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2016 Construction Spending 1-3-17


U. S. Census posted November construction spending 0.9% higher than October and 4.1% higher than November 2015. Year-to-date spending through November is 4.4% higher than 2015.

With only one month to go, 2016 is predicted to finish at $1,166 billion, up 4.8% from 2015. December spending is projected to come in at an annual rate near $1,200 billion. At this point, in order for total 2016 spending to drop below $1,160 billion, December would need to fall 6% below November, a magnitude of change that simply does not occur from month to month.

Current monthly spending is at a 10 year high and on a current dollar basis (before adjusting for inflation) is exceeded in all historical spending by only 5 months at the peak spending in early 2006. By the 2nd quarter of 2017 spending will reach all-time highs on a current dollar basis. On a constant dollar basis adjusted for inflation we are still several years below peak spending.

For inflation adjusted spending see “Are We at New Peak Construction Spending”

Revised spending for September is 1.25% higher than original posted on 11-1-16 and for October is -0.1% lower than original posted 12-1-16. However, October data is still pending revision again on 2-1-17 and is expected to increase. In the last 3 years every month has been revised up from the original amount posted. 2016 monthly revisions year-to-date average +1.3%.

The table included here shows the predicted total 2016 spending compared to 1st 2016 estimates and current 2016 estimates provided from my data = CA (Construction Analytics) and from CMD (ConstructConnect) and FMI.


What Are You Reading 2016

Thank you to all my readers for making this construction economics blog worthwhile. Here’s ten of my most visited articles in 2016.

Construction Cost Inflation – Midyear Report 2016

Construction Inflation Indices

Trump’s Wall

Starts Point to Robust 2017 Spending

June Jobs Report Construction

Construction Spending 2016 – Midyear Nonresidential Markets

Construction Spending 2016 – Midyear Summary

How Much Does A Steel Cost Increase Affect Construction?

Saturday Morning Thinking Out Loud #1 – Infrastructure

Behind The Headlines – Construction Data

Construction Cost Inflation – Commentary


General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of construction projects. To properly adjust the cost of construction over time you must use actual final cost or selling price indices.

Click Here for Link to a 20year Table of 25 Indices

Inflation in construction acts differently than consumer inflation. When there is more work available, inflation increases. When work is scarce, inflation declines. A very large part of the inflation is margins, wholesale, retail and contractor. When nonresidential construction was booming from 2004 through 2008, nonresidential inflation averaged almost 8%/year. When residential construction boomed from 2003 to 2005, inflation in that sector was 10%/year. But from 2009 through 2012 we experienced deflation, the worst year being 2009. Residential construction experienced a total of 17% deflation from 2007 through 2011. From 2008 to 2010, nonresidential buildings experienced 10% deflation in two years.

2-12-18 plots updated to Dec 2017 data

BCI 1992-2019 2-12-18

BCI 2005-2019 2-12-18

Since 1993, long-term annual construction inflation for nonresidential buildings has averaged 3.5%, even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8%. 

Spending growth, up 40% in the four-year period 2012-2015, exceeded the growth during the closest similar four-year periods 2003-2006 (37%) and 1996-1999 (36%), which were the two fastest growth periods on record with the highest rates of inflation and productivity loss. Growth peaked at +11%/year in 2014 and 2015, exceeded only slightly by 2004-2005.

Although spending growth slowed to only 6.5% in 2016, Construction spending growth for the four-year period 2013-2016 totals 39% and remains near equal with the four-year high. It’s expected, after final revisions are posted, that 2017 spending will increase 6+% and maintain a consistently high four-year level of spending.  

Producer Price Index (PPI) Material Inputs (excluding labor) costs to new construction went up +2.4% in 2016 after a downward trend from +5% in 2011 led to decreased cost of -2.2% in 2015, the only negative cost for inputs in the past 20 years. Inputs costs to  all construction are up +4.2% in 2017. More specific input costs, nonresidential structures in 2017 are up 4.3%, infrastructure cost are up over 5% and single-family residential inputs are up 4.3%. But material inputs accounts for only a portion of the final cost of constructed buildings.

Labor input is currently experiencing cost increases. When there is a shortage of labor, contractors may pay a premium to keep their workers. All of that premium may not be picked up in wage reports. Potential labor shortages in an area might result in +8% to +10% inflation on labor cost just over the last two years. Unemployment in construction is the lowest on record. A tight labor market will keep labor costs climbing at the fastest rate in years.

Nationally tracked indices for residential, nonresidential buildings and non-building infrastructure vary to a large degree. When the need arises, it becomes necessary that contractors reference appropriate sector indices to adjust for whole building costs.

