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Construction Starts and Spending trends may not be apparent unless you look deep into the last few years of data.
Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts.
Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.
Power market starts and spending provides a good example. Power starts peaked in 2015 at an all-time high, up 142% from 2014 and more than the prior two years combined. Yet Power spending was down 6% in 2015 and up only 3% in 2016. This happened because Power starts were also at an all-time high in 2012, just below the 2015 level, and those starts drove 2014 spending to an all-time high, but then tapered off in 2015. Those peak starts from 2015 will still be contributing spending for several years to come, long beyond typical jobs, and that drives up typical spending growth because it adds more than typical number of months that contribute spending.
Power starts dropped 11% in 2016 and continue to drop in 2017. Year-to-date and year over year comparisons to 2016 show Power starts down in all respects. For the 1st six months of 2017, Power starts are down four out of six months compared to same month in 2016 and year-to-date through June is down a total 20%.
Even though Power starts have been declining since the 2015 high point, Power had several periods with an exceptionally high value of new starts, some of these periods 2x to 3x the normal rate of growth and a year or two longer duration than typical; late 2014, Jan-May 2015, Feb-Jun 2016 and again in Feb-Jul 2017. When we have old, long duration jobs that are still contributing to monthly spending, spending goes up. A large share of the cash flow or monthly spending from all those exceptional starts will occur in 2018 and 2019. Those jobs will elevate Power spending 10% to 20% in 2018 and also in 2019.
- Pattern of cash flows from construction starts is indicating substantial acceleration in spending over next six months in all sectors, perhaps most notable in infrastructure.
- Infrastructure jobs from 2014 with longer than average duration will continue into 2018. These break the average balanced cycle of one month of old jobs ending for every new month of jobs starting. That will increase spending in 2018.
This simplified example shows what happens to monthly spending growth when a long duration job first influences spending past the typical duration and then when it ends. In the example here, starts grow at 1% per month and have a typical duration of 5 months. One month has an unusually large project start that will last for 10 months. A typical month of spending has cash flow from 5 months of starts, but the long duration project creates 6 months of cash flows for the period beyond typical duration.
Notice what happens and when it occurs. When the large project starts it has no unusual affect on spending. When it first extends beyond typical duration, it has a massive +20% growth effect on spending, even though starts had only been increasing at 1%/month for the previous 5 months. When it ends it has a similar downward effect, again, even though starts had been increasing at 1%/month.
Spending growth (or declines), both when an extra large job causes it to increase and then when the extra job ends, is almost entirely influenced by the long duration project, not by normal monthly starts growth rate.
2017 construction spending is expected to reach $1,255 billion, up 6% from 2016. Average annual rate of spending is going to increase 5% from $1,240 to $1,300 at year end. I wouldn’t be surprised to see future revisions to Mar-Apr-May spending smooth out that erratic period and add to total $ 2017.
- All sectors have already hit spending lows for the year and will increase 4% to 8% over the next six months.
- Infrastructure will finish the year with totals down 2%, but the annual rate of spending could potentially increase 8% from July to year end. 2018 shows 11% growth.
- Nonresidential Buildings are up 5.3% in 2017, the sixth consecutive year of growth. For 2018 expect 8% growth.
- Residential spending will be up nearly 12% for 2017, the sixth year over 9%. Spending growth in 2018 slows to 2%.
2017 construction starts through August total $482 billion, down 1% compared to revised 2016. If 2017 gets revised as expected, even by only 4%, it will show +3% growth over 2016, but we won’t see that growth in the data until next year.
- Starts revisions for the period 2008-2015 averaged +5.8%/yr. For the period 2012-2015 revisions averaged +4.0%.
- The smallest revision to starts data since 2008 was +3.5%/yr. 2016 year-to-date through August revisions are +11%.
- Previous year starts are always revised upwards. Therefore, current year starts year-to-date growth is always understated.
- Starts have been increasing at an average rate of 11%/year for the last 5 years.
- After revisions, I expect 2017 will be the highest amount of new construction starts in 13 years.
Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. However, a few months of exceptional 2015 starts will elevate 2018 spending and late 2016 starts will elevate 2019 spending.
