st, we’ll start with a quick summary of 2017 results.
2017 Wrap Up – Spending, Starts and Backlog
TOTAL construction spending in 2017 reached $1.236 trillion, an increase of 4.3% over 2016.
Total spending is up 57% from the 2011 low point and is now 6% above the previous 2006 high.
Nonresidential Buildings spending in 2017 finished at $419 billion, up only 2.7% from 2016.
Nonresidential spending is up 47% from the 2011 low point but is still 4.5% below the 2008 high. By December 2017, the seasonally adjusted annual rate (SAAR) had reached $433 billion, near the all-time high, only 2% below the peak in 2008.
2017 spending finished below my forecast due to lower than expected performance in Educational and Office. Educational starts increased 6%+/year for the last three years, but spending increased only 4%/year the last two years. Office starts increased nearly 30% in 2016, but dropped 2% in 2017. Spending increased only 3% in 2017.
History shows total spending has been revised up 53 times in the last 60 months. I expect future revisions will smooth out spending in unusually low periods and increase total 2017 spending above this forecast. I suspect either big upward revisions to 2017 spending or large increases in backlog will boost 2018 spending in these two markets.
2017 New Starts
Dodge Data 2017 TOTAL construction starts increased only 2.6% from 2016. However, starts are always revised upward in the following year. I expect revisions will show 2017 starts increased by 6% to 7% over 2016. Revisions to date (to Jan & Feb 2017) have already increased the 2017 Total to 4.2% over 2016. Even if the Total reaches 6% growth over 2016, 2017 starts will still have posted the lowest growth since 2011.
Nonresidential Buildings starts, currently are up 9% for 2017, could finish up 14% after all revisions. Nonresidential Buildings new starts are up 55% in four years.
Although there was a 1% decline in 2015, starts averaged 12%/year growth for the last four years. The six months from Aug 2016 to Jan 2017 totaled the highest average starts since Jan-Jun 2008, also the year nonresidential buildings spending peaked. The six months Jul-Dec 2017 just surpassed both those previous peak highs. All of those new high starts will generate spending in 2018, so 2018 spending benefits from the two strongest six-month periods of starts on record.
- Previous year starts always later get revised upwards. Therefore, current year starts ytd growth is always understated. This analysis compensates for that.
- Nonres Buildings Starts increased at an average of 12%/year for the last 5 years.
- Nonres Buildings Starts are at all-time highs.
- New starts will generate record high 2018 starting backlog for every sector.
The pattern of nonresidential buildings construction starts for the last 30 months indicated spending increases in the 2nd half of 2017 and set up 2018 for the highest ever starting backlog and record spending. Spending started to show increases in November and is up 4% the last 3 months vs the previous 3 months.
2018 Starting Backlog
TOTAL All Construction starting backlog for 2018, currently at an all-time high, increased 30% in the last three years.
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.
- Nonresidential buildings 2018 starting backlog is up 12%.
- Starting Backlog is at an all-time high for nonresidential buildings.
- 80% of all Nonresidential spending within the year will be generated from projects in starting backlog.
Nonresidential Buildings 2018 starting backlog is the highest ever, up 12% from 2017, 8% over the previous high in 2009. This will increase as more revisions to 2017 are posted.
Nonresidential buildings 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% through 2017. Starting backlog has increased for 5 years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for 5 years at an average 9%/year. Nonres Buildings will reach a new high for spending in 2018.
Cash flow models of construction projects in backlog are indicating substantial acceleration in nonresidential spending over the next year. The share of spending within the current year from backlog is at an all-time high for nonresidential buildings.
2018 New Starts
Starts for 2018 are conservatively estimated at 3% growth. After revisions I expect that to increase to 6%. But 2018 starts generate only 20% of 2018 spending, so a difference of 3% in new starts would change 2018 spending by less than 1%.
The following table shows predicted cash flow from backlog on record as of March 20, 2018 and predicted starts that will generate future backlog in 2018.
