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Pandemic Impact on Construction – Recession in 2020?

This analysis attempts to develop the resulting impact of a construction recession scenario caused by the current Covid-19 pandemic. The scenario presented does not assume a catastrophic failure of the U.S. economy, but does assume a large drop in construction activity in 2020 and 2021.

This analysis generates spending cash flows from current and assumed reduced new construction starts to then determine how spending may affect future construction activity.

Impact of Pandemic on Construction

Analysis of a Recession Scenario 2020-2022

by Ed Zarenski  3-20-20

The change around us is happening so fast, in my opinion, no one is ready for what comes next.

The world is struggling to get the upper hand in a pandemic, travel is coming to a near halt, stock markets are down 30% in a month, universities have sent students home, schools and businesses are closed until further notice, events all around the country are being canceled and people are being instructed to stay home and limit social contact.

We won’t get the first hard data of Coronavirus impacts on the construction industry spending and jobs until reports released in first week in May which will cover jobs mid-March thru mid-Apr and spending for March. The first hint at what we might expect regarding slowdown could be the Dodge construction starts for March which comes out around Apr 20. But spending and jobs from work in backlog coming out in the May reports could be better 1st indicator.

Firms that manufacture goods used in construction may be closed temporarily, so they are producing less. Shipping of products on world markets has slowed or stopped completely. Materials supplies will soon be affected. Construction projects will most likely experience delays. Product shortages, delivery delays and shutdowns will drive up costs and extend project schedules.

Projects in planning may be canceled due to drop in demand, decline in capital or slowdown in economy. Retail stores may cancel expansion, educational facilities may delay starting new construction, transportation facilities may postpone later phases of long planned growth.

As I sit here writing this, the city of Boston this morning announced that ALL non-essential construction projects are to shut down today. That’s nearly all projects. Boston accounts for $22 billion/year in construction spending, 80% of all construction in the state of Massachusetts, 60% of all work in MA-CT-RI, 50% of all New England. This affects well over 100,000 jobs.

Also, the San Francisco Bay area has been directed to shelter-in-place, essentially shutting down all nonessential construction work. This impacts approximately 200,000 construction jobs and amounts to about double the volume of work as Boston.

We can expect more locations to issue directives such as these in the near future.

How Can We Measure the Effects Due to Covid-19 Impacts?

Let’s first establish the baseline. The starting baseline is my current construction spending and backlog forecast for 2020-2021 which includes 2019 total spending and new construction starts through February. There is considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

The best indicator of future construction activity is the sum of the projected monthly cash flows generated by all the construction starts that have been recorded.

This plot shows the correlation between projected cash flow from starts and actual spending.

Starts CF 2015-2022 3-17-20 BASELINE
baseline forecast

Recession What If? Starting Baseline 

To begin, we can look at the current forecast of new starts, backlog and spending.

Construction Starts in 2018 were up 4% and prior to that were up 10%/yr. 2019 starts including revisions are up 4%. 2020 starts are forecast down 4%. Current Backlog is up 30% in the last 4 years, at all-time high. Although spending is forecast up only 4%/yr. the next two years, spending is at an all-time high.

Residential construction starts peaked in 2018. Starts in 2019 are level yoy, but have been flat or in moderate decline since mid-2018. Spending is forecast up 5% in 2020 but down 1% in 2021.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Starts have moved sideways or in slight decline since mid-2018. 2019 starts are down 9% from 2018. Spending is forecast up 3% in 2020 and 2021.

Infrastructure starting backlog, by far the most robust, has increased 15%/year for the 3 years 2018-2020. Spending is forecast up 6% in 2020 and up 8% in 2021.

It is important to understand when spending from backlog occurs. Average cash flow curves for nonresidential work show about 15%-20% of spending from new starts occurs in the year started and about 40%-50% occurs the following year. 80% of all nonresidential spending in any given year is from backlog. If new starts drop by 10%, that has only a 1.5% to 2% impact on total spending in the first year. The following year spending would be down 4% to 5%.

Residential spending is far more dependent on new starts than backlog. Only about 30% of residential spending comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total spending by 7% in that year.

Recession Scenario

When a recession occurs, new construction starts would be substantially reduced. Although some projects will be canceled or delayed mid-schedule, most projects already in construction would move on to completion. Most of the cut back comes from a reduction in new starts.

In the great recession, residential starts dropped 70% from 2005 to 2009, down from $400 billion to $110 billion.  Nonresidential Buildings starts dropped 35% from 2008 to 2010. Nonbuilding starts fell only 6% in 2009. Total All Spending declined 30% from $1.160 trillion in 2006 to $788 billion in 2011.

Regardless what may lead to a construction recession, in this case a global pandemic, it is the current high amount of work in backlog that will work hard to mute its effect.

No analyst had been indicating huge declines in new construction starts within the next few years. At worst, some suggested a moderate slowdown. Prior to today, data seemed to agree with a moderate slowdown.

Although Dodge is forecasting the $ value of housing starts down 6% in 2020, Housing Starts # of units as reported by US Census in Q4 2019 are at a post-recession high, reducing the likelihood of such a decline.

Dodge 2020 forecast for new nonresidential buildings starts is down 2.5%.

This recession scenario does not assume a catastrophic failure of the economy.

It is unknown how much existing or new work might get canceled. To get an idea how a recession might impact construction spending, this analysis reduces new construction starts by 20% in 2020 and 10% in 2021 from the baseline. That’s about the average of what occurred in the great recession, although then it was far greater in residential and much less in non-building infrastructure. Only once in the last 20 years, other than the great recession, did new construction starts drop more than 5% in any sector in a year.

So initially, compared to the baseline forecast, there would be 20% less work to bid on in 2020 and 10% less in 2021. But that is not how spending, or revenues, would react. Backlog and spending schedule curves determine the impact on spending, or revenues.

Here’s the resulting change in the spending plots. Only the estimated spending to the right of the dateline changes.

Starts CF 2015-2022 3-17-20 RECESSION
RECESSION SCENARIO

Residential construction spending would drop about 14% in 2020 and then drop 13% in 2021 below the baseline scenario. Residential is far more dependent on new starts within the year for spending than on backlog. That’s why residential spending drops quicker than all other work.

Nonresidential Buildings spending ends 2020 4% lower than it would have under the baseline scenario but then drops 12% in 2021 and 10% in 2022. Backlog going into 2020 in this sector is strong and therefore, even though spending is 4% lower than baseline, 2020 still posts a spending gain of 1.5%. 2021 declines 8% and 2022 gains 1%.

Non-building Infrastructure spending ends 2020 3% lower than it would have under the baseline scenario but then drops 9% in 2021 and 10% in 2022. Non-building Infrastructure has so much work in backlog that this sector still posts a spending gain of 6% in 2020 and 1% in 2021. It declines by 2% in 2022.

The major declines in 2020 are residential since most residential spending comes from new starts within the year, but for all other work, the strength of backlog going into 2020 pushes most of the declines out to 2021 and 2022.

Total all spending would drop from the current 2020 forecast of $1.365 trillion to $1.260 trillion. In 2021 and 2022, instead of baseline spending of $1,370 trillion, it would drop to $1.230, back to the level of 2016. The losses in the Great Recession, a total drop of almost $400 billion, set construction spending growth back 12 years.

