PUBLIC WORK AND INFRASTRUCTURE SPENDING
Most public work is non-building infrastructure, or public works type projects, but some public work is nonresidential buildings. In 2018, of $301 billion in public work, $177 billion (59%) is non-building infrastructure, $118 billion (39%) is nonresidential buildings, $6 billion is residential. The public subset of work in the last 25 years has grown by $20 billion/year only twice, during the construction boom of 2006-2007.
Excluding the worst recession years, the average annual growth of all publicly funded work since 2001 is $8 billion/year. In the four best construction boom years growth averaged $20 billion/year.
The two largest markets contributing to public spending are Highway/Bridge and Educational, together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 12% of public spending. Sewage/Waste Water and Water Supply add up to another 12% of public work. All other markets combined, none more than 4% of total public work, account for only 15% of public spending.
Non-Building Infrastructure sector, at a total of $313 billion in 2018, is less than 25% of all construction spending, mostly supported by the Power market. Power accounts for 33% of all non-bldg infrastructure spending. Highway represents 30% and Transportation about 15%. However, Power is 80% private; Highway is 100% public; Transportation 70% public.
60% of non-building infrastructure spending is publicly funded. Highway is a little more than half of all publicly funded non-bldg infrastructure work. The public non-bldg subset of work in the last 25 years has grown by $10 billion/year or more three times, 2006, 2007 and 2018. In 2006-2007, Highway accounted for most of that growth. In 2018, Transportation accounted for half the growth.
Excluding the worst recession years, the average annual growth of publicly funded non-bldg infrastructure work since 2001 is $5 billion/year. In the four best construction boom years growth averaged $12 billion/year.
Nonresidential Building sector, at a total of $434 billion in 2018, is 35% of all construction spending, mostly supported by the Educational and Commercial markets. Educational accounts for 22% of all nonresidential buildings spending, commercial 20%. However, Educational is 80% public, Commercial is only 4% public.
Other nonresidential buildings that are publicly funded are: Public Safety – 100% public; Amusement/Recreation Facilities (i.e.’ Convention Centers, Stadiums) – 45% public; Healthcare – 20% public; Office – 13% public. None are more than 4% of total public spending.
Less than 30% of nonresidential buildings spending is publicly funded. Educational is 60% of all publicly funded nonresidential building. The public nonresidential building subset of work in the last 25 years has grown by $10 billion/year twice, in 2007 and 2008. Both times, Educational accounted for 75% of that growth.
Excluding the worst recession years, the average annual growth of publicly funded nonresidential building since 2001 is $4 billion/year. In the four best construction boom years growth averaged $8 billion/year.
Residential is 40% of all construction spending but only 2% of public spending.
Average post-recession growth in public infrastructure + public institutional jobs is about 40,000 jobs per yr. Maximum growth in a year was 60,000 jobs. Growth of $10 billion in spending in a year supports about 40,000 new jobs.
All public work in the last 25 years has grown by $20 billion/year only twice. The average annual growth of all publicly funded work since 2001 is $8 billion/year. In the four best construction boom years growth averaged $20 billion/year.
Total All Public Infrastructure construction, including non-building public works and nonresidential public buildings, already has 2019 and 2020 growth projections at historic capacity of +$20 to +$30 billion/year. Historically, even in the construction boom years of 2005-2008, we have never exceeded that growth volume, especially by another $10-$20 billion/year, nor added an additional 40,000-80,000 jobs per year above the average 40,000 or the maximum 60,000 jobs in a year.
Any government funding intended to increase public infrastructure construction would most likely be limited by industry growth rates to at best no more than $10-$20 billion a year.
The above Marketwatch article links to a twitter thread I posted that summarizes Infrastructure limitations in a nutshell.
See also these articles for much more analysis on Infrastructure
New Construction Starts data represents a share or a portion of all construction, on average about 60% of all construction. Dodge Data starts totaled approximately $740 billion and $785 billion for 2016 and 2017. Total construction spending was $1,246 billion in 2017 and $1,300 billion in 2018. What happens if within individual markets the share of information collected in the starts data is not constant from year to year?
Office starts increased by an average of 20%/year from 2012 to 2015. Spending increased by 20%/year from 2013 to 2016. But then in 2016, starts increased 31% and spending in 2017 turned to a 1% decline. 2018 spending gained only 10%. That was unusual and unexpected since 2016 starts indicated a very large increase in spending the following year.
Growth in starts can signify one of two things; future growth in spending, or growth in capturing a larger share of the market. To find share of market captured, starts need to be compared to the cash flow over the time for which those starts will be spent. Typical cash flows predict 20% gets spent in the year started, 50% in the following year and 30% in the 3rd year.