Office spending, down slightly (temporarily) due to timing of completions from old jobs, is on track to reach 12% growth in 2017. Starts have been increasing since 2010 with the strongest growth period of new starts from Sept 2016 through June 2017. So, for the next 10 months we may see year/year comparisons negative, but that high volume of starts from Sept 2016 to June 2017 is going to elevate spending in 2018 and 2019.
Commercial spending early reports for June and July are both well below that predicted by starts cash flows and may be prone to substantial revisions. Commercial spending revisions have been up 17 of last 18 months an average of 6.0%/month. (10-2-17 Commercial spending was revised up by 4% for both June and July) Commercial starts have been increasing every year since 2010.
Educational has seen a slow but steady growth in new starts since 2012. Current dip in spending are not expected to continue. Cash flow from starts is indicating a steady climb in spending from now through the end of 2018.
Healthcare starts from 2015 are ending unevenly, rather than smoothly, causing temporary dips in spending. Growth resumes by Sept-Oct.
Transportation Terminal starts in the first three months of 2017 were more than three times higher than any three-month period in the previous five years. While this helped turn 2017 spending positive, 2017 is still affected by uneven starts from two to three years ago holding down gains in the 2nd half. Transportation will show only a 1% gain in 2017 but double digits gains in 2018. The high volume of 2017 starts has the most affect on 2019 spending.
Highway spending in 2018 will benefit from a scenario exactly as described above in the cash flow chart. Projects that started in 2015 but that have unusually long duration will contribute spending in 2018 beyond the duration that typical projects have ended. It is not recent new starts but old ongoing projects that will increase 2018 spending by 6%.
Public Works cash flow from starts has been indicating declines in spending since last summer. In fact, declines in public works spending (down 20% YTD in Sewage Waste Disposal) is the biggest drag on Infrastructure spending in 2017. However, now spending declines are expected to turn to growth in the 2nd half 2017 and continue growth through 2018.
(This analysis does not include any spending projections from an infrastructure investment bill).
See August Construction Spending 10-2-17 for more trends in spending.
The AIA recently published the Nonresidential Buildings Consensus Forecast Midyear 2017 report. The consensus of seven firms projects spending growth for nonresidential buildings at 3.8% for 2017 and 3.6% for 2018. The largest growth in the AIA forecast for any building type for both years is 10% for 2017 Retail & Other Commercial. The highest reported total annual prediction from any firm is 4.4% for 2017 and 5.5% for 2018. AIA Midyear Consensus Report July 2017
Construction Analytics forecast for nonresidential buildings construction spending growth is +7.3% for 2017 and +10.7% for 2018. Growth in 2016 was 7.5%.
Year-to-date (YTD) spending for the 1st 5 months of 2017 is up +5.2%, led by Office and commercial, both near 15%. Estimate-to-complete (ETC) for the final 7 months is forecast at +8.1%. Total spending for Nonresidential Buildings in 2017 is forecast to increase 7.3% = $438 billion.
If spending were to slow to 3.8% growth for 2017, since YTD growth is already 5.2%, the rate of growth in the final 7 months would need to fall to only 2.4%. However, the predicted cash flow from construction starts shows very strong spending growth in the 2nd half 2017 and into 2018. Nonresidential Buildings construction starts for the last 12 months posted the highest average since 2007-2008. This is helping boost spending.
Outside of recession years, nonresidential buildings construction spending for the year dropped below 4% annual growth only twice in 24 years, since data has been tracked. In fact, right now spending needs to grow at 4.5% just to stay ahead of construction inflation. So any forecast of spending growth below 4.5% actually might suggest that construction is not expanding, but is contracting. All indications are that there are no recessionary effects right now and economic activity does not suggest we are headed for a non-recession low spending for nonresidential building construction. I don’t expect spending to drop to 4% growth for the next three years.
The pattern of nonresidential buildings construction starts for the last 30 months is indicating spending increases in the 2nd half of 2017 and is setting up 2018 for the highest ever starting backlog and record spending. Even if starts crash to zero growth for the remainder of the year, 2017 spending would drop by less than 1% and we still begin 2018 with record backlog.
