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Constant Dollar Construction Growth

11-2-17

Construction spending had been chugging along very nicely from 2012 through 2016 with annual growth ranging between +6.5% and +11.0%. The average spending growth for those 5 years is 8.5%/yr. For 2017, spending growth will come in at only just over 5%.

Perhaps what may be more important is the inflation adjusted growth or constant dollar growth. Constant dollar growth measures volume. Volume growth ranged from +3.0% to +8.0% in the 5 years from 2012 through 2016. The average constant$ growth for those 5 years is 5.4%/yr. The rest of the spending growth was inflation dollars. For example: a year in which spending growth is 7% but that has 4% inflation ends up with only 3% constant$ volume growth.

From 2005 peak volume ($1,448 bil in 2017$) to the lows reached in 2011 ($954 bil), constant dollar volume dropped 34%. Since the 2011 low, volume has increased 31%. In rapid growth years volume increases between 6% to 8%/yr. In average or low growth years, constant dollar volume growth ranges closer to 2% to 3%/yr.

Spend current vs constant 2017 11-8-17

2017 will post the highest composite construction inflation in 11 years, 4.5%. Residential inflation has averaged 6%/yr for the last 5 years. With 2017 at 5% construction spending growth, the lowest in six years, and at the highest inflation in years, 2017 volume growth will fall to only +0.6%.

Residential, with nearly 12% spending growth in 2017, still holds onto the best volume growth in 2017 at slightly over 5%. Residential has recorded the highest volume growth in 5 of the last 6 years, the lowest coming in at +5%, averaging 8%/yr for 6 years.

Nonresidential Buildings constant dollars is down slightly for 2017, posting a volume decline of -0.2%. This was predictable since Manufacturing, after recording 90% growth from 2011 to 2015, has worked off a big backlog and dropped 15% (from an all-time high) in the last two years, most of that drop in 2017. For 2017 that drop offset $8 billion of growth from other markets. Nonresidential Buildings volume increased 20% in the previous 3 years.

Non-building Infrastructure volume is down 6% in 2017 after growing only 5% in the previous 2 years. However, the non-building infrastructure sector led all growth in 2014 at +8.5%. It should be noted that 2015 posted the all-time high for Infrastructure spending. The largest declines since then are in Environmental Public Works projects, Sewer/Water/Conservation. All three markets posted declines in new project starts in 3 or 4 of the last 4 years. Spending in 2017 is down 17% from the most recent high in 2015.

Public works spending is responsible for 80% of the dollar decline in non-building infrastructure spending since the high in 2015.

In 2018, Nonresidential Buildings and Non-building Infrastructure lead spending growth.  Residential spending will slow considerably after six years of solid growth. Constant$ volume growth after inflation will climb back to +2.3% with the two nonresidential sectors over 5% and residential dropping to a volume decline.

Spend Sector Constant 2006-2018 11-2-17

 

 

ARCHIVE – Construction Inflation Index Tables 2016 data

10-24-16 original posted
1-27-17 updated index tables and plots
8-6-17 archived this for 1-27-17 2016 content  –  Linked Master Index Tables has updated data

8-6-17  SEE Construction Inflation Index Tables For Updated 2017 Indices

Construction Cost Indices come in many types: Final cost by specific building type; Final cost composite of buildings but still all within one major building sector; Final cost but across several major building sectors (ex., residential and nonresidential buildings); Input prices to subcontractors; Producer prices and Select market basket indices.

Residential, Nonresidential Buildings and Non-building Infrastructure Indices developed by Construction Analytics, (in BOLD CAPS), are sector specific selling price composite indices. These three indices represent whole building final cost and are plotted in Building Cost Index  – Construction Inflation below and also plotted in the attached Midyear report link. They represent average or weighted average of what is considered the most representative cost indicators in each major building sector. For Non-building Infrastructure, however, in most instances it is better to use a specific index to the type of work.

