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Articles Detailing 2018 Construction Outlook
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These links point to articles here on this blog that summarize end-of-year data for 2017 and present projections for 2018.
Most Recently Published
New Starts and 2017 Starting Backlog
2018 Spending Forecast
Dodge Data posted December construction starts on 1-25-18, showing total starts increased 3% from 2016. However, this compares un-adjusted 2017 starts to upwardly revised 2016 starts. Starts are always revised upward in the following year. I expect revisions will show 2017 starts increased by more than 6% over 2016. Total backlog starting 2018 is up 11%. Backlog has increased on average 10%/year the last three years. 2018 spending is projected to increase 8%.
Nonbuilding Infrastructure starts in 2017 are down 2%. However, we can expect post-year revisions to infrastructure starts. I expect, when all revisions are posted, that 2017 will show infrastructure starts increased a few percent from 2016. Starts peaked in 2015 and are still near that high-point. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. Although 2017 shows a spending drop of 3.6%, spending is also prone to large upward revisions, particularly in Power, the largest market in Infrastructure. Starting backlog is up 25% in the last two years. Spending for 2018 is projected to increase 9% to an all-time high.
Transportation terminals 2017 new starts jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work, including terminals, runways, rail and dock work is up 100% in the last two years. 2018 spending is projected to increase 25% over 2017. Also, 2019 spending is projected up over 15%.
Power plant new starts are down for the 2nd year but had hit an all-time high in 2015, up nearly 150% from 2014. Pipeline starts were up more than 125% in 2016 and again in 2017. Starting backlog for all power projects has nearly doubled in the last three years. Spending is projected to increase 10% in 2018 and 5% in 2019.
Highway spending is not projected to change by much, up only 3% in 2018, but it has been within a few percent of the all-time high for the last three years. Backlog from new starts has increased on average 6%/year for the last four years.
Nonresidential Buildings new starts in 2017 are up 7%. When all revisions are in, I expect that to climb over to 10%. Starts are up 60% in four years. Starting backlog is up 20% in the last two years. Spending for 2018 is projected to increase 9%.
Office new starts hit an all-time high in 2016 and just missed surpassing that mark in 2017. Starts increased on average 22%/year from 2013 through 2016, but 2017 starts dropped 2%. Starting backlog increased dramatically during that 2013-2016 growth period and backlog is up 50% in the last two years. Spending followed with three years of growth over 20%/year from 2014 through 2016. The 3% spending growth currently recorded for 2017 is an unexplained anomaly. All other data indicates 2017 spending should have followed the pattern set in 2014-2016. 2018 spending is predicted to climb 10% and 2019 could increase 12%.
Educational new starts hit an eight year high in 2016 and increased another 6% in 2017. Starting backlog has increased 10%/year for the last three years. The last three years we’ve seen spending increases of 6%, 5% and 3%. For 2018, spending is projected to increase 14%.
Healthcare starts jumped 13% in 2016, the first significant increase in nearly 10 years. 2017 starts maintained even level with 2016. Coming into 2018, starting backlog is up 16% over the past two years, a sign for slow moderate growth. 2017 is the first time in 5 years Healthcare spending increased, up 4.3%. For 2018, spending is projected to increase 4.8%.
Manufacturing posted several very large project starts in 2017, increasing total starts 20% over 2016. This increased starting backlog 8% for 2018. Although still well below the banner years of 2015 and 2016, spending is projected to increase 8% in 2018.
Amusement/Recreation new starts increased only 5% in 2017, but that follows a 30% increase in 2016 to reach a new high in 2017. Starting backlog has doubled from 2014 to 2018. Spending increased only 5% in 2017 but spending is up 40% in the last 3 years, also reaching a new high in 2017. Spending for 2018 is projected to increase 11%. This spending category includes sports stadiums which by some accounts may fall 40% in 2018.
Lodging experienced six consecutive years of massive growth in starts and spending after losing 75% of its pre-recession market. Starts grew 30%/year from 2011 through 2016. In 2017 starts posted a decline of 5%. Spending averaged 25% growth from 2012 through 2016, but posted only 7% growth in 2017. Backlog is still up slightly to start 2018. Spending is projected to come in at 6% growth for 2018. But backlog drops off 15% for 2019 and spending is expected to follow suit.