New Office construction starts for the last 12 months are the best ever recorded, on track to reach a total 50% growth over two years. Retail/Commercial starts have averaged year-over-year (YOY) growth of greater than 10%/year for the last three years. Educational starts averaged YOY growth of 8%/year for the last two years. These three markets comprise 60% of all nonresidential buildings. Healthcare starts have quietly increased to a record high over the last 12 months. Every market except manufacturing will finish 2017 with new starts totals near or at post recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. All construction starts $ data in this report references Dodge Data & Analytics starts data.
Construction spending for Commercial/Retail, Lodging and Office construction all remain very strong with 2017 total growth near 15%. Educational (+9%) and healthcare (+4%) both show sizable gains after years of little to no growth.
92% of all construction spending in 2017 is already in backlog projects.
A scenario that would have Office spending drop down to 8.9% annual growth from the track it is on today (+15.4% YTD) would require a highly improbable and unprecedented non-recessionary decline in spending in the remaining months of 2017. To grasp the enormity of the decline needed, it would take canceling 8% of all ongoing office projects or new starts for the remainder of the year would need to drop by 50%.
Educational will show an increase in YTD gains in the 3rd quarter because increasing spending in 2017 will be measured against the lowest quarter (3rdqtr) in 2016. Healthcare may not show sizable YTD gains until 4th quarter, for which 2016 reached lowest spending of the year and 2017 will reach highest.
Total nonresidential buildings spending growth accelerates to 10+% in 2018, led by institutional and office spending.
Nearly all nonresidential buildings construction starts in 2016 are still contributing to spending. Since originally posted they have been revised up by 16%. Since most spending from new starts (approximately 50%) occurs in the year following the start, early spending projections based on original posted starts $ may understate 2017 spending.
Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure spending is quite erratic, while nonresidential buildings spending, with only slight variation, has been climbing at a strong steady pace for more than 4 years. Some analysts track nonresidential total spending, but these two sectors perform so differently it is important to break them apart to track trends. Buildings spending is up 2% from Q2’16 and up 5% YOY. In the 2nd half 2017 YOY spending is expected to reach 8% over the same months from 2016. Worthy of note is that non-building infrastructure spending, even though down slightly, just experienced two years of record highs. It will hold down the overall nonresidential total performance, but still finish 2017 near record highs.
See this article from February comparing my starting forecast compared to the Jan 2017 AIA Consensus Nonresidential Bldgs 2017 Forecasts Vary
Dodge released the Feb 2017 construction starts today. For the Jan and Feb reports, I think the most relevant piece of information in this report is that Jan and Feb 2016 values were revised up, in total by 15%. That alone has added 2% to total 2016 starts.
In the Dodge October Construction Outlook report, construction starts total for 2016 were predicted at $676 billion, and 2017 at +5%, or $713 billion. Revisions so far have increased 2016 actual to $692 billion. 2016 is on track to go above $700 billion, and at +5%, 2017 could reach $735 billion.
New 2017 starts are being compared to upwardly revised 2016 values. That understates 2017 performance. Dodge Data provides revised starts a month later and 12 months later. In every monthly release, the previous month is revised AND the last year’s year-to-date is revised. Dodge does incorporate other (minor) revisions at a later date, but the “12 month” revision to the previous year-to-date values captures the largest part of all revisions.
This February report includes revisions to the total 2016 YTD, Jan+Feb 2016. The 2017 values won’t get that equivalent “12 month” revision until next year. Therefore, Current year YTD values (not-yet-revised) are being compared to the previous year YTD revised values which has the affect of making current YTD growth appear lower than it should.
In the last 10 years the YTD revisions have always been up. Usually, most of the revisions occur to nonresidential buildings, about 5% to 6% per year, with only a 3% to 4% revision to infrastructure and only 2% to residential.
So far in 2017, year-to-date 2016 values for Jan+Feb have been revise up by 15%. That’s a 2% revision to the 2016 annual total. Already in just the first two months, on an annual basis, nonresidential buildings have been revised up 2%, non-building infrastructure up 4% and residential up 1.3%.
While the 2017 YTD value this month is noted as down 4% compared to last year, keep in mind last year’s value was just revised up by 15%. So, much of the reason 2017 is down is because 2016 values have had revisions applied and 2017 have not. To me, this latest report looks up.