BCI 1992-2018 5-15-17

Click Here for LINK to Cost Inflation Midyear Report 2016 – text on Current Inflation

All actual index values have been recorded from the source and then converted to current year 2016 = 100. That puts all the indices on the same baseline and measures everything to a recent point in time.

Not all indices cover all years. For instance the PPI nonresidential buildings indices only go back to years 2004-2007, the years in which they were created.

SEE Construction Inflation Index Tables For 2017 Tables

index-table-2000-to-2018-updated-2-17-17

SEE BELOW FOR LARGER IMAGE

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. When construction activity is declining, construction cost increases slow or may even turn to negative, due to reductions in overhead and profit margins, even though labor and material costs may still be increasing.

Selling Price, by definition whole building actual final cost tracks the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor overhead and profit. Selling price indices should be used to adjust project costs over time.

Here’s a LINK to a good article by Faithful & Gould that explains “If you want to avoid misusing a cost index, understand what it measures.” 

quoted from that article,

wiggins-cost-iindex

R S Means Index and ENR Building Cost Index (BCI) are examples of input indices. They do not measure the output price of the final cost of buildings. They measure the input prices paid by subcontractors for a fixed market basket of labor and materials used in constructing the building. These indices do not represent final cost so won’t be as accurate as selling price indices.

Turner Actual Cost Index nonresidential buildings only, final cost of building

Rider Levett Bucknall Actual Cost Index in RLB Publications nonresidential buildings only, final cost of building, selling price

IHS Power Plant Cost Indices specific infrastructure only, final cost indices

  • IHS UCCI tracks construction of onshore, offshore, pipeline and LNG projects
  • IHS DCCI tracks construction of refining and petrochemical construction projects
  • IHS PCCI tracks construction of coal, gas, wind and nuclear power generation plants

Bureau of Labor Statistics Producer Price Index only specific PPI building indices reflect final cost of building. PPI cost of materials is price at producer level. The PPIs that constitute Table 9 measure changes in net selling prices for materials and supplies typically sold to the construction sector. Specific Building PPI Indices are Final Demand or Selling Price indices.

PPI Materials and Supply Inputs to Construction Industries

PPI Nonresidential Building Construction Sector — Contractors

PPI Nonresidential Building Types

PPI BONS Other Nonresidential Structures includes water and sewer lines and structures; oil and gas pipelines; power and communication lines and structures; highway, street, and bridge construction; and airport runway, dam, dock, tunnel, and flood control construction.

National Highway Construction Cost Index (NHCCI) final cost index, specific to highway and road work only.

S&P/Case-Shiller National Home Price Index history final cost as-sold index but includes sale of both new and existing homes, so is an indicator of price movement but should not be used solely to adjust cost of new residential construction

US Census Constant Quality (Laspeyres) Price Index SF Houses Under Construction final cost index, this index adjusts to hold the build component quality and size of a new home constant from year to year to give a more accurate comparison of real cost inflation

Beck Biannual Cost Report develops indices for only five major cities and average. The indices may be a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost but should not be used to adjust the cost in either of these two sectors.

Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in six major cities and average.

Other Indices not included here:

Consumer Price Index (CPI) issued by U.S. Gov. Bureau of Labor Statistics. Monthly data on 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.

Leland Saylor Cost Index  Clear definition of this index could not be found, however detailed input appears to represent buildings and does reference subcontractor pricing. But it could not be determined if this is a selling price index.

Sierra West Construction Cost Index is identified as a selling price index but may be specific to California. This index may be a composite of several sectors. No online source of the index could be found, but it is published in Engineering News Record magazine in the quarterly cost report update.

Vermeulens Construction Cost Index can be found here. It is described as a bid price index, which is a selling price index, for Institutional/Commercial/Industrial projects. That would be a nonresidential buildings sector index. No data table is available, but a plot of the VCCI is available on the website. Some interpolation would be required to capture precise annual values from the plot. The site provides good information.