Duration for projects in backlog helps to better predict spending activity over time. Apply the expected duration to Starts data to produce a Forecast Cash Flow and that shows the expected pattern of spending. Since Starts data is a sampling of about 60% of all construction projects, and since starts get spent over an extended period of time, starts dollar values can’t be used to directly predict spending.
The rate of change in Starts Cash Flow gives an indication of the rate of change in future construction spending.
Cash flow indicates how much and when spending will occur. That allows a forecast of how spending from each month of previous starts will occur from all projects in backlog. Backlog could include projects that started two to three years ago, sometimes longer. 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.
This plot shows actual spending history compared to that predicted by starts cash flow. Sometimes they diverge but overall it’s a pretty good indicator of the slope of growth.
TOTAL construction spending in 2018 will reach $1.330 trillion, an increase of 7.6% over 2017. Nonresidential Buildings make up most of the growth.
Nonresidential Buildings spending in 2018 is forecast to reach a new high, $459 billion, an increase of 9.6% over 2017, surpassing the previous 2008 high. Educational and Manufacturing make up 55% of the growth.
For 2018, Educational spending is projected to increase 14%, the best increase since 2007. Educational starting backlog increased 10%/year for the last three years.
Manufacturing spending is projected to increase 12% in 2018. Manufacturing posted several very large project starts in 2017. Two thirds of all 2018 spending comes from projects started in 2016 and 2017.
Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure spending is quite erratic, while nonresidential buildings spending, with only slight variation, has been climbing at a strong steady pace for more than 4 years. Some analysts track nonresidential total spending, but these two sectors perform so differently it helps to break them apart to track trends.
Nonresidential Buildings spending for 2018 is forecast to increase 9%. Institutional accounts for 52% of 2018 Nonres Bldgs spending growth, Commercial 27% and Industrial 21%.
Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long term average inflation is close to 4%. Every time spending dropped below 4%, nonresidential buildings real volume declined that year.
Nonresidential buildings inflation forecast for 2018 is 4.5% to 5%. Spending needs to grow at a minimum of 4.5% just to stay ahead of construction inflation. Inflation in this sector has been at 4% or higher the last four years. A forecast of 2018 spending growth below 4.5% would suggest that nonresidential buildings construction volume is contracting. Economic activity does not indicate a non-recession low spending for nonresidential building construction. I expect volume growth in 2018.
Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. For 2018 (adjusted to the baseline 2017$) it will be $439 billion.
Constant $ spending shows all years from 1995 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $, 2018 is still 18% below the 2000 peak.
Spending in current $ is almost back to the peak of $438 billion in 2008, but volume is lower than almost all years from 1985 to 2010 and is still 22% lower than the 2000 high.
Volume in 2011 dropped to the lowest since 1983.
Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Nonresidential jobs increased by 27% during that period, 15% in excess of volume growth.
Nonresidential Buildings spending in 2018 is forecast to reach a new high, $459 billion, an increase of 9.6% over 2017, surpassing the previous 2008 high. Educational and Manufacturing make up 55% of the growth.
Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 12% from 2017, up 24% in the last two years. Nonresidential Buildings 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is up 38% with 9% growth forecast for 2018.
80% of all nonresidential buildings construction spending in 2018 is already in backlog projects at the start of the year. Two thirds of all 2018 spending comes from projects that started in 2016 and 2017.
For 2018, Educational spending is projected to increase 14%, the best increase since 2007. Educational starting backlog increased 10%/year for the last three years. Manufacturing spending is projected to increase 12% in 2018. Manufacturing posted several very large project starts in 2017.
Educational new starts total from the last five months of 2017 posted the highest 5mo total in at least seven years, 13% higher than the next best 5mo. The highest and 2nd highest quarters were within the last 15 months, so both still contribute fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.