Not only did Boston shut down non-essential construction projects but also New York and California have done the same. Boston accounts for about $20 billion/year in construction spending, but NY and CA together account for about $280 billion. Let’s assume CA and NY and Boston shut down all but critically essential construction for 1 month. Let’s say that is 80% of all construction. That represents a shutdown of $20 billion of construction in one month’s time.

The difference with shutdown vs a reduction in new starts is that work shut down is delayed. It will reduce total spending in that month in 2020 but will simply push spending to the end of the project, which could occur in 2020, 2021 or later. If 50% of all U.S. construction shut down for one month it would delay $50 billion worth of work by one month.

The magnitude of spending declines would impact the jobs situation. History shows that job declines of the same magnitude do not follow immediately with volume declines, therefore we would probably not see much reduction in workforce in 2020. But spending declines in 2021 and 2022 could lead to a loss of about 500,000 to 750,000 jobs. Over the course of the great recession we lost 2.3 million jobs.

You can read more about the job situation here.

To summarize:

This is a WHAT IF? Analysis.

Assumption that new construction starts drop 20% in 2020 and 10% in 2021 lower than the baseline forecast.

This would cause total construction spending to drop 8% in 2020, 12% in 2021 and 7% in 2022 from the previously established baseline forecast.

The spending declines measured in dollars are: down $100 billion in 2020, down another $40 billion lower in 2021, but then up $20 billion in 2022 over 2021.

This could lead to a loss of about 500,000 to 750,000 jobs

What this will do to the construction inflation rate is hard to predict. Typically when work volume decreases the bidding environment gets more competitive and prices go down. However, if materials shortages develop, that would cause prices to increase. Add to these issues the fact that almost every project currently under construction may be halted for a period of time, the delays may add several weeks to perhaps a month or two to the overall schedule. I think in this case the materials availability issues and schedule delays will outweigh and decline in work available for bid. I would add a minimum of 1% to all baseline inflation rates for 2020 and 2021.

“None of us have much of a sense what the economy will be in 2021.” Fed Chair Jerome Powell 12-11-19

2020 Construction Economic Forecast – Jan 2020

Construction Analytics 2020 Construction Economic Forecast

This January, 2020 Construction Economic Forecast addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Backlog, Spending or Revenue, and Volume. New Construction Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Spending adjusted for Inflation differentiates between Revenue and Volume. Backlog can be referenced to assess expected future Volume and Spending. Cash flow 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

Click here for a downloadable PDF of 2020 Construction Economic Forecast Feb 2020

Click here for a downloadable PDF of SUMMARY – 2020 Construct Econ Forecast 2020

Summary of 2020 Construction Outlook

Total of All construction spending in 2019 is forecast to decrease -0.2% to $1.305 trillion. For 2020, spending increases by 4.6% to $1.365 trillion.

Spend Forecast 2018-2022 1-21-20

Nonresidential Buildings construction spending is forecast to finish 2019 at $455 billion, level with 2018. For 2020 the forecast is a gain of 3% to $467 billion. Educational and Commercial/Retail held down gains in 2019. Office (which includes data centers) and Lodging gained 7% each. Office, Healthcare and Educational all support growth in 2020.

Residential construction spending forecast is down 5% to $521 billion in 2019 and up 6% to $552 billion in 2020. New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, growth in 2019 slowed to less than inflation. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. 2020 volume is forecast to increase 2%.

Non-building Infrastructure construction spending is forecast to increase 7% to $329 billion in 2019 and 5% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

Spend Sector monthly 2015-2021 2-10-20

Spending data for the previous two years gets revised in July of the following year. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2019 spending is down -0.2% to $1.305 trillion, that will most likely increase to a net gain.

In their October annual report, Dodge Data forecast 2019 construction starts to total $809 billion, down 1% from 2018. However, starts are always revised up in the following year. In just the last three years, nonresidential starts have been revised up by 7.5%/yr and residential starts by 2.4%/yr. I expect revisions will show 2019 starts increased by 3% to 4% over 2018. However, even with revisions, 2019 starts will post the slowest annual growth since 2011.

Dodge Data and Analytics new construction starts for November 2019 advanced to the highest seasonally adjusted annual rate ever, resulting in the three months Sep-Oct-Nov 2019 posting the highest 3-mo average ever, 10% higher than the total average for 2018.  Several long duration projects started, so a lot of the spending from these new starts will occur in 2021-2022. Dodge is forecasting 2020 starts down 4%. This forecast includes only 1% to 2% growth in new starts for 2021-2022.

Starting backlog, which increased 5% leading into 2020 is currently at an all-time high, up 20% since 2017. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. More than 20% of all spending in 2020 is from projects that started more than 3 years ago. 

While a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years. Current indications are that 2020 backlog will be up 4% for residential work, 6% for nonresidential buildings and 7% for infrastructure work.

  • Starts increased 8%/yr. in 2016 and 2017, but only 4% in 2018.
  • Starts are forecast to decline slightly in 2019 and 2020.
  • Spending increased 9%/yr. from 2012 to 2016, then slowed to 4%/yr. in 2017 and 2018.
  • Spending declined 1% in 2019 and is forecast up 4% for 2020 and 1% in 2021.
  • Backlog reaches a post-recession high in 2020, up 20% from 2017, up 100% from 2013.

Since early 2018, jobs have been increasing while construction volume is declining. A declining volume of work does not support jobs growth. When volume of work decreases, jobs should also decrease. If jobs increase, then it results in more workers to produce the same amount of work. In other words, productivity is declining. This could result in one or more of these outcomes:

  • Labor demand on hiring drives labor cost up by unexpected amounts.
  • New labor coming into the workforce has less experience, lowering productivity.
  • Contractors cannot meet schedules, extending project duration.
  • Contractors work overtime to meet schedules, adding cost.

All scenarios either extend project duration or drive up the cost of projects or both, which could lead to some unforeseen inflation.

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. Residential and Nonresidential Buildings inflation indices developed by Construction Analytics are final cost selling price indices.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work.

This link points to comprehensive coverage of the topic inflation. Click Here for Link to a 20-year Table of 25 Indices

This link points to articles related to the Construction Outlook for 2020. Click Here for Link to Construction Economic Outlook 2020

 

Some Signs Ahead – Economic Indicators

The following reports can be accessed by clicking on the hyperlinks provided.

AIA Consensus January 2020 Construction Forecast is a semi-annual survey of construction economists’ projections for future nonresidential buildings spending. The January 2020 Consensus report of expectations for nonresidential construction shows predicted growth for 2020 at 1.5%. All major markets show growth expectations between -2% and +4%. Office, Healthcare and Education are projected to gain 3% to 3.9%. Commercial/Retail, Lodging and Amusement/Recreation are expected to fall 1.3%-1.9%.

Architectural Billings Index (ABI) measures monthly work on the boards in architectural
firms. It is a nine to twelve month leading indicator to construction. Index values above 50 show increasing billing revenues, and below 50 indicates declining revenues. All ABI indices were above 50 from Jan. 2017 through Jan. 2019. However, from Jan. 2018 through 2019, contrary to the index, spending posted the largest drop in six years.

Dodge Momentum Index (DMI) is a monthly measure of nonresidential projects in
planning, excluding manufacturing and infrastructure. It is a leading indicator of specific nonresidential construction spending by approximately 12 to 15 months. This plot moves the DMI ahead to show when the index would have an affect on construction spending. The DMI is indicating a slow decline in new spending for the 1st half of 2020 but then a rapid increase in the 2nd half. From July 2019 onward, the DMI does not agree with the Starts Cash Flow which is a forecast of  the movement in the spending forecast.