The Bureau of Reclamation Construction Cost Trends comprehensive indexes for about 30 different types of infrastructure work including dams, pipelines, transmission lines, tunnels, roads and bridges. 1984 to present.

Click Here for Link to Construction Cost Inflation – Midyear Report 2016

1-27-17 – Index updated to Dec. 2016 data

index-table-2000-to-2009-updated-2-17-17

index-table-2010-to-2018-updated-2-17-17

8-6-17  SEE Construction Inflation Index Tables For Updated 2017 Indices

 

Construction Forecasting Presentation

Attached PDF of my Forecasting presentation delivered 5-22-17 at Advancing Building Estimation in Houston

EdZ presentation ABE Forecasting Costs 5-22-17

A few bullets from this presentation

  • Construction Starts is not construction spending
  • Cash flow = Spending = Revenue
  • Revenue is not Volume of work
  • Spending minus inflation = Volume
  • Understand what’s in an Index to avoid misguided inflation adjustments
  • We can’t ignore productivity
  • Spending activity has just as much influence on inflation as labor and material cost.

 

Slides in this presentation come from the following articles:

1st Qtr Update 2017 Construction Spending Forecast

Inflation Index vs Spending

Construction Jobs Growing Faster Than Volume

Construction Inflation Index Tables

Inflation Index vs Spending

The two plots lined up here represent spending and spending corrected for inflation or real volume growth in the top plot versus construction inflation in the bottom plot. On the Inflation plot, the black line represents final selling price, actual inflation. The red line represents the ENR Building Cost Index which is a fixed market basket of labor and materials, not a complete selling price index. All plots are for nonresidential buildings only.

The index shows how cost inflation climbs in periods when spending is accelerating and the index slows when spending is increasing slowly. Also we can see that the major decline in spending resulted in a major deflation in the index. Note the ENR BCI does not show the major decline in the inflation index. That’s because the ENR BCI is not final selling price. It shows what the cost of labor and materials did during that period,  but does not capture how contractors adjusted their margins down so deeply due to loss of volume.

The takeaway from this comparison is this:

  • Labor and material indices do not show what real total inflation is doing
  • When spending increases rapidly, inflation increases rapidly
  • When spending increases slowly, inflation increases slowly
  • An understanding of which direction and how much spending is moving is more important to predicting inflation than the change in the cost of labor and materials

 

Index vs Spending 1993-2016 5-13-17

 