Educational starts are up 6% in 2017. Starts averaged YOY growth of 6%/year for the last three years and have had steady growth since 2012. The growth in starts will support growth in spending over the next three years. Starts for 2018 are predicted to go up 10% and this will push 2019 starting backlog even higher.
Educational backlog has been increasing for 5 years or longer. In 2016 and 2017 starting backlog increased 10%/year. 2018 starting backlog is up 8% from 2017. Backlog growth has been exceeding spending growth for the last four years. This should produce higher spending growth for the next few years.
Educational spending in the second half 2017, up 10% from the 2017 low point, is now at a post recession high. We can expect to see another six to eight months of growth before spending levels off in mid-2018 at a sizable gain over 2017.
Educational spending previous highs of $103-$104 billion in 2007 and 2008 may be passed in 2018. Both new starts and backlog have increased every year since 2012. A build-up of backlog is indicating that 2018 spending could increase dramatically. At peak, educational represented 30% of all nonresidential buildings spending. Now it’s only 22%. That’s expected to increase slightly for the next three years.
Educational construction spending in 2018 is forecast to reach a new high, $105 billion, an increase of 14% over 2017.
Healthcare starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. So while 2017 starts gained only 1%, most of 2017 is part of the fastest period of post-recession growth in years. All those starts contribute to 2018 spending. Starts have been increasing since 2012.
Healthcare starting backlog increased 10% for 2017 and 5% for 2018. Backlog has been increasing unevenly and grew 30% in 4 years. Spending followed a fairly similar pattern. Backlog is increasing in 2019. Backlog is indicating spending growth for 2018 and 2019.
Healthcare spending has been very slow to recover, experiencing declines as recently as 2013, 2014 and 2016, hitting an 8 year low in 2014, when all other nonresidential building markets had already returned to growth. From 2012 through 2016, Healthcare spending dropped 9%. 2017 posted a gain of 3.9%. Backlog will support spending gains for the next few years but gains could be uneven.
Healthcare construction spending for 2018 is forecast to reach $42 billion, an increase of 4.3% over 2017.
Amusement/Recreation starts have been increasing at an average rate of 15%/yr for five years, up 30% in 2016 and 5% in 2017. Within the last six months, Aug 2017 to Jan 2018, there have been four very large billion dollar project starts. There has been a year’s worth of new starts in six months.
Amusement/Recreation starting backlog increased 20%/yr for the last four years at the same time that spending was increasing at a rate of 10%/year. This means backlog will continue to support increased spending at least for the next few years.
Amusement/Recreation spending hit an 8 year low in 2013 but we’ve had 3 years of excellent growth of 10%/yr or more since then. 2017 spending increased only 5%. But backlog is indicating 15%-20% increases for 2018 and 2019. This market is only 5% of nonresidential buildings spending.
Amusement/Recreation construction spending for 2018 is forecast to reach $29 billion, an increase of 23% over 2017.
Commercial/Retail starts finished 2017 essentially flat, but that is compared to peak starts in 2016. Starts for the 12 months Aug 2016 – June 2017 posted 10% growth over the previous 12 months. Starts had been remarkably strong from the 4th quarter 2015 though the 1st quarter 2017. Commercial/Retail starts have been increasing every year since 2010.
In 2010, Warehouse starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010. See this Bloomberg article Warehouses Are Now Worth More Than Offices, Thanks to Amazon
Commercial/Retail starting backlog for 2018 will drop slightly from 2017. In addition, some of the big projects from the period of strong new starts growth are ending. This will slow spending after 7 years of strong growth. 2018 backlog still produces a spending increase but current projections show spending slows even more in 2019.
Commercial/Retail spending dropped from the high of $90 billion in 2007 to $40 billion in 2010. It has been growing steadily since reaching bottom in early 2011, and has recovered to an annual total rate of $88 billion in 2017. Spending increased an average of 13%/year for six years from 2012 through 2017. Growth will be positive in both 2018 and 2019 but will slow dramatically since we are currently near the all-time high.
