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2019 Construction Economic Forecast – Nonresidential – Dec 2018

Construction Analytics 2019 Construction Economic Forecast – Nonresidential

This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.

NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018.  Most spending from these new starts will occur in 2020. This will increase the 2020 nonresidential buildings spending forecast, with the largest increase in manufacturing. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis. The biggest changes reduced residential spending for the next two years.  See the 2019 Construction Economic Forecast – Summary for the residential analysis.

This analysis was edited 12-6-18 to include that most recent starts data and the U S Census October spending data.

 

Summary

Total of All construction spending is forecast to increase 6% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.

01e summary

Nonresidential Buildings construction spending is forecast to increase 6% to $444 billion in 2018, 0% to $443 billion in 2019 and 9% to $482 billion in 2020. The forecast for 2019 will be supported by Office (which includes data centers) and Amusement/Recreation but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.

Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.7% to $334 billion in 2019 and 10.1% to $368 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.

27 sector plot for cover

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,328 trillion, a gain of 6.5%, that will most likely increase.

Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% growth for the 3-year period 2018-2020.

Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.

 

Construction Inflation Indices

Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long-term average inflation is 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.

Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Inflation in this sector has been at 4% or higher the last four years.

Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel tariff impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.

02 inflation bars

Non-building Infrastructure indices are far more market specific than any other type of index. Reference specific Infrastructure indices rather than any average.

These links point to comprehensive coverage of the topic inflation and are recommended reading.

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

Click Here for Cost Inflation Commentary – text on Current Inflation

 

New Construction Starts

All construction starts data in this report references Dodge Data & Analytics Starts Data.

For nonresidential buildings, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. This means that nonresidential spending growth in 2019 is still being affected by starts from 2016.

The following plot show the 3-month moving average and trend line of starts for Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.

06 starts nonres bldgs

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

Starts is a survey sample of a portion of all construction, on average about 50% to 60% of all construction. This can introduce potential error when using starts to predict spending. In any survey, if sample size remains constant, let’s say at 50% of population, but survey response increases 5%/year, then output of the population should increase at 5%/year. However, if survey response increases at 5%/year but sample size is increasing at 3%/year then output of the population should increase at only 2%/year.

If starts survey sample size varies from year to year, it’s possible some of the anticipated spending growth reported by new starts may not represent growth in real volume of future work but could simply represent a change in sample size. Potential significant variations in sample size are seen in the data and may cause errors in the forecast. The detail of Education spending provides an example.

 

Starting Backlog

Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. Starting Backlog for 2019 is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 years.

08e nonres bklg

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or several years ago.

  • 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
  • 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.

09 start bklg plot

Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.

10e infra bklg

 

Cash Flow

Simply referencing total new starts or backlog does not give the complete picture of spending within the next calendar year. Projects, from start to completion, can have significantly different duration. An office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also by old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Although new nonresidential buildings starts increased only 1.6% in 2018 note that cash flow increases by almost 8% due to a very large increase from starting backlog. To a lesser extent the same thing happens in 2019.

Non-building infrastructure starts and cash flow follows a similar pattern. In 2018 and 2019 new starts decline moderately, spending from new starts declines substantially but starting backlog and spending from starting backlog increases are so strong that total cash flow within the year continues to increase.

 

 Nonresidential Buildings Spending

Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, fall -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Rec support the 2019 forecast but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

17e spend nonres bldgs

18 nonres bldgs plot

Nonresidential buildings construction spending in constant $ (inflation adjusted $ to base 2017) will reach $424 billion in 2018 after hitting a post-recession peak of $431 billion in 2016 and dropping to $419 billion in 2017. In 2019 constant $ spending will total $420 billion. Constant $ spending or real volume growth shows all years from 1996 through 2009 had higher volume than any years 2016-2019. Volume reached a peak near $530 billion in 2000 & 2001 and went over $500 billion again in 2008. In constant $ volume, I don’t see returning to that peak before 2023.

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Educational

New Starts averaged YOY growth of 11%/year for the last five years. Starts from the last five months of 2017 posted the highest 5mo total in at least seven years, 13% higher than the next best 5mo. The highest and 2nd highest quarters were both within the last 15 months, so both those periods contribute fully to 2018 spending. 2017 starts will support 25% of spending in 2019. Starts are expected to finish 2018 up 5%. 2018 starts will support 50% of spending in 2019 and 20% of spending in 2020.

Bklg 01e Educ

Backlog in five years 2014-2018 increased 11%/year. It is unusual that Starts and Backlog continue to grow for five years but that growth is not reflected in actual spending. From 2013 to 2018 new starts increased 66% but spending for the period of those starts will increase only 34%. That would seem to indicate a very large volume of work is growing in backlog and spending at some point should boom and remain high for an extended period, but the cash flow model is not in agreement. A possible explanation is the sample survey of new starts has been increasing, so not all the starts growth for five years represents growth in new work. Some of the increase in starts is simply growth in sample size. Educational starts 2012-2015 averaged 50% sample size of total spending. In 2016-2018 the average sample size vs spending was 60%.

Spending is now at a post-recession high.  Spending increased 6%/year for 2015, 2016 and 2018, while 2017 increased only 1%. 2017 and 2018 are still subject to revision. Expect to see growth level off until mid-2019. Leveling at post-recession high is not a bad thing. A build-up of backlog is indicating that spending should increase substantially, but a disconnect in the analysis was noted above. Spending growth increases again in 2020.

At peak, educational represented 30% of all nonresidential buildings spending. Now it’s only 22%. That’s expected to increase slightly for the next three years.

Educational construction spending is forecast to reach $96 billion in 2018, $93 billion in 2019 and $103 billion in 2020.

 

Healthcare

Starts are at an all-time high, up almost 40% in the last 5 years. Some longer duration projects push a substantial amount of spending out to 2020.

Bklg 02e Hlthcr

Backlog increased 11% for 2017 and 8% for 2018. Backlog has been increasing unevenly and grew 30% in 4 years. Backlog increases 3% to start 2019 but is not indicating spending growth in 2019. Cash flow from backlog is indicating spending growth in 2020.

Spending has been very slow to recover, experiencing declines as recently as 2013 and 2014, hitting an 8 year low in 2014, when all other nonresidential building markets had already returned to growth. 2017 posted a gain of 4.4% but then 2018 gained less than 1%. Backlog is increasing but real spending gains won’t materialize until 2020.

Like Educational, backlog growth has been exceeding spending growth for the last few years. That would indicate spending at some point may boom and remain high for an extended period. Cash flow models indicate this may occur in 2020. Other possible explanations are; starts are overstated; cash flow curves (average 28mo) are too short in duration; projects got canceled after starts were recorded; large spending revisions could get posted in the future.

Healthcare construction spending for 2018 is forecast to finish at $42 billion, an increase of only 0.7% over 2017. Considering 4% inflation, Healthcare real volume has declined every year since 2012 with exception of 2017 which would have been flat. It will decline again in 2019 with a forecast -2.7% decline in spending. 2020 realizes the 1st big spending increase in 8 years, +14% to $47 billion.

 

Amusement/Recreation

Starts are up 13% in 2018. Although down 1% in 2017, starts increased at an average rate of 15%/yr. from 2013 through 2017. Within the past 15 months there have been five billion-dollar project starts.

Bklg 03e Amuse.JPG

Starting backlog increased 20%/yr for the last four years while spending was increasing at a rate of 10%/year. This means backlog should continue to support increased spending at least for the next few years.

Spending hit an 8 year low in 2013 but we’ve had 3 years of excellent growth of 10%/yr or more since then. 2017 spending increased only 7% and 2018 11%, but cash flow is indicating a 12% increase for 2019. This market is only 5% of nonresidential buildings spending.