See Also 1st Qtr Update 2017 Construction Spending Forecast

BTH – 20 Snips From Recent Articles

2-17-17  Behind The Headlines

  1. From the Jan 2011 bottom of the recession in construction to current, both net jobs (jobs x hours worked) and volume (spending after adjusted for inflation) have increased equally by 28%.
  2. Growth of only 100,00 to 140,000 new jobs in 2017 would be the slowest growth in 5 years and will look like a hiring slowdown. Some might attribute it to lack of available workers. In large part it may be due to a balancing of workforce to real volume growth.
  3. Staffing patterns (appear to) lag changes in work volume.
  4. These six Nonresidential Buildings markets, which make up 80% of all nonresidential buildings spending, posted the following growth in starts leading into 2017: Office +37%, Lodging +40%, Educational +11%, Healthcare +21%, Commercial Retail +11% and Amusement/Recreation +21%
  5. Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current nonres bldgs growth cycle.
  6. Office construction starting backlog for 2017 (projects under contract as of Jan 1, 2017) is 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.
  7. For 2017, the amount of construction spending (on manufacturing buildings) from starting backlog has dropped 25% from the level of 2016. Even an increase of 50% in new 2017 starts would not make up for that loss.
  8. More infrastructure projects started construction in the 1st 6mo of 2015 than any time in history. This will boost infrastructure spending through 2017.
  9. As measured in comparable constant dollars, No, we are not back to previous levels of spending. We will probably not return to previous highs before 2020.
  10. The entire construction industry best growth rate ever achieved (in 2016 constant$) absorbed $1 trillion in new spending over 5 years. Infrastructure has not absorbed $1 trillion newly added work in 25 years.
  11. long term best average rates of growth (indicate) we could increase infrastructure spending through new stimulus between $7 billion to $10 billion a year
  12. Construction spending, from 1st release to last revision of data, has been revised upward every month since August 2013. That would indicate the first reports of an “unexpected decline” almost always get revised up in following months.
  13. In the last 36 months, there were 16 Census construction spending releases that initially showed a decline vs the previous month. Five months showed a decline vs the previous year. After revisions every month was revised up from the original posted amount. There remained only 2 significant mo/mo declines. There were no remaining year/year declines.
  14. Current year YTD “not-yet-revised” values for new construction starts are always compared to the previous year YTD “revised values” which has the affect of making current year growth appear lower than it should. In the last 10 years the YTD revisions to previous year values have never been down.
  15. Residential starts in 2016 posted the best year since 2005-2006. Residential starts bottomed in 2009 and have now posted the 7th consecutive year of growth.
  16. Total construction spending in 2017 will reach $1,236 billion supported by a 4th consecutive year of strong growth in nonresidential buildings.
  17. Office construction reached a new all-time high in September 2016. Spending will be in the range of +20% to +30% year over year growth for 2017 with total coming in at $91 billion.
  18. It’s real damn hard to add $100 billion in new construction volume in a year. After adjusting for inflation, construction volume has never increased by $100 billion. It has increased by $75 billion 4 times and 3 more times by $50 billion.
  19. If you want to avoid misusing a cost index, understand what it measures.
  20. Selling Price, by definition whole building actual final cost, tracks the final cost of construction. Selling price indices should be used to (adjust costs for inflation so you can) compare costs over time.

Constant Dollars – Impact of Inflation

2-4-17

Current $ vs Constant $

This clearly shows the impact of inflation on comparing Construction Spending data. Reports commonly compare current $1.166 trillion 2016 total spending today back to the (then) current $1.150 trillion at 2006 peak. Of course that seems to establish a new high. But that is so misleading.

Constant $ adjusted for inflation converts all past spending into 2016$ for an equalized comparison. From the low point in 2011 we’ve increased spending by 51% but in constant 2016$ we’ve added only 31% in volume and we are still 16% below the 2005 peak.

As measured in comparable constant dollars, No, we are not back to previous levels of spending. We will probably not return to previous highs before 2020.

The widening gap from right to left, as we look back in time, is the cumulative affect of inflation. It might be only 2% or 4% looking back one year, but back to 2003 it’s 40%.

spend-current-vs-constant-2003-2016-2-3-17

Impact of Inflation

In all projections, the affect of inflation must be considered. Why is tracking inflation important? Well, as an estimator it’s necessary to assign the appropriate cost to items over time. And it’s needed to properly interpret construction economics. But it’s also important for business management.

bci2001-2016-2-9-17

Due to construction inflation, a company that was building $700 million in nonresidential buildings in 2005 needs to build $1 billion today just to remain the same size as in 2005. Increasing revenues by 5% annually in a period when inflation is increasing by 5% is not increasing annual volume. While revenue may be increasing, volume would be static. Over a period of years, if this were to occur, since some companies will grow, the amount of volume available to bidders could potentially restrict growth in the number of bidders able to secure new work or in the growth in the size of companies.

In this table, both the index values and the resultant annual escalation are shown. The index value gives cumulative inflation compared to 2016$.

index-2003-to-2017-edz-from-prod-2-17-17

 

SEE ALSO these other posts 

Are We at New Peak Construction Spending?

Construction Inflation Index Tables

Construction Cost Inflation – Midyear Report 2016

Are We at New Peak Construction Spending?

1-4-17

Total construction spending peaked in Q1 2006 at an annual rate of $1,222 billion. For the most recent three months it has averaged $1,172 billion. It is currently at a 10 1/2 year high at just 4% below peak spending.  But that ignores inflation.