A major construction industry news source has a series of articles referencing Dodge Data New Construction Starts, listing the starts data, but then incorrectly refers to the data as construction spending and looks at the yr/yr trend in values to predict % change that construction spending will rise or fall. This is incorrect use of starts data and misrepresents how to use 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 the year is the total value of project revenues that came under contract in that year. 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. That’s a new start. 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 a false indicator and it’s not a good use of data.
Dodge Data New Construction Starts is powerful data if used properly.
Dodge Data New Construction Starts in December fell off the pace of growth we had in the previous few months due entirely to a large drop in Energy Infrastructure starts. Total of all starts for 2016 finished as the highest year since 2005. Un-adjusted 2016 totals are only 1% higher than 2015, but 2015 totals have already been adjusted up, so this is an unequal comparison. Annual adjustments are always UP and average about +4% per year. After 2016 totals get adjusted up we might see 2016 growth of 4% to 5% over 2015.
Residential starts in 2016 posted the best year since 2005-2006. Residential starts bottomed in 2009 and have now posted the 7th consecutive year of growth. New starts show an increase of only 6% for 2016, but that follows several years of growth averaging more than 20%/year. I expect after adjustments 2016 residential starts will be revised to 8% growth. Spending has bounced 90% off the bottom in large part due to 17%/year average growth in 2013-2014-2015. Because both starts and spending growth have been so strong, recent percent growth rates are smaller. Expect only 5% spending growth in 2017.
Nonresidential Building new starts in December remained consistent with October and November. Although well below the yearly highs reached in August and September, the final three months helped carry 2016 totals to an 8-year high. Nonresidential Buildings starts for the last six months averaged the highest since the 1st half of 2008. Total starts as posted are up only 4% from 2015 but nonresidential buildings has been subject to the largest adjustment of all sectors. I expect after adjustment nonresidential buildings will show a 2016 increase of about 8% to 9%.
These six Nonresidential Buildings markets, which make up 80% of all nonresidential buildings spending, posted the following growth in starts leading into 2017: Office +37%, Lodging +40%, Educational +11%, Healthcare +21%, Commercial Retail +11% and Amusement/Recreation +21%. For the last 3 years spending combined growth in these six markets has ranged between 9%/yr and 12%/yr. For 2017, expect spending growth of 14%.
Manufacturing, which has an 18% market share of nonresidential buildings, saw new starts decline by 38% in 2016. However, in 2014 and 2015 this market posted the fastest growth of any market in a decade and posted the two highest years on record. In 2015 spending increased 33% to the highest ever recorded for manufacturing buildings. Spending is down 4% in 2016 and is expected to decline 13% more in 2017, but 2017 will still be the 3rd highest year of spending on record.
Non-building Infrastructure monthly new construction starts in December fell to a 10-year low. However, due to strong performance throughout the year, and even though total starts fell 11% from 2015, total Infrastructure starts for 2016 came in at the second highest year on record. 2015 was up 27% from 2014. So, even though headlines will point to an 11% decline in 2016, due to the distribution of spending from backlog, 2017 will post the largest spending increase in 3 years. I expect after adjustments the 2016 decline will be revised up by 3 points to -8%.
Power and Highway/Bridge/Street make up two thirds of non-building infrastructure spending. Power project starts dropped 33% in 2016, but from the highest annual total of starts on record. In 2015, Power starts increased 150% to an all-time high and Highway/Bridge/Street finished just shy of a 6-year high. In the 1st five months of 2015, a years worth of Power projects started and they are not yet completed. That volume is still contributing to infrastructure spending in 2017. It was not unexpected that starts in these markets would be down for 2016. The amount of monthly spending from projects started in 2014 and 2015 in this sector will contribute to spending for several years to come. Spending in 2017 will be the highest ever in this sector, up 4% from 2016.
Dodge Data published new construction starts for January 2017 on Feb 22. Starts are up 12% from December; +1% in residential, +16% in nonresidential buildings and +44% in non-building infrastructure. December was revised slightly. Among the major changes for this January: electric utility +285%; misc public works +222%; transportation terminals +768% (mostly LaGuardia airport terminal); offices +26%; manufacturing -69%; educational -18%.
