Headlines of construction spending declines are almost always premature.
April construction spending 1st release was issued on 6-1-17 by U. S. Census. The initial release shows April DOWN 1.4% from March, a value many news sources have reported as “construction spending is slowing”, “one of the largest drops in six years”, “an unexpected slump”, “spending continued to demonstrate substantial weakness.” I’ve written about this numerous times but it’s worth repeating again. Construction spending almost always gets revised UP in the following month after 1st release. Average revision so far in 2017 is +1.8% and for the last 18 months +1.3%. Monthly construction spending has now been revised UP every one of the last 43 consecutive months.
Headlines of construction spending declines are almost always premature.
Construction spending is almost always a miss when first posted, until it gets revised up in the following monthly report to show is it almost never a miss.
The 1st release of March construction spending came out May 1. This initial release indicates a decline of 0.2% from February. Keep in mind, all 12 monthly reports in 2016 were subsequently revised up. Nine times in the previous 14 months, the 1st report of spending was down vs the prior month. After revisions, only three months were down compared to the prior month.
In the last 48 months, the 1st report of spending was down vs the prior month 20 times. 47 times the initial value was revised UP. After revisions, only nine months were down compared to the prior month.
Monthly construction spending has been revised UP every one of the last 42 consecutive months.
The 1st release of spending is almost always being compared to a previous month and a previous year that have been revised up. Upward revisions to monthly construction spending in 2016 have been as high as 3.4% and for the year average 1.1%/mo. So, a 0.2% mo/mo decline s probably not a decline at all after revision, and there will be a revision, most likely UP.
After spending is first published it is revised in each of the two following months. Then all the values for the entire year are revised with the May data release the following year.
Some specific markets construction spending revised after 1st release (2016 data). These markets represent almost 50% of nonresidential data.
- Office revised UP 8 of 12 months (average of all 12 +1.1%)
- Commercial UP 9 of 12 avg 1.8%
- Educational UP 10 of 12 avg 1.8%
- Power UP 12 of 12 avg 3.6%
At age 30, I couldn’t run a 7 minute mile.
I was a pretty good runner in high school and college, but really didn’t come into my own until later in life. It wasn’t until I practiced proper nutrition and learned how to train that things really came together. All of my best post high school times were in my 40s. In fact, age adjusted, all the best times of my life were in my 40s. This should give you some perspective. You are not on the downhill when you hit 40. You have years of potential in front of you. I’d like to set a challenge for some of my younger friends. You can do what ever you want. Set goals. Break your own records.
41 – 1 mile 4:41.7 2nd 40-49 Boston, Northeastern Track USATF NE
43 – 3000m 9:24.2 Boston, Northeastern Track USATFNE 5:02 mile
41 – 4 mile 21:20 2nd 40-49 Arnold Mills July4 Cumberland RI 5:20 mile
41 – 8k (4.97mi) 27:40 3rd team 40-49 National XC Champ Franklin Park 5:34
43 – 8.1 mile 45:08 1st master 40-49 Harvey’s Lake PA 5:34
40 – 10mi 55:13 11th, 1st 40-49 Narragansett RI Blessing of the Fleet 5:31
42 – 13.1mi 72:53 11th 40-49 New Bedford MA Half Marathon NE Champ. 5:34
45 – 20mi mark in marathon 2:00:08 at Burlington Vermont marathon 6:00 mile
45 – 26.2mi marathon 2:41:17 2nd master Burlington Vermont marathon 6:07
I’ve been saying for a long time the data doesn’t show a construction jobs shortage.
In total, construction jobs have been increasing faster than construction volume (spending minus inflation). But, to get a better picture we need to look at jobs vs volume by sector, Residential and Nonresidential. Then we need to look at history.
Since 2009, RESIDENTIAL volume has increased 49%, jobs increased 22%. This is partly explained by absorption of excess staff retained during recession.
From 2006 to 2009 volume decreased 53% but jobs decreased only 36%, leaving a significant amount of excess jobs.
It looks like from 2009 to 2016 there has not been enough jobs growth to support the volume growth, BUT…
Residential net changes just since 2006, volume is down 29% while jobs are down 22%. We are not nearly back to pre-recession productivity.
Since 2009, NONRESIDENTIAL BUILDINGS volume is down by 10% but jobs are up 13%. By no means, if we look at just these 7 years, does this look like a jobs shortage.