In constant inflation adjusted dollars spending is still 18% below the Q1 2006 peak.

spend-current-vs-constant2016-plot-nov-2016

Current headlines express exuberance that we are now at a 10 1/2 year high in construction spending but fail to address the fact that is comparing dollars that are not adjusted for inflation.

In the 1st quarter of 2006 total spending peaked at a annual rate of $1.2 billion and for the year 2006 spending totaled $1,167 billion. We are within a stone’s throw of reaching that monthly level and 2016 will reach a new all-time high total spending by a slim fraction. But all of that is measured in current dollars, dollars at the value of worth within that year, ignoring inflation.

Adjusting for inflation gives us a much different value. Inflation adjusted dollars are referred to as constant dollars or dollars all compared or measured in value in terms of the year to which we choose to compare. To be fair, we must now compare all backdated years of construction to constant dollars in 2016. What would those previous years be worth if they were valued in 2016 dollars?

By mid-2017 total construction spending will reach a new all-time high, but in constant inflation adjusted dollars will still be 17% below 2006 peak. We will not reach a new inflation adjusted high before 2020.

Residential construction spending is still 32% below the 2006 peak of $690 billion. In constant inflation adjusted dollars it is 39% below 2006 peak.

Nonresidential Buildings construction spending is only 3.5% below 2008 peak of $443 billion. However, in constant inflation adjusted dollars it is 18% below 2008 peak.

Non-building Infrastructure construction spending pre-recession peaked in 2008 at at an annual rate of $290 billion.  However, post recession it peaked in Q1 2014 at $314 billion. It is now 8% below the 2014 peak. In constant inflation adjusted dollars it is 12% below the 2014 peak.

For more on inflation SEE Construction Cost Inflation – Midyear Report 2016

Construction Inflation Index Tables 2017

10-24-16 original posted
1-27-17 updated index tables and plots
8-6-17 updated index tables and plots to 2017 base = 100

This collection of Indices is published in conjunction with this linked commentary

Click Here for  Cost Inflation Midyear Report 2017 – text on Current Inflation

Construction Cost Indices come in many types: Final cost by specific building type; Final cost composite of buildings but still all within one major building sector; Final cost but across several major building sectors (ex., residential and nonresidential buildings); Input prices to subcontractors; Producer prices and Select market basket indices.

Residential, Nonresidential Buildings and Non-building Infrastructure Indices developed by Construction Analytics, (in BOLD CAPS), are sector specific selling price composite indices. These three indices represent whole building final cost and are plotted in Building Cost Index  – Construction Inflation, see below, and also plotted in the attached Midyear report link. They represent average or weighted average of what is considered the most representative cost indicators in each major building sector. For Non-building Infrastructure, however, in most instances it is better to use a specific index to the type of work.

BCI 1992-2018 8-6-17

BCI 2005-2018 8-6-17.JPG

Click Here for  Cost Inflation Midyear Report 2017 – text on Current Inflation

All actual index values have been recorded from the source and then converted to current year 2017 = 100. That puts all the indices on the same baseline and measures everything to a recent point in time, Midyear 2017.

Not all indices cover all years. For instance the PPI nonresidential buildings indices only go back to years 2004-2007, the years in which they were created. In most cases data is updated to include June 2017. These data have had significant changes since last issued in both PPI data and I H S data.

Index Table 2001 to 2020 updated 8-6-17.JPG

SEE BELOW FOR LARGER IMAGE

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. When construction activity is declining, construction cost increases slow or may even turn to negative, due to reductions in overhead and profit margins, even though labor and material costs may still be increasing.

Selling Price, by definition whole building actual final cost tracks the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor overhead and profit. Selling price indices should be used to adjust project costs over time.

Here’s a LINK to a good article by Faithful & Gould that explains “If you want to avoid misusing a cost index, understand what it measures.” 

quoted from that article,

wiggins-cost-iindex

R S Means Index and ENR Building Cost Index (BCI) are examples of input indices. They do not measure the output price of the final cost of buildings. They measure the input prices paid by subcontractors for a fixed market basket of labor and materials used in constructing the building. These indices do not differentiate residential from nonresidential. These indices do not represent final cost so won’t be as accurate as selling price indices.