Amusement/Recreation construction spending for 2018 is forecast to reach $28 billion, an increase of 12% over 2017. 2019 is forecast to increase 12% to $31 billion.

Pic Educ Hlth Amuse.jpg 

Commercial/Retail

Commercial/Retail starts have been increasing every year since 2010 but starts in 2018 are flat vs 2017 Starts are at a peak but after 5 years of 15%-20% growth/year are up only 4% in the last two years.

Commercial starts are seeing strong gains from distribution centers (warehouses which are in commercial spending). The decline in retail stores is being hidden by the increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are still up only 4% in 2018 but increased 500% from 2010 to 2017.

In 2010, Warehouse starts were only 1/3 of Store new starts. In 2018, Warehouse starts are 25% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010. See this Bloomberg article Warehouses Are Now Worth More Than Offices, Thanks to Amazon

Bklg 04e Comm

Some big projects from a period of strong new starts growth are ending. This will slow spending after 7 years of strong growth. 2018 backlog still produces a spending increase which may finish close to +5%, but forecast shows spending slows even more to only 2% in 2019 and less than 1% in 2020.

The biggest change in Commercial/Retail in the last few years is that backlog is now more heavily weighted with warehouse projects than store projects. The mix has shifted from 60/40 stores in 2014-2015 to 55/45 warehouses in 2018-2019.

Spending dropped from the high of $90 billion in 2007 to $40 billion in 2010. It has been growing steadily since reaching bottom in early 2011 and has recovered to an annual total rate of $92 billion in 2018. Spending increased an average of 13%/year for six years from 2012 through 2017. Spending growth will be flat in 2019 and 2020 but we are currently near the all-time high. It is worth noting that the $92 billion in 2018 dollars after accounting for inflation is still 30% lower than the $90 billion of spending in 2007.

Commercial/Retail construction spending is forecast to reach $92 billion in 2018, $91 billion in 2019 and $90 billion in 2020, flat to no growth after seven strong years.

 

Office

Starts finished 2018 up 8%. In 2016 starts were up 30% and had reached similar too highs in 1998 and 2006-2007. Starts have been increasing since 2010 with the strongest growth period 2013-2016, up 25%/year. Although the rate of growth slowed in 2017 and 2018, the total amount of starts is at an all-time high. In the last 12 months there are no less than a dozen project starts valued each at over $500 million, a few of those over $1 billion. That high-volume period of starts will elevate spending through 2019 and well into 2020. Data centers are included in Office.

Bklg 05e Offc

Backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018, backlog reached a new high, up 25% over 2017. Starting backlog for 2019, up 19%, is three times what it was just five years ago. Office starting backlog 2017-2019 increased an average of 20%/year. Backlog growth should support strong spending into 2020.

Growth of only 1% in starts for 2019 and 3% increase for 2020 keeps office starts near the all-time high. Even with low growth in new starts for the next two years, the amount of work in backlog from starts on record provides growth in spending for the next three years.

Spending increased by 20%/year from 2013 to 2016, but in 2017 it turned to a 1% decline. That was unusual and unexpected since 2016 starts and 2017 backlog had both reached 10-year highs. Possible explanations might be: a very large number of projects were canceled or delayed; potential revisions to 2017 Office spending may still be pending (In July every year, the previous two years of spending gets revised); but highly probable is the sample size of starts increased dramatically in 2016 and the 30% increase in starts was not all growth in real volume but was partially just a change in sample size, therefore the spending forecast may have been significantly overstated.

Again, it is worth noting that spending in 2018, which for the first time returned to the previous highs posted in 2008, once adjusted for inflation is still about 25% lower in real volume than 2008.

Office construction spending is forecast to reach $74 billion in 2018, $79 billion in 2019 and $84 billion in 2020.

 

Lodging

Lodging posted a new high for starts in 2018, up 8% over 2017. For the period 2011-2016 starts averaged over 30%/year growth for six years. In 2017, starts declined 4% but that remained near the 2016 high. Now with a gain in 2018, those three years average very evenly. Peak starts were in 2016.

Bklg 06 Lodg

Starting backlog averaged increases of 30%/yr. from 2015 to 2017. Lodging starting backlog jumped from $7 billion/yr. in 2014 to $15 billion/yr. in 2018. It has supported similar spending growth. Lodging projects have relatively short duration and timing of starts within the year is important to spending and next-year starting backlog. Compared to most other types of nonresidential buildings, a greater than average percentage of lodging spending occurs within the year started. So, movement in starts has a greater impact on spending within the year.

Lodging spending recorded the largest drop of any market, falling 75% from $36 billion in 2008 to $9 billion in 2011. However, it also recorded the strongest rebound of any market, climbing 20% to 30% per year for the 5-years 2012-2016. In 2011, Lodging dropped to only 3% of total sector spending. It rebounded to 7% in 2017. Lodging actual spending increased 12% in 2018. It’s still not back to the previous high of $36 billion in 2008. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.

Lodging construction spending for 2018 is forecast to reach $32 billion, an increase of 12% over 2017. Spending is forecast at $31 billion for 2019 and $32 billion for 2020.

Pic Comm Offc Lodg

 

Religious and Public Safety

Spending of $11-$12 billion/year represents only 2.5% of total nonresidential building spending. In 2008-2009 it was 5% of the total. The religious building market has been declining since 2002 and is down 55% since then. Public Safety peaked in 2009 and has declined every year through 2017, down 40% from the peak. In 2018, public safety spending is increasing.

I don’t track starts or backlog for these markets. I do track monthly spending and carry a forecast in the Table of Construction Spending classified as Other Nonres Buildings.

Religious and Public Safety currently amounts to $12 billion/year. A 10% change in spending of $1.2 billion in a year would amount to only 0.2% change in all nonresidential buildings spending. This category doesn’t often change by 10% yr/yr, so it’s affect is very small.

 

Manufacturing

Manufacturing reached record high starts in 2014 and record spending in 2015, posting a 100% increase in new starts in 2014 that drove starting backlog and spending to new highs in 2015 and 2016. New starts declined 20%-30%/year for the next two years after the high in 2014 but then 2017 starts increased 27%. Now 2018 starts have increased by 18%, yet that is still 15% lower than 2014.

Starts in June came in at four times the average of all monthly starts in the last three years. October came in at three times the average. Those two months would add up to more than half of annual starts for any of the last three years. Some of these projects will still be contributing to spending in 2023.

Bklg 07e Mnfg

Starting Backlog remained equally high in 2015 and 2016, but then dropped 17% in 2017. Backlog dropped 17% in 2017 and actual spending dropped 13%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts, up 27%. This will support a spending rebound in the future but not before a temporary drop in mid-year 2019.

Spending was forecast to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Based on cash flows from starts, from April 2016 through the end of 2017 spending was expected to decline in 17 of 21 months. It did decline in 14 of those months. Over the next 30 months there are only six months have a forecast to decline, all of those between March and September 2019, all caused by uneven cash flows from very large projects either ending or pushing spending out to future years. This will hold down total spending in 2019. Although backlog for 2019 is up 40%, much of the cash flow from that will occur in 2020.

Manufacturing construction spending is forecast to reach $67 billion in 2018, $65 billion in 2019 and then jump 25% to $82 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.

 

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works project starts increased 20% in 2018 and boost spending in 2019 and 2020.