For the period 2011-2015, office starts compared to the value of cash flow over the next 3 years stayed within a range of 45% to 50% of total spent. For 2016 starts, the share of starts compared to cash flow of those starts jumped to 60%. In other words, the growth in spending in 2017 and 2018 did not correspond to the huge growth in starts in 2016. The 31% growth in 2016 starts did not produce future growth in spending but may have mostly represented growth in capturing a larger share of the market.
Analysis shows similar activity in Transportation starts versus spending and to a lesser extent is several other markets.
Construction Starts Data can vary year to year as a share of total market activity. Commonly used to predict future spending, the share of market captured in the starts data, if not consistent, can skew any use to forecast spending. Starts share of market must be analyzed before starts can be used to forecast future spending.
This is a PDF of slides (including notes) from my
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Construction Spending for Jan was just released March 13th at $1.287 trillion saar, up 1.3% from Dec. But…
the most notable numbers in this March report are BIG REVISIONS DOWNWARD TO NOV (-2.3%) AND DEC (-2.2%), particularly to residential.
Residential revisions Nov -3.9%, Dec -4.4%.
Nonresidential revised down -0.8% in both Nov & Dec.
2018 total spending currently at $1.293 trillion, 2% below expected.
If these residential reports are correct, we have been in a residential construction spending downturn, now down 12% since last May. I predict these numbers are suspect.
Current total residential spending for 2018 in this most recent report is $545 billion, up 2.6% from 2017. But after deducting 4.4% residential inflation, that means real residential construction volume would be DOWN -1.8% for 2018. Yet, new starts in 2018 were up 6% and new residential jobs increased 3.5%.
However, in 2018 residential spending, the monthly variances from statistical rates of spending look very similar to 2006, up thru May then down 15% to year end.
Cash flow models of construction starts data from Dodge Data for residential spending spread over time indicate residential spending should be UP 3% since May, not down!
Just a reminder, we had a huge upward revision to 2015 residential spending data in July 2016. The 2018 data gets a big revision on July 1, 2019.
The monthly spending data gets revised three times after the 1st release. In the mean time, it can be compared to the statistical averages to determine if 1st reports, or even 2nd reports of spending are in line with expectations. The current Nov and Dec residential construction spending data varies from the statistical average by 3 to 4 standard deviations. That’s highly unusual!
To understand just how unusual that is, let’s compare to how rare any monthly spending varies by 2 standard deviations (StdDev) from the statistical monthly average:
Non-Builiding Infrastructure has varied by 2 StdDev only 5 times in 18 years, only once in the last 15 years, even including recessionary years.
Excluding recessionary years, Nonresidential Buildings varied by more than 2 StdDev only 12 times in 16 years and only 4 times in the last 8 years.
In both those data sets above, only twice ever in over 400 total months of data was the variance greater than 2.5 StdDev.
Excluding recessionary years, Residential Building monthly spending exceeded 2 StdDev from the average only 10 times in 14 years, all 10 times were in the last 8 years.
Recessionary years really skew the data. Non-building Infrastructure was the only sector not affected by the recession like all other construction. Residential spending was affected the most. In the four residential recessionary years, 2006-2009, residential monthly spending (in 48 months) exceeded 2 StdDev 28 times, 19 of those times 3 StdDev or greater.
In the residential data set, 5 of the 10 non-recessionary variances over 2 StdDev were in 2018. That simply does not occur in the historical data. That’s like having your teenage son grow an inch every year from 13 to 16 but then shrinking 2 inches in year 17. The average of those 5 unusual months in 2018 was 3.5 StdDev from the statistical average, with Nov and Dec posting the greatest variances since 2009.
The only time we’ve ever seen data like that was within the recession years of 2006-2009. So, either the 2018 residential data is foretelling the beginning of another recession, or the data, particularly the Nov and Dec data, will be subject to significant revisions, in this case upward.
Starts and cash flow expectations seem to indicate the 2018 data is currently being reported too low. I expect 2018 residential data will be revised up by $10bil to $15bil. We may not have that information until July 1, 2019.
Feb 26, 2019
Since the bottom of the construction recession year 2011, through 2018 construction spending has increased 67%. During that time construction volume has increased only 32%. All the rest was inflation.
Construction spending is not the only factor for business growth planning. The adjustment for Inflation is the most important factor.
If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending minus inflation.
Look at the data to the left of the vertical line through 2006. Notice in the bottom plot in the years 2004 and 2005 there is very high spending but very low volume. In 2006 spending was up 4% but real volume declined 3%. For those three years inflation totaled nearly 30%. On the top plot you can see the cumulative effect of several years of high inflation. From 2000 to 2006 spending increased 45% but volume barely moved at all. During this period jobs increased by about 15% and even that outpaced volume. Businesses watched as spending increased 45% in seven years. They increased staff by 15%, but real volume was flat. Heading into the recession construction dollars on the books had been increasing for years but volume was stagnant and companies were top-heavy with jobs.