Even previous years imbalance would not account for a need to add that many jobs. From 2006 to 2009 volume increased 2% but jobs decreased 15%. In a previous report Is There a Construction Jobs Shortage? I explained why this may occur following a prior top-heavy jobs expansion during a period of high inflation.
Nonresidential net changes just since 2006, volume is down 8% but jobs are down only 3%. Again, we are not nearly back to pre-recession productivity.
For both residential and nonresidential buildings, comparing post-recession growth to pre-recession 1996-2006 $ Put-In-Place per Job, productivity is down 21%, or we currently have 100/(100-21) = 27% more jobs now than it took before to get the same amount of work done.
If the current construction expansion period is viewed as having a jobs shortage, that claim demands that we must accept, since pre-recession, productivity has declined by 21% and the reason there is now a jobs shortage is that it takes 27% more jobs to put in place construction than it did on average from 1996 to 2006.
In my opinion, that’s a harder pill to swallow than a jobs shortage.
For more related to this discussion see Is There a Construction Jobs Shortage?
Don’t like the year-over-year (yoy) Construction Spending percent change? Just wait until next month. It’s going to be worse!
The latest year over year construction spending through February is up 3.0% compared to Feb 2016.
March data yoy comparison is going to come in at or under 2%. But construction spending is increasing!
It just so happens March 2016 was an outstanding month. That lowers the yoy percent change, but March 2016 is the anomaly.
Yoy doesn’t indicate if this year is doing poorly or if that month last year was a great month.
Yoy doesn’t indicate what direction current spending is taking.
Yoy compares an unadjusted 2017 value to an upwardly adjusted 2016 value.
For the last 40 consecutive months the construction spending value has been revise UP. But not until after major news media gets to report that yoy construction spending did not meet expectations.
For the last 18 months the average adjustment to construction spending after the 1st release of data +2%.
The yoy and mo/mo percentage change in the 1st release was understated every time.
For Q1 2017, yoy values are expected to range between 1.5% and 3.5%. 2017 is expected to finish the year up 6% over 2016.
This is a summary of the main points on Infrastructure from several recent articles. Those articles detail current market conditions, growth already in backlog and future growth potential. The articles (linked here) are:
- Calls for Infrastructure Problematic
- Infrastructure & Public Construction Spending
- Infrastructure – Ramping Up to Add $1 trillion
- Infrastructure Outlook 2017 – Construction Spending
Non-building Infrastructure spending in 2016 will finish at $290 billion, down 1% from 2015. Negative drivers were Transportation, Sewage/Waste Disposal, Communications and Water Supply. However, Power and Highway/Bridge, 57% of all infrastructure, were both up. Spending based on projected cash flow from Dodge Data Starts predicted this drop.
- In 2017, Non-building Infrastructure, following two slightly down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets.
- Headlines point to a 6% decline in new infrastructure starts in 2017
- Starting backlog for 2017 increased 6% over 2016.
- The cash flow in 2017 from starting backlog will be up 10%.
Infrastructure currently has the highest amount of work in backlog in history. Starting backlog accounts for 80% of all spending within the year. Even with an anticipated decline in new starts in 2017, starting backlog for 2018 will still be at another new high. Spending from starting backlog is predicted to reach record levels in both 2017 and 2018.
- Total Construction spending for 2017 is more than $1.200 trillion.
- Infrastructure, public and private, is $300 billion, only 25% of total construction spending.
- Public is only 60% of all infrastructure, $180 billion, so 15% of total construction.
- Public Nonresidential Institutional Buildings referred to as infrastructure (Educ, HlthCr, Safety) adds another $95 billion, 8% of total construction.
The two largest markets contributing to public spending are highway/bridge (32%) and educational (25%), together accounting for 57% of all public spending. The next largest market, transportation, is only about 10% of public spending.
- Total Construction spending average constant $ growth post-recession is $50 billion/year. It exceeded $75 billion/year only once.
- Infrastructure, only 25% of total construction spending, increased by more than $25 billion in a single year only once. The average annual growth for the past 20 years (excluding recession yrs) is less than $10 billion/year.
- Public Infrastructure annual growth averages only $6 billion/year, has never exceeded $16 billion in a single year.
- Public Institutional Buildings annual growth averages only $6 billion/year, has never reached $20 billion.