Commercial/Retail construction spending for 2018 is forecast to reach a new high, $91 billion, an increase of 4% over 2017.
Office construction starts finished 2017 down 2%, but only because 2016 had reached a recent high, similar too the highs in 1998 and 2006-2007. Starts have been increasing since 2010 with the strongest growth period of new starts in the 12 months July 2016 – June 2017, the highest 12 months on record, 60% higher than the previous 12 months. That high-volume period of starts will elevate spending in both 2018 and 2019. Data centers are included in Office.
Office starting backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018, backlog reached a new high, up 13% over 2017. Office starting backlog increased an average of 30%/year for the last 3 years. Backlog growth should support very strong spending increases into 2019.
Office spending dropped more than 40% from $68 billion/year in 2007-2008 to $37 billion from 2010 through 2013. From 2014 to 2016, spending increased by more than 20%/year, but in 2017 it slowed to only 3%. That was unusual and unexpected since starts and backlog had both reached 10 year highs. Possible explanations might be that a very large number of projects were canceled, 2016 starts were overstated or potential revisions to 2017 Office spending could be released in July.
Office construction spending in 2018 is forecast to reach a new high, $75 billion, an increase of 8% over 2017.
Lodging starts in 2017 finished down 5%. From 2010 to 2016 starts averaged over 30%/year growth for six years. In 2018, Lodging starts could decline. But, even though new starts are down in 2017 and expected down in 2018, those will still be two of the three highest years. Peak starts were in 2016.
Lodging starting backlog is up 13% for 2018, having already averaged increases of 30%/yr since 2015. Lodging starting backlog jumped from $7 billion/yr in 2014 to $17 billion/yr in 2018. It has supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.
Lodging spending recorded the largest drop of any market, falling 75% from $36 billion in 2008 to $9 billion in 2011. However it also recorded the strongest rebound of any market, climbing 20% to 30% per year for the 5-years 2012-2016. In 2011, Lodging dropped to only 3% of total sector spending. It has rebounded to 7% in 2017.
Lodging spending will increase by 5% in 2018. It’s still not back to the previous high of $36 billion in 2008. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.
Lodging construction spending for 2018 is forecast to reach $30 billion, an increase of 5% over 2017.
Manufacturing is the only nonresidential building market that did not finish 2017 with new starts totals at or near post-recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. Manufacturing posted a 100% increase in new starts in 2014 that drove starting backlog and spending to new highs in 2015 and 2016. New starts declined 25%-30%/year for the next two years after the high in 2014. 2017 starts increased 20%, but that is still 35% lower than 2014.
Manufacturing backlog remained equally high in 2015 and 2016, but then dropped 20% in 2017. 2018 backlog will see an increase of 8%. Starting backlog dropped 20% in 2017 and spending dropped 12%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts and that pushed 2018 starting backlog back up, but not quite as high as 2015-2016. This will support a spending rebound in 2018-2019 after a drop of 18% in the last two years.
Manufacturing spending was forecast to fall 11% in 2017 after peaking in 2015 from massive growth in new starts in 2014. Based on cash flows from starts, from April 2016 through the end of 2017 spending was expected to decline in 17 of 21 months. It did decline in 14 of those months. The forecast is now for very little declines in the next two years.
Manufacturing spending for 2017 is $66 billion versus $75 billion in 2016 and $80 billion in 2015. Although 2017 dropped to $66 billion, that was still higher than any but those two highest years. The 2017 spending drop of 11% is the largest drop since pre-recession, but it is measured compared to the peak years. Manufacturing in some reports is referred to as Industrial. 2019 spending could surpass the 2015 peak.
Manufacturing construction spending for 2018 is forecast to reach $75 billion, an increase of 13% over 2017.