DMI Starts Spend 2015-2021 1-15-20

Producer Price Index indices for 2019 materials average Inputs to construction in 2019 posted a gain of only 1.5%. up 2.1% for nonresidential buildings and up only 0.9% for residential. However, selling price indices for nonresidential buildings and nonresidential trades averages 4% with Industrial buildings, warehouses and schools all over 4.5%. The difference between these indices is the combined affect of labor cost and contractor margins which are not tracked in the PPI inputs.

FMI Q4 2019 Nonresidential Construction Index (NRCI) is 50.4, the lowest reading in eight years. The NCRI is a diffusion index based on a survey of opinions submitted by nonresidential construction executives. With only one slight bump up in Q2 2019, it dropped every other quarter since Q2 2018. Construction spending has been lower every quarter since Q2 2018. Construction spending in 2018 and 2019 declined to the two lowest years since 2011.

Institute for Supply Management (ISM) Non-Manufacturing Index (NMI) Report
for December 2019 is a better indicator of activity in the construction industry than the
ISM manufacturing report. The NMI measures economic activity in 13 industries
(including construction) not covered in the manufacturing sector. The December NMI is
55.0, above 50 for 126 consecutive months, indicating continued economic growth.
Construction shows growth in business activity and increased backlog. Construction shows slower deliveries but no change in prices paid. Construction reports contractors in short supply. A comment from a construction respondent, “While demand is outstripping supply in the housing market, business is down due to global trade insecurity causing affordability, labor and cost pressures.”

 

Construction Starts > Cashflow > Backlog > Spending

One of the best predictors of construction inflation is the level of activity in an area. When the activity level is low, contractors are all competing for a smaller amount of work and therefore they may reduce bids. When activity is high, there is a greater opportunity to bid on more work and bids can be higher. The level of activity has a direct impact on inflation.

Construction starts data is needed to predict spending or the level of market activity. This provides insight into market costs and inflation. To predict spending activity from new construction starts, the starts data must be spread over time using appropriate cash flow curves. On average about 20% of new construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in year three or later. Applying an expected duration for all starts depending on market type to produce a forecast cash flow from starts data, the expected pattern of spending is developed.

The starts data is a survey. As in any survey, starts data captures a share of the total market or a portion of all construction spending, on average about 60% of all construction. The easiest way to understand this is to compare total annual construction starts to total annual spending. National starts from 2016 to 2019 range from $750 billion/year to $800 billion/year, while spending in this period ranges from $1,200 billion/year to $1,300 billion/year. From this comparison we can see starts captures a share of about 60% of the total market. 

This table shows Office starts in 2016 did not drive up spending in 2017, the 2nd year, when most spending occurs. Manufacturing had two huge years of growth in starts but very little growth in spending the following years. The cash flow curves for starts determine when spending occurs. The forecast shows Office spending up 9% in 2020 and Manufacturing up 10% in 2021.

Starts vs Spending Cash Flow 1-27-20 shorter

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

Backlog at the beginning of the year or new starts within the year does not give an indication of spending within the year. New starts within any given year could contribute spending spread out over several years. Total cash flow in the year, or spending, could include cash flow from projects that started or entered backlog years ago. An increase in backlog could represent a level rate of market activity, but for a longer duration.

Cash flow provides the best indicator of how much and when spending will occur. Cash flow from all previous starts gives a prediction of how spending will change monthly from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.

 

New Construction Starts

Total of all construction starts increased every year from 2010 through 2019. Average growth from 2012 to 2017 was 8%/year. New starts slowed to +2% in 2018 and are forecast up +1% in 2019 and +2% in 2020. Backlog is still up leading into 2020 but after that starts and backlog are forecast to remain below 2% gain or decline over the next few years. Total spending has only slight gains in 2021 and 2022.

CF Forecast Total All Markets Table National 1-27-20

Nonresidential Buildings starts (excluding Terminals) increased every year since 2010. Only Manufacturing declined slightly in 2017. Commercial/Retail declined 6% in 2018. Commercial, Lodging and Amusement posted declines in 2019. The last three years (adjusted) starts are up only 2% to 3% per year. 

Backlog for Office Buildings and Lodging is up 100%+ since 2016. Office includes data centers. Commercial/Retail backlog is down 14% in the last two years. Spending is still up 4% in 2020 but then with the slowdown in starts forecast in 2020, backlog growth stalls and spending slows in 2021-2022.

75%-80% of all Nonresidential Buildings spending within the year will be generated from projects that were booked in starting backlog at the beginning of the year.

CF Forecast Nonres Bldgs Table National 1-27-20

Non-building Infrastructure two markets with the largest share of new starts are Highway/Bridge and Transportation. Transportation terminals and rail starts are up 35% in the last three years, but backlog has doubled because a large portion of those starts is very long duration projects.

CF Forecast NonBuilding Table National 1-27-20

Non-building Infrastructure starts can be erratic with a long pattern of up then down years. Starts (including Terminals) gained only 4% in 2019 but are at an all-time high. Even though starts gain less than 2% in 2020, backlog peaks in 2021. Spending increases are in the 5% to 8% range at least for the next two years. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years. Spending in recent years has been boosted by Transportation terminals and Highway projects.

Most of the residential spending in any year is cash flow from new starts. For short duration residential spending, single-family residential and renovations work, approximately 75% of spending in the year comes from project starts within the year.

CF Forecast Residential Table National 1-27-20

For long duration residential spending, typical of multifamily residential, approximately 50%-55% of the spending occurs in the year of the start, 35%-40% in the next year and only 5%-10% occurs two years out.

  • 75% to 80% of short duration Residential spending within the year will be generated from projects that are recorded as new starts within the year.
  • 50% to 55% of long duration Multifamily Residential spending within the year will be generated from projects that are recorded as new starts within the year.

Dodge releases its first forecast of next year’s starts every year in the 4th quarter. Dodge initial forecast for 2019 starts was $808 billion, no change from 2018. Starts are currently at $818 billion and will be subject to more 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 2020.

Revisions for the last 8 years averaged more than +6%/yr., with most of the upward revision in nonresidential buildings. However, for the last 3 years revisions added only 4%. Revisions to nonresidential buildings have been greater than 7%/year for the last 3 years, non-building revisions average 8%/yr and residential revisions average 2.4%/yr. Therefore, 2019 starts growth is very likely under-reported.

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 at least 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 was affected by starts from 2016 and residential growth from starts in 2017. This also means that nonresidential spending growth in 2020 is still being affected by starts from 2017.

The Estimated Spending plot below is an index. The plot shows greater accuracy in the cash flow forecast when the slope of the predicted cash flow and actual spending plot lines move in the same direction at the same slope. 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 is accurately predicting the spending.

The light green line for nonresidential buildings spending estimated from starts cash flow shows smooth spending, even though actual monthly starts can be erratic. The actual spending often follows close to the pattern estimated from cash flows.

Starts CF 2015-2022 1-18-20

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 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

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.

Nonresidential Buildings starting backlog at the beginning of 2020 reached an all-time high. 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 2020 is up 60% in 5 years.

CF Forecast Nonres Bldgs Table National 1-27-20

Non-building Infrastructure starting backlog at the beginning of 2020, up 10% from 2019, reached an all-time high. Some of this is very long-term work that started construction in 2016-2017 and it will contribute spending for the next several years. In fact, about half of all spending in 2020 comes from projects that started prior to Jan 2019. 2021 Backlog is forecast to increase 9%. Backlog is up 25% in the last 3 years. 