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Non-building Infrastructure constant $ volume reached a high of $309 billion in 2015 and peaked at the all-time high of $311 billion in 2016, but then dropped to $295 billion in 2017. 2018 saw a return to $303 billion and 2019 is projected to reach $309 billion. Only twice before, 2008 and 2009, did Infrastructure exceed $300 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.

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Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

22 infra plot

Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Transportation spending is projected to increase 15-20%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 7%. 2019 and 2020 are forecast to increase 6% to 10%.

 

Power

Power spending as reported by U.S. Census includes infrastructure for all electric power generation plants and distribution, gas and LNG facilities and all pipelines. In the last year there were more than twenty $billion+ project starts and a dozen more projects valued over $500 million each. In 2015 pipeline starts represented less than 10% of all power starts. In 2018 year-to-date, pipelines are half of all power work started. In three years, pipeline work increased by more than $20 billion or 500%.

Starts, completions and pauses in work cause erratic movement in actual spending. Cash flow may be adversely impacted by very large projects ending or by the delay of large projects that started previously. A multi-billion-dollar nuclear power plant stopped work and large pipeline project delays after the start was recorded have adversely impacted the cash flow forecast. This impacted the spending forecast in 2017, which finished down 5%, 15% below initial projections, and again 2018 will finish 10% below initial projections for 2018 posted back in Nov. 2017.

Bklg 08 pwr.JPG

Although total power starts for 2018 are down 13%, electric / power generation is down 35% but gas/LNG and pipelines starts are up. Starts peaked in 2015-2016, but total in backlog reached a peak in 2018. However, much of this work is very long duration projects, so 2018 backlog will be providing spending at least through 2021. Spending could see 5% gains in 2019 but unless 2019 starts increase 2020 will experience a modest decline. Dodge is predicting 2019 starts will decline 3%.

Power construction spending is forecast to reach $102 billion in 2018, $109 billion in 2019 but then only $107 billion in 2020.

Power spending highlights one of the biggest shortfalls of judging expected performance based on year-to-date change. Notice in the 1st quarter of 2018, spending year-to-date (YTD) was down 8% to 10% from 2017. It is clear now that did not give a good indication of how 2018 would proceed. A better indication is provided by the trend line expected in the current year versus the trend line in the previous year. If they diverge, then early YTD changes will not give a clear indication of expected performance in the current year. An example follows. Note, SAAR data shows performance trend but cumulative NSA$ is needed to get YTD$.

YOY trend Power example 11-28-18.JPG

YOY Power trend data 11-28-18

Power posted the highest spending for 2017 early in the year, then declined in the 2nd half. In 2018, the beginning of the year posted the lowest rate of spending for the year, increased through June, then stayed higher in the 2nd half. The YTD percent growth compared to 2017 has been increasing throughout the year. Higher spending in the 2nd half 2018 compared to the lowest values of the year in late 2017 will boost year-to-date spending every month through year end. Although YTD spending through August is up only 2%, I expect the total for the year will finish up 6%. Even if power spending declines 1% per month for the remainder of the year it will still finish up 5% over 2017.

 

Highway/Street/Bridge

Highway starts hit an all-time high in 2017 and are forecast to climb another 8% in 2018. This model is predicting starts growth will slow or level off after 2018.

Bklg 09e HiWay

Starting backlog increased 30% in the last 3 years and will increase another 14% leading into 2019. This long duration backlog is going to provide for a large increase in spending but not until late 2020 and even more-so into 2021.

Spending in 2018 did not increase in tandem with backlog, because the share of spending within the year from projects that started 1 or 2 years before began to decline. In 2020 and 2021, the share of spending within the year from projects that started 2, 3 and 4 years before is increasing.

Highway construction spending is forecast to reach $92 billion in 2018, $93 billion and then jump to $105 billion in 2020. 2021 may see an increase of 10% in spending.

 

Transportation

Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not account that airports include not only land-side terminals but also air-side runway work and rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work.

Terminals and rail starts reached record high in 2017, both up 120% after a 35% increase in 2016. Spending in 2018 is forecast to finish up more than 20%. Starting Backlog increased 22% in 2017 then jumped 95% in 2018. However, Transportation sample size of new starts potentially increased 30%, far more than any other market. A large portion of the 2017 increase in starts is expected to be change in sample size. This model adjusts 2017 starts down by 20%. Still, most of that backlog spending will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. In the last 24 months there have been sixteen $billion+ new project starts and seven $500million+ new starts.

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2018 total starts are 100% higher than any other year prior to 2017. Starting Backlog skyrocketed from $15 billion in 2016 to $55 billion for 2019. Backlog will support spending for several years to come. Keep in mind, when a $4 billion project first gets recorded in starts, that is the general contract. Many subcontracts will be awarded by the general contractor over the next few years.

Based on predicted cash flows from starts, spending is expected to increase at least into mid-2021.  2018-2019-2020 should see increases of 15% to 20%/year. Dodge is forecasting 2019 starts will stay close to the elevated levels of 2017 and 2018. I’m predicting starts in 2019 will decline from 2018 simply due to the huge volume of new work that started in the last two years. Even with that, backlog could set a record high in 2020.

Transportation construction spending is forecast to reach $55 billion in 2018, $62 billion in 2019 and $75 billion in 2020. Given the growth in backlog and some very long duration projects started recently, spending growth may increase again in 2021.

 

Environmental Public Works

Environmental Public Works includes sewerage projects, Water supply and Conservation, or Dams, water resource and river/harbor projects. New starts for all these type projects declined from 2014 through 2017. Then all showed gains in 2018 and the forecast is more gains in 2019. All of these projects are public spending and saw no real gains in spending from 2010 through 2017. With the projected increases in starts in 2018 and 2019, spending is now forecast to increase the next three years to a new high by 2020.

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Public Works construction spending is forecast to grow 9% to reach $43 billion in 2018, $46 billion in 2019 and $56 billion in 2020.

 

Communications

Starts data for communications is not regularly reported. Total starts for the year is always recorded well after year end. A moderate forecast is included for future starts growth the next two years.

Actual spending is erratic, up 10% one year down 3% the next then up 25% followed by 2% growth. 2018 should finish down 1% after a 12% gain in 2017. The forecast shows a 5% decline in 2019 and flat spending into 2020.

Bklg 12e Commun

Communication construction spending was up 12% in 2017 and finished at $24.8 billion The forecast for 2018 is down 1% to $24.5 billion. Expect $23 billion in 2019 and $23 billion in 2020.

 

For a PDF of this Nonresidential report 2019 Construct Econ Forecast – NONRES – Dec 2018 RVSD 12-6-18

 

Link to 2019 Construction Economic Forecast – Summary

2019 Construction Economic Forecast – Summary – Dec 2018

Construction Analytics 2019 Construction Economic Forecast

This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.

NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018.  Most spending from these new starts will occur in 2020. U.S. Census construction spending for October posted large reductions to several months of residential spending. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis, by far most of the 2019 and 2020 changes are significant reductions in residential spending. See the 2019 Construction Economic Forecast – Nonresidential for detail on all nonresidential and non-building markets

This analysis was edited to include the most recent starts data and the U S Census October spending data.

Summary

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.

01e summary

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.

Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.

27e sector plot for cover

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,321 trillion, a gain of 6.0%, that will most likely increase.

Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% new starts growth for the 3-year period 2018-2020.

Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.

 

Construction Inflation Indices

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. These costs are captured only in Selling Price, or final cost indices.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

Revenue is spending but real volume is spending minus inflation. Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long-term average inflation is 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.

To differentiate between Revenue and Volume you must use actual final cost indices, otherwise known as selling price indices, to properly adjust the cost of construction over time.

Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Spending needs to grow at a minimum of 4.7% just to stay ahead of construction inflation. Inflation in this sector has been at 4% or higher the last four years.