Religious and Public Safety spending of $11-$12 billion/year represents only 2.5% of total nonresidential building spending. In 2008-2009 it was 5% of the total. The religious building market has been declining since 2002 and is down 55% since then. Public Safety peaked in 2009 and has declined every year since, now down 40% from the peak. I don’t track starts or backlog for these markets. I do track monthly spending and carry a forecast in the Table of Construction Spending.
Religious and Public Safety currently amounts to $11 billion/year. A 10% change in spending of $1 billion in a year would amount to only 0.2% change in all nonresidential buildings spending. This category doesn’t often change by 10% yr/yr, so it’s affect is small.
Public construction is a subset of Nonresidential Buildings and Non-building Infrastructure and includes about 1% of Residential.
Only about 25% of all Nonresidential Buildings spending, about $100-$110 billion, is publicly funded, mostly Educational. In total, this makes up about one third of Public spending.
- Nonresidential Buildings is 25% public (mostly institutional), 75% private.
- Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
- Public Institutional = $100 billion, mostly Educational ($70b).
The largest market contributing to public spending is Highway/Bridge, 32% of total public spending. Major Nonresidential Buildings markets that contribute to public spending are Educational, 26% of total public spending, and Office, Healthcare, Public Safety and Amusement/Recreation which each account for about 3%.
Educational is 80% public, Transportation 70%, Amusement/Rec 50%, Healthcare 20%, and Power is 10% public, along with few other smaller shares.
Public spending hit a low in June 2017. It has been increasing since then. Public Educational, in the second half 2017, up 10% from the 2017 low point, is now at a post recession high. We can expect to see another six months of growth before spending levels off in mid-2018 at a sizable gain over 2017.
Educational alone accounts for about 30% of the Public spending growth in 2018. Educational new starts total for the last three months posted the highest quarter in at least seven years. The 2nd highest quarter was also within the last 12 months, so both will contribute fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.
Click here for a formatted printable PDF 2018 Forecast – Nonresidential Buildings
For the 2018 Forecast Summary see 2018 Construction Spending Forecast – Mar 2018
The 2018 Outlook link Economic Outlook
Here’s how to use the Starts data and how it affects spending Construction Starts and Spending Patterns 9-26-17
Construction starts data in this report references Dodge Data & Analytics starts data
See these posts for additional info
For more on Public work see Down the Infrastructure Rabbit Hole 2-16-18
For effects of inflation see Constant Dollar Construction Growth 11-2-17
We’ve all seen headlines like, “Construction Spending is back to previous level”, or “Construction Spending back to a new high.” Here’s how even true information can be deceiving.
It’s true, construction spending in current $ reached a new high in 2017 at $1,236 billion. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.
Let’s say a store will sell a bushel of apples, cost $100 in 2014, $110 in 2015, $120 in 2016 and $130 in 2017. If we look at the current $ spent on apples each year, it looks like business is booming, up 30% in 3 years. But the reality is, with the exception of inflation, the apple business has not changed at all. Only one bushel of apples sold every year. The year to year change in un-adjusted current $ is the increase in cost, not the increase in volume.
Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.
Total construction spending in constant $ (inflation adjusted $) reached $1,236 billion in 2017. After adjusting all previous spending to equivalent 2017$, we can see that all years from 1997 through 2008 had higher volume than 2017. In 2000-2001 volume was just over $1,400 billion and in 2005 volume reached a peak at $1,454 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.
Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1995 through 2010 had higher volume than 2017. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. Spending in current $ is almost back to the peak of $438 billion in 2008, but volume is lower than almost all years from 1985 to 2010 and is still 22% lower than the 2000 high volume.
Non-building Infrastructure construction spending in constant $ reached $294 billion in 2017. Recent highs were posted in 2015 and 2016 at $305 billion and $304 billion and 2018 is expected to reach $319 billion. Previous spending adjusted to equivalent 2017$ shows that 2008 and 2009 were both just slightly higher than $300 billion. Volume reached a peak $313 billion in 2016. Spending in current $ hit new highs in 2015 and 2016. This is the only sector that has current $ and constant $ at or near all-time highs.