Addressing the current period 2011 through 2018, if you base business growth on your annual revenue growth, or spending, rather than using inflation adjusted dollars, your forecast for business growth over this eight year time period would be more than double actual volume growth.
Notice the blue bars for annual spending growth in 2017 and 2018 at approximately 4% and 5% respectively. But look at the black lines superimposed on those bars that reflect real volume growth after inflation. There has been only 1% real volume growth in the last two years. Yet jobs increased 8% in two years. Most of the growth in spending is inflation dollars, not real volume growth. Inflation does not support jobs growth.
For 2017-2018 residential spending increased 17% but volume was up only 7%. Nonresidential buildings spending up 6.5% but volume was down 2.5%. Non-building infrastructure spending was up 4% but volume was down by 3%. Inflation across these sectors totaled 7% to 10% for these two years.
Construction jobs, now over 7,400,000 have been over 7,300,000 since summer 2018. The last time jobs were over 7,300,000 was mid-2005 through early 2008, at which point the recession abruptly caused the loss of over 700,000 jobs within 10 months and more than 2 million jobs over the next three years. Jobs are now only 5% lower than the previous high of 7,700,000 in 2006-2007. But construction volume is still 15% below peak constant $ volume reached in early 2006. So the current situation of jobs growth rate exceeding volume growth is worse than it was leading into the last recession.
For 2019 I expect residential and nonresidential buildings to experience a slight decline in volume. I do not yet see a recession as volume picks up again in 2020, but nonresidential construction jobs in particularly have been increasing faster than volume for several years. Part of that is explained by some nonresidential workers are used to build residential space (hi-rise structure). When the next downturn hits, the potential need to cut nonresidential construction jobs may be quite painful.
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New Construction Starts data is published monthly by Dodge Data and Analytics. Starts data captures a share of the total market or a portion of all construction, on average about 50% to 60% of all construction. Changes in sample size can introduce potential errors in forecast when using starts to predict construction spending.
In any survey, if sample size remains constant, let’s say at 50% of actual output, but survey response increases 5%/year, then that reflects output should increase at 5%/year. However, if survey response increases at 5%/year but sample size is increasing at 3%/year (50%, 53%, 56%, 59%, etc.) then actual output should increase at only 2%/year.
For a survey sample to be used to compare to itself from year to year to predict growth in spending, sample size must remain constant from year to year. If it is not constant, the apparent growth in starts does not all reflect real growth in spending.
It is impossible within a single year to verify if the current market share captured is constant with previous year sample size. The sample period of data is a year of new starts. To find out if the sample size is consistent, the sample must be compared to actual spending from starts from that period. Starts from any given year get spent over a period of the next 2 to 4 years. It takes several years to see the pattern of starts sample size versus actual spending.
An average spending pattern for nonresidential buildings starts, OR A TYPICAL CASH FLOW CURVE, for any given year is: 20% of the revenue gets spent in the year started, 50% in the next year and 30% in the 3rd and 4th year. Multi-billion $ highway projects, manufacturing facilities, power projects and transportation terminals would have much longer duration cash flow curves. In other words, if you desire to predict construction spending in 2019, you need to know what starts were at a minimum in 2017 and 2018, and in many cases back to 2016 or even 2015.
2018 construction starts do not provide enough information to predict 2019 spending.
If starts survey sample size varies from year to year, it’s possible some of the spending growth anticipated from new starts may not represent growth in real volume of future work but could simply represent a change in sample size. Potential significant variations in sample size are seen in the data and may cause errors in the forecast.
Here are some examples. In the following table the line item “starts vs actual cash flow $” uses cash flow curves unique to each type of construction. For instance, in Office and Educational the spending curve is close to the average 20%/50%/30% as described above. That means 2015 starts is compared to a cash flow curve that spreads spending of 2015 starts over the next three years by 20%/50%/30%.
In the Educational data we see it is unusual that Starts and Backlog continued to grow for five years but that same rate of growth was not reflected in actual spending. From 2013 to 2018 new starts increased more than 60% but spending for the period of those starts (97% gets spent between 2014-2020) increased only 30%. That would seem to indicate a very large volume of work is growing in backlog, and spending, at some point, should boom and remain high for an extended period. But the cash flow model is not in agreement.
A possible explanation is the sample survey of new starts has been increasing, so not all the starts growth for five years represents growth in new work. Some of the increase in starts is simply growth in sample size.
As evidence, Educational starts for the period 2012-2015 averaged just less than 50% sample size of actual total spending. In 2016-2018 the average sample size vs spending was over 60%.