Selling Price is whole building actual final cost. Selling price indices track the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor margins or overhead and profit.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index, Beck Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price of nonresidential buildings only. The individual average annual growth for all these indices over the past 4-years is 4.6%/year.

Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. The PPI tracks material cost at the producer level, not prices or bids at the contractor as-built level.

Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that DO NOT represent whole building costs yet are commonly used to adjust project costs. The ENRBCI tracks a limited market basket of labor and materials. RSMeans holds the quantity of materials and labor for a building constant. Neither index addresses contractor margins. However, they are useful in that they also publish input cost indices from many cities. This provides a reference to compare those cities to the national average, but still, only for a limited basket of labor and materials. Neither gives any indication of the level of market activity in an area.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for six years from 2013 to 2018 is 5.7%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and currently is near 5.5% in 2018. Anticipate national average residential construction inflation for 2018 at least 5.5 % to 6%.

Nonresidential Buildings indices have averaged 4% to 4.5% over the last five years and have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically has led to accelerated inflation.

There are clear signs of increasing construction activity and a tightening construction labor market.  The national construction unemployment rate recently posted below 4%, the lowest on record with data back to 2000. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. The average has been below 5% for the last 18 months. An unemployment rate this low potentially signifies labor shortages. The Job Openings and Labor Turnover Survey (JOLTS) for construction is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.  Labor shortages cause contractors to pay premiums over and above normal wage increases to keep workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data.

Recent news of tariffs has extended beyond just steel. I calculated a 25% tariff on raw steel would add 1% to the cost of nonresidential steel buildings. Hi-rise residential buildings, if building is structural steel, would fall in this category. Wood framed residential impact would be small. A 25% increase in mill steel could add 0.65% to final cost of building just for the structure. It adds 1.0% for all steel in a building. If your building is not a steel structure, steel still potentially adds 0.35%. 

Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.

02 inflation bars

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation in 2018. Notice during that same period seldom did any input indices climbed above 3%.

03 inflation pct

Every index as published has its own base year = 100, generally the year the index was first created, and they all vary. All indices here are converted to the same base year, 2017 = 100, for ease of comparison. No data is changed from the original published indices.

04 inflation index

Non-building Infrastructure indices are far more market specific than any other type of index. Reference specific Infrastructure indices rather than any average.

These links point to comprehensive coverage of the topic inflation and are recommended reading.

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

Click Here for Cost Inflation Commentary – text on Current Inflation

 

Current$ vs Constant$

Comparing current $ spending to previous year spending does not give any indication if business volume is increasing. The inflation factor is missing. If spending is increasing at 5%/year at a time when inflation is 4%/year, real volume is increasing by only 1%.

The current Nonresidential buildings forecast of spending growth at 6.0% for 2018 would suggest that after inflation, nonresidential buildings construction volume is growing slightly.  So expect volume growth in 2018, but next year 4.3% inflation and no spending growth is signaling a volume decline in 2019.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Nonresidential jobs increased by 27% during that period, 15% greater than volume growth.

Residential spending increased by 110% since 2010, but after inflation, real residential volume increased by only 57%. Jobs increased by only 37%, 20% short of volume growth.

When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007. In 2005 constant $ volume reached a peak at $1,450 billion. At current rates of growth, we would not eclipse the previous high before 2022.

05 current constant

Spending in current $ is 14% higher than the previous 2006 high spending.

Volume after adjusting for inflation is still 14% lower than the previous 2005 high volume.

 

Jobs and Volume

The period 2011-2017 shows both spending and jobs growth at or near record highs.

A spending forecast of 6.6%+ in 2018, or an increase of $83 billion in construction spending, demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction “volume”. But construction jobs growth seems to closely follow growth in spending. Construction jobs have increased by 400,000 in a year only four times in the last 50 years, each time accompanied by one of the four highest spending growth increases in 50 years. However, $80 billion in added spending is not the same as $80 billion in volume, and jobs needed is based on volume.

Although spending will increase 6.6%, construction inflation has been hovering near 4.5% for the last five years. Real volume growth in 2018 after inflation is expected to be near 2% or only $26 billion. That would mean the need, if there are no changes in productivity, is to add only about 130,000 additional jobs in 2018, a rate of growth that is well within reach. That is less than the average jobs growth for the last seven years.

Construction added 1,400,000 jobs in the last 5 years, an average of 280,000/year. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Total spending increased 60%+ since 2010, but with 30% inflation. Real total volume since 2010 has increased by only about 30%. Jobs also increased by 30%, in balance with need. But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 50% since 2010 with 35% inflation. Nonresidential volume since 2010 has increased by only 15%. Jobs increased by 27%, 12% in excess of volume growth.

Residential spending increased by 125% since 2010, but after 40% inflation, real residential volume increased by 85%. Jobs increased by only 40%, 45% short of volume growth.

Residential construction labor cannot be directly compared to residential volume because

  • Some residential high-rise jobs, for example structure, are performed by firms whose primary activity is commercial construction. Those jobs are classified as nonresidential.
  • Buildings that are multi-use commercial retail and residential, even lo-rise, may be built by contractors whose firms are classified nonresidential labor. The construction spending would be broken out to residential and nonresidential, but the labor would not.
  • Some residential immigrant labor is not counted

For these reasons, it is best to simplify comparisons of spending activity to total labor.

For more on Jobs see Construction Jobs and Residential Construction Jobs Shortages

 

New Construction Starts

New construction starts for the six months in the 1st half 2018 reached an all-time high.

New Construction Starts three-month average for May-Jun-Jul is $840 billion, all-time high.

Year-to-date (YTD) 2018 starts are currently reported as up only 2% from 2017, but 2017 starts through September have already been revised up by 9%, 10% in nonresidential buildings, 16% in non-buildings and 3% in residential. 2018 starts will not be revised until next year. Revisions have always been up.

Revisions for the last 10 years averaged more than +7%/yr., with most of the upward revision in nonresidential buildings. Revisions to nonresidential buildings have been greater than 10%/year for the last 7 years. Therefore, 2018 starts growth is very likely under-reported.

All construction starts data in this report references Dodge Data & Analytics Starts Data.

Dodge releases its first forecast of next year’s starts every year in the 4th quarter. Last year the first forecast for 2018 was for starts to increase 3% to $765 billion. 2018 starts, based on data as of September, could reach $806 billion, but at first appearing to show no gain from 2017. That’s because 2017 has already been revised up by $50 billion. After 2018 revisions are posted next year, 2018 starts could reach $830-$840 billion. Dodge forecast 2019 starts at $808 billion, no change from 2018. This will be subject to two upward revisions.

  • Previous year starts always later get revised upwards. Therefore, current year starts YTD growth is always understated. This analysis compensates for that.
  • New starts will generate record high starting backlog for every sector in 2019.
  • Even a low forecast for starts in 2019 produces record backlog for 2020.

For nonresidential buildings spending, long duration jobs can sometimes have a 5 to 6-year schedule. On average most years have at least some projects start that will be under construction for 4 years. For an entire year’s worth of starts, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. Residential starts contribute spending into the third year. This means that nonresidential spending growth in 2019 is still being affected by starts from 2016 and residential growth from starts in 2017. This also means that nonresidential spending growth in 2019 is still being affected by starts from 2016.

The next two plots show the 3-month moving average and trend line of starts for Residential and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.

06 starts two plots

The plot below is an index. The plot shows greater accuracy in the forecast when the slope of the predicted cash flow and actual spending plot lines move in the same direction. It’s not the spread between the lines that gives any indication. If the slope of the lines is the same, then the cash flow accurately predicted the spending.