Residential buildings construction spending in constant $ reached $523 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1996 through 2007 had higher volume than 2017. Volume reached a peak $748 billion in 2005. Only the years 2004-2006 had higher spending in current $. The 2005 current $ peak of $630 billion is still 17% higher than 2017, but 2017 volume is still 30% lower than peak volume.
This has several implications besides misleading headlines that claim construction is at a new high. Just look at the period 1996-2007 on the residential plot. Spending in current $ increased 130% from $270 billion to $620 billion. But this was during a period that recorded some of the highest residential construction inflation on record. Inflation was 90%. Follow the guidelines up to constant$ and see that real volume increased only 40% from $530 billion to $750 billion.
If you are hiring to meet your needs and you see that spending (revenue) has increased by 130%, do you hire to meet revenue? No. Hiring requires a knowledge of volume growth. Residential jobs during this time frame increased by 55%, more than real volume growth, but no where near the 130% spending growth.
The above plots were developed using current and historical Census construction spending and inflation indices were developed from construction industry resources, documentation which can be found here on this blog.
Articles Detailing 2018 Construction Outlook
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These links point to articles here on this blog that summarize end-of-year data for 2017 and present projections for 2018.
Most Recently Published
2018 Starting Backlog & New Starts
2018 Spending Forecast
1-26-18 updated 3-5-18
Dodge Data posted December construction starts on 1-25-18, showing total starts increased 3% from 2016. However, this compares unadjusted 2017 starts to upwardly revised 2016 starts. Starts are always revised upward in the following year. I expect revisions will show 2017 starts increased by more than 6% over 2016. January starts, released 2-22-18 dropped 2% from December, but Residential starts hit the highest SAAR$ in 11 years and total starts SAAR$ went over $725 billion for 6th time in the last year and the only times since 2007.
Total starting backlog for 2018, currently at an all-time high, has increased on average 10%/year the last three years. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog.
Total All 2018 construction spending is projected to increase 8% to $1.330 trillion.
Spending measured in current 2018$ will reach an all-time high, however, measured more appropriately in constant inflation adjusted dollars, will still come in 14% below the 2005 high. When comparing inflation adjusted constant dollars, 2018 spending is still lower than all years from 1998 through 2007.
In constant inflation adjusted dollars, which more closely reflects volume, 2018 Infrastructure spending will reach a new high but nonresidential buildings is still 4-5 years away from a new high and residential spending is 6-8 years from a new high.
Read more about Constant Dollar Construction Growth
Non-building Infrastructure starts in 2017 are down 2%. However, we can expect post-year revisions to infrastructure starts. I expect, when all revisions are posted, that 2017 will show infrastructure starts increased a few percent from 2016. Starts peaked in 2015 and are still near that high-point. 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. Although 2017 shows a spending drop of 3.6%, spending is also prone to large upward revisions, particularly in Power, the largest market in Infrastructure. Starting backlog is up 25% in the last two years. Spending for 2018 is projected to increase 8% to an all-time high.
Transportation terminals 2017 new starts jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work, including terminals, runways, rail and dock work is the highest ever, up 80% from 2017, up 100% in the last two years. Spending has been within few % of the 2015 all-time high for 4 years. Spending is projected to increase 20-25%/year for the next two years.
Power plant new starts are down for the 2nd year but had hit an all-time high in 2015, up nearly 150% from 2014. Pipeline starts were up more than 125% in each of the past two years. Starting backlog for all power projects has nearly doubled in the last three years. Spending is projected to increase 5% and 7% in 2018 and 2019.
Highway spending is not projected to change by much, up only 2% in 2018, but it has been within a few percent of the all-time high for the last three years. Backlog from new starts has increased on average 6%/year for the last four years.