A major revision was posted to January 2016 starts. They were revised up in total by 23%, a huge move equal to about 1/3 to 1/2 of what we would normally see for a total annual revision. For the last 4 years the annual revision to new starts has averaged +4%. January 2016 residential starts were revised up 9%, nonresidential buildings up 21% and non-building infrastructure up 49%. Even with that, current January 2017 starts are up 10% from January a year ago.
Prior to the data release on Feb. 22, non-building infrastructure 2016 starts were down 11% from 2015. You will note in my commentary above I predicted that would be revised to show only an 8% decline. After one month it has already been revised to only an 8.6% decline. I now expect after all months of 2016 infrastructure starts are revised 2016 will show only a 6% decline from 2015.
2-1-17 Upated to include Decmber data
Non-building Infrastructure spending in 2016 will finish at $291 billion, down less than 1% from 2015. Spending based on projected cash flow from Dodge Data Starts predicted this drop. The negative drivers were Transportation, Sewage/Waste Disposal, Communications and Water Supply. Power, the largest infrastructure market at 34% of total sector spending, will finish up 3.3%. Highway/Street, 31% of total sector, will finish up 2%.
In 2017, 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.
Annual percent growth in new starts (backlog), by itself, is not necessarily a good indicator of spending in the following year. The duration of backlog must be known to forecast spending.
At the beginning of 2016, work in backlog had increased 9% over 2015, but because a large percentage was very long duration work, the amount of cash flow (work put-in-place) in 2016 from that backlog decreased from 2015.
At the beginning of 2017, work in backlog increased only 6% over 2016. What is significant though is that the amount of cash flow in 2017 from that backlog will be up 10%. That is being caused by long duration work-to-complete backlog from 2014 and 2015, which is dominated by spending in the power market. In the 1st five months of 2015, a years worth of Power work started and it’s not yet completed. It’s still contributing to infrastructure spending in 2017.
Although new starts in 2016 will finish down 6% from 2015, starts in 2015 were so strong that 2016 will still be a high volume of new starts. 2015 was up 25% from 2014. So, even though headlines will point to a 6% decline in new infrastructure starts in both 2016 and 2017, due to the distribution of spending from backlog, 2017 spending will post the largest growth in 3 years. 2017 will be a record year for spending on infrastructure, up more than 4% from 2016.
Infrastructure construction starts and spending is dominated by movements in Power and Highway markets. Power/Electric/Gas and Highway/Bridge/Street, about equally, comprise 65% of all infrastructure spending. Transportation/Air/Rail accounts for 15%. Sewage/Waste 8%, Communication 6%, Water 4% and Conservation 3%.
Power is 90% private, 10% public. Highway is 100% public. Transportation is 30% private, 70% public. Sewage, Water and Conservation are 100% public. Communication is 100% private.
Power project starts dropped 25% in 2016 but from the highest annual total 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 strong spending in 2017. Almost half of all the spending in 2017 is generated from projects that started in 2014 and 2015. Power spending in 2017 will increase 2% over 2016 for a 6th consecutive year of near $100 billion in spending.
Highway/Street, the second largest public market, reached all-time highs in spending from the 3rd quarter 2015 through the 1st quarter 2016. After a 6 month slow down, spending in November again reached a new all-time high. Highway spending in 2017 will grow 5% over 2016.
Transportation hit all-time highs in spending all during the 2nd half of 2015. Spending declined by 6% in 2016 but is still the second highest year on record. It will again equal those 2015 highs throughout all of 2017. Transportation spending in 2017 will grow 6% over 2016.
Projected impact of proposed infrastructure stimulus:
- None of the starts or spending detailed above includes any projections of potential work from future stimulus.
- Infrastructure spending, about 25% of total construction spending, increased more than $25 billion in a single year only once. The average annual growth for the past 20 years is less than $10 billion/year. Although infrastructure growth is always erratic with no growth some years, the average growth for the last six years (post-recession) has averaged $10 billion/year. Some of those years included prior stimulus growth.
- The annual growth in PUBLIC Infrastructure has never exceeding $20 billion in a single year and averages only $7 billion.