Turner Actual Cost Index nonresidential buildings only, final cost of building

Rider Levett Bucknall Actual Cost Index in RLB Publications nonresidential buildings only, final cost of building, selling price

IHS Power Plant Cost Indices specific infrastructure only, final cost indices

  • IHS UCCI tracks construction of onshore, offshore, pipeline and LNG projects
  • IHS DCCI tracks construction of refining and petrochemical construction projects
  • IHS PCCI tracks construction of coal, gas, wind and nuclear power generation plants

Bureau of Labor Statistics Producer Price Index only specific PPI building indices reflect final cost of building. PPI cost of materials is price at producer level. The PPIs that constitute Table 9 measure changes in net selling prices for materials and supplies typically sold to the construction sector. Specific Building PPI Indices are Final Demand or Selling Price indices.

PPI Materials and Supply Inputs to Construction Industries

PPI Nonresidential Building Construction Sector — Contractors

PPI Nonresidential Building Types

PPI BONS Other Nonresidential Structures includes water and sewer lines and structures; oil and gas pipelines; power and communication lines and structures; highway, street, and bridge construction; and airport runway, dam, dock, tunnel, and flood control construction.

National Highway Construction Cost Index (NHCCI) final cost index, specific to highway and road work only.

S&P/Case-Shiller National Home Price Index history final cost as-sold index but includes sale of both new and existing homes, so is an indicator of price movement but should not be used solely to adjust cost of new residential construction

US Census Constant Quality (Laspeyres) Price Index SF Houses Under Construction final cost index, this index adjusts to hold the build component quality and size of a new home constant from year to year to give a more accurate comparison of real residential construction cost inflation

Beck Biannual Cost Report develops indices for only five major cities and average. The indices may be a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost but should not be used to adjust the cost in either of these two sectors.

Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in six major cities and average.

Other Indices not included here:

Consumer Price Index (CPI) issued by U.S. Gov. Bureau of Labor Statistics. Monthly data on 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.

Leland Saylor Cost Index  Clear definition of this index could not be found, however detailed input appears to represent buildings and does reference subcontractor pricing. But it could not be determined if this is a selling price index.

Sierra West Construction Cost Index is identified as a selling price index but may be specific to California. This index may be a composite of several sectors. No online source of the index could be found, but it is published in Engineering News Record magazine in the quarterly cost report update.

Vermeulens Construction Cost Index can be found here. It is described as a bid price index, which is a selling price index, for Institutional/Commercial/Industrial projects. That would be a nonresidential buildings sector index. No data table is available, but a plot of the VCCI is available on the website. Some interpolation would be required to capture precise annual values from the plot. The site provides good information.

The Bureau of Reclamation Construction Cost Trends comprehensive indexes for about 30 different types of infrastructure work including dams, pipelines, transmission lines, tunnels, roads and bridges. 1984 to present.

Click Here for Link to Construction Cost Inflation – Midyear Report 2017

8-6-17 – Index updated to June 2017 data

Index Table 2001 to 2010 updated 8-6-17

Index Table 2011 to 2020 updated 8-6-17

Click Here for LINK to Cost Inflation Midyear Report 2017 – text on Current Inflation

Construction Volume Vs Construction Spending

Construction volume is not the same as construction spending.

Spending vs Volume 1994-2015

Spending is the number nearly everyone follows. Volume is spending minus inflation.

Two years that show the greatest differences between spending and volume highlight the affect of inflation. In 2004 and 2005 total construction spending grew by 11% and 12.5%, but after inflation, volume grew by only 3% and 2%. In the most recent year, construction spending in 2015 grew by 10.5% but total construction volume grew by only 7.5%.

For the four years 2012 through 2015 construction spending grew by 35% but after inflation volume grew by 21%. Inflation accounts for 14% of spending growth.