CF Forecast NonBuilding Table National 1-27-20

Residential starting backlog, unlike nonresidential, does not contribute nearly as much short-term residential spending within the year. 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. 

CF Forecast Residential Table National 1-27-20

The plot below shows that backlog has been increasing since 2011-2012. Many projects in backlog extend out several years in the schedule to support future spending, so backlog growth in not an indicator that tracks directly yr/yr with spending. Without any new construction starts in 2020 or beyond, current backlog at the start of 2020 would still contribute some spending for the next 6 years until all the projects in backlog are completed.

Start Backlog Res Starts 1-27-20

For Nonresidential Buildings, 68% of 2020 Backlog will get spent within the 1st year. 27% of 2020 Backlog will get spent next year. 2020 backlog will last for 58 months.

For Non-building Infrastructure, 53% of 2020 Backlog will get spent within the 1st year. 32% of 2020 Backlog will get spent next year. 2020 starting backlog will last for 72 months

For Residential construction, 95% of 2020 Backlog will get spent within the 1st year. 2020 backlog would run out in 18 months. Residential construction is far more dependent on new construction starts. If no new work started, the backlog workload would run out quickly.

How much of the spending forecast is supported by starting backlog. For all construction, 62% of 2020 total spending comes from starting backlog. If no new work starts after December 2019, then only 24% of the 2021 spending forecast would be supported from 2020 starting backlog.

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 previous starts still in backlog plus cash flow from new starts supports a 2020 spending forecast of $1,365 billion, an increase of 4.6% over 2019. Dodge initial November 2019 forecast for construction starts in 2020 is $776 billion, down 4% from 2019. However, subsequent revisions may increase that a few percent.

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. The highlighted examples below, Office and Manufacturing, show starts is not a good indicator of expectation for spending. 

Starts vs Spending Cash Flow 1-27-20 shorter

Note that new manufacturing starts were up 29% in 2017 and 26% in 2018, yet 2019-2020 spending is forecast to increase only 3%. This is due in part to the share of market captured in the starts survey having increased, but also to very large projects that started but that have much longer than normal duration to complete, therefore moving the largest monthly cash flows further out into the future.

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.

Starts vs Spending 2011-2019 1-27-20

Spending

Total of All construction spending is forecast to increase 0.2% to $1.305 trillion in 2019, 4.6% to $1.365 trillion in 2020 and 0.9% to $1.377 trillion in 2021.

Spend Forecast Sectors 2016-2022 1-27-20

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.

 

Residential Buildings Spending

Residential construction spending is forecast down -4.6% to $521 billion in 2019, but strong new starts in Q4 increases spending by 6.0% to $552 billion in 2020. A 5% decline in 2020 new starts lowers spending in 2021 by -3.79% to $532 billion.

New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential monthly rate of spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, there was no overall growth in 2019. 

Residential spending average growth from 2011 through 2017 was 12%/year. Although spending increased 2.7% in 2018, growth was less than inflation of 4.3%, therefore 2018 volume after inflation decline by 1.5%. In 2019 residential spending decreased 4.5%. After accounting for 3.6% inflation, real volume decreased by 7.8%. Residential construction volume in 2019 posted the largest volume decline in 10 years. 2020 volume is forecast to increase only 2%.

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

CF Forecast Residential Table National 1-27-20

Total residential new starts for the last 3 months and the last 6 months posted the highest rates of growth since 2006. Growth for 2019 is initially down -2.5%, but that is because 2018 has already been revised up by 2.1% and 2019 is yet to be revised. Revisions are usually up. Dodge predicted 2019 starts would fall 5%, however my current forecast is a drop of only 1.3%. 2020 starts are forecast up 2.6%.

CF Forecast Residential MFonly Table National 1-27-20

Residential current$ spending reached a 12-year high in 2018 of $580 billion but that was still far below the 2006 peak of $690 billion. In constant$, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant$, 2018 spending is still 28% below the 2005 peak. As of Dec 2019, constant$ spending is 37% below the 2005 peak.

Spend current vs constant Residential 2020 2-10-20

 

Nonresidential Buildings Spending

Nonresidential Buildings construction spending for 2019 is forecast to finish at $455 billion, up only 0.3% from 2018. Spending is forecast to increase 2.9% to $467 billion in 2020 and 1.2% to $473 billion in 2021. Healthcare, Educational and Office (which includes data centers), support the 2020 forecast. There is downward pressure the next two years from slowdowns in Amusement/Recreation, Commercial/Retail and Lodging.

Spend Forecast NonresBldgs 2016-2022 1-27-20

Current$ spending for Nonresidential buildings reached a monthly high of $470 billion in mid-2018 but then fell slightly and remained between $450 and $460 billion in 2019. Both 2018 and 2019 totals averaged new annual high marks just slightly above 2008. Average annual 2019 spending grew only 0.3% from 2018. 2020 is forecast up 2.9%.

Spending in constant$ (inflation adjusted $) peaked in mid-2018 at $450 billion but by Dec. 2019 it’s down 10% to only $406 billion. It’s expected to remain at this level throughout 2020. Constant $ spending or real volume growth shows all years from 1995 through 2010 had higher volume than the 2020 forecast.

Spend current vs constant Nonres Bldgs 2020 2-10-20

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 6.8% to $329 billion in 2019 and 4.9% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. In 2017, transportation terminals  increased more than 100%. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

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

Spend Forecast Nonbldg Infra 2016-2022 1-27-20

Current$ spending for Non-building Infrastructure reached a high annual rate of $340 billion in mid-2019 but then fell slightly to only $325 billion by year end.  Spending in 2020 is expected to increase slowly from $330 billion to $350 billion. Total 2020 spending is expected to increase 5%.

Non-building Infrastructure construction spending in constant $ (inflation adjusted $) peaked at reached $330 billion in 2016, an all-time high, but then dropped to $280 billion in 2018. In 2020 it will average $300 billion. Constant $ spending or real volume growth dropped 10% in 2017-2018 but is forecast to gain 6% in 2019-2021.

Spend current vs constant Non-bldg Infra 2020 2-10-20

 

Public Infrastructure and Public Institutional

Just 60% of all Non-building Infrastructure spending, about $194 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

About 30% of all Nonresidential Buildings spending, about $134 billion, is publicly funded, mostly Educational. Nonresidential buildings spending makes up just over 40% of Public spending.

  • Infrastructure = $328 billion, ~25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $194 billion. Private Infrastructure = $134 billion.
  • Power and Communications are mostly privately funded infrastructure.

 

  • Nonresidential Buildings is 30% public (mostly institutional), 70% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $110 billion, mostly Education ($80b).

 

Spend PubPriv 2019 totals detail 2-10-20

Public Infrastructure + Public Institutional = $300 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

The two largest markets contributing to public spending are Highway/Bridge (33% of total public spending) and Educational (27%), together accounting for 60% of all public construction spending. At #3, Transportation is only 13% of public spending. Environmental Public Works combined makes up 17% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation account for about 3%-4% each.

Highway is 100% public and Public Works 99%. Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20%. 

Public Starts and Backlog

The Public markets with the largest share of growth in new starts the last two years are Transportation and Public Works. Transportation terminals and rail starts are up 30% in the last three years, but backlog has doubled because a large portion of those starts is very long duration projects. Public works starts are up 20% and backlog is up 40%. Infrastructure projects typically have the longest duration. Projects contribute spending sometimes up to 5 or 6 years.  