Current backlog already accounts for 80% of all spending. Current spending growth from backlog (Public infrastructure + Institutional) is predicted to add $20 billion/year in work over the next two years. This will absorb some current jobs and create 100,000 to 150,000 new heavy engineering and nonresidential jobs.
For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 new construction jobs per year.
Any infrastructure plan added, for the most part, needs to be considered as added on top of the current spending plan, $20bil/yr next two yrs, already at all time highs.
- Average growth in total construction jobs is about 270,000 jobs per year. The largest growth was 400,000 in 1999.
- Average post-recession growth in public infrastructure + institutional jobs is about 35,000 jobs per year. The best growth was 50,000 jobs/year.
Current data predicts public institutional and infrastructure spending and jobs growth, already above the long term average, is expected to increase by $20 billion/year for the next several years.
Adding $20 billion/year more in spending for an infrastructure expansion plan would push total public work to double record levels. It’s doable, but would be difficult to achieve and is probably not sustainable at that rate.
One limiting factor will be jobs growth. Also, the supply chain may not have the capacity to increase so rapidly, especially to think the industry could continue to expand at a historical rate of growth for years to come. In years past, expansion like this has led to rampant inflation within the industry.
Adding $100 billion in a single year to public infrastructure and institutional work is unrealistic. That is greater than the maximum level of growth for the entire construction industry. The portion of the industry we are dealing with here is less than 25% of the entire industry.
Adding $100 billion, a one third increase in annual spending for this sector, would require the distribution network surrounding the industry to expand equally as fast. It would need 300,000 to 400,000 new jobs filled in a year, in a sector that has at maximum grown 50,000 jobs in a year. That’s unrealistic.
The public infrastructure subset of the construction industry appears too small to accommodate an increase of $10 billion/year and 40,000 new jobs/year over current growth. When the potential projects pool is expanded to include public institutional buildings, that total pool may then accommodate an increase of $10 to $15 billion/year over normal growth.
Excessively rapid growth will only take volume and jobs away from normal growth, generally leads to rapid inflation and has a devastating effect when a massive program ends and all those jobs disappear.
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.
Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of the year. Projects in starting backlog could have started last month or last year or three years ago. The requirement is that those projects have not reached their end-date and some portion of the revenues generated by those projects is still ETC. The sum of all ETC represents current backlog.
A cash flow schedule of all ETC backlog and predicted new starts provides a tool to predict future spending. The $ reported here are the results of a cash flow analysis using Dodge Data & Analytics Construction Starts. Do keep in mind the DDA Starts value represents a survey of about 50% to 60% of the industry. While the percent change of values from year to year is relevant, the $ value does not compare directly to the actual spending $ values.
It is not enough to look at just the change in starts or the change in backlog to get an indication of the strength of the market. While continued growth in backlog is most important, the predicted cash flow from backlog and new starts is necessary for predicting future spending.
The last time nonresidential buildings experienced a decline in starting backlog was 2013, Total construction spending on nonresidential buildings in 2013 registered a weak 0.8% gain. Since 2013, nonresidential buildings starting backlog is up 60%, reaching a new all-time high at the beginning of 2017. The previous high in 2009 was $241 billion. In 2016 it was $230 billion. For the start of 2017 it is $248 billion.
Revenues from starting backlog account for 75% of all nonresidential buildings construction spending within the year. If no new work started within the year, by year end there would be only 25% of the total in backlog needed to support the industry.
Not only is starting backlog higher coming into 2017, but also spending from backlog is predicted up by 5% and 2017 new starts are predicted up 8%. New starts are very strong in Office, Lodging, Educational, Healthcare and Amusement/Recreation.
This supports my predictions that 2017 will be another banner year for spending on nonresidential buildings, up a strong 10% from 2016. Similar growth is expected in 2018. This will produce a new high in current dollar spending, but will still be 15% below the constant $ all-time highs.
(edit 3-21-17 updated table)
Non-building infrastructure experienced declines in starting backlog in 2012 and 2015. Fortunately, in both of those years, new starts were up. For the last eight years infrastructure starting backlog has been near $200 billion, +/- $10 billion. In 2008, the last pre-recession year, backlog stood at $178 billion. At the beginning of 2017, non-building infrastructure backlog is at an all-time high, $243 billion, up 36% from 2008. In the last two years starting backlog is up 20%.