Office Spending increased by 20%/year from 2013 to 2016, but in 2017 it turned to a 1% decline. That was unusual and unexpected since 2016 starts and 2017 backlog had both reached 10-year highs. Highly probable is that the sample size of starts increased dramatically in 2016 and the increase in starts was not all growth in real volume but was partially just a change in sample size, therefore the 2017 spending forecast may have been significantly overstated.
For the period 2011-2015 sample size increased from 45% to near 50% of actual total spending. In 2016, sample size jumped 25%! For 2016-2018 the average sample size vs spending was near 60%.
Transportation Terminals and Rail starts reached record high in 2017, both up 120% after a 35% increase in 2016. Starting Backlog increased 22% in 2017 then jumped 95% in 2018. Spending in 2018 is forecast to finish up more than 20%. However, Transportation sample size of new starts may have increased far more than any other market. Does it all represent a real increase in future spending or is this a good example of a change in sample size?
For the period 2011-2015 sample size increased from 25% to 30% of actual total spending. In 2016, sample size jumped to 40% of actual. In 2017 sample size jumped to 70%!
A large portion of the 2017 increase in starts is expected to be a change in sample size. Starts more than doubled from 2015 to 2017. If all that represented an increase in volume, spending would have doubled from 2016 to 2019. We already have actual spending in hand of more than half of 2017 starts and there is no possible outcome that shows the 125% increase in new starts in 2017 will produce an equivalent increase in spending. Most of the actual spending occurs in 2018 and 2019. For those two years, spending will be up 35%.
Office in 2016 posted a 31% increase in starts, mostly due to Hudson Yards and Vanderbilt Tower in NYC. This appears to have increased the annual share of market captured in the starts for 2016. Overall spending in the following years did not increase. Transportation starts in 2017 posted a 121% increase, but almost all of that can be attributed to an increase in market share captured due to $16 billion in starts for LaGuardia, Orlando and LAX airport work. In a year when several multi-billion $ projects start, the starts data share of market increases. This signifies a change in survey size, not an equally sizable increase in future construction spending.
These examples show that starts share of market captured from year to year are not all consistent and therefore starts compared to previous year should not be used to predict spending directly but that starts sample size must be analyzed before using the data to forecast future spending. Construction Analytics models adjusted starts using unique cash flow curves to predict construction spending for the Economic Forecast published here.
Some important points in the Construction Starts data that show how important it is to keep track of long-term trends. The month to month reports can often make the data look much different than the trend. Most recent data here is the November report issued Dec 20 by Dodge Data.
Here’s the spending forecast that shows how starts are impacting construction spending 2019 construction economic forecast nonresidential Dec 2018
Manufacturing construction starts in Nov plunged 71%.
Manufacturing starts in Oct were up 180% and June was up 1300%, 2 of top 5 best months ever. Starts are on track to finish the year up 20%+, 2nd best year ever.
Transportation terminals construction starts in Nov plunged 73%.
Transportation terminals had a blockbuster year in 2017, up 125% with 3 of the best ever monthly starts. Oct 2018 was 4th best starts ever. 2018 will finish as 2nd best year ever.
Amusement/Recreation starts in Nov dropped 18%.
Amusement/Rec starts in October was the 3rd best month ever recorded. Nov is still near one of the best ever. Amuse/Rec starts in 2018 will total the best year ever recorded up 25% from 2017, up 100% in 5 years.
Educational construction starts in Nov dropped 6%.
Educ starts have declined 3 months in a row, but that is from the highest 4 months ever recorded. 2018 construction starts are on track to finish up 13%, the best year ever, averaging gains of 11% a year for last 5 years. Starts from the last five months of 2017 posted the highest 5mo total in at least seven years, 13% higher than the next best 5mo
Healthcare construction starts are down 8% in Nov.
Healthcare starts could finish 2018 down 3%, but on average are up 4%+/year for the last 5 years. Starts are near the all-time high reached last year.
Office construction starts in Nov down just 2%.
Office construction starts declined 4 of last 5 months, but June, Oct and Nov were the 3 best months in 10 years. Office starts are on track to finish 2018 up 15%, best year ever, up over 100% in last 5 years.
Commercial/Retail starts have been increasing every year since 2010 but starts in 2018 are flat vs 2017 Starts are at a peak but after 5 years of 15%-20% growth/year are up only 4% in the last two years.
Commercial starts are seeing strong gains from distribution centers (warehouses which are in commercial spending). The decline in retail stores is being hidden by the increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are still up only 4% in 2018 but increased 500% from 2010 to 2017.
Highway and Bridge construction starts fell 33% in Nov.
Highway starts in October were the highest since January 2014. Highway starts have increased on average 3%+/year the last 7 years. Starts in 2018 reach an all-time high.
Environmental Public Works includes Sewerage projects, Water Supply and Conservation, or dams, water resource and river/harbor projects. New starts for all these types projects declined from 2014 through 2017. In 2018, through November, Water Supply posted 5 down months, Sewerage post 6 down months and Conservation posted 7 down months. Yet all are forecast to finish 2018 with gains.