The light green line for nonresidential buildings spending estimated from starts cash flow shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows close to the pattern estimated from cash flows.

07 starts index

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

 

Starting Backlog

Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. 2019 Backlog is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 years.

08e nonres bklg

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or several years ago.

  • 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
  • 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.
  • 70% of All Residential spending within the year is generated from new starts, but this is weighted because 85% of all residential work is short duration single family and renovation work.
  • 65% on long duration Multifamily Residential spending within the year will be generated from projects in starting backlog.

09 start bklg plot

Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.

10e infra bklg

Multifamily residential has a longer duration and a greater percentage of spending comes from backlog. But, due to the shorter duration of projects, about 75% of single family and residential renovation spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much short-term residential spending within the year.

11e Cashflow Forecast RSDN ALL 12-1-18

 

Cash Flow

Simply referencing total new starts or backlog does not give an indication of spending within the next calendar year. 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. New starts within any given year could contribute spending spread out over several years. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also by old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,321 billion, a spending increase of 6.0% over 2017. The forecast for 2019, based on a minimal increase in starts, is $1,341 billion, an increase of only 1.5% over 2018. Dodge initial November 2018 forecast for 2019 construction starts is for $808 billion, no gain over 2018. However, subsequent revisions may increase that a few percent.

The following table illustrates the difference between Starts and Cash flow. It shows Manufacturing Bldgs. projects in backlog as of October 2018 and predicted starts in 2018 through 2021. Note there are sometimes vast differences between amounts of Starts, whether already in Backlog at beginning of year or New Starts within the year, and Cash Flow from Backlog and New Starts.

12e mnfg bklg cashflow

Cash Flow modeling predicted a huge decline of -16% in manufacturing spending in 2017. This was in stark contrast to seven other economic analysts who predicted spending would be between -7% and +7%, for an average of +0.4% as reported in the January 2017 AIA Consensus. Manufacturing spending actually ended the year at -13.0%. Obviously, there is no correlation between a 25% increase in new starts within the year and a predicted -16% drop in spending. The actual -13% drop in 2017 spending reflects a return to normal after an unusually large volume of spending in 2015 and 2016 that was generated by a record volume of starts in 2014.

Note that new manufacturing starts were up 27% in 2017 and could be up 18% in 2018, yet 2018 spending is forecast to increase only 1.5%. This is due to projects that started several years ago but are now coming to an end. They are dropping out of the monthly cash flows and holding down 2018 spending even though starts have been up substantially for two years. This substantial volume of new starts in 2017 and 2018 will be providing a boost to spending in 2020 and 2021.

 

Spending

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019 and 6.3% to $1.426 trillion in 2020.

13e spend sectors

Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.

The following table clearly shows there is not a correlation between starts in any year with spending in either the current or the following year. The practice of using construction starts directly to predict spending can be very misleading in an industry that relies on data for predictive analysis to plan 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 a false indicator and it’s not a good use of data.

14 spend vs starts

 

Residential Buildings Spending

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020.

Residential spending in 2018 slows after six years of growth all over 10%/year. Average spending growth the last seven years is 12%/year. Although Residential 2019 construction spending is still increasing slightly 0.5%, growth has slowed to less than inflation of 5%. Therefore real 2019 residential volume after inflation is forecast to decline by 4%+, the largest real volume decline since 2009. In 2018 residential spending increased 5.6%, but after inflation real volume increased only a fraction of a percent.

Residential spending in 2018 is 50% single family, 13% multi-family and 37% improvements. In 2011, improvements were 48% of residential spending.

Single Family Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts.

11e Cashflow Forecast RSDN ALL 12-1-18

Total starts for the last 6 months are the highest since 2006, but % growth has slowed considerably. New starts in 2017 which initially posted only 2% growth have already been revised up to 4%. I expect that to be revised up to 5%. Growth of 7% is expected for 2018. Slower growth is now expected after 5 years (2012-2016) of starts increasing at an average 20%/year. Multi-Family Residential spending is more dependent on backlog.

15e Cashflow Forecast RSDN MF ONLY 12-1-18

Residential spending hits a 12-year high in 2018. Residential spending reached a current $ peak of $630 billion in 2005. 2018 pending is still 10% below that peak. In constant $, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant $, 2018 spending is still 27% below the 2005 peak.

16 res nonres plot

 

Nonresidential Buildings Spending

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

17e spend nonres bldgs

18 nonres bldgs plot.JPG

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached as high as $440 billion in 2017 but averaged only $419 billion in 2017. In 2018 it will reach a high of $430 billion but average only $424 billion. The yearly average recently peaked at $431 billion in 2016. Constant $ spending or real volume growth shows all years from 1996 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $ 2018 is still 20% below that 2000 peak.

19 nonres cur con

 

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works had strong 20% growth in 2018 starts and Highway starts hit a new high in 2018.

20e spend nonbldg

Non-building Infrastructure construction spending in constant $ (inflation adjusted $) reached $311 billion in 2016, an all-time high, but then dropped to $296 billion in 2017. In 2018 it will reach $302 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.

21 nonbldg cur con

Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

22 infra plot

Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Transportation spending is projected to increase 20-25%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 8%. 2019 and 2020 are forecast to increase 5% to 6%.

 

Public Infrastructure and Public Institutional

Less than 60% of all Non-building Infrastructure spending, about $170 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

About 25% of all Nonresidential Buildings spending, about $110 billion, is publicly funded, mostly Educational. Nonresidential buildings spending makes up almost 40% of Public spending.

  • Infrastructure = $300 billion, ~25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $170 billion. Private Infrastructure = $130 billion.
  • Power and Communications are privately funded infrastructure.
  • Nonresidential Buildings is 25% public (mostly institutional), 75% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $100 billion, mostly Education ($70b).

23 pub prv spend.JPG

 

Public Infrastructure + Public Institutional = $280 billion, 23% of total construction spending.

Public Infrastructure + Institutional average growth is $12 billion/year. It has never exceeded $30 billion in growth in a single year.

See also Publicly Funded Construction

See also Down the Infrastructure Rabbit Hole

24 pub prv share

Public Spending

Total public spending for 2018 is projected to finished up 9.5% at $320 billion. Every major public market is projected to finish up for 2018. By far, the largest Public spending increases for 2018 are Highway, Transportation, Sewer and Waste Disposal and Water Supply.

25e pub prv sectors

The two largest markets contributing to public spending are Highway/Bridge (32% of total public spending) and Educational (25%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending. Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20% public. Power is about 6% public, along with few other smaller shares.

Public spending hit a 4-year low in mid-2017. It has been increasing since then and is now near an all-time high. I’m expecting to see strong growth through 2020.

Due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 growth are Educational (+15%) and Transportation (+35%), with a combined total forecast 20% growth in public spending.

Current levels of backlog and predicted new starts gives a projection that Public Non-building Infrastructure spending will reach an all-time high in 2018 and again in 2019.

26e pub bklg

For a Full Formatted PDF of this Report click

2019 Construction Economic Forecast – Summary – Dec 2018

 

Link to the 2019 Nonresidential Forecast Report

2019 Construction Economic Forecast – Nonresidential – Nov 2018

Down the Infrastructure Rabbit Hole

2-16-18

Down the Infrastructure Rabbit Hole. A twitter thread on construction capacity.

The infrastructure sector is only 25% of all construction spending, with the largest share being the Power market. Power accounts for 33% of all infrastructure spending. Highway represents 30% and Transportation about 15%. However, Power is 80% private, Transportation 30% private.