Annual construction inflation varies for residential, nonresidential buildings and nonresidential infrastructure, and it varies sometimes so widely that each should be used only to adjust that specific group. Since 1993, long-term annual construction inflation for buildings has been 3.5% per year, even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8% per year.

Historical average volume growth over the last 22 years is grossly distorted by the recession. Volume declined in 8 of those 22 years.  In the worst three years of the recession, 2008, 2009 and 2010, volume declined by 28%. If we take out those three years the typical growth period averages are more apparent. The historical average volume growth in construction with recession data removed and after adjusting for inflation is 2% per year for 19 years.

Adjusting for inflation is changing current dollars to constant dollars.

Current dollars = dollars are reported in the value of the year reported, 2008 = 2008$, 2015 = 2015$.  News reports almost always refer to current dollars and therefore do not account for the influence of inflation.

Constant dollars = all dollars adjusted to represent dollars in the year of comparison. This adjusts for inflation so 2008$ (and all other years) are converted to equivalent 2015$.

It’s not too hard to understand why we need to look at constant dollars when you think of it in terms of building a house. For example, a 2,500 sf house built in 2001 may have cost $250,000 then to build. Today to build that exact same house may cost $400,000. The house is no different, so volume remains the same. The only thing that changed is inflation. With respect to constant dollars for the same volume, $250,000 in 2001 dollars would be equal to $400,000 in 2015 dollars.

The common comparison is to look at growth in construction spending from year to year. What that does not tell us is how much of the spending growth is inflation and how much is a real increase in construction volume.

Spend current vs constant2015 22pct volume growth

Constant dollars makes a huge difference in the analysis. Adjusting all previous years of spending allows us to compare changes in volume growth from year to year. This plot of total construction dollars shows current dollars would indicate we are now only 7% below the previous high and we’ve had growth of 37% from the recession low.  Constant dollars, adjusting for inflation, shows volume is still 17% below the previous cycle high and we’ve had growth of only 22% since the recession lows.

Construction Inflation Cost Index

Note: The original post you’ve reached here was written in Jan 2016. For the latest information follow this link to the newest post on Inflation written 8-6-2017.   Construction Cost Inflation – Midyear Report

Also See  Construction Inflation Index Tables Table of 25 indices 2001-2020 updated 8-6-2017.

This data gets updated twice a year.

Thank You. edz

Jan. 31, 2016

Construction inflation for buildings in 2016-2017 is quite likely to advance stronger and more rapidly than some estimators and owners have planned.

Long term construction cost inflation is normally about double consumer price inflation. Construction inflation in rapid growth years is much higher than average long-term inflation. Since 1993, long-term annual construction inflation for buildings has been 3.5%/yr., even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8%/yr. 

For the period 2013-2014-2015, nonresidential buildings cost indices averaged just over 4%/yr. and residential buildings cost indices average just over 6%/yr. I recommend those rates as a minimum for 2016-2017. Some locations may reach 6% to 8% inflation for nonresidential buildings but new work in other areas will remain soft holding down the overall average inflation. Budgeting should use a rate that considers how active work is in your area.

Infrastructure projects cost indices on average have declined 4% in the last three years. However, infrastructure indices are so unique that individual specific indices should be used to adjust cost of work. The FWHA highway index dropped 4% in 2013-2014 but increased 4% in 2015. The IHS power plant cost index gained 12% from 2011-2014 but then plummeted in 2015 to an eight year low. The PPI industrial structures index and the PPI other nonresidential structures index both have been relatively flat or declining for the last three years.

These infrastructure sector indices provide a good example for why a composite all-construction cost index should not be used to adjust costs of buildings. Both residential and infrastructure project indices often do not follow the same pattern as cost of nonresidential buildings.

Anticipate construction inflation of buildings during the next two years closer to the high end rapid growth rate rather than the long term average.

Building Cost Inflation Index

See more comments on Construction Inflation here

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