More on Construction Starts
Construction Analytics 2019 Construction Economic Forecast – Nonresidential
This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.
NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018. Most spending from these new starts will occur in 2020. This will increase the 2020 nonresidential buildings spending forecast, with the largest increase in manufacturing. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis. The biggest changes reduced residential spending for the next two years. See the 2019 Construction Economic Forecast – Summary for the residential analysis.
This analysis was edited 12-6-18 to include that most recent starts data and the U S Census October spending data.
For a fully formatted PDF of this Nonresidential report 2019 Construct Econ Forecast – NONRES – Dec 2018 RVSD 12-6-18
Total of All construction spending is forecast to increase 6% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.
Nonresidential Buildings construction spending is forecast to increase 6% to $444 billion in 2018, 0% to $443 billion in 2019 and 9% to $482 billion in 2020. The forecast for 2019 will be supported by Office (which includes data centers) and Amusement/Recreation but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.
Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.
Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.7% to $334 billion in 2019 and 10.1% to $368 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.
In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,328 trillion, a gain of 6.5%, that will most likely increase.
Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% growth for the 3-year period 2018-2020.
Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.
Construction Inflation Indices
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 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.
Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Inflation in this sector has been at 4% or higher the last four years.
Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel tariff impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.
In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.
Non-building Infrastructure indices are far more market specific than any other type of index. Reference specific Infrastructure indices rather than any average.
These links point to comprehensive coverage of the topic inflation and are recommended reading.
New Construction Starts
All construction starts data in this report references Dodge Data & Analytics Starts Data.
For nonresidential buildings, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. This means that nonresidential spending growth in 2019 is still being affected by starts from 2016.
The following plot show the 3-month moving average and trend line of starts for Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.
Starts are sometimes 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 the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.
Starts is a survey sample of a portion of all construction, on average about 50% to 60% of all construction. This can introduce potential error when using starts to predict spending. In any survey, if sample size remains constant, let’s say at 50% of population, but survey response increases 5%/year, then output of the population should increase at 5%/year. However, if survey response increases at 5%/year but sample size is increasing at 3%/year then output of the population should increase at only 2%/year.
If starts survey sample size varies from year to year, it’s possible some of the anticipated spending growth reported by new starts may not represent growth in real volume of future work but could simply represent a change in sample size. Potential significant variations in sample size are seen in the data and may cause errors in the forecast. The detail of Education spending provides an example.
Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. Starting Backlog for 2019 is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 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.
- 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
- 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.
Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.
Simply referencing total new starts or backlog does not give the complete picture of spending within the next calendar year. Projects, from start to completion, can have significantly different duration. An office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also by old jobs ending, and are heavily dependent on the type, size and duration of jobs.
Although new nonresidential buildings starts increased only 1.6% in 2018 note that cash flow increases by almost 8% due to a very large increase from starting backlog. To a lesser extent the same thing happens in 2019.
Non-building infrastructure starts and cash flow follows a similar pattern. In 2018 and 2019 new starts decline moderately, spending from new starts declines substantially but starting backlog and spending from starting backlog increases are so strong that total cash flow within the year continues to increase.
Nonresidential Buildings Spending
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.
Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, fall -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Rec support the 2019 forecast but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.
Nonresidential buildings construction spending in constant $ (inflation adjusted $ to base 2017) will reach $424 billion in 2018 after hitting a post-recession peak of $431 billion in 2016 and dropping to $419 billion in 2017. In 2019 constant $ spending will total $420 billion. Constant $ spending or real volume growth shows all years from 1996 through 2009 had higher volume than any years 2016-2019. Volume reached a peak near $530 billion in 2000 & 2001 and went over $500 billion again in 2008. In constant $ volume, I don’t see returning to that peak before 2023.
New Starts averaged YOY growth of 11%/year for the last five years. Starts 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 both within the last 15 months, so both those periods contribute fully to 2018 spending. 2017 starts will support 25% of spending in 2019. Starts are expected to finish 2018 up 5%. 2018 starts will support 50% of spending in 2019 and 20% of spending in 2020.
Backlog in five years 2014-2018 increased 11%/year. It is unusual that Starts and Backlog continue to grow for five years but that growth is not reflected in actual spending. From 2013 to 2018 new starts increased 66% but spending for the period of those starts will increase only 34%. That would seem to indicate a very large volume of work is growing in backlog and spending at some point should boom and remain high for an extended period, but the cash flow model is not in agreement. A possible explanation is the sample survey of new starts has been increasing, so not all the starts growth for five years represents growth in new work. Some of the increase in starts is simply growth in sample size. Educational starts 2012-2015 averaged 50% sample size of total spending. In 2016-2018 the average sample size vs spending was 60%.