Only 60% of all Infrastructure spending is publicly funded. Highway is about half of all publicly funded Infrastructure construction. That public subset of work in the last 25 years has grown by $20 billion/year only once and averages growth of less than $10 billion/year.

Most public work is Infrastructure or public works projects, about 60%, but some public work is nonresidential buildings, about 40%. Public Safety is 100% public. Educational projects are 80% public. Amusement/Recreation Facilities (i.e.’ Convention Centers, Stadiums) is 50% public. Healthcare is 20% public.

The two largest markets contributing to public spending are Highway/Bridge (32%) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending.

Sewage/Waste Water and Water Supply add up to another 10% of the market. All other markets combined, Conservation and all other various nonresidential buildings, none more than 4% of the total, account for less than 20% of public spending.

Spend Public Share 2-25-18

It is rare that Nonbuilding Public Infrastructure construction spending increases by more than $10 billion in a year. Once, only once, it increased by an average of $10 billion/year for three years. Excluding recession, average annual growth is $4 billion/year.

It is rare for Total All Public Infrastructure to increase by $20 billion in a year. It has done so only ever twice. Excluding the two worst recession years, the average annual growth since 2001 is $7 billion/year.

For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 to 50,000 new construction jobs per year.

Infrastructure construction spending is near all-time highs and has been for the last several years. Public spending is 10% ($30bil) below all-time highs, the largest deficits coming from Educational, Sewage/Waste Water and Water Supply.

Either an infrastructure spending plan is used to create new work or it becomes a funding source to pay for work already planned, in which case it does not increase spending or jobs projections.

As proposed, states and municipalities would be required to come up with 80% of the funding for any new infrastructure project to qualify for 20% of funding from the federal government, potentially shifting the bond funding tax burden to states.

Alternatively, states could solicit private partnership funding, in which case what would normally be considered public assets could become privately controlled assets. This raises a whole new list of issues for discussion, not engaged here.

Infrastructure currently has the highest amount of work in backlog in history. Public work is at its 2nd highest starting backlog only to 2008. Starting backlog accounts for 80% of spending in the current year and 60% of spending in the following year.

Current levels of backlog and predicted new starts gives a projection that Public Nonbuilding Infrastructure spending will reach an all-time high in 2018 and again in 2019.

Total All Public Infrastructure in 2018 also reaches an all-time current$ spending high. However, in constant$, inflation adjusted, volume of work is still well below previous peak.

The non-building infrastructure construction sector does not have the capacity to increase spending over and above existing planned (booked and projected new starts) work by another $10 billion/year, nor does it have the capacity to add an additional 40,000 jobs per year.

Total All Public Infrastructure construction, including public works and Nonresidential public buildings, already has a growth projection near historic capacity. It cannot double that volume by another $10-$20 billion/year and add an additional 40,000 – 80,000 jobs per year.

Below is the timeline of my articles series on Infrastructure. Some of the numbers have changed slightly over the past year, but not enough to change the premise of the articles.

2-28-18 Publicly Funded Construction

2017/12/03  spending-summary-construction-forecast-fall-2017

2017/11/11  backlog-construction-forecast-fall-2017

2017/10/10  is-infrastructure-construction-spending-near-all-time-lows

2017/03/23  behind-the-headlines-infrastructure-spending-&-jobs

2017/03/06  calls-for-infrastructure-problematic

2017/03/05  infrastructure-public-spending

2017/01/30  infrastructure-ramping-up-to-add-1-trillion

2016/10/29  Saturday-morning-thinking-outloud-Infrastructure

Residential Construction Jobs Shortages

2-3-18

During the period  including 2011 through 2017, we had record construction spending, up 50% in 5 years, moderate inflation reaching as high as 4.6% but averaging 3.8%, record construction volume growth (spending minus inflation), up 30% in 5 years and the the 2nd highest rate of jobs growth ever recorded.

Residential spending was up 90% in 5 years, but real residential volume up only 50%. Residential inflation, at 6%/year, was much higher than all construction. Jobs increased only 33%.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-1999 with the highest 5-year growth ever of 1,483,000 jobs. That same 93-99 period had the previous highest spending and volume growth. 2004-2008 would have reached those lofty highs but the residential recession started in 2006 and by 2008 spending had already dropped 50%, offsetting the highest years of nonresidential growth ever posted.

The point made here is the period 2011-2017 shows spending and jobs at or near record growth. Although 2017 slowed, there is no widespread slowdown in volume or jobs growth.

This 2011-2017 plot of Construction Jobs Growth vs Construction Volume Growth seems to show there is no jobs shortage. In fact it shows jobs are growing slightly faster than volume. But that just does not sit well with survey data from contractors complaining of jobs shortages. So how is that explained?

Jobs vs Volume 2011-2017 2-1-18

There have been cries from some quarters, including this blog, that the answer lies in declining productivity. There seems to be plenty of workers, but it now takes more workers to do the same job that took fewer in the past. As we will see, that is part of the answer, but doesn’t explain why some contractors need to fill vacant positions. To find data that might answer that question about a jobs shortage we must dig a little deeper.

The total jobs vs volume picture masks what is going on in the three major sectors, Residential, Nonresidential Buildings and Non-Building Infrastructure. A breakout of jobs and volume growth by sector helps identify the imbalances and helps explain construction worker shortages. It shows the residential sector at a jobs deficit.

7 years 2011-2017  – % Jobs growth vs % Volume growth

  • Totals All Construction  Jobs +31%, Volume +30%
  • Nonres Bldgs  Jobs +27%, Volume +19%
  • Nonbldg Hvy Engr  Jobs +21%, Volume +12%
  • Residential  Jobs +40%, Volume +54%

The totals show jobs and volume almost equal, data that supports the 2011-2017 totals plot above and what we would expect in a balanced market. But severe imbalances show up by sector. Both nonresidential sectors show jobs growth far outpaced volume growth. Residential stands out with a huge deficit, with jobs way below volume growth.

Just looking at 2017 growth shows the most recent imbalances.

2017 % jobs growth vs % volume growth

  • Totals All Construction Jobs +3.4% Volume -0.8%
  • Nonres Bldgs Jobs +3.3% Volume -1.6%
  • Nonbldg Hvy Engr Jobs +1.7% Volume -6.0%
  • Residential Jobs +3.5% Volume +4.2%

Census recently released initial construction spending for 2017, totaling $1.230 trillion, up only 3.8% from 2016. What is somewhat disconcerting is that 2017 construction spending initial reports growth of 3.8% do not even match the total inflation growth of 4.6% for 2017, indicating a -0.8% volume decline. However, as does always occur, I’m expecting upward revisions (estimated +2%) to 2017$ construction spending on 7-1-18. If we don’t get an upward revision, then 2017 will go down as the largest productivity decline since recession. Even if we do get +2% upward revision to 2017$ spending, 2017 volume would be revised up to +1.2% and jobs growth will still exceed volume growth.

Let’s look a little deeper at the data within the sectors. Each chart is set to zero at Jan 2011 so we can see the change from that point, the low point of the recession, until today. At the bottom of each chart is shown a Balance at start. That represents the cumulative surplus or deficit of jobs growth compared to volume growth for the previous 10 years prior to Jan 2011. If there are no changes in productivity, or no surplus or deficit to counteract, then jobs should grow at the same pace as volume.

There are slight differences between the data in the three sector charts and the total construction chart. The sector charts use annual avg data and the totals chart uses actual monthly data.