Nonresidential Buildings new construction starts in 2017 are up 7%. When all revisions are in, I expect that to climb over to 10%. Total starts for the last 6 months are 10% higher than any time since 2007. Starts are up 60% in four years. 2018 starting backlog is the highest ever, 10% above 2008, up 15% from 2017. Spending for 2018 is projected to increase 8% to 9%.
Office new starts hit an all-time high in 2016 and just missed surpassing that mark in 2017. Starts increased on average 22%/year from 2013 through 2016, but 2017 starts dropped 2%. Starting backlog increased dramatically during that 2013-2016 growth period and backlog is up 50% in the last two years. Spending followed with three years of growth over 20%/year from 2014 through 2016. The 3% spending growth currently recorded for 2017 is an unexplained anomaly. All other data indicates 2017 spending should have followed the pattern set in 2014-2016. Spending in 2018 is forecast to climb 8% and 2019 could increase 12%.
Educational new starts hit an eight year high in 2016 and increased another 6% in 2017. Total new construction starts for the last 6 months are 13% higher than any other 6-month total since 2008. Starting backlog has increased 10%/year for the last three years. The last three years we’ve seen spending increases of 6%, 5% and 3%. For 2018, spending is projected to increase 14%, the strongest growth since 2007.
Healthcare starts jumped 13% in 2016, the first significant increase in nearly 10 years. 2017 starts maintained even level with 2016. Coming into 2018, starting backlog is up 16% over the past two years, a sign for slow moderate growth. 2017 is the first time in 5 years Healthcare spending increased, up 4.3%. For 2018, spending is projected to increase 4%.
Manufacturing posted several very large project starts in 2017, increasing total starts 20% over 2016. This increased starting backlog 8% for 2018. Although still well below the banner years of 2015 and 2016, spending is projected to increase 12% in 2018 and 10% in 2019.
Amusement/Recreation new starts increased only 5% in 2017, but that follows a 30% increase in 2016, to reach a new high in 2017. New construction starts for the last 6 months is the highest 6-month total new starts ever recorded, 1/3rd higher than any time in last 10 years. This will help drive Amuse/Rec spending to double digit growth next two years. Starting backlog has doubled from 2014 to 2018. Spending increased only 5% in 2017 but spending is up 40% in the last 3 years, also reaching a new high in 2017. Spending is forecast to increase 20% for 2018 and 15% in 2019.
This spending category includes sports stadiums which by some accounts may fall 40% in 2018, but that is hard to envision, considering the record new starts over the last 6 months. Sports stadiums is 1/3rd of Amuse/Rec so that would lower my forecast by about 10%. I’m sticking with my forecast.
Lodging experienced six consecutive years of massive growth in starts and spending after losing 75% of its pre-recession market. Starts grew 30%/year from 2011 through 2016. In 2017 starts posted a decline of 5%. Spending averaged 25% growth from 2012 through 2016, but posted only 7% growth in 2017. Backlog is still up slightly to start 2018. Spending is projected to come in at 8% growth for 2018. But backlog drops off 15% for 2019 and spending is expected to follow suit.
Commercial construction is being supported by new starts for warehouse construction which have increased seven consecutive years. In 2010 warehouse construction was only 20% of this market. From 2010, stores grew 50% to a peak in 2015, but warehouses grew 500% to peak in 2017 and are now 50% of the total market. Warehouses are increasing and stores are declining. In 2018, warehouses will make up 60% of the market. Total commercial starts for 2018 will remain equal to 2017 and 2016. The years of big backlog growth occurred from 2012 to 2017. Backlog remains constant from 2017 to 2018 and declines slightly in 2019. After 6 years of spending growth averaging more than 12%/year, spending will increase by only 4% in 2018 and 1% in 2019.
Public share of new construction starts are up only 10% in 3 years. But due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 spending growth are Educational and Transportation with a combined total forecast 20% growth. Expect 2018 public spending to increase 6% to 8%, the best growth in 10 years.
Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts. New construction starts for January 2018 are the highest in 11 years. Total starts for the last 6 months are the highest since 2006. Residential starts in 2018 are projected to increase 7% over 2017, almost all of that coming from new single family starts. Residential spending in 2018 is projected to increase only 6% after five years of increases over 10%.
In What Category is That Construction Cost? explains where some specific costs are carried, which may vary between sources. Take particular note of Transportation, Office and Commercial.
Starts Trends Construction Forecast Fall 2017 for a much more thorough handling of the starts forecast.
I’ve read several articles recently describing, Why 2018 could be a boom year for construction spending. Several reasons being given to support a potential boom, when we look a little deeper, actually may not be good indicators at all to predict the trend for a strong year in 2018. In my Fall Forecast I do predict 8% growth in 2018 construction spending, but let’s take a look at what gets us there.
Data that doesn’t tell us much about the future trend in construction spending.
Jobs increased in 2017 up 35% over 2016. In 2017 construction added 210,000 jobs, growth of 35% over 2016, but in 2016 jobs growth decreased by 55% from 2015. 2016 growth was the lowest in 5yrs. In 2013 jobs growth increased by 85% and in 2014 by 71%, but in 2015 and 2016 jobs growth slowed. Yet 2015 was one of the best construction spending years on record. And in 2017, jobs growth increased over 2016 but spending growth slowed. The direction of jobs growth is not an indicator of the future trend in spending.
Nov 2017 spending was higher than expected, and YTD is up 4.2%. This is a slippery slope. Actually we won’t know any particular monthly spending until several months after the initial release. All monthly spending values are subject to revision three times after initial release. However, residential spending is higher than expected for the YTD and nonresidential buildings spending is below expectations for YTD. But more importantly, construction spending normally fluctuates. For instance, in the 2nd half of 2015, spending was down 4 out of 6 months, lower than forecast three times, posting a total decline of 2.5%. Yet 2015 finished the year up 10%. Then, in the 1st half of 2016, spending was up 5 out of 6 months, far exceeding forecast 3 times, posting a total increase of 6% in 6 months. 2016 finished up 6.5% for the year. Neither half performance predicted final results within the year or the forecast for the future. Furthermore, after inflation, 2017 spending is currently flat with 2016$, so all we are seeing in the 4.5% spending growth in 2017 is inflation. Current and past spending is not an indicator of the future trend in spending.
What data does give an indication of the future trend in construction spending?
Construction Starts (Dodge Data & Analytics DDA), Backlog, Cash flow from Starts, the Architectural Billings Index (ABI), The Dodge Momentum Index (DMI) and New Residential Permits and # of Units Construction Starts all give an indication of the future trend in spending.
Residential Permits and # of new units started gives a fairly immediate indication of residential activity. The ABI gives an indication of nonresidential building to start construction about 9 months out and the DMI about 12 months out. The ABI and DMI give some indication as to whether future starts will increase or decrease. DDA Starts give an indication of the percent growth in future work, but not when the spending will occur, so cannot be used directly to predict spending. A good example is the new start for airport terminal work recorded as a new start in 2017 at $4 billion. But it may take 5 or 6 years to complete that $4 billion project and only cash flow will show the impact on spending.
Care must be taken to use Starts data properly. It is regularly misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate 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.
Cash flow is the best indicator of how much and when spending will occur. Cash flow from DDA starts gives a prediction over time of how spending from each month of previous starts will occur 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.
Of course, data highlighting demand, occupancy rates, labor and material trends and other economic factors affecting construction trends all weigh into determining future spending expectations. However, for nonresidential buildings and infrastructure approximately 75% to 80% of all spending within the year comes from starting backlog. Most economic factors that will have an affect on spending within the year are already captured in projects that have started and are in current backlog. On the other hand, new residential starts are more important. 70% of all residential spending in the year comes from new starts.
The following trend predictions are developed based on using this outline.