Spending is now at a post-recession high. Spending increased 6%/year for 2015, 2016 and 2018, while 2017 increased only 1%. 2017 and 2018 are still subject to revision. Expect to see growth level off until mid-2019. Leveling at post-recession high is not a bad thing. A build-up of backlog is indicating that spending should increase substantially, but a disconnect in the analysis was noted above. Spending growth increases again in 2020.
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 is forecast to reach $96 billion in 2018, $93 billion in 2019 and $103 billion in 2020.
Starts are at an all-time high, up almost 40% in the last 5 years. Some longer duration projects push a substantial amount of spending out to 2020.
Backlog increased 11% for 2017 and 8% for 2018. Backlog has been increasing unevenly and grew 30% in 4 years. Backlog increases 3% to start 2019 but is not indicating spending growth in 2019. Cash flow from backlog is indicating spending growth in 2020.
Spending has been very slow to recover, experiencing declines as recently as 2013 and 2014, hitting an 8 year low in 2014, when all other nonresidential building markets had already returned to growth. 2017 posted a gain of 4.4% but then 2018 gained less than 1%. Backlog is increasing but real spending gains won’t materialize until 2020.
Like Educational, backlog growth has been exceeding spending growth for the last few years. That would indicate spending at some point may boom and remain high for an extended period. Cash flow models indicate this may occur in 2020. Other possible explanations are; starts are overstated; cash flow curves (average 28mo) are too short in duration; projects got canceled after starts were recorded; large spending revisions could get posted in the future.
Healthcare construction spending for 2018 is forecast to finish at $42 billion, an increase of only 0.7% over 2017. Considering 4% inflation, Healthcare real volume has declined every year since 2012 with exception of 2017 which would have been flat. It will decline again in 2019 with a forecast -2.7% decline in spending. 2020 realizes the 1st big spending increase in 8 years, +14% to $47 billion.
Starts are up 13% in 2018. Although down 1% in 2017, starts increased at an average rate of 15%/yr. from 2013 through 2017. Within the past 15 months there have been five billion-dollar project starts.
Starting backlog increased 20%/yr for the last four years while spending was increasing at a rate of 10%/year. This means backlog should continue to support increased spending at least for the next few years.
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 7% and 2018 11%, but cash flow is indicating a 12% increase for 2019. This market is only 5% of nonresidential buildings spending.
Amusement/Recreation construction spending for 2018 is forecast to reach $28 billion, an increase of 12% over 2017. 2019 is forecast to increase 12% to $31 billion.
Commercial/Retail starts have been increasing every year since 2010 but starts in 2018 are flat vs 2017 Starts are at a peak but after 5 years of 15%-20% growth/year are up only 4% in the last two years.
Commercial starts are seeing strong gains from distribution centers (warehouses which are in commercial spending). The decline in retail stores is being hidden by the increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are still up only 4% in 2018 but increased 500% from 2010 to 2017.
In 2010, Warehouse starts were only 1/3 of Store new starts. In 2018, Warehouse starts are 25% 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
Some big projects from a 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 which may finish close to +5%, but forecast shows spending slows even more to only 2% in 2019 and less than 1% in 2020.
The biggest change in Commercial/Retail in the last few years is that backlog is now more heavily weighted with warehouse projects than store projects. The mix has shifted from 60/40 stores in 2014-2015 to 55/45 warehouses in 2018-2019.
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 $92 billion in 2018. Spending increased an average of 13%/year for six years from 2012 through 2017. Spending growth will be flat in 2019 and 2020 but we are currently near the all-time high. It is worth noting that the $92 billion in 2018 dollars after accounting for inflation is still 30% lower than the $90 billion of spending in 2007.
Commercial/Retail construction spending is forecast to reach $92 billion in 2018, $91 billion in 2019 and $90 billion in 2020, flat to no growth after seven strong years.
Starts finished 2018 up 8%. In 2016 starts were up 30% and had reached similar too highs in 1998 and 2006-2007. Starts have been increasing since 2010 with the strongest growth period 2013-2016, up 25%/year. Although the rate of growth slowed in 2017 and 2018, the total amount of starts is at an all-time high. In the last 12 months there are no less than a dozen project starts valued each at over $500 million, a few of those over $1 billion. That high-volume period of starts will elevate spending through 2019 and well into 2020. Data centers are included in Office.
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 25% over 2017. Starting backlog for 2019, up 19%, is three times what it was just five years ago. Office starting backlog 2017-2019 increased an average of 20%/year. Backlog growth should support strong spending into 2020.
Growth of only 1% in starts for 2019 and 3% increase for 2020 keeps office starts near the all-time high. Even with low growth in new starts for the next two years, the amount of work in backlog from starts on record provides growth in spending for the next three years.