Jobs vs Volume 2011-2017 NonResidential Bldgs 2-3-18

Jobs vs Volume 2011-2017 NONbuilding 2-3-18

 

Nonresidential Buildings and Non-building Infrastructure, over seven years and the most recent three years, show jobs increasing far more rapidly than volume. Nonresidential Buildings started 2011 with a surplus of jobs after the recession, but Infrastructure started 2011 with a substantial deficit of jobs. Only in this last year did Infrastructure jobs reach long-term balance with work volume.

Nonresidential Buildings started 2011 with a 13% surplus of jobs and more than doubled it in the seven years following. I’ve suggested before it could be that a part of this surplus is due to companies hiring to meet revenue growth, and not inflation adjusted volume. Although nonresidential spending actually increased 43%, volume since 2010 has increased only 12%. Since 2010 there has been 30% nonresidential buildings inflation, which adds zero to volume growth and zero need for new jobs. A 43% increase in spending could lead companies to erroneously act to staff up to meet spending, or revenue, more than needed for the 12% volume increase.

Jobs vs Volume 2011-2017 Residential 2-3-18

This plot for residential work shows from 2011 to the end of 2017, we’ve experienced a 20% growth deficit in jobs. How many residential jobs does this 20% growth deficit represent? From Jan 2011 through Dec 2017, residential jobs increased from approximately 2,000,000 to 2,700,000. So the base on which the % growth increased over that time is calculated on 2,000,000. An additional 20% growth would be a maximum of 400,000 more jobs needed to offset the seven year deficit. But what about the imbalances that existed when we started the period?

During the residential recession from just 2005 through 2010, residential volume declined by 55%, but jobs were reduced by only 38%. For the entire period 2001-2010, total volume of work declined by 14% more than jobs were reduced. Some of the surplus jobs get absorbed into workforce productivity losses and some remain available to increase workload. It’s impossible to tell how much of that labor force would be available to absorb future work, so for purposes of this analysis an estimate of at least 5% seems not unreasonable. That would mean for 2011-2017, instead of a need for an additional 20% more jobs, the need could be reduced by 5% or 100,000 jobs.

This analysis shows a current deficit of 300,000 to 400,000 residential construction jobs. While it does also show nonresidential buildings jobs far exceed the workload and there are more than enough surplus jobs to offset the residential deficit, there would be several questions of how transferable jobs might be between sectors.

  1. Are there highly technical specialty jobs in Nonresidential Buildings that would not be transferable to Residential?
  2. What is the incidence of specialty workers engaging in work across sectors? i.e., job is counted in one sector but working in another sector.
  3. What has been the impact of losing immigrants from the construction workforce?
  4. Is the ratio of immigrant workers in Residential much higher than Nonresidential?
  5. Is the pay more attractive in Nonresidential construction?
  6. What, if any, percentage of the Residential workforce is not being counted? Day labor?

One thing is known for certain,  high-rise multifamily residential buildings may often be built by a firm that is classified primarily as a nonresidential commercial builder. Therefore, some jobs that are counted as nonresidential are really residential jobs.

I think most of these would have a more negative impact on Residential jobs. However, there is some possibility that the overall deficit may not be quite as high as available data show (points 2 and 6). And there is always the possibility that we’ve crossed a threshold that has led to new gains in productivity, although to some extent, the stark differences between Residential and Nonresidential Buildings data might counter that proposition.

These two following report references both document that there is a large unaccounted for shadow workforce in construction. This workforce is probably mostly residential.

Pew Research Center – “Share of Unauthorized Immigrant Workers in Production, Construction Jobs Falls Since 2007” 

NAHB’s HousingEconomics.com “Immigrant Workers in the Construction Labor Force”

and these more recent reports adds volumes of data on immigrant labor

NAHB’s Jan 2018 Report on Immigrant Labor in Construction

Pew – U.S. Unauthorized Immigrant Total Dips to Lowest Level in a Decade NOV 2018

Unemployment and productivity includes only jobs counted in the official U.S. Census Bureau of Labor Statistics (BLS) jobs report.  Both these reports document a large, unaccounted for shadow workforce in construction. By some accounts, 40% or more of the construction workforce in California and Texas are immigrant workers. Immigrants may comprise between 14% and 22% of the total construction workforce. It is not clear how many within that total may or may not be included in the U.S. Census BLS jobs report. However, the totals are significant enough that they would alter some of the results commonly reported.

The best way to see the implications that the available data do show is to look at productivity. The simplest presentation of productivity measures the total volume of work completed divided by the number of workers needed to put the volume of work in place, or $Put-in-Place per worker. In this case, $ spending is adjusted for inflation to get a measure of constant $ volume, and jobs are adjusted for hours worked.

As the Residential jobs deficit increases vs workload, this plot shows that $PIP is increasing. That makes sense. The workload continues to increase and the jobs growth is lagging, so the $PIP per worker goes up. For Nonresidential Buildings, the rate of hiring is exceeding the rate of new volume and therefore the $PIP is declining.

Prod $PIP by Res Nonres only 2001-2017 2-4-18

In boom times, residential construction adds between 150,000 and 170,000 jobs per year and has only twice since 1993 added 200,000 jobs per year. In the most recent several years expansion, residential has reached a high of 156,000 jobs in one year but has averaged 130,000 per year over 5 years. So it’s pretty unlikely that we are about to start adding residential construction jobs at a continuous rate of 200,000+ jobs per year.

If residential jobs growth were to increase by 50,000 jobs per year over and above current average growth, it would take 6 to 8 years to wipe out the jobs deficit in residential construction.

This problem is not going away anytime soon.

For more history on jobs growth see Is There a Construction Jobs Shortage?

For more on the imbalances of Res and Nonres jobs see A Harder Pill To Swallow!

For some hypotheses as to why nonresidential imbalances continue to increase see Construction Spending May 2017 – Behind The Headlines

Construction Inflation Index Tables

  • 10-24-16 Originally posted
  • 2-10-19 updated index tables and plots to include Q4 2018 data

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

Click Here for  Cost Inflation Commentary – 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.

The following plots of Construction Analytics Building Cost Index are all the same data. Different time spans are presented for ease of use.

BCI 1967-2018 7-10-18

BCI 1992-2019 2-12-18

BCI 2005-2020 2-10-19

Click Here for  Cost Inflation Commentary – 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.

All forward forecast values where-ever not available are estimated and added by me.

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 December 2018.

  • June 2017 data had significant changes in both PPI data and I H S data.
  • December 2017 data had dramatic changes in FHWA HiWay data.

SEE BELOW FOR TABLES

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. ENR does not differentiate residential from nonresidential, however the index includes a quantity of steel so leans much more towards nonresidential buildings. RS Means is specifically nonresidential buildings only. These indices do not represent final cost so won’t be as accurate as selling price indices. RS Means subscription service provides historical cost indices for about 200 US and 10 Canadian cities. RSMeans 1960-2018 CANADA Keep in mind, neither of these indices include markup for competitive conditions. FYI, the RS Means Building Construction Cost Manual is an excellent resource to compare cost of construction between any two of hundreds of cities using location indices.

Notice in this plot how index growth is much less for ENR and RSMeans than for all other selling price final cost indices.

BCI 2010-2020 Firms 2-24-19

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

Rider Levett Bucknall Actual Cost Index  published in the Quarterly Cost Reports found in RLB Publications  for nonresidential buildings only, represents final cost of building, selling price. Report includes cost index for 12 US cities and cost $/SF for various building types in those cities. Also includes cost index for Calgary and Toronto.

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

See this article by the Bureau of Labor Statistics on Nonresidential building construction overhead and profit markups applied to select Nonres building types

PPI Materials Inputs and Final Cost Graphic Plots and Tables in this blog updated 2-10-19

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 five major cities plus average. I did not see specifically if the index is or is not a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost,  but may be better used in conjunction with other more specific sector selling price indices. Beck has not published index values since 2015.