CF Forecast PUBLIC Table National 1-27-20

Public spending backlog is up an average 9%/year for the last three years. Some of this is very long-term work that started construction in 2016-2017 and it will contribute spending for the next several years. 40% of all public spending in 2020 comes from projects that started prior to Jan 2019. Backlog is up 25% in the last 3 years and is forecast to increase another 9% to start 2021. 

Public Spending

Total public spending for 2019 is projected to finished up 8% at $332 billion. Every major public market is projected to finish up in 2020. By far, the largest Public spending increases measured in dollars for 2020 are Transportation, Highway and Educational.

Spend Forecast PubPriv 2016-2022 1-27-20

Public work construction spending in constant $ (inflation adjusted $) reached $318 billion in 2016, short of the highs reached in 2002 and 2008. Constant$ value work then dropped to $300 billion in 2017 and has been level through 2019. In 2020 it will increase only 1%.

Spend current vs constant Infrastr PUBLIC 2020 2-10-20

Construction Inflation

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Most spending for residential comes from new starts in the year.

2020 starting backlog is up 5.5% across all sectors. However, while a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years.

Residential new construction starts in 2019 (number of units started) gained 4% over 2018. In 2018, starts dropped every quarter after Q1, but then increased every quarter in 2019 and closed out the 2nd half of 2019 at 9% higher than the average of the previous six quarters. New starts measured in dollars dropped slightly in 2019. Spending from new starts fell 5% in 2019 but is forecast up 6% for 2020. Residential construction volume (spending after inflation) in 2019 dropped 8%, the largest volume decline in 10 years. Volume in 2019 dropped to a 4-year low. A volume gain of 2% in 2020 leaves residential still at a 4-year low.

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.

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.

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.

Consumer Price Index (CPI), tracks changes in the prices paid by 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.

Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that do not capture whole building cost.

Producer Price Index (PPI) Material Inputs (which excludes labor and margins) to new construction increased +4% in 2018 after a downward trend from +5% in 2011 led to decreased cost of -3% in 2015, the only negative cost for inputs in the past 20 years. Input costs to nonresidential structures in 2017+2018 average +4.3%, the highest in seven years. Infrastructure and industrial inputs were the highest, near 5%. But input costs for 2019 are coming in at less than +1%. Material inputs accounts for only a portion of the final cost of constructed buildings.

Materials price input costs in 2019 slowed to an annual rate of less than 1%.  

Labor input is currently experiencing cost increases. The National construction unemployment rate was recently posted below 4%, the lowest on record with data back to 2000.  The average has been below 5% for the last 18 months. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. An unemployment rate this low signifies a tight labor market. This may cause contractors to pay premiums over and above normal wage increases to keep valued workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data, so aren’t easily tracked. Lack of experienced workers and premiums to keep labor drive labor cost increases higher than wage growth.

Although many contractors report shortages due to labor demand, labor growth may slow due to a forecast 2019-2020 construction volume decline. We might see a labor growth decline lag spending/volume decline.

When construction activity is increasing, 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.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price (for nonresidential buildings only). The average annual growth for all these indices over the past five years is 4.7%/year. For the last two years, average nonresidential buildings inflation is 5.3%.

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

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. Typically, large declines in volume are accompanied by declines in inflation. Forecast residential inflation for the next three years is level at 3.8%.

A word about Hi-Rise Residential. Most of the cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. On the contrary, this type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, a more appropriate index to use for hi-rise residential construction is the nonresidential buildings index.

Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years. Spending needs to grow at a minimum of 4.4%/yr. just to stay ahead of construction inflation, otherwise volume is declining. Spending slowed dramatically in 2019. However, new starts in 2018 and 2019 boosted backlog and 2020 spending will post the strongest gains in four years.

Several Nonresidential Buildings Final Cost Indices averaged over 5% per year for the last 2 years and over 4% per year for the last 5 years. Nonresidential buildings inflation totaled 22% in the last five years. Input indices that do not track whole building cost would indicate inflation for those five years at only 12%, much less than real final cost growth. For a $100 million project escalated over those five years, that’s a difference of $10 million, potentially underestimating cost.

Notice in this next plot how index growth is much less for ENR BCI and RSMeans, both input indices, than for all other selling price final cost indices. From 2010 to 2019, total final price inflation is 110/80 = 1.38 = +38%. Input cost indices total only 106/85 = 1.25 = +25%, missing a big portion of the cost growth over time.

 Nonresidential Buildings Selling Price Indices vs Input Indices

BCI 2010-2020 Firms 12-9-19

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, stayed flat from 2015-2017, then increased 15% in 2018-2019. The IHS Pipeline and LNG indices increased 4% in 2019 but are still down 18% since 2014. Coal, gas, and wind power generation indices have gone up only 5% total since 2014. Refineries and petrochemical facilities dropped 10% from 2014 to 2016 but regained all of that by 2019. BurRec inflation for pumping plants and pipelines has averaged 2.5%/yr since 2011 and 3%/yr the last 3 years.

Anticipate 3% to 4% inflation for 2020 with the potential to go higher in rapidly expanding Infrastructure markets, such as pipeline or highway.  This link refers to Infrastructure Indices.

 Construction Analytics Building Cost Index

BCI 2005-2022 12-9-19

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart of the range of all other nonresidential building inflation indices. Bars represent the predicted range of inflation from various sources with the solid line showing the composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation of less than 1%, the actual inflation is following a pattern of growth above 4%. The low end of the predicted range is almost always established by input costs (ENR BCI is plotted), while the upper end of the range and the actual cost are established by selling price indices.

 Construction Analytics Nonresidential Buildings Cost Index

vs Range of Input Indices

Inflation Range 1993-2020 plot vs ENR 1-18-20

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation since 2018.

Reference Inflation PCT 12-17-19

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.

Reference Inflation INDEX 12-17-19

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

A word about terminology: Inflation vs Escalation. These two words, Inflation and Escalation, both refer to the change in cost over time. However escalation is the term most often used in a construction cost estimate to represent anticipated future change, while more often the record of past cost changes is referred to as inflation. Keep it simple in discussions. No need to argue over the terminology, although this graphic might represent how most owners and estimators reference these two terms.

Inflation Escalation with text

This link points to comprehensive coverage of the topic inflation and is recommended reading. Click Here for Link to a 20-year Table of 25 Indices

 

Current$ vs Constant$ – Spending vs Volume

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%.

Nonresidential buildings spending increased 3.3% in 2017, 4.4% in 2018 and 0.3% in 2019. But nonresidential buildings inflation for those three years was 3.7%, 5.0% and 5.0%. Nonresidential volume therefore declined for three consecutive years by a total of 5.5%. The current nonresidential buildings forecast spending growth is 3%/yr or less for the next three years. With inflation near 4%, that would suggest inflation adjusted nonresidential buildings construction volume is declining.

Residential spending increased from 2011 through 2017 by average growth of 13%/year.  With average residential inflation during that period of 5%/year, inflation adjusted residential volume increased by 8%/year. That changed in 2018. 

Residential spending increased only 2.7% in 2018 and dropped 4.6% in 2019. Residential inflation for 2018 and 2019 was 4.3% and 3.6%. Residential volume therefore declined by 1.6% in 2018 and 8% in 2019. Current residential forecast spending growth is +6% in 2020 but then -3.7% in 2021. With inflation just under 4%, that indicates inflation adjusted residential construction volume will grow only 2% in 2020 but may drop 7% in 2021.