- The average growth in infrastructure jobs (excluding all recessionary years because those years would make the result approach zero) is about 25,000 jobs per year.
- Based on infrastructure proportion of all construction, and on both all construction and infrastructure historical maximum rates of spending and jobs growth, it may be unrealistic to anticipate more than $10 billion/year growth in the infrastructure sector. ie., (from current total add $10bil yr1, $20bil yr2, $30bil yr3, etc.) See Infrastructure – Ramping Up to Add $1 trillion for more detailed explanation.
In 2015, nonresidential buildings starts were very high in the beginning of the year and dropped off in the later part of the year. In 2016 it’s just the opposite. This skews year-to-date total comparisons and for most of this year makes it appear as if there may be no growth in new starts.
Here’s a simple example:
Let’s say 4 months in 2016 had starts of $6, 8, 10 and 12 billion and the same months in 2015 had starts of $10, 9, 8 and 7 billion. The year-to-date change for 2016 vs 2015 after the 1st month (6 vs 10) is down 40%. After two months it’s 14 vs 19 (6+8 vs 10+9), down 26%. In the 3rd month 2016 has better performance than 2015 (10 vs 8), but the year-to-date (24 vs 27), down 11%, is still strongly influenced by the earlier months. But in the 4th month we get 36 vs 34 and finally the year-to-date shows 2016 growth of 6% over 2015. That is the current scenario.
Construction Starts for nonresidential buildings for the 1st 4 months in the 2nd half of 2016 (Jul-Oct) are 30% higher than the average of the 1st half 2016 and almost 40% higher than the same 4 months in 2015, and yet the year-to-date % change 2016 vs 2015 is ZERO.
To keep from being misdirected, year-to-date comparisons require knowing not only the direction of the current year trend but also the direction of the previous year trend.
The most recent 3 month (Aug-Sep-Oct) average of nonresidential buildings construction starts by Dodge Data represent the best 3 months since Q1 2008. Although year-to-date performance of zero growth would seem to indicate a slow down, starts are doing just fine. I’m forecasting the final two months of the year to be up 40% from 2015.
But wait, there’s more!
Every year, starts from the previous year are adjusted, always higher. 2016 starts won’t be adjusted up until 2017. But that means all current 2016 (un-adjusted) starts are being compared to 2015 that has already been adjusted up. This causes the year-to-date comparison to be always understated. The average adjustment to nonresidential building starts for the last few years has been about +5%. If that trend remains consistent then next year we should see that 2016 starts were approximately 5% higher than first posted and growth was really much better than current values would seem to indicate.
With 10 months of data in hand, year-to-date starts for nonresidential buildings show no change from 2015. However starts are doing very well and I’m predicting the 2016 volume of starts will lead to 8% growth in spending in 2017.
Construction Starts for September were released 10-18-16 from Dodge Data and Analytics. Here’s some of the major points that can be developed from the data:
The six Nonresidential Buildings markets, Office (+30% YTD), Lodging (+50%), Educational (+10%), Healthcare (+20%), Commercial Retail (+15%) and Amusement/Recreation (+15%) make up 80% of all nonresidential buildings spending and account for combined growth of 16.5% in YTD new starts. Office and Lodging in 2016 will reach the 5th consecutive annual increase. Educational Markets, Commercial Retail and Amusement/Recreation will each record the 4th consecutive annual increase in total value of new starts. Spending combined for these six markets peaked in 2008 and dropped 37% to a bottom in 2012. For the last 3 years spending growth has ranged between 9%/yr and 12%/yr. For 2017, expect spending growth of 8%.
Manufacturing makes up 18% of nonresidential building market share. New starts 2016 YTD are down 54% from 2015. However, in 2014 and 2015 this market posted the fastest growth of any market in a decade and posted the two highest years on record for this market. It is currently settling back to a normal growth range. In 2014 starts increased 90%. In 2015 spending increased 33% to the highest ever recorded for manufacturing buildings. Spending will be down 2% to 3% in 2016 and down another 13% more in 2017, but 2017 will still be the 3rd highest year of spending on record.