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

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.

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 not be used to adjust construction pricing.

Jones Lang LaSalle Construction Outlook Report National Construction Cost Index is the Engineering News Record Building Cost Index (ENRBCI), a previously discussed inputs index. The report provides some useful commentary.

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.

US Historical Construction Cost Indices 1800s to 1957

Click Here for Link to Construction Cost Inflation – Commentary

2-12-18 – Index update includes revisions to historic Infrastructure data

2-10-19 updated index tables and plots to include Q4 2018 data

Index Table 1991 to 2000 updated 2-12-18

Index Table 2001 to 2010 updated 4-20-18

Index Table 2011 to 2020 updated 2-10-19

How to use an index: Indexes are used to adjust costs over time for the affects of inflation. To move cost from some point in time to some other point in time, divided Index for year you want to move to by Index for year you want to move cost from. Example : What is cost in mid 2019 for a nonresidential building whose midpoint of construction was 2013? Divide Index for 2019 by index for 2013 = 109.6/86.0 =  1.27. Cost of building in 2013 times 1.27 = cost of same building in 2019. Costs should be moved from/to midpoint of construction. Indices posted here are at middle of year and can be interpolated to get any other point in time.

All forward forecast values where-ever not available are estimated by Construction Analytics, generally 0.5% to 1.0% lower each for 2019 and 2020.

Click Here for LINK to Cost Inflation Commentary – text on Current Inflation

Steel Statistics and Steel Cost Increase Affect on Construction?

9-18-16    update Mar 2018

Recent articles suggest that steel cost is expected to increase and this will almost certainly affect the cost of construction. But just how much of an affect would a cost increase have on total building cost? The cost increase that is being talked about is the mill price cost of steel, or something like pipe and tube producer price (PPI), since pipe and tube is a world trade item, but not a Fab Steel PPI. None of these include total cost of steel installed. The PPI is the price after fabrication. Total cost is the contractor’s bid or selling price installed which includes all markups (or markdowns).

PPI Steel Materials Inputs plot updated 2-10-19 to include 2018 data

PPI Materials Steel 2-20-19

The questions we need to answer are:

  • How much of a cost increase will we see in the raw product, manufactured raw steel?
  • How much steel is used in a building?
  • What affect will a raw material cost increase have on the cost of steel installed?
  • How much does that change the cost of the building?

It might help to start with a basic understanding of steel manufacturing and use.

Basic Oxygen Steel (BOS) steel making uses between 25 and 35% recycled steel to make new steel. BOS steel usually has less residual elements in it, such as copper, nickel and molybdenum and is therefore more malleable than EAF steel so it is often used to make automotive bodies, food cans, industrial drums or any product with a large degree of cold working. Cold rolled steel is in this category which would include gypsum wall system steel studs and HSS Hollow Structural Sections.

Electric Arc Furnace (EAF) steel making contains more residual elements that cannot be removed through the application of oxygen and lime. It is used to make structural beams, plates, reinforcing bar and other products that require little cold working. EAF steel uses almost 100% recycled steel. Most steel that goes into a building or civil structure is in this category. 2/3rds of all steel manufactured in the US is EAF steel.

Typically quoted benchmark steel pricing that I’ve seen is based on either cold-rolled-coil sheet steel or hot-rolled-coil sheet steel.  This is a common product used for the automotive industry or appliance, but not so much for the construction industry (steel studs vs structural steel). EAF Structural steel is nearly 100% dependent on recycled steel so is not as much affected by price changes of iron ore, as is BOS steel.

The United States is the world’s largest steel importer. Of the ~25 to 30MMT imported, 50% of that comes from Canada, Brazil and South Korea, our top three suppliers. Mexico and Russia supply 9% each. China supplies less than 2% of our steel imports, In total imports comprise about 13% of US steel consumption.

The United States consumes approximately 100 million tons of steel each year. More than 40 million tons is used in the construction industry. The next largest industries, automotive and equipment and machinery, together do not use as much steel as construction. The U.S. imports about 25-30% of the steel it uses.

Steel Use

The graphic chart above is by American Iron and Steel Institute.

Structural steel is the most widely used structural framing material for buildings used in the U.S. with nearly 50% market share in nonresidential and multistory residential buildings. Prior to the recession steel had a 60% market share.

Steel Share of Building Frame 3-1-18

The table of data above is by Dodge Analytics, from this paper by American Institute of Steel Construction.

Sources are also linked below.

What affect might a steel cost increase have on a building project?  It will affect the cost of structural shapes, steel joists, reinforcing steel, metal deck, stairs and rails, metal panels, metal ceilings, wall studs, door frames, canopies, steel duct, steel pipe and conduit. Structural steel and reinforcing steel are hot-rolled long products, EAF steel. All the others are cold-rolled flat sheet BOS steel.

Here are some averages of the percentage of steel material costs as related to total project construction cost.  For a building that is predominantly masonry, these percentages would be reduced considerably. For a heavy industrial building the percentages might be higher.

Assuming a typical structural steel building with some metal panel exterior, steel pan stairs, metal deck floors, steel doors and frames and steel studs in walls, then all steel material installed represents about 14% to 16% of total building cost. 

Structural Steel only, installed, is about 9% to 10% of total building cost, but applies to only 60% market share of steel buildings. The other 6% of total building cost applies to all buildings. 

Other steel is very likely higher to take into account any increased cost in major mechanical equipment such as chillers, pumps, fan powered boxes, cooling towers, tanks, generators, plumbing fixture supports, electrical panel boxes and cable trays.

If the structural steel subcontractor increases bid price by 10%, that raises the cost of the building by 1%, but if it is the mill price of steel that increases by 10% the increase to final building price is far less. It is the mill price of steel, rather than fabricated steel, that you would track in the producer price index (PPI).

The final cost of steel installed in a building is about four times the cost of the raw mill steel material used in making and installing the final product. Why so different? Well, for instance, structural steel cost includes: raw mill steel cost, delivery to shop, drafting, shop fabrication, shop paint, delivery to job site and shop markup. At the job site it includes: unload and sort, field installation crew, welding machine, crane and operator, contractor’s overhead and profit and sales tax.

Assuming a building as described above, a 10% increase in the cost of mill steel, which (material only) affects one fourth the cost of 16% of the total building cost, then a 10% increase in the cost of ALL mill steel may result in a composite price increase on a whole building of about 10% x ¼ x 16% = 0.4%. A 10% increase in the cost of mill steel just for structure may result in a composite price increase on a whole building of about 10% x ¼ x 10% = 0.25%.

So, if the mill cost of steel were to increase 10% from $700/ton to $770/ton prior to shop fabrication,  for a $100 million building, that could add roughly 0.25% ($250,000) to the cost of the structural steel contract or roughly 0.4% ($400,000) to the total cost of all steel.

A 25% increase in mill steel could add 0.65% to final cost of building just for structure. It adds 1.0% for all steel in a building.

For a project such as a steel bridge, where not just 16% of cost is steel material, but potentially 40% to 60% of cost is steel, a 25% increase in mill steel might add as much as 3% to 4% to final cost.

links to relevant data

Steel Imports Report Global Steel Trade Monitor

Steel Capacity Utilization and Use American Iron and Steel Institute

Structural Steel Industry Overview  AISC

World Steel Production – Consumption – Imports – Exports

Steel Benchmark Pricing

Crain’s NY – Impact of steel tariffs already being felt in NYC

 

 

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