In 2018 and 2019, total construction volume declined 6%. Residential volume declined 10%. Construction spending forecast for 2020 is $1,365 billion, an increase of 4.6% from 2019. But 2020 inflation is forecast at 4%. So, after inflation real volume growth in 2020 is forecast up less than 1%. It’s down 1.4% for nonresidential buildings but up 2% for residential.

Spend Sector 2015-2021 1-4-20

Nonresidential Buildings will post declines in volume in 2020 & 2021. Non-building Infrastructure volume will increase 1% in 2020 and 4% in 2021. If residential starts hold as forecast at only 1% to 2% growth, residential volume will decline sharply by 7% in 2021 after a moderate 2% gain in 2020. Overall, total construction volume has declined in 4 out of the last 6 quarters and is forecast to drop slightly in 3 of 4 quarters in 2020.

The plot below, comparing inflation adjusted constant dollars with current spending dollars for all construction, clearly shows that although spending is at an all-time high, volume is down the last two years and is lower than all years from 1998 through 2008. 

Spend current vs constant 2019 1-22-20

Spending after adjusting for inflation shows volume never got closer than 13% less than the previous 2005 high. Currently, volume is 17% lower than the 2005 peak.

 

Jobs and Volume

Construction requires about 5,000 workers for a year 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, spending is not the same as volume, and jobs needed is based on volume.

Construction added 1,400,000 jobs in the 5 years 2014-2018, an average of 280,000 jobs/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.

Although 2020 spending will increase 4.6%, construction inflation has been hovering between 4% and 5% for the last five years. Real volume growth in 2020 after inflation is expected to be only 0.6% or only $7 billion. That would mean the need, if there are no changes in productivity, is to add only about 35,000 additional jobs in 2020.

But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 50% since Jan. 2011 with 35% inflation. Nonresidential volume increased by only 15%. Jobs increased by 27%, 12% in excess of volume growth.

Residential spending increased by 125% since Jan. 2011, but after 40% inflation, real residential volume increased by 85%. Jobs increased by only 40%, 45% short of volume growth.

There are a few reasons why residential construction labor might not be compared easily to residential spending; 

  • 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 undocumented labor is not counted, and it’s primarily residential.

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

Jobs should follow volume growth, yet history shows that in non-recessionary periods, even with volume declining, jobs usually continue to increase, but perhaps at a slower rate.

From 1997 to 2004, it took 4800 jobs to put-in-place $1 billion of construction in one year. By 2008 that increased to 5500 jobs to do $1 billion of work in one year. It remained level at 5500jobs/$1 billion/yr until 2016. In 2018 it jumped to 5800 jobs and in 2019, 6100 jobs, the highest ever recorded.   

There has not been any volume growth in the last two years to support jobs growth. In constant$, there was no volume growth in any sector in 2018. In 2019 only Non-building Infrastructure shows 2% growth. Total construction volume is down 1.4% in 2018 and 4.4% in 2019. 

In the last two years, spending increased only 2.5%, but construction inflation totaled 9%, therefore, real volume declined by more than 6%, yet jobs increased by 7.5%. From 2006 to 2017, jobs and volume growth were nearly equal. Since 2017, volume and jobs growth is diverging. Construction volume has been declining while jobs have been increasing. That can’t be sustained. 

This plot shows predicted 2020 jobs growth of 1.5% or just over 100,000 jobs. Since volume is forecast to gain less than 1%, any jobs growth in 2020 beyond 1% will increase the disparity between jobs and volume growth. The disparity has been increasing since early 2018. It’s a 15% difference right now. Within a year that could be 20%.

Jobs vs Volume 2015-2020 monthly 1-10-20

By resetting the baseline of this next plot to 2006, the year of the last major divergence in jobs growth vs volume, it shows all other years from 2007 to 2017 were pretty well-balanced growth. With the exception of 2006 and now 2018-2019, for almost every year from 1997 to 2019 jobs grew pretty closely aligned with volume. A big 15% spread occurred in 2006, then growth remained balanced through 2017. The spread now is near the same as it was in 2006.

See post for development of this plot Expect Construction Jobs Growth to Slow in 2020

Jobs vs Volume 1991-2020 2006 deficit reset 11-19-19

Volume declines will drive jobs to slower growth. We had 6 years of annual growth of 250,000-300,000/yr. Jobs increased by only 150,000 in 2019. In 2020, growth may be lower to 100,000.

Construction jobs growth slowed substantially the last two quarters. I  predicted jobs growth would slow because volume growth had already been declining since early 2018 when volume reached a peak of $1,300 billion. Volume is now $1,200 billion, down 8% in 22 months.  After 6 years of jobs increasing at an average 280,000/year, jobs are up only about +150,000 in 2019, but only +70,000 in the last 8 months. The rate of jobs growth is now the slowest in 7 years. I expect this trend to continue.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that labor cost growth will add to inflation.

Jobs trailing 12mo growth 2013-2020 1-10-20

The plot of jobs growth shows current growth rate is below an annual rate of 150,000 jobs/year and it is expected to remain there through 2020, potentially dipping as low as 100,000.

I’d be surprised if jobs start to decline, but that certainly could be envisioned and it would help explain away some of the disparity in growth shown on the Jobs/Volume plot up above.

 

Predicted Reliability of Construction Forecasting

For any future forecast month, the most information is in hand the month before. Assessing the amount of actual data (jobs in backlog) versus the amount of predicted data gives an indication of how much weight can be placed on the forecast. Obviously, the balance of actual data versus predicted data gets less the further out in time we view the forecast.

For Nonresidential work, most of the spending in any given year comes from projects already in backlog. For nonresidential forecasting, 80% of all the spending in the year comes from projects in backlog. Only 20% of spending in the year is generated from new project starts within the year.

For Residential work, most of the spending in any given year comes from new project starts within the year. Only about 30% of the spending in the year comes from projects already in backlog.

The total amount of work in backlog supports 98% of the forecast in the following month for nonresidential and 94% of the forecast for residential. The amount of known work that will generate spending in the month 12 months out from the forecast date is only 80% for nonresidential work. It’s only 30% for residential work.

For the period only 12 to 24 months out from the forecast date, actual nonresidential data drops from 80% to 30%. Residential actual data drops from 30% to zero.

For all markets combined, accounting for the weighted averages of residential and nonresidential work, once all construction starts are reported to include the data as of Dec. 2019, the 2020 forecast includes 78% actual data and 22% predicted data. The 2021 forecast includes only 40% actual data from starts that have been booked.  All the rest of the 2021 forecast is predicted.

Three years out from the current date the reliability of the forecast is dependent entirely on economic outlook and the predictive methodology of the analytic tools, not on actual data. It’s important to know, when you are looking at a forecast that projects three years out past the current year, there may be no “actual” data in that forecast.