Non-building Infrastructure starts will be down nearly 10% in 2016 but were up 25% in 2015. Power and Highway/Bridge/Street make up 2/3rds of non-building infrastructure spending. In 2015, Power starts increased 150% to an all-time high and Highway/Bridge/Street finished just shy of a 6-year high. It is not unexpected that starts in these markets will be down for 2016. The volume of monthly spending from projects started in 2014 and 2015 in this sector will contribute to spending for several years to come. Spending in 2017 will be the highest ever in this sector, up 7% from 2016.
Residential starts are having the best year since 2005-2006. Residential starts bottomed in 2009 and are now in the 7th consecutive year of growth. Although new starts will increase only about 7%-8% for 2016, that follows 4 years of growth averaging more than 20%/year. Spending peaked in 2005-2006 and dropped 60% to a low in 2009-2010. Spending has bounced 90% off the bottom in large part due to 17%/year average growth in 2013-2014-2015. Both starts and spending slowed in 2016 but still expect 7% to 8% spending growth in both 2016 and 2017.
Starts are recorded in full in the month a project starts but the total project budget gets spent over a long duration, so the effects on spending are spread over the next 2 to 3 years. Total starts are Up 10%/yr to 12%/yr for the last 4 years. The current forecast for 2016 is growth of only 3.5%, but that now leads us to a very important factor that must be considered when using starts data to predict future spending.
There is a major factor that keeps new starts in the current year from appearing as good as they should. Dodge Data continually revises starts. In every monthly release, the previous month is revised AND the last year’s year-to-date is revised. Dodge does incorporate other (usually minor) revisions at a later date, but the “12 month” revision to the previous year-to-date values captures a large part of all revisions.
So this September report includes revisions to the total 2015 YTD values through September 2015. None of the 2016 values yet include that equivalent “12 month” revision and won’t until next year. But the current year YTD not-yet-revised values are being compared to the previous year YTD revised values which has the affect of making current year growth appear lower than it should.
In the last 10 years the YTD revisions have never been down. Usually, most of the revisions occur to nonresidential buildings, about 5% to 6% per year, with only a 2% to 3% revision each to infrastructure and residential.
For total nonresidential buildings, so far year-to-date 2015 values through September have been revised UP by 9%. So while the 2016 year-to-date nonresidential buildings value this month is noted as down 2% compared to last year, much of the reason it is down is because 2015 values have had revisions applied that increase the 2015 base by 9%. We won’t get those equivalent “12 month” revisions applied to 2016 values until next year. When all the revisions are in, new starts for nonresidential buildings (typically revised up by 5% to 6%) in 2016 are on track to equal or exceed 2015 and perhaps record the third consecutive year of over $220 billion. We are within easy striking distance of the all-time high for nonresidential buildings starts reached in 2007!
For residential starts, if 2016 values get revised up next year by only 2%-3%, then 2016 will have grown by nearly 10% over 2015. Unless we experience a severe downward trend in new residential starts, which is NOT predicted, 2016 will post an all-time high for new residential starts.
(Year-to-date by market and month/month values by market are not published.)
Dodge Data and Analytics yesterday released August new construction starts. The August number came in right about where I expected it, just over $700 billion. August starts are 21% higher then July which was an 8 month low. However, year-to-date through August totals $439 billion, down 7% from the same period 2015.
August came in at a seasonally adjusted annual rate (SAAR) of $711 billion, the highest since May 2015. In fact, this is only the fourth month since January 2008 that registered new starts over a SAAR $700 billion. The other three were in the 1st half of 2015.
Nonresidential Buildings new starts for August came in at a seasonally adjusted $267 billion, the second highest month since early 2008. The year-to-date is down compared to last year because 2015 had some very high months that helped the first half of 2015 reach an average of $214 billion, but the first five months of 2016 had some soft months that averaged only $189 billion. New starts for the last three months average $212 billion and starts have been increasing since May.
Residential new starts reached a SAAR of $291 billion in August, the third time this year over $290 billion, averaging over $280 billion so far for 2016, the highest since 2007.
Non-building Infrastructure starts for August total SAAR of $153 billion. Infrastructure starts fluctuate much more than any other and this year have ranged from $121 billion to $200 billion. Last year they ranged from $127 billion to $261 billion. Since 2006 Infrastructure starts annual totals have been between $140-$160 billion, except for last year when they shot up to $180 billion. So even though 2016 is coming in near the high end of the average from 2006-2014, it’s still well below last year because last year was so unusually high.