Spending increased by 20%/year from 2013 to 2016, but in 2017 it turned to a 1% decline. That was unusual and unexpected since 2016 starts and 2017 backlog had both reached 10-year highs. Possible explanations might be: a very large number of projects were canceled or delayed; potential revisions to 2017 Office spending may still be pending (In July every year, the previous two years of spending gets revised); but highly probable is the sample size of starts increased dramatically in 2016 and the 30% increase in starts was not all growth in real volume but was partially just a change in sample size, therefore the spending forecast may have been significantly overstated.
Again, it is worth noting that spending in 2018, which for the first time returned to the previous highs posted in 2008, once adjusted for inflation is still about 25% lower in real volume than 2008.
Office construction spending is forecast to reach $74 billion in 2018, $79 billion in 2019 and $84 billion in 2020.
Lodging posted a new high for starts in 2018, up 8% over 2017. For the period 2011-2016 starts averaged over 30%/year growth for six years. In 2017, starts declined 4% but that remained near the 2016 high. Now with a gain in 2018, those three years average very evenly. Peak starts were in 2016.
Starting backlog averaged increases of 30%/yr. from 2015 to 2017. Lodging starting backlog jumped from $7 billion/yr. in 2014 to $15 billion/yr. in 2018. It has supported similar spending growth. Lodging projects have relatively short duration and timing of starts within the year is important to spending and next-year starting backlog. Compared to most other types of nonresidential buildings, a greater than average percentage of lodging spending occurs within the year started. So, movement in starts has a greater impact on spending within the year.
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 rebounded to 7% in 2017. Lodging actual spending increased 12% 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 $32 billion, an increase of 12% over 2017. Spending is forecast at $31 billion for 2019 and $32 billion for 2020.
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 through 2017, down 40% from the peak. In 2018, public safety spending is increasing.
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 classified as Other Nonres Buildings.
Religious and Public Safety currently amounts to $12 billion/year. A 10% change in spending of $1.2 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 very small.
Manufacturing reached record high starts in 2014 and record spending in 2015, posting a 100% increase in new starts in 2014 that drove starting backlog and spending to new highs in 2015 and 2016. New starts declined 20%-30%/year for the next two years after the high in 2014 but then 2017 starts increased 27%. Now 2018 starts have increased by 18%, yet that is still 15% lower than 2014.
Starts in June came in at four times the average of all monthly starts in the last three years. October came in at three times the average. Those two months would add up to more than half of annual starts for any of the last three years. Some of these projects will still be contributing to spending in 2023.
Starting Backlog remained equally high in 2015 and 2016, but then dropped 17% in 2017. Backlog dropped 17% in 2017 and actual spending dropped 13%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts, up 27%. This will support a spending rebound in the future but not before a temporary drop in mid-year 2019.
Spending was forecast to fall 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. Over the next 30 months there are only six months have a forecast to decline, all of those between March and September 2019, all caused by uneven cash flows from very large projects either ending or pushing spending out to future years. This will hold down total spending in 2019. Although backlog for 2019 is up 40%, much of the cash flow from that will occur in 2020.
Manufacturing construction spending is forecast to reach $67 billion in 2018, $65 billion in 2019 and then jump 25% to $82 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.
Non-building Infrastructure Spending
Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works project starts increased 20% in 2018 and boost spending in 2019 and 2020.
Non-building Infrastructure constant $ volume reached a high of $309 billion in 2015 and peaked at the all-time high of $311 billion in 2016, but then dropped to $295 billion in 2017. 2018 saw a return to $303 billion and 2019 is projected to reach $309 billion. Only twice before, 2008 and 2009, did Infrastructure exceed $300 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.
Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.
Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Transportation spending is projected to increase 15-20%/year for the next two years.
No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 7%. 2019 and 2020 are forecast to increase 6% to 10%.
Power spending as reported by U.S. Census includes infrastructure for all electric power generation plants and distribution, gas and LNG facilities and all pipelines. In the last year there were more than twenty $billion+ project starts and a dozen more projects valued over $500 million each. In 2015 pipeline starts represented less than 10% of all power starts. In 2018 year-to-date, pipelines are half of all power work started. In three years, pipeline work increased by more than $20 billion or 500%.
Starts, completions and pauses in work cause erratic movement in actual spending. Cash flow may be adversely impacted by very large projects ending or by the delay of large projects that started previously. A multi-billion-dollar nuclear power plant stopped work and large pipeline project delays after the start was recorded have adversely impacted the cash flow forecast. This impacted the spending forecast in 2017, which finished down 5%, 15% below initial projections, and again 2018 will finish 10% below initial projections for 2018 posted back in Nov. 2017.