Commercial construction is being supported by new starts for warehouse construction which have increased seven consecutive years. In 2010 warehouse construction was only 20% of this market. From 2010, stores grew 50% to a peak in 2015, but warehouses grew 500% to peak in 2017 and are now 50% of the total market. Warehouses are increasing and stores are declining. In 2018, warehouses will make up 60% of the market. Total commercial starts for 2018 will remain equal to 2017 and 2016. The years of big backlog growth occurred from 2012 to 2017. Backlog remains constant from 2017 to 2018 and declines slightly in 2019. After 6 years of spending growth averaging more than 12%/year, spending will increase only 3% in 2018 and 2019 may reach only 2%.
Residential spending is more dependent on new starts within the year than on backlog from previous starts. Residential starts are projected to increase 7% over 2017, almost all of that coming from new single family starts. However, residential spending in 2018 is projected to increase only 7% after five years of increases over 10%.
In What Category is That Construction Cost? explains where some specific costs are carried, which may vary between sources. Take particular note of Transportation, Office and Commercial.
Starts Trends Construction Forecast Fall 2017 for a much more thorough handling of the starts forecast.
I’ve read several articles recently describing, Why 2018 could be a boom year for construction spending. Several reasons being given to support a potential boom, when we look a little deeper, actually may not be good indicators at all to predict the trend for a strong year in 2018. In my Fall Forecast I do predict 8% growth in 2018 construction spending, but let’s take a look at what gets us there.
Data that doesn’t tell us much about the future trend in construction spending.
Jobs increased in 2017 up 35% over 2016. In 2017 construction added 210,000 jobs, growth of 35% over 2016, but in 2016 jobs growth decreased by 55% from 2015. 2016 growth was the lowest in 5yrs. In 2013 jobs growth increased by 85% and in 2014 by 71%, but in 2015 and 2016 jobs growth slowed. Yet 2015 was one of the best construction spending years on record. And in 2017, jobs growth increased over 2016 but spending growth slowed. The direction of jobs growth is not an indicator of the future trend in spending.
Nov 2017 spending was higher than expected, and YTD is up 4.2%. This is a slippery slope. Actually we won’t know any particular monthly spending until several months after the initial release. All monthly spending values are subject to revision three times after initial release. However, residential spending is higher than expected for the YTD and nonresidential buildings spending is below expectations for YTD. But more importantly, construction spending normally fluctuates. For instance, in the 2nd half of 2015, spending was down 4 out of 6 months, lower than forecast three times, posting a total decline of 2.5%. Yet 2015 finished the year up 10%. Then, in the 1st half of 2016, spending was up 5 out of 6 months, far exceeding forecast 3 times, posting a total increase of 6% in 6 months. 2016 finished up 6.5% for the year. Neither half performance predicted final results within the year or the forecast for the future. Furthermore, after inflation, 2017 spending is currently flat with 2016$, so all we are seeing in the 4.5% spending growth in 2017 is inflation. Current and past spending is not an indicator of the future trend in spending.
What data does give an indication of the future trend in construction spending?
Construction Starts (Dodge Data & Analytics DDA), Backlog, Cash flow from Starts, the Architectural Billings Index (ABI), The Dodge Momentum Index (DMI) and New Residential Permits and # of Units Construction Starts all give an indication of the future trend in spending.
Residential Permits and # of new units started gives a fairly immediate indication of residential activity. The ABI gives an indication of nonresidential building to start construction about 9 months out and the DMI about 12 months out. The ABI and DMI give some indication as to whether future starts will increase or decrease. DDA Starts give an indication of the percent growth in future work, but not when the spending will occur, so cannot be used directly to predict spending. A good example is the new start for airport terminal work recorded as a new start in 2017 at $4 billion. But it may take 5 or 6 years to complete that $4 billion project and only cash flow will show the impact on spending.
Care must be taken to use Starts data properly. It is regularly misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.
Cash flow is the best indicator of how much and when spending will occur. Cash flow from DDA starts gives a prediction over time of how spending from each month of previous starts will occur from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.
Of course, data highlighting demand, occupancy rates, labor and material trends and other economic factors affecting construction trends all weigh into determining future spending expectations. However, for nonresidential buildings and infrastructure approximately 75% to 80% of all spending within the year comes from starting backlog. Most economic factors that will have an affect on spending within the year are already captured in projects that have started and are in current backlog. On the other hand, new residential starts are more important. 70% of all residential spending in the year comes from new starts.
The following trend predictions are developed based on using this outline.
Total Construction Starting Backlog is at a record high, up 30% from the previous high in 2008.