Reliability of Data 10-2-18

 

Questions regarding this analysis can be addressed to: Edward R. Zarenski – Construction Economics Analyst – Construction Analytics – edzarenski@gmail.com – 401-330-6152

Data used in this report is accessed from the following data sources:

Construction Analytics Economics Reports  https://edzarenski.com/

Construction Analytics Inflation https://edzarenski.com/2016/10/24/construction-inflation-index-tables-e08-19/

Associated General Contractors of America AGC https://www.agc.org/learn/construction-data/construction-data-producer-prices-and-employment-costs

Dodge Data and Analytics Construction Starts  https://www.construction.com/news

Engineering News Record  https://www.enr.com/

Mortenson https://www.mortenson.com/cost-index

Rider Levitt Bucknall  https://www.rlb.com/en/index/publications/?geolocation=americas

RSMeans data from Gordian https://www.rsmeans.com/landing-pages/2019-rsmeans-cost-index.aspx

S&P/Case-Shiller U.S. National Home Price Index  https://fred.stlouisfed.org/series/CSUSHPINSA

Turner  http://www.turnerconstruction.com/cost-index

U.S. Census Construction Spending https://www.census.gov/construction/c30/release.html

U.S. Census Housing Construction Index https://www.census.gov/construction/nrs/pdf/price_uc.pdf

U.S. Department of Labor Bureau of Labor Statistics https://www.bls.gov/ppi/ppinrbc.htm

U.S. Department of Labor Bureau of Labor Statistics Construction Labor U. S. https://www.bls.gov/iag/tgs/iag23.htm

 

Click here for a downloadable PDF of 2020 Construction Economic Forecast Feb 2020

Click here for a downloadable PDF of SUMMARY – 2020 Construct Econ Forecast 2020

Summary of 2020 Construction Outlook

Construction Analytics 2020 Construction Economic Forecast – Jan 2020  (Excerpt from the complete economic report)

For the full report see 2020 Construction Economic Forecast – Jan 2020

 

Summary of 2020 Construction Outlook

Total of All construction spending in 2019 is forecast to decrease -0.2% to $1.305 trillion. For 2020, spending increases by 4.6% to $1.365 trillion.

Spend Forecast 2018-2022 1-21-20

Nonresidential Buildings construction spending is forecast to finish 2019 at $455 billion, level with 2018. For 2020 the forecast is a gain of 3% to $467 billion. Educational and Commercial/Retail held down gains in 2019. Office (which includes data centers) and Lodging gained 7% each. Office, Healthcare and Educational all support growth in 2020.

Residential construction spending forecast is down 5% to $521 billion in 2019 and up 6% to $552 billion in 2020. New starts are recovering from a 10% drop in the 1st half of 2019 and are now expected down only slightly for 2019 after the latest three-month average starts were the highest ever. Residential spending peaked in Q1 2018 and dropped 11% to a low in July 2019. Although spending has since recovered half of that drop, growth in 2019 slowed to less than inflation. Residential construction volume in 2019 dropped 8%, the largest volume decline in 10 years. 2020 volume is forecast to increase 2%.

Non-building Infrastructure construction spending is forecast to increase 7% to $329 billion in 2019 and 5% to $345 billion in 2020. Transportation spending gets strong growth from three years of record new starts. Half of all transportation spending in 2021 comes from projects that started in 2017-2019. Both Public Works and Highway starts have been increasing modestly to reach new highs in 2019. Non-building Infrastructure projects have the highest share of multi-billion dollar projects that spread spending out over longer duration.

Spend Sector 2015-2021 1-5-20

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 2019 spending is down -0.2% to $1.305 trillion, that will most likely increase to a net gain.

In October, Dodge Data forecast their 2019 construction starts to total $809 billion, down 1% from 2018. However, starts are always revised up in the following year. In just the last three years, nonresidential starts have been revised up by 7.5%/yr and residential starts by 2.4%/yr. I expect revisions will show 2019 starts increased by 3% to 4% over 2018. However, even with revisions, 2019 starts will post the slowest annual growth since 2011.

Dodge Data and Analytics new construction starts for November 2019 advanced to the highest seasonally adjusted annual rate ever, resulting in the three months Sep-Oct-Nov 2019 posting the highest 3-mo average ever, 10% higher than the total average for 2018.  Several long duration projects started, so a lot of the spending from these new starts will occur in 2021-2022.

Dodge is forecasting 2020 starts down 4%. This forecast includes only 1% to 2% growth in new starts for 2021-2022.

Starting backlog, which increased 5% leading into 2020 is currently at an all-time high, up 20% since 2017. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. More than 20% of all spending in 2020 is from projects that started more than 3 years ago. 

While a few markets will outperform in 2020 (transportation, public works, office), predicted cash flow (spending) from backlog is up only 1% to 2%. Long duration projects added to backlog and will spread spending out over the next few years. Current indications are that 2020 backlog will be up 4% for residential work, 6% for nonresidential buildings and 7% for infrastructure work.

  • Starts increased 8%/yr. in 2016 and 2017, but only 4% in 2018.
  • Starts are forecast to decline slightly in 2019 and 2020.
  • Spending increased 9%/yr. from 2012 to 2016, then slowed to 4%/yr. in 2017 and 2018.
  • Spending declined 1% in 2019 and is forecast up 4% for 2020 and 1% in 2021.
  • Backlog reaches a post-recession high in 2020, up 20% from 2017, up 100% from 2013.

Since early 2018, jobs have been increasing while construction volume is declining. A declining volume of work does not support jobs growth. When volume of work decreases, jobs should also decrease. If jobs increase, then it results in more workers to produce the same amount of work. In other words, productivity is declining. This could result in one or more of these outcomes:

  • Labor demand on hiring drives labor cost up by unexpected amounts.
  • New labor coming into the workforce has less experience, lowering productivity.
  • Contractors cannot meet schedules, extending project duration.
  • Contractors work overtime to meet schedules, adding cost.

All scenarios either extend project duration or drive up the cost of projects or both, which could lead to some unforeseen inflation.

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. Residential and Nonresidential Buildings inflation indices developed by Construction Analytics are final cost selling price indices.

Nonresidential buildings inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% average for the last 4 years.

Residential construction inflation in 2019 was only 3.6%. However, the average inflation for six years from 2013 to 2018 was 5.5%. It peaked at 8% in 2013 but dropped to 4.3% in 2018 and only 3.6% in 2019. Forecast residential inflation for the next three years is level at 3.8%.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work.

This link points to comprehensive coverage of the topic inflation. Click Here for Link to a 20-year Table of 25 Indices

This link points to articles related to the Construction Outlook for 2020. Click Here for Link to Construction Economic Outlook 2020

 

To Support Construction Jobs, We Need Volume

11-2-19

12-6-19 plots updated to include Nov jobs and Oct spending.

Construction Spending IS NOT Construction Volume.

I read an analyst report this week that stated construction jobs growth isn’t keeping pace with construction volume growth. The reference appeared to be to construction spending. That fails to apply inflation to convert construction spending to construction volume, so compares apples to oranges. Spending must be adjusted for inflation to get real volume growth. Jobs MUST be compared to volume.

For over two years now, construction volume growth has not supported construction jobs growth we’ve seen. I expected jobs growth to slow down. I’ve been saying this for over a year. This sure looks like it.

For 2018 jobs growth averaged over 300k. Since January 2019 the rate of jobs growth has dropped from 300k to 150k.

Jobs trailing 12mo growth 2013-2019 12-6-19

Current projected new starts data IS NOT supporting construction volume growth for the next 2 yrs. Growth of 3%/yr in non-building infrastructure will be offset by declines in residential buildings and flat nonresidential buildings. Therefore, there is no real volume support for jobs growth.

This plot adjusts construction spending by taking out inflation to get real construction volume growth. Last year of real volume growth was 2016. Yet jobs continue to climb. This can’t continue. The plot above shows it has slowed.