Revenues from starting backlog account for 80% of all non-building infrastructure construction spending within the year. However, because infrastructure projects are long duration, only about 60% of total backlog gets spent within the year. If no new work started within the year, by year end there would still be 55% of the total in backlog needed to support the industry.
In 2016, although starting backlog was up, new starts were down and spending from backlog was also down. That cemented a decline in spending in 2016. New starts in 2016 declined for power, highway, transportation and public works, but due to long duration projects contributing to strong backlog in these markets, spending will be up in all except public works. New infrastructure starts in 2017 are predicted down 5%, but spending from backlog is predicted to increase by more than 10%, and that more than offsets the decline in new starts. 2017 will post a solid gain of 4% to reach a new high in spending and that is expected to increase again in 2018.
Residential new starts hit bottom in 2009 and starting backlog hit bottom in 2010. Residential on average has the shortest duration and new starts has a dramatic impact on the amount of available work. Both new starts and backlog are up about 300% from the lows. New residential starts have increased every year since the 2009 bottom, but are still lower than 2006.
Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much. If no new work started within the year, within a matter of a few months there would be no backlog ETC left to support the industry.
Coming into 2017, starting backlog is up, and new starts are up and spending from new starts is up. But the rate of growth in new starts and spending from new starts is slowing. This is not unexpected after 4 years (2012-2015) of new starts growth averaging greater than 20%/year. The last two years it’s 12%/yr. This leads to a prediction of future spending increases ranging between 5% to 7% for the next two years.
A major construction industry news source has a series of articles referencing Dodge Data New Construction Starts, first listing starts data, but then incorrectly refers to the data as construction spending and looks at the trend in values to predict if construction spending in 2017 will rise or fall. This is incorrect use of data and misrepresents Dodge Data New Starts. The starts data as it is being used isn’t a valid indicator to get a spending projection in the next year.
New Starts for 2016 is the total value of project revenues that came under contract in 2016. The values reported by Dodge are a sampling survey of about 50% to 60% of the industry. The percent change in values is very useful. The total dollar volume is not comparable to actual spending.
The entire value of a project is considered in backlog when the contract is signed. Projects booked on or before December 2016 that still have work remaining to be completed are in backlog at the start of 2017. Simply referencing total new starts or backlog does not give an indication of spending within the next calendar year, particularly for infrastructure and residential. Projects, from start to completion, can have significantly different duration. Whereas a residential project may have a duration of 6 to 12 months, an office building could have a duration of 18 to 24 months and a billion dollar infrastructure project could have a duration of 3 to 4 years. So new starts within any given year could contribute spending spread out over several years.
Backlog at the start of 2017 could include revenues from projects that started last month or as long as several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of 2017 is not the total amount recorded when that project started, but is the amount remaining to complete the project or the estimate to complete (ETC). And all of that ETC may not be spent in the year following when it started, dependent on the duration remaining to completion.
The only way to know how much of total starts or total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects that have started, over the past few years. The sum of the amounts from all projects in each month gives total cash flow in that month, or monthly spending in that year. Spending in any given month could have input from projects over the last 36 months. That’s what shows the expected change in spending.
Construction Starts provide the values entering backlog each month. Except for residential, new project starts within the year contribute a much smaller percentage to total spending in the first year than all the backlog ETC on the books at the start of the year. New residential projects contribute the most to spending within the year started because generally residential projects have the shortest duration. Residential projects started in the first quarter may reach completion before the year is over. New infrastructure projects generally have the longest duration and may contribute some share of project value to backlog spread over the next several years.
The following table clearly shows there is not a correlation between starts in any year with spending in the following year. The practice of using construction starts directly to predict spending in the following year can be very misleading in an industry that relies on data for predictive analysis to plan for the future. Not only does it not predict the volume of spending in the following year, it does not even consistently predict the direction spending will take, up or down, in the following year. It ‘s not a good use of data.
Dodge Data New Construction Starts is a powerful piece of data if used properly.
The imbalance between construction spending and construction jobs is nothing new. It’s been going on for years. It reflects more than just worker shortages. It captures changes in productivity due to activity. It also helps explain why sometimes new jobs growth rates do not follow directly in step with spending growth. A big part is that it reflects hiring practices. That imbalance can be affected by either over or under-staffing and that can be affected by inflation.