Click Here for Link to a Table of 25 Index Values

ENRBCI and ENRCCI are prefect examples of commonly used indices that DO NOT represent whole building costs, yet are widely used to adjust project costs. An estimator can get into trouble adjusting project costs if not using appropriate indices.

CPI, the Consumer Price Index, tracks changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should never be used to adjust construction pricing. Historically, Construction Inflation is about double the CPI. However for the last 5 years it averages 3x the CPI.

Taking into account the current (Jan 2018 12 mo) CPI of 2% and the most recent 5 years ratio, along with accelerated cost increases in labor and material inputs and the high level of activity in markets, I would consider the following forecasts for 2018 inflation as minimums with potential to see higher rates than forecast.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for five years from 2013 to 2017 is 5.8%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and reached 5.8% in 2017.

Anticipate residential construction inflation for 2018 at least 5%.

Several indices for Nonresidential Buildings have averaged 4% to 4.5% over the last five years and all have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. Input indices that do not track whole building cost would indicate inflation for those four years is only 10%, much less than real final cost. For a $100 million project escalated over those four years, that’s a difference of $8 million, potentially underestimating cost. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically leads to accelerated inflation.

Anticipate construction inflation for nonresidential buildings during the next two years near a growth rate of 5% rather than the long term average of 3.5%.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, dropped 2% in 2015-2016, then increased 2% in 2017. The IHS Pipeline and LNG indices are down 25% from 2014 to 2017. Coal, gas, and wind power generation indices have gone up only 6% in seven years. Refineries and petrochemical facilities have dropped 5% in the last 4 years. Input costs to infrastructure are down slightly from the post recession highs, but most have increased in the last year. Input cost to Highways are up 4.7% and to the Power sector are up 5.8% in 2017. Work in Transportation and Pipeline projects is increasing rapidly in 2017 and 2018.

Infrastructure indices registered 2% to 4% gains in 2017. Anticipate a minimum of 3% to 4% inflation for 2018 with the potential to go higher in rapidly expanding markets..

This plot for nonresidential buildings only shows bars representing the predicted range of inflation from various sources with the line showing the actual composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation of less than 1%, the actual inflation is following a pattern of growth above 4%. The low end of the predicted range is almost always established by input costs, while the upper end and the actual cost are established by selling price indices.

Inflation Range 2000-2018 plot 8-6-17

In every estimate it is always important to carry the proper value for cost inflation. Whether adjusting the cost of a recently built project to predict what it might cost to build a similar project in the near future or answering a client question, What will it cost if I delay my project start by one year?, whether you carry the proper value for inflation can make or break your estimate.

  • Long term construction cost inflation is normally about double consumer price inflation (CPI).
  • Since 1993 but taking out 2 worst years of recession (-8% to -10% total for 2009-2010), the 20-year average inflation is 4.2%.
  • Average long term (30 years) construction cost inflation is 3.5% even with any/all recession years included.
  • In times of rapid construction spending growth, construction inflation averages about 8%.
  • Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. It has averaged 4.2% for the last 4 years.
  • Residential buildings inflation reached a post recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.8% for the last 5 years.
  • Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/suppliers margins.
  • When construction volume increases rapidly, margins increase rapidly.
  • Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.

Click Here for Link to a Table of 25 Index Values

Want to Know About Construction Data?

There’s no shortage of data and monthly articles about the construction industry. Like anything else, you need to know how each piece affects the whole if you wish to understand all that data.

In my semi-annual report, “Construction Economics – Market Conditions in Construction”, you can gain an understanding of each piece of the whole, how to read it and use it and the impact it has on total construction.

Topics covered in the report:

  • Construction Starts – The Importance of Cash Flow
  • Leading Indicators – Which Numbers Tell Us About Next Year
  • Construction Spending – YTD, Mo/Mo and Yr/Yr
  • Nonresidential Construction Spending by Major Market
  • Residential Construction Spending and Housing Starts
  • Public/Private Spending
  • Inflation Adjusted Volume – Real Growth
  • Jobs and Unemployment and Increased Hours
  • Jobs/Productivity
  • Behind the Headlines – What’s Right? What’s Wrong?
  • Some Signs Ahead – Links to Industry Articles
  • Producer Price Index – Only Part of Materials Cost
  • Material Price Movement – Major Materials
  • Consumer Inflation is NOT Construction Inflation
  • Construction Inflation and What Affects It.
  • ENR Building Cost Index
  • Indexing by Location – City Indices
  • Selling Price – The All-In Cost
  • Indexing – Addressing Fluctuation in Margins
  • Escalation – What Should You Carry?

Watch HERE for the soon to be released 2015 year-end report with forecast for construction in 2016.