Jobs vs Volume 2015-2020 12-6-19

Construction jobs growth has slowed considerably over last 2Q, as expected. While construction jobs are up about +150k in last year, jobs (through Nov) increased only +48k in the last 7 months. I’m expecting this trend to continue. In fact, I wouldn’t be the least bit surprised to see in the near future some months when construction jobs decline. The fact is, construction volume simply does not support jobs growth.

Total construction volume, spending after accounting for inflation, has been down for 5 of the last 6 quarters. Volume peaked from Q1 2017 to Q1 2018, but the last year of real volume growth was 2016. Volume is flat or down while jobs continue to rise. This can only mean contractors will be at risk of being top-heavy jobs if a downturn comes.

Caution is advised if putting emphasis on construction JOLTS, which has been climbing to new highs. From mid-2006 to mid-2007, JOLTS reached near the then all-time high. But construction volume, starting in mid-2006, was already on the downward slope. Volume peaked in early 2006 and fell 10% by mid-2007. Construction did not begin shedding jobs until late 2006, but mid-2007, job losses were well underway. Within 12 months, more than 500,000 jobs were gone. Within 18 months, construction jobs were down 1.5 million.

Construction spending annual rate will increase by 3% in the next 12 months, but volume in constant $ after inflation will remain flat. In Q42020-Q12021 spending slows to less than inflation, so volume begins a modest decline. Growth of 3%/yr in non-building infrastructure will be offset by declines in residential buildings and flat nonresidential buildings. Jobs will continue to grow and spread the imbalance even more.

The construction jobs slow down has been in the cards for a long time. With all the talk of skilled labor shortages, there’s been little discussion of the unsustainable excess jobs growth. Maybe it’s about time to change the conversation.

Construction Analytics Voted Best Construction Blog 2019

Ed Zarenski’s Construction Analytics blog

won the 2019 Best Construction Blog competition.

blog best

“Sometimes patience and quality count more for success than razzle dazzle and pushy marketing. These observations seem appropriate for the 2019 Best Construction Blog winner, Ed Zarenski’s Construction Analytics.”

“His blog’s uniqueness and success results from its detailed analysis and data about the construction economics topic, including forecasts and projections — with a Google search leadership relating to construction inflation.”

“Zarenski’s blog, effectively, provides a solid overview of the construction industry’s economic picture. That knowledge is useful for contractors, suppliers and professionals seeking to benchmark performance and plan their business’s future based on industry-focused but larger economic trends.”

Construction Analytics wins 2019 Best Construction Blog competition

 

 

Inflation and Forecasting Presentation Advancing Precon & Estm Conf 5-22-19

This is a PDF of slides (including notes) from my

Construction Inflation & Forecasting Presentation

at Hanson Wade

Advancing Preconstruction & Estimating Conference

 Dallas, TX 5-22-19

Advancing Pre-construction & Estimating conference 2019

Full EdZ Presentation Inflation-Forecasting w notes HW-APE 5-22-19 PDF

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
  • 8-10-19 updated index tables and plots to include Q2 2019 data
  • 1-14-20 added index table from 2015-2023 to include Q4 2019 data

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

See the article Construction Inflation 2020

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 highlighted BOLD CAPS in the tables below), 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

8-10-19 note: this 2005-2020 plot has been revised to include 2018-2020 update.

BCI 2005-2020 8-10-19

See the article Construction Inflation 2020

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 wherever 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 June 2019.

  • 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. RSMeans Cost Index Page 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.

8-10-19 note: this 2010-2020 plot has been revised to include 2018-2020 update.

BCI 2010-2020 Firms 12-9-19

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. Boston, Chicago, Denver, Honolulu, Las Vegas, Los Angeles, New York, Phoenix, Portland, San Francisco, Seattle, Washington,DC. Also includes cost index for Calgary and Toronto. RLB also publishes cost information for select cities/countries around the world, accessed through RLB Publications.

Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in seven major cities and average. Chicago, Milwaukee, Seattle, Phoenix, Denver, Portland and Minneapolis/St. Paul.

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.

RS MEANS Key material cost updates quaterly

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

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.

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

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 six major U.S. cities and Mexico, 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. Read the report for the trend discussion. Atlanta, Austin, Charlotte, Dallas/Fort Worth, Denver, Tampa and Mexico

Other Indices not included here:

CoreLogic Home Price Index HPI for single-family detached or attached homes monthly 1976-2019. This is a new home and existing home sales price index.

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.

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. A review of website info indicates almost all the work is performed in California, so this index may be regional to that area.  Updated Index Page

DGS California Construction Cost Index CCCI  The California Department of General Services CCCI is developed directly from ENR BCI.  The index is the average of the ENR BCI for Los Angeles and San Francisco, so serves neither region accurately. Based on a narrow market basket of goods and limited labor used in construction of nonresidential buildings, and based in part on national average pricing, it is an incomplete inputs index, not a final cost index.

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.

Colorado DOT Construction Cost Index 2002-2019 Trade bids for various components of work published by Colorado Dept of Transportation including earthwork, paving and structural concrete.

Washington State DOT Construction Cost Index CCI for individual components or materials of highway/bridge projects 1990-2016

Minnesota DOT Highway Construction Cost Index for individual components of highway/bridge projects 1987-2016

Iowa DOT Highway Cost Index for individual components of highway/bridge projects 1986-2019

New Hampshire DOT Highway Cost Index 2009-2019 materials price graphs and comparison to Federal Highway Index.

New York Building Congress New York City Construction Costs compared to other US and International cities

U S Army Civil Works Construction Cost Index CWCCIS individual indices for 20 public works type projects from 1980 to 2050. Also includes State indices from 2004-2019

Eurostat Statistics – Construction Cost Indices 2005-2017 for European Countries

Comparative International Cities Costs – This is a comparative cost index comparing the cost to build in 40 world-wide cities  If this International Cities Costs is a parity index, which involves correcting for difference in currency, then you must know the parity city in each country, which in the US I think is Chicago.

OECD International Purchasing Power Parity Index

Turner And Townsend International Construction Markets 2016-2017

Turner And Townsend International Construction Markets 2018

Rider Levitt Bucknall Caribbean Report 2018

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

8-10-19 Note: updated index tables to include Q2 2019 data

Index Table 1991 to 2000 updated 8-10-19

Index Table 2001 to 2010 updated 8-10-19

Index Table 2011 to 2020 updated 8-10-19

1-14-20    This table updates 2018 and 2019 data and 2020-2023 forecast. Nonresidential inflation, after hitting 5% in both 2018 and 2019, is forecast for the next three years to fall from 4.4% to 3.8%, lower than the 4.5% avg for the last 4yrs. Forecast residential inflation for the next three years is level at 3.8%. It was only 3.6% for 2019 but averaged 5.5%/yr since 2013. 

Index Table 2015 to 2023 q42019 update 1-14-20

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.

See the article Construction Inflation 2020

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 30MMT imported, 50%+ of that comes from our top few import suppliers, Canada, Brazil, South Korea and Mexico.  Russia supplies 7%-9%. No other country supplies more than 5% of our imports. China supplies less than 2% of our steel imports, The U.S. is responsible for almost 10% of global steel imports, more than double the second largest importer. The U.S. annually imports about $20-$25 billion of steel, $2 billion from Mexico.

The United States consumes approximately 110 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 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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