Although total power starts for 2018 are down 13%, electric / power generation is down 35% but gas/LNG and pipelines starts are up. Starts peaked in 2015-2016, but total in backlog reached a peak in 2018. However, much of this work is very long duration projects, so 2018 backlog will be providing spending at least through 2021. Spending could see 5% gains in 2019 but unless 2019 starts increase 2020 will experience a modest decline. Dodge is predicting 2019 starts will decline 3%.
Power construction spending is forecast to reach $102 billion in 2018, $109 billion in 2019 but then only $107 billion in 2020.
Power spending highlights one of the biggest shortfalls of judging expected performance based on year-to-date change. Notice in the 1st quarter of 2018, spending year-to-date (YTD) was down 8% to 10% from 2017. It is clear now that did not give a good indication of how 2018 would proceed. A better indication is provided by the trend line expected in the current year versus the trend line in the previous year. If they diverge, then early YTD changes will not give a clear indication of expected performance in the current year. An example follows. Note, SAAR data shows performance trend but cumulative NSA$ is needed to get YTD$.
Power posted the highest spending for 2017 early in the year, then declined in the 2nd half. In 2018, the beginning of the year posted the lowest rate of spending for the year, increased through June, then stayed higher in the 2nd half. The YTD percent growth compared to 2017 has been increasing throughout the year. Higher spending in the 2nd half 2018 compared to the lowest values of the year in late 2017 will boost year-to-date spending every month through year end. Although YTD spending through August is up only 2%, I expect the total for the year will finish up 6%. Even if power spending declines 1% per month for the remainder of the year it will still finish up 5% over 2017.
Highway starts hit an all-time high in 2017 and are forecast to climb another 8% in 2018. This model is predicting starts growth will slow or level off after 2018.
Starting backlog increased 30% in the last 3 years and will increase another 14% leading into 2019. This long duration backlog is going to provide for a large increase in spending but not until late 2020 and even more-so into 2021.
Spending in 2018 did not increase in tandem with backlog, because the share of spending within the year from projects that started 1 or 2 years before began to decline. In 2020 and 2021, the share of spending within the year from projects that started 2, 3 and 4 years before is increasing.
Highway construction spending is forecast to reach $92 billion in 2018, $93 billion and then jump to $105 billion in 2020. 2021 may see an increase of 10% in spending.
Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not account that airports include not only land-side terminals but also air-side runway work and rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work.
Terminals and rail starts reached record high in 2017, both up 120% after a 35% increase in 2016. Spending in 2018 is forecast to finish up more than 20%. Starting Backlog increased 22% in 2017 then jumped 95% in 2018. However, Transportation sample size of new starts potentially increased 30%, far more than any other market. A large portion of the 2017 increase in starts is expected to be change in sample size. This model adjusts 2017 starts down by 20%. Still, most of that backlog spending will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. In the last 24 months there have been sixteen $billion+ new project starts and seven $500million+ new starts.
2018 total starts are 100% higher than any other year prior to 2017. Starting Backlog skyrocketed from $15 billion in 2016 to $55 billion for 2019. Backlog will support spending for several years to come. Keep in mind, when a $4 billion project first gets recorded in starts, that is the general contract. Many subcontracts will be awarded by the general contractor over the next few years.
Based on predicted cash flows from starts, spending is expected to increase at least into mid-2021. 2018-2019-2020 should see increases of 15% to 20%/year. Dodge is forecasting 2019 starts will stay close to the elevated levels of 2017 and 2018. I’m predicting starts in 2019 will decline from 2018 simply due to the huge volume of new work that started in the last two years. Even with that, backlog could set a record high in 2020.
Transportation construction spending is forecast to reach $55 billion in 2018, $62 billion in 2019 and $75 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.
Environmental Public Works
Environmental Public Works includes sewerage projects, Water supply and Conservation, or Dams, water resource and river/harbor projects. New starts for all these type projects declined from 2014 through 2017. Then all showed gains in 2018 and the forecast is more gains in 2019. All of these projects are public spending and saw no real gains in spending from 2010 through 2017. With the projected increases in starts in 2018 and 2019, spending is now forecast to increase the next three years to a new high by 2020.
Public Works construction spending is forecast to grow 9% to reach $43 billion in 2018, $46 billion in 2019 and $56 billion in 2020.
Starts data for communications is not regularly reported. Total starts for the year is always recorded well after year end. A moderate forecast is included for future starts growth the next two years.
Actual spending is erratic, up 10% one year down 3% the next then up 25% followed by 2% growth. 2018 should finish down 1% after a 12% gain in 2017. The forecast shows a 5% decline in 2019 and flat spending into 2020.
Communication construction spending was up 12% in 2017 and finished at $24.8 billion The forecast for 2018 is down 1% to $24.5 billion. Expect $23 billion in 2019 and $23 billion in 2020.
For a PDF of this Nonresidential report 2019 Construct Econ Forecast – NONRES – Dec 2018 RVSD 12-6-18