Heard at Dodge Data Outlook 2016, Oct. 30, 2015

Dodge Data & Analytics Outlook 2016 event held in Washington DC, October 30, 2015.

A brief summary of comments heard and information from my notes.

Art Gensler – Founder Gensler

How do you control 5000 people?  Hire good people and get out of their way.

People value what they pay for and ignore what they get for free.

Beth Ann Bovino – U.S.Chief Economist, Global Economics & Research, Standard & Poor’s

Domestic economy is strong and strengthening.

Jobs are stronger – Quits rate is at a 7 year high.

Housing starts are up – Home prices are up.

Wages are struggling and we have a historical 38 year low labor participation rate.

Ted Hathaway – CEO Oldcastle BuildingEnvelope

We increased wages significantly to keep people from leaving.

The cost and disruption is huge if you lose a valuable member of a team.

Dan McQuade – President, Construction Services, AECOM

Three emerging trends

Global collaboration

Investing capital with clients and partners

Better collaboration with vendors & suppliers. Treat subs and vendors as partners.

Larry Kudlow – Economist and Senior Contributor CNBC

Our biggest problem – We do not have strong steady economic growth.

Corporate profits were high after recession but have declined last three quarters. Profits were likely responsible for the stock market rise.

Bob Murray – Vice President, Economic Affairs, Dodge Data & Analytics

The DMI is reflecting the institutional dip has ended and now beginning to grow, although slowly.

New construction starts 2013 = 11%, 2014 = 9%, 2015 = 13%p

Actual $ put-in-place 2013 = 7%, 2014 = 5%, 2015 = 10%

New starts that declined in 2015 Warehouses, Stores, Public Bldgs, Manufacturing

New Starts that increased in 2015 Residential, Hotels, Highway, Electric-Gas-Power

Expectations for 2016

Total new construction starts up 6%.

Residential up 16%, single family will grow faster than multifamily.

Commercial up 11%, led by warehouses and stores

Institutional up 9%, led by educational

Manufacturing down 1%, but from very high 2014 and 2015

Power down 43% from extreme high starts in 2015

Construction cycles may be indicating we have years of growth left in the current cycle.

Construction Spending Market Performance of Major Nonresidential Buildings 2015-2016

The Construction Spending BOOM in 2015 is being led by spending on nonresidential buildings.  Spending on nonresidential buildings year-to-date (YTD) is +20%, +$41 billion. For housing the YTD is +11%, +$24 billion and for nonbuilding infrastructure projects YTD is -2.5%, -$5 billion.

Let’s take a look at the current growth trends to find out where they are headed.

In 2004-2006, residential spending was 55% of all construction spending. The annual growth in 2004 was 19% and in 2005 it was 15%. For the last 5 years residential spending has been only 32%-37% of total spending.  In 2012 & 2013, residential led with annual spending gains of 13% and 19%. In 2014 & 2015, nonresidential buildings, also at 37% of total spending, led the gains at 9% and 19% growth. In 2016 the lead shifts back to residential with a projected growth of 14%. Infrastructure has not led growth since 2007 and 2008 when that sector had growth of 19% and 10%, at a time when residential spending was declining by 19% and 28%.

We can get a very good idea of nonresidential buildings spending and growth by looking at the five major markets. These five markets make up 85% of all nonresidential buildings construction spending and half of total 2015 construction spending growth.

Snip PCT of Spending 5 markets Oct 2015

See my blog post on October 11, 2015. I wrote:

“New nonresidential buildings construction starts cash flows indicate spending will continue to grow until Feb-Mar 2016, then drop consistently each month until Q3 2016.  The decline is almost entirely due to big starts from Q3-Q4 2014 finishing and dropping out of the monthly spending numbers.”

Snip STARTS YTD Aug2015Snip Spending Growth 5 markets 2015 2016 Oct2015 

More detail of how each market will perform, and why, follows.

Educational Construction Spending 2016

Spending in 2016 is projected to grow +5% over 2015. Other industry projections for educational spending in 2016 range from 1.5% to 12% growth over 2015, with the average of those seven estimates at 6%. As of August 2015, project starts that will generate 60% of all spending in 2016 are already booked.

Starts for the first 8 months of 2015 were up 12% from the same 8 months of 2014.  Educational spending increased only 4% year-to-date 2015 from the same period 2014, but the current annual rate of growth is 11%. Monthly spending is increasing and should continue to do so at least until mid-2016 before dropping off slightly into year end.