2000-2008 The Expansion
For the 1st several years, nonresidential construction spending was flat or down. Then for two years spending was up only slightly, but constant $ volume (spending inflation adjusted) had actually decreased. Nonresidential jobs fell from 2001-2003 but then grew for several years during this period when constant $ volume was decreasing, creating productivity losses.
On the other hand, residential spending grew 80%, but after adjusted for inflation, volume grew only 23%. Most staffing increases during this period were for residential construction and jobs/volume growth was pretty consistent. Residential saw mixed productivity during this period. In 2006 residential volume had already started declining.
It is not uncommon when work is plentiful that productivity declines. In 2004-2005, spending increased by 24%, but inflation was hovering around 8% to 9%/year. Constant $ volume (spending after inflation) increased by only 6%. Jobs grew faster, by 9%. Net productivity decline.
In 2006, nonresidential work was starting to take off, increasing 45% from 2006 though 2008. During this period jobs increased by only 8% and volume added 16%. Excess volume was able to absorb a good portion of the jobs/volume imbalance from 2000-2006.
See the line chart below “Productivity = Annual $ Put-In-Place per worker. These up or down periods for each of these sectors discussed here can easily be seen in rising or falling $PIP volume on that chart, sectors plotted separately. The bar graph “Total Annual Productivity Change”, is the composite total of the three sector graphs.
Net volume in 2006 declined, but jobs increased another 5%. For the three-year period 2004-2006, spending increased by 28%, but after inflation, real volume increased by less than 5%. Jobs increased by 14%. Productivity declined by nearly 10%.
Heading into 2007, residential firms had excess staff, as measured by the negative imbalance of jobs/volume. Compounding productivity issues, when spending started to decrease significantly, it took longer for companies to downsize their workforce. The workforce was not reduced to match the volume of work lost. Residential construction was first to show the strain, already having started to decline in 2006 and continuing to decline through 2009.
2006-2010 The Residential Recession
Residential construction was 1st hit by the recession in early 2006. For the 4 years 2006-2009, residential volume dropped 55%. It remained flat for two more years, down a few more percent. Over six years starting 2006, residential jobs dropped only 40%.
The Annual $ PIP line chart above shows that for 2006-2009 there were only residential losses, or negative balance between jobs/volume. Both nonresidential sectors were improving slightly at the time. The total negative bars in those years is entirely due to residential.
2009-2011 The Nonresidential Recession
Nonresidential Buildings construction didn’t fall into recession until 2009. In the two years 2009-2010, nonresidential buildings lost over 30% in volume but only 22% in jobs.
This chart simply shows the imbalance between the number of jobs and the dollar volume of work put in place for each year compared to the year before. In a simple form that can be referred to as a change in productivity. In all these charts, jobs/year are adjusted for hours worked and dollars are always constant $ inflation adjust to 2016$.
In 2009 my chart shows a huge productivity gain. It is almost entirely due to Non-building infrastructure, which never did fall into deep recession. Combined residential and nonresidential buildings only in 2009 would have shown a net 1% gain.
2011-2012 Early Recovery
Starting 2011, firms had lost significant revenue but had retained more staff than needed. There was so much excess staff (in relation to how much total revenue was available) that almost no reasonable gains in spending could wipe away the losses in productivity. Volume improved by 1%, but hiring resumed and jobs grew by 1%. Due to excess staff still on payrolls, productivity showed a 6% decline.
For the next few years, when we look at jobs growth vs. volume growth, there is reason to believe that slow jobs growth (2011 through 2013) may not be all due to labor shortages. Although we lost more than 2 million jobs, there remained excess jobs when compared to the amount of volume that was available.
At least part of the blame for slower new jobs growth was that excess staff already on hand were being absorb by the new spending gains. For a period there was insufficient volume out in the market to support all the staff that had remained on board. Finally, there was increased revenues which would first reabsorb part of the excess labor before rehiring started.
2012-2016 The Construction Boom
It took three more years to see a significant move towards balancing jobs and real volume. In 2014, jobs increased 6% and constant volume increased 7%. For the first nine months of 2015, jobs increased 3% and volume increased 8%. This was a good productivity balance period.In the three years 2012-2014, volume increased 16% but new jobs grew by only 11%. The increased work volume absorbed a good portion of the excess staffing.
What reasons could cause contractors to think they need more staff?