Infrastructure and Residential sectors dropped to a decade low backlog in 2010. In 2013, nonresidential buildings hit the lowest starting backlog since 2004. Combined, total backlog hit a low-point in 2011, the lowest since 2003. Total Starting Backlog has been increasing since 2011, up 65% in 2018.
Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Residential backlog is at a post-recession high, although as will be explained later, it is new residential starts that are more important and starts have tripled since the 2009 low. 70% of all residential spending in the year comes from new starts. Residential starts are still 20% below the 2004 peak.
Starts Generate Backlog
New Starts increased at an average rate of 11%/year from 2012 to 2016. 2017 starts slowed to less than half that pace.
Nonresidential Buildings starts, even though there was a 1% decline in 2015, averaged 13%/year growth for the last 4 years. 2017 will post an 8% increase. The 6 months from Aug 2016 to Jan 2017 was the highest starts since Jan-Jun 2008, also the year nonresidential buildings spending peaked. The 6 months Apr-Sep 2017 just surpassed both those previous peak highs.
Non-building Infrastructure starts were the highest in the 1st 6 months of 2015 than any 6-month period in history. Total 2015 starts increased 26%. 2016 is down just 2% from the peak 2015 starts and 2016 is the 2nd highest starts on record. Those early 2015 starts will still generate 10% of all spending in 2018. 2017 starts are level with 2016. After revisions, 2017 starts may set a new peak high.
Residential starts in 2016 posted the best year since 2005-2006. New starts in 2016 were revised up to show an increase of 10% over 2015. That follows five years of growth averaging 20%/year. New starts in Q1’17 reached an 11 year high.
New Backlog is added every month from New Construction Starts. When projects first enter backlog, the amount counted to backlog is the total value of project revenues under contract that are about to start construction, or the same as the new start values. For purposes of predicting future construction spending, as each month of project construction passes, work that has been put-in-place is subtracted from the total value to get the amount remaining in backlog.
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 three years ago. The amount counted in backlog is the value of the project that remains or that has not yet been put-in-place. Backlog is the total amount of future spending that will be generated by the project, commonly referred to as the ETC. The sum of all ETCs represents current backlog.
- Nonresidential buildings 2018 starting backlog is up 10%
- Non-building Infrastructure 2018 starting backlog is up 12%
- Residential buildings 2018 starting backlog is down 3%
- Starting Backlog is at an all-time high for nonresidential buildings and non-building infrastructure.
Typically, starting backlog is a reference to the amount of work in backlog on January 1st. It is referred to as the Starting Backlog for the coming year. The sum of all ETCs as of December 31st represents Starting Backlog.
For any project that has a remaining duration going out past year end, backlog at the start of year does not represent the amount that will be spent within the year. Some of that project backlog will be spent in future years. For this reason, backlog is not representative of spending within the year and the change in Starting Backlog from year to year is not an indication of a change in spending from year to year.
Values and duration of projects that make up backlog help to better predict spending activity over time, particularly in the coming year.
A cash flow schedule of all ETC backlog and predicted new starts provides a tool to predict future spending. It is not enough to look at just the change in backlog to get an indication of the strength of the market. While continued growth in backlog is important, the predicted cash flow from backlog and cash flow from new starts is necessary for predicting spending.
Construction spending is strongly influenced by long duration projects in backlog, more-so than normal monthly starts growth rate. The pattern of continuing or ending cash flows from the long duration backlog projects causes fluctuations in spending that supersede the balance cycle of one month of old jobs ending for every new month of jobs starting. This often can be responsible for some of the monthly fluctuations of construction spending.
The following table shows predicted cash flow from backlog on record as of October 1, 2017 and predicted starts that will generate future backlog in 2018.
Look Ahead to 2018
Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2018. For four years, from 2010 to 2013, all nonresidential backlog remained nearly constant. Since then, growth has been similar to the pre-recession construction boom of the early 2000s.
Nonresidential buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle. Starting backlog has increased for 5 years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for 5 years at an average 9%/year. Buildings will reach a new high for spending in 2018.
Non-building Infrastructure 2018 starting backlog is up 35% since 2014 but spending from backlog is up only 10%. Infrastructure starting backlog has been increasing for more than 10 years, sometimes only a fraction of a percent per year. Since 2010, backlog increased only 3%/year for the first 5 years then it jumped 35% in the last 3 years. Spending within the year from starting backlog is up 8% in 2018. Infrastructure spending will hit a new high in 2018.
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 residential spending within the year. New residential starts in Q1’17 reached an 11 year high.