Healthcare Construction Spending 2016

Spending for healthcare is expected to remain flat with no growth in spending in 2016.  Other industry projections for healthcare spending in 2016 range from 3% to 12% averaging 6% growth. As of August 2015, project starts already booked will generate 60% of all spending in 2016. New starts in 2016 generate about 25% of the total spending in 2016. If we get some very large new starts in the next few months, that could change total spending projections in 2016. Starts would need to increase 20% ( every month) over my projections for the next 16 months to reach 6% growth in spending next year.

Starts for the first 8 months of 2015 were down 4% from the same 8 months of 2014 and most recently have been declining. 2014 starts grew only 2% over 2013. Healthcare spending had an annual growth rate of 5% in the first eight months of 2015. The decline in new starts signals a projected decline in spending for the next 8 months. Spending growth resumes in mid-2016 but at a very low 3% annual rate and that from an already low rate of spending at the start of the year.

Snip Constr Spending Plot Educ Hlthcr Oct15 2015

Commercial/Retail Construction Spending 2016

Spending in 2016 is projected to grow +7% over 2015. Other industry projections for office spending in 2016 range from 5.5% to 15% growth over 2015, with the average of those estimates at 10%. As of August 2015, project starts that will generate 55% of all spending in 2016 are already booked.

Starts for the first 8 months of 2015 were up 17% from the same 8 months of 2014.  Commercial spending increased 15% in the first half 2015 from the first half of 2014, but then spending declined by 8% in the last three months and may continue to decline for the next few months.  Spending will resume a growth rate of 15% annual in the first 8 months of 2016. Commercial spending will peak in the second quarter 2016 before dropping again into year end.

Office Construction Spending 2016

Spending in 2016 is projected to grow +8% over 2015. Seven other industry projections for office spending in 2016 range from 7% to 18% growth over 2015, with the average of those seven estimates at 12%. As of August 2015, project starts that will generate 55% of all spending in 2016 are already booked.

Starts for the first 8 months of 2015 were 23% lower than the first 8 months of 2014  Spending from 2014 starts will start to drop off in late 2015 and early 2016 and based on new starts in 2015, by mid-2016 the monthly rate of spending will start to decline, keeping totals for 2016 to less than 10% growth. Spending on office buildings in 2016 will peak in the 1st half year with the 2nd half coming in 10% lower.

Manufacturing Construction Spending 2016

Spending in 2016 is projected to grow +9% over 2015. Seven other industry projections for manufacturing buildings spending in 2016 range from 5% to 18% growth over 2015, with the average of those seven estimates at 11%. As of August 2015, project starts that will generate 70% of all spending in 2016 are already booked.

Starts for the first 8 months of 2015 were only 6% lower than the first 8 months of 2014. However, even if starts for the next 4 months increase each month by 50% they will still not equal the amount of starts in the last 4 months of 2014.  Total starts for 2015 are projected to finish 20% lower than 2014.  That’s probably a good thing since 2014 starts were up 87% from 2013, the highest annual growth ever recorded for any market sector.

Spending from 2014 starts will start to drop off in late 2015.  Spending reached a peak this year in the 2nd quarter but is expected to drop for the next five to six months. Spending on manufacturing buildings in 2016 will again peak in the 2nd quarter and then drop off into the end of the year.

Snip Constr Spending Plot Mnfg Offc Comm Oct15 2015

Nonresidential Buildings Construction Spending Through 2016

New nonresidential buildings construction starts cash flows indicate spending will continue to grow until Feb-Mar 2016, then drop consistently each month until Q3 2016.  The decline is almost entirely due to big starts from Q3-Q4 2014 finishing and dropping out of the monthly spending numbers. New starts in 2015 did not grow as much as in the previous two years. Although the predicted decline in monthly spending over 6 months is 8%, 2016 may finish with a rate of monthly spending higher than when it started.

The drop and recovery can vary from the predicted shown here and it’s not likely to be so smooth, but new starts from here on forward would really have to skew from a normal growth pattern by a lot to change this pattern by a little.  Nonresidential buildings on average take about 20 to 24 months to complete, so every month we move out adds about 4% to 5% uncertainty to future spending.

This prolonged period of spending declines is sure to cause alarm in the headlines in mid-2016, but the decline and the reversal are supported in large part by starts already booked.  Unless something dramatic and unexpected comes along to throw a wrench in the works, I’m expecting a pattern like this for 2016.

Total nonresidential buildings spending in 2016 will finish the year about 10% higher than 2015.

Snip Constr Spend Nonres 4yr oct15

Welcome to my Construction Economics blog

Welcome to my new blog.  Here I will expand on current issues of construction economics.  On Twitter @edzarenski, I will tweet updates to my most recent Construction Economic report and out of necessity I will keep it short.  When issues demand further explanation, you will find it here.  Thanks for visiting. edz

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