One reason is contractors don’t typically track revenues in constant $, they track in current dollars. So any comparison to a previous year is to inflated data. To achieve business plan growth of 6%/year, is it necessary to grow staff by 6%/year? If during that period inflation is 4%, then real volume growth is only 2%/year and new staffing needs are far less than anticipated.
Basing staffing needs on current $ revenue growth can lead to the same kind of over-staffing we saw going into the recession. There is the potential that contractor’s hiring could be swayed by highly inflated spending when actually volume is not as strong as thought.
From the Jan 2011 bottom of the construction recession through Dec 2016, both work output (jobs x hours worked) and volume (spending after adjustment for inflation) increased equally by 29%.
(note: BLS revisions to hours worked, issued in the 3-10-17 release changed total growth output from 29% to 30%).
There are always unequal up and down years, but this longer term period shows balanced growth returned after a tumultuous period. We were so far down on the scale after the recession it seems reasonable that we experienced this re-balancing.
Both 2014 and 2015 show productivity gains. That is unusual in that there have not been two consecutive years of productivity gains in 23 years (while my jobs data goes back to 1970, spending data goes back only to 1993).
The trend changed in October of 2015. Now when we look at jobs growth vs. volume growth, there is reason to believe that any jobs growth slow-down may be at least in part due to recent over-hiring.
2014-2016 Record Jobs Growth
In the last three years, we’ve added 840,000 construction jobs. We’ve also increased hours worked to an equivalent to 880,000 jobs, growth of 15%. That’s a faster rate of growth in three years than the 2004-2006 construction boom. To help explain that growth, real volume in 2014-2016 was far greater than the volume in 2004-2006, or any other three-year period for that matter. The last time we’ve seen jobs growth like this was 1995-1999.
2012 through 2016 is the greatest construction boom on record, whether measuring unadjusted current $ spending or constant $ real volume after inflation, flying past the 2000-2005 boom and narrowly beating out 1995-2000. And we started 2017 with backlog at a record level, so the boom continues.
5-Year Construction Booms Compared to 2012-2016
- 2012 – 2016 current $ +$377 bil +48% — constant $ +265 bil +29%
- 2001 – 2005 current $ +$314 bil +39% — constant $ +30 bil <3%
- 1996 – 2000 current $ +$254 bil +46% — constant $ +235 bil +21%
Notice how little growth actually occurred in the five-year period 2001 through 2005. While there was significant spending growth, most of it was inflation, and 90% of it was residential. During that period composite inflation increased more than 35%. Also, nonresidential construction was having a setback, dropping 15% in volume in that five years. The real story out of the 2001-2005 boom period is to compare residential work.
- 2012 – 2016 Rsdn current $ +$211 bil +83% — constant $ +146 bil +46%
- 2001 – 2005 Rsdn current $ +$280 bil +80% — constant $ +132 bil +23%
Residential inflation 2001-2005 was a whopping 47%. But, total residential spending was up 80%. After adjusting for inflation, residential still added 23% to volume during that period. During both periods, residential volume grew more than jobs, so both periods had a net productivity gain.
Also in 2001-2005, nonresidential added 3% more jobs in a five year period in which volume dropped 15%. The very high levels of inflation help explain why staff may have grown to such excess during that period. Contractors were seeing revenues grow by 20%-30% and were slowly adding jobs in a period when real volume was dropping 3% per year.With the exception of residential growth, there was a downturn in other work. New jobs increased by only 11%, but due to rampant inflation, real volume increased by less than 3%. Nonresidential contributed all the negative productivity in 2001-2005.
2014-2015 Construction Spending for the Record Books
- 2014 to 2015 current $ +$206 bil +23% — constant $ +158 bil +16%
No two consecutive years of construction come close to equaling the real volume put-in-place during 2014-2015. The two years 2004-2005 had greater growth in spending, but most of that was inflation, so had little growth in volume. In fact, we would need to consider three consecutive years to come close to 2014-2015 and the three years that comes closest is 1996-1998 and that would still be a few percent short. This volume growth is driving huge jobs growth.
From October 2015 through March 2016, jobs growth was exceptional. During that 6 month period we added 215,000 construction jobs, the fastest jobs growth period in a decade. That period topped off the fastest two years of jobs growth in 10 years. Record increases in jobs growth are not what we might expect if there is a labor shortage.