- Cash flow models of construction projects in backlog are indicating substantial acceleration in nonresidential spending over next year, perhaps most notable in infrastructure.
- 75% to 80% of nonresidential spending within the year comes from Starting Backlog.
- 70% of residential spending within the years comes from New Starts. Residential starts are at a post-recession high.
- Share of spending within the current year from backlog is at an all-time high for nonresidential buildings and non-building infrastructure.
Nonresidential buildings experienced a decline in starting backlog as recently as 2013. Since 2013, nonresidential buildings starting backlog is up 60%. Backlog will hit a new all-time high for 2018, 5% over the previous high in 2009 . Not only is starting backlog higher coming into 2018, but also spending from backlog is predicted up by 10%. This will produce a new high in current dollar spending.
Revenues from starting backlog account for 75% of all nonresidential buildings construction spending within the year.
Educational starts, backlog and spending has been increasing for 5 years or longer. 2018 starting backlog is up 16% from 2017. Starts for 2018 are predicted to go up 13% and this will push 2019 starting backlog even higher. This should produce good spending growth for the next few years.
Office construction starting backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018 it’s up 27% over 2017. Office starting backlog increased an average of 28%/year for the last 5 years. Actual spending increased an average of 17%/year. Backlog growth looks like it will support very strong spending increases into 2019.
Commercial Retail backlog will hold steady from 2017 into 2018. This should level off spending after 7 years of strong growth. 2018 backlog still produces a spending increase but current projections show a slight drop in 2019.
Lodging backlog increases slightly for 2018. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.
Manufacturing posted a 100% increase in new starts in 2014 that drove starting backlog to new highs for the next two years. With new starts slowing back to normal by 2016, starting backlog dropped 20% in 2017 and spending dropped 12%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts and that pushed 2018 starting backlog again to a new high. This will support a spending rebound in 2018-2019 after a drop of 18% in the last two years.
Non-building infrastructure backlog stood at $180 billion in 2008, the last pre-recession year. At the beginning of 2017, non- building infrastructure backlog hit an all-time high, $260 billion, up 45% from 2008. For the last three years, starting backlog is up 40%. In 2018, it’s up 13%, another new high.
Revenues from starting backlog account for 80% of all non-building infrastructure construction spending within the year.
Power backlog has doubled since 2014. It’s up 11% for 2018. Starts are down 14% from the 2015 peak, but spending from backlog is increasing. Most relevant is that backlog increased much stronger than spending. Backlog is being driven higher by very long duration projects that started in 2015, 2016 and 2017.
Highway starts declined the last two years from the peak in 2015, but starting backlog increased the last 3 years and is now 25% higher than 2015. The last three years of highway starts are still feeding spending in 2018. There is very little change in the amount of spending from backlog, so 2018 spending won’t change very much from 2017.
Transportation new starts shot up by 70% in 2017, pushing 2018 starting backlog to a new high, up 75% from 2017. That will help increase 2018 spending by more than 15%, but a larger spending increase could come in 2019.
Environmental Public Works, Sewer/water/Conservation is experiencing declining starts, declining backlog and declining spending from backlog. All are at the lowest since 2014. We may not see any increase in construction spending until 2019.
Public vs Private starts are not tracked separately, but the public share of markets is known. Therefore a projection of public backlog is possible. Highway and Environmental Public Works are 100% public. Educational is 80% public, Transportation is 70%, Amusement/Rec is 50%, Healthcare is 20% and Power is 10% public, along with few other smaller shares. Starting backlog for 2018 is up 40% from 2014 due to the predominantly long duration projects that make up public work. This is a post-recession high and is nearing the all-time high of 2008. Increased backlog is indicating the best construction spending increases since 2008 for the next two years.
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 now 3x higher than the lows. New residential starts have increased every year since the 2009 bottom, but are still 25% lower than 2004-2005. Residential spending reached its peak of $630 billion in 2005. Current spending is still 15% below that peak. In constant $, spending is 30% below that peak.
Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike longer duration nonresidential projects, 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 residential construction industry.
New starts slowed in 2017 to only 4% growth and similar growth of 6% is expected for 2018. This is not unexpected after 5 years (2012-2016) of new starts growth at an average 20%/year. This leads to a prediction of 2018 spending up only 6%.
All construction starts data in this report references Dodge Data & Analytics starts data.
See this companion post for Starts Trends Construction Forecast Fall 2017
Also see 2018 spending forecast Spending Summary Construction Forecast Fall 2017