But there is another major factor that keeps new starts from appearing as good as they should look. Dodge Data continually revises starts. In each monthly release we can see not only the previous month revision but also the previous year-to-date revision. They do incorporate other revisions at a later date, but the “12 month” revision to the previous year-to-date values captures a large part of all revisions. So this August report includes revisions to 2015 values through August 2015. None of the 2016 values yet include that “12 month” revision. In the last 10 years the revisions have never been down. Usually, most of the revisions occur to nonresidential buildings, about 5% to 6% per year, with only a 2% to 3% revision to infrastructure and residential.
For nonresidential buildings, so far year-to-date 2015 values have been revised UP by almost 8%. So while the 2016 year-to-date nonresidential buildings value this month is down 10% compared to some very strong starts in early 2015, part of the reason it is down is because 2015 values have had revisions applied that increase the 2015 base by 8%, but we won’t see those equivalent “12 month” revisions applied to 2016 values until next year. When all the revisions are in, new starts for nonresidential buildings in 2016 are on track to equal or exceed 2015 and perhaps record the third consecutive year over $220 billion. We are within easy striking distance of the all-time high for nonresidential buildings starts reached in 2007!
For residential starts, if 2016 values get revised up next year by only 2%-3%, then 2016 will have grown by nearly 10% over 2015. Unless we experience a severe downward trend in new residential starts, which is NOT predicted, 2016 will post an all-time high for new residential starts.
Housing starts can be erratic. It’s not unusual to see monthly housing starts fluctuate up or down by 10%, sometimes 20%. But what affect does this have on the flow of housing work? Not as much as you might think.
Although housing starts is in units, not dollars, we can create a “cash flow” to see how the new starts generate activity over future months. To see the flow of work I’ve created a simple time flow of starts to show the activity generated for new housing starts.
About 2/3rds of housing starts are single family units. These might have a construction duration ranging from 6 to 9 months. The remaining 1/3rd of starts are multifamily units. Those could have construction duration of anywhere from 8 months to 16 months and in some cases longer. For this simple analysis I’ve used a work flow duration of 2/3rds at 7 months and 1/3rd at 17 months. Varying the duration longer or shorter by a few months will not have a big effect on the outcome. It changes the slope of the growth rate but does not change the consistency of the growth pattern.
A time flow of housing starts shows growth rates of; 2013 +13%; 2014 +10%; 2015+12%. Actual construction spending shows growth of 2013 +19%; 2014 +14%; 2015+13%.
The chart above, “Housing Starts Monthly and Trend” shows the actual monthly starts values and a three month moving average. Monthly starts periodically peak and dip erratically. Look at February 2015, the biggest dip in 5 years. The 1st quarter 2015 was down 7% qtr/qtr. But then notice it took less than 4 months for starts to come right back to the trend line and the trend remained intact. 2015 finished up 11%. This is how the monthly housing starts (# of units) data goes.
The “Work Flow” chart plots the actual work load out over time from the month the work started to completion. The total work flow in any given month is the sum of the work contributed from starts in previous months that have yet to be completed. Residential work flow has averaged +12% for the last 3 years. In 2015, growth was 14%. The very steep climb in early 2013 activity reflects work generated from the 28% rise in new starts in 2012, the largest % increase in new starts in 30 years.
Starts in any given month have only a small % impact on the slope of change in every succeeding month until completion. This is the same concept as cash flow. Construction spending in any given month is the sum of all the ongoing projects from all previous months.
This next plot shows the same workflow, only Not Seasonally Adjusted, so it shows the winter dips in activity and the steeper rate of growth during the more productive months. Although the average slope of growth is similar to the SAAR plot, this shows the real total work activity in any given month varies from that shown by the SAAR plot. However, it is not erratic like the starts plot, it is smooth and repetitive year after year.
It would take a dramatic change in housing starts to significantly alter the progress of work flow and it would need to be a sustained change in starts. If a 20% decline is offset by an corresponding increase in the following month or months, then the future months of work flow will show little affect from the decline.