And yet, the Jobs Opening and Labor Turnover Survey (JOLTS) is the highest it’s been in many years and that is a signal of difficulty in filling open positions. But, one of the known factors during a high level of market activity (lot’s of construction work – we are at record levels) is that workers know there is another and sometimes better job just down the road. During high levels of activity, unless the current employer is paying some kind of premium to keep them, workers may leave for greener pastures. That creates a high level of job churn.
Hiring Changes Lag Volume Changes
It is important to take note that it appears the two most recent six-month surges in jobs lag the period of greatest volume growth. I noted earlier that contractor staffing changes seem to lag movements in volume.
Since Sep 2015, jobs have been increasing more than real construction volume. For much of 2014 and 2015 construction spending real volume growth was exceeding jobs growth. Spending in 2016 slowed from the all-time record levels. That’s not totally unexpected as it would be highly unusual for that record level of growth to continue. But hiring continues.
Since Sept 2015, construction volume growth (spending minus inflation) slowed or stalled and completely contrary to what one would expect in a labor shortage, new jobs growth has been exceeding volume.
- From Sep15 to Mar16 jobs increased+3.3%, volume increased +1.6%
- From Mar16 to Aug16 jobs had no change, volume decreased -3.3%
- From Aug16 to Feb17 jobs increased +2.6%, volume increased +0.10%
This most recent six-month period posted 177,000 jobs, the 3rd best for any consecutive six months since 2005-2006. Although we experienced a slow down in new jobs through the middle of 2016, that was bracketed by two of the three strongest six month growth periods in more than 10 years. For 18 months Sep’15 to Feb’17, jobs are up 7% higher than volume. For 2012-2014 volume grew 6% more than jobs.
For 2017, several economists are predicting total construction spending will increase by just over 6% (including my estimate of 6.5%). However, I’m also predicting that combined construction inflation for all sectors will increase by about 4.5%. That leaves us with a net real volume growth of only 2.0%. Therefore, for 2017, I do not expect jobs to increase by more than 2.0%, or 140,000. That number seems hard to swallow given we are already at 98,000 in the first two months. But remember, jobs have been growing faster than volume for the last 17 months. We could be due for another no-jobs-growth absorption period.
If jobs increase more than 140,000 and both spending and inflation hold to my predictions, then jobs will continue to outpace volume and that will show up on my plot as a productivity loss for 2017. Jobs have been getting ahead of volume for 17 months. Contractors may still be hiring, lagging the movement in real volume growth. It will take the next few months to see if that is the case but I would expect jobs growth to slow or stop for the next few months and I would not attribute that to labor shortages. As we’ve seen before, we should expect jobs/volume to come back to balance.
So, here we are powering our way through the greatest construction expansion ever recorded, with three years of jobs growth at a 11-year high and jobs growing faster than volume for the past 17 months. Does that seem like a jobs shortage to you?
Few analysts are talking about current forward looking conditions and the problems such a massive infrastructure construction spending program might cause.
Every major construction agency is currently seeing monthly infrastructure construction spending drop and is calling for promptly initiating a $1 trillion infrastructure spending program. Infrastructure spending has been flat to down slightly for the last seven months. But infrastructure spending is notoriously uneven. I’d like to see increased construction spending as much as the next guy, but there are issues that need to be taken into account. I see problems down the road.
I’ve written about this before here Infrastructure – Ramping Up to Add $1 trillion and here Infrastructure & Public Construction Spending and Conor Sen wrote about it recently in a Bloomberg View article Math Will Kill Trump’s Infrastructure Plan. Some assumptions of increasing infrastructure spending by $100 billion and maintaining that level for the next 10 years are a pipe dream. Only three times in history has the “entire” construction industry ever increased by $100 billion in one year. The infrastructure sector, only 25% of all construction, does not have the capacity to grow by $100 billion in a year.
One of the big issues a massive expansion and abrupt program end causes is the need for a huge growth in the workforce, and that could be difficult particularly at a time when the non-working unemployed pool is near an all-time low. But perhaps more important, when all that expansion spending comes to an end, there is no long term ongoing backlog for all that labor to go to, so it results in massive job losses. Very large volume new starts and abrupt ending causes devastating disruption in the industry.
Here I will address spending and volume growth.
The infrastructure sector of construction is only 25% of all construction. Growth has exceeded $20 billion/year only three times and average growth (without recessionary declines) is $12.5 billion/year. But most of that was driven by the power market, which is 80% private. Power contributes 1/3rd of all infrastructure spending. Only 60% of all infrastructure is publicly funded. That public subset of work in the last 25 years has grown by $20 billion/year only once and with all the negative recessionary years eliminated growth would average less than $10 billion/year.
To repeat, because this provides a concept of the capacity of the industry, the entire infrastructure sector has an average growth rate of $12.5 billion/year and the public infrastructure sector less than $10 billion/year. And that’s taking out all the down years. It’s worth a note here that although I have conveniently removed down years from the data to get an average positive-year growth rates, infrastructure spending has never grown continuously for more than five consecutive years without experiencing a down year. The last 5 years 2012-2016 shows 3 years up 20%, then 2015 and 2016 were both down 1% to 1.5%. At the end of 2016, down 2.5% from the high in 2014, spending is still near all-time highs. In constant 2016$, The high was Q1’16 at $300 billion. The average lately is $280 billion, but expect to be back over $300 billion by Jan 18.
Infrastructure currently has the highest amount of work in backlog in history. Current backlog already accounts for 80% of all spending in 2017 and 60% of spending in 2018. Even with an anticipated decline in new starts in 2017, starting backlog for 2018 will still be at another new high. Spending from starting backlog is predicted to reach record levels in both 2017 and 2018. Early indications are that 2019 will repeat the same but that will depend on new starts in 2017 and 2018. Ignoring 2019 and beyond for the moment, for the next two years we are looking at record levels of spending on infrastructure.
The projected growth rate in infrastructure spending for the two-year period 2017-2018 is expected to reach the largest growth since the period 2005-2008. Construction Analytics (this analyst), FMI and ConstructConnect all predict growth between 10% and 13% or between $30 and $40 billion for this two-year period. My forecast does not include any spending input from a future infrastructure spending plan.
I said earlier that adding $100 billion and maintaining that level of spending for the next ten years is an unrealistic approach. Essentially, that would create an instantaneous need for 400,000 new jobs in the 1st year and then provide no jobs growth for the next nine years. Construction jobs can’t grow that fast. The maximum jobs growth ever achieved for all infrastructure was 50,000 jobs in a year. And now it’s worth repeating, only 60% of infrastructure is public work.
I’ve suggested another scenario for how it might be possible to ramp up to spend $1 trillion. In another article, Infrastructure – Ramping Up to Add $1 trillion, I laid out how it could be done in 13 years if spending were increased by $10 billion each year. I’ll add here that the entire infrastructure sector has not added a total of $1 trillion new spending in 25 years, so it’s quite unreasonable to assume it could be done in 10 years.
Infrastructure spending for 2017-2018 is about to exceed the historical average growth rate. Any infrastructure plan will replace some, but not all, of the currently planned new work. But it won’t replace any work already in backlog, which is at record levels and still contributes to spending over the next four years. So any infrastructure plan, for the most part, needs to be added on top of the current spending plan.
It would be extremely difficult to increase spending by another $10 billion/year when current spending is already expected at record levels. In fact, the look ahead for 2018 has spending already increasing by more than $20 billion. There is nothing in our history to suggest we could double the growth rate and sustain that level of spending. Of course, this will point back to the discussion of balance of jobs/volume and available labor in a potentially tight labor market.
The public infrastructure subset of the construction industry appears too small to accommodate a plan to add $1 trillion in spending, even when it only increases at $10 billion/year and absorbs 40,000 new jobs/year. Either the base that we hope to grow needs to be larger from the very beginning (Can public educational buildings be considered part of the plan?) or the rate of growth needs to be slower. Excessively rapid growth will only take volume and jobs away from normal growth, generally leads to rapid inflation and has a devastating effect when a massive program ends and all those jobs disappear.
Everything above here is based on new infrastructure plan spending “increasing” total construction spending. The plan is very difficult to achieve. However, if the $1 trillion dollars were used to fund projects that are already within the $150 to $170 billion in new public infrastructure projects that start every year, then there are no issues at all as to how fast or how much in funds can be spent. But that provides for no growth to the industry not already accounted for in the normal growth rate and it provides no new jobs. It simply funds projects that would have been built otherwise and funds the workers already in the industry to keep working. I don’t think this is what everyone has in mind.
For more on this discussion see Infrastructure Spending & Jobs