Home » Posts tagged 'Forecast' (Page 2)
Tag Archives: Forecast
Construction Forecast 2022 – Jan22
Spending and Volume updated 1-4-22. Jobs updated 1-7-22
1-28-22 See the bottom of this post for a link to download a PDF of the complete article.
See the link at end for full report updated 2-11-22 to include year-end data.
5-6-22 The complete article has been updated and is here
Construction Forecast 2022 Update 5-6-22
The construction data leading into 2022 is unlike anything we have ever seen. Construction starts were up in 2021, but backlog leading into 2022 is down. That is not normal. Backlog is rarely down and usually when starts have been down the previous year. In this case the starts declined in 2020, but that 2020 decline was so broad and so deep, even with an increase in starts in 2021, backlog to start 2022 has not yet recovered (to the start of 2020). Spending for 2021 was up 8%, but after adjusting for inflation, real volume after inflation was down. Last time that happened was 2006 and 2002, the only two other times that happened in the last 35 years. Let’s have a look at all the data that sets up 2022.
New Construction Starts for 2022, as reported by Dodge Data and Analytics, are forecast up +5% total for the year. Residential starts will be up +2%, but that is on top of a +33% gain over the previous two years. Nonresidential Bldgs starts will be up +8%, just recovering to pre-pandemic levels. Nonbuilding starts are forecast up +8%, still -6% below 2019.
Construction Backlog leading into Jan 2022 vs Jan 2021 is up only +1%, but it’s still down 8% vs Jan 2020. Residential backlog is up +21%, but Nonresidential Bldgs backlog is up only +2%, still down -14% from the start of 2020 and Non-Building backlog is down -8% yoy, now -17% below the start of 2020.
Nonresidential Bldgs starting backlog for 2022 is still down -14% from the start of 2020 and Non-Building backlog is now -17% lower than the start of 2020. That could weigh on spending for several years.
(Construction Analytics measures Backlog at the start of the year vs backlog at the start of the previous year. This is different than the ABC Backlog indicator, which measures current month’s backlog compared to previous year’s total revenue).
Backlog at the beginning of the year or new starts within the year does not give an indication of what direction spending will take within the year. Backlog is increasing if new starts during the year is greater than spending during the year. An increase in backlog could immediately increase the level of monthly spending activity, or it could maintain a level rate of market activity, but spread over a longer duration. In this case, there is some of both in the forecast. It takes several years for all the starts in a year to be completed. Cash flow shows the spending over time.
Spending for 2021, with 11 months actual in year-to-date, is forecast up +7.9%. However, that can be misleading. Residential spending for 2021 is up 22% while Nonresidential Bldgs is down -5% and Non-Bldg is down -1%.
In almost every data release this year, Census has revised the previous month upwards. That has been adding to my forecast throughout the year.
Spending includes inflation which does not add to the volume of work.
My current and predicted Inflation rates:
- 2020 Residential 5%, Nonres Bldgs 4.8%, Nonbldg Infra Avg 4.5%
- 2021 Residential 14.2%, Nonres Bldgs 6.8%, Nonbldg Infra Avg 7.8%
- 2022 Residential 7%, Nonres Bldgs 4.5%, Nonbldg Infra Avg 3.7%
- There is greater chance for rates to move up than down.
After adjusting for inflation, total volume in 2021 is down -2.5%. Residential volume for 2021 is up +7.4% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8.1%.
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 will add to labor cost inflation. Since 2010, Construction Spending is up over 100%, but after adjusting for inflation, Volume is up only 28%. Jobs are up 41%.
Jobs average over the year 2021 increased +2.3%. Volume was down -2.5%
Spending Forecast for 2022 is expected to increase +3.0%. Residential spending for 2022 is forecast up +5.7%. Nonresidential Bldgs forecast is up +3.5%. Non-Bldg forecast is down -3.6%.
Some of the biggest impacts to nonresidential buildings spending are: Warehouses, 60% of Comm/Retail, new starts are up 50% since Jan 2020. Comm/Retail could post the largest gains in 2022 nonres bldgs spending. Lodging starts even with 24% growth in 2022, are still down 50% from Jan 2020. Manufacturing starts dropped over 50% in 2020 but gained nearly all of that back in 2021. Manufacturing spending in 2022 should return to the level of 2019.
Many construction firms judge their backlog growth by the remaining estimate to complete of all jobs under contract. The problem with that, for example, is that Nonresidential Buildings spending (revenues) are expected to grow +3.5% in 2022, but after adjusting for inflation the actual volume of work is down about -1%. By this method, in part, these firms are accounting for an increase in inflation dollars passing through their hands. Spending includes inflation, which does not add to the volume of work.
Total volume for 2022 is forecast down -2.5%. After adjusting for inflation, Residential volume for 2022 is forecast down -1%. Nonresidential Bldgs volume is also forecast down -1% and Non-Bldg volume is forecast down -7%.
The Non-Building Infrastructure spending forecast for 2022 is more affected by a drop of -17% in starts in 2020 (2020 starts would have generated 30% of 2022 spending) than by any increase in starts in 2022 (which would generate only 15% of 2022 spending).
Non-building construction starts recorded 18 months (from April 2020 through September 2021) averaging 16% below the Q3’19-Q4’19 average of starts. Non-building Infrastructure Backlog beginning 2022 is down -17% from Jan 2020, the largest two-year drop on record. Non-building Infrastructure Spending has declined in 15 of the last 21 months.
Why is spending still down in Non-building? Here’s a few notes on construction starts that drive spending.
Power starts for the 3yr period 2020-2022, even with 11% growth in 2022, are expected to average 33% lower compared to 2017-2019. Transportation starts for the 3yr period 2020-2022 are expected to average 40% lower compared to 2017-2019. These two make up 50% of the Non-bldg sector and we could see spending remain depressed in both for the next two years.
Highway starts through 2020 are up 15% in 3 years. But spending in 2019 through 2021 has remained constant. This might be an example of adding new starts but it doesn’t show in spending because work is spread out over many years, or this could be indicating no real change in volume but a change in share of total market being captured in the starts.
On average about 20% of new nonresidential buildings construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in future years. (For residential the spending curve is more like 70%-30%).
Nonresidential Buildings construction starts recorded 12 consecutive months (from April 2020 through March 2021) at 20% or more below the Q4’19-Q1’20 average of starts. Nonres Bldgs spending has posted 17 of the last 21 months down and is still down 13% from Feb 2020.
Construction Analytics has been forecasting these drops in Nonresidential spending since August of 2020.
In constant (inflation adjusted) dollars, as of Nov. 2021, Nonres Bldgs spending is 20% below the Feb 2020 peak. The bottom is expected in mid-2022.
Below is the Non-building plot, inflation adjusted. Both these plots show there has been no increase since Feb 2020 in volume of nonresidential or non-building work to support jobs growth, and there is little to no help in 2022.
If new construction starts in 2022 post an add of $100 billion in new starts for infrastructure, only about $20 billion of that would get put-in-place in 2022. The cash flow schedule for that $100 bil of new starts would extend out over 3 or 4 years. Most of that $100 bil would get spent in 2023 and 2024.
Current Final Demand pricing for Nonres Bldgs and Trades is highest on record. Prices support high inflation this year and next. Do not expect inflation to turn to deflation in 2022 or any time in the near future. The only time in 50 years that construction experienced deflation was in the period 2008 to 2011. At that time conditions were 10x worse than now.
1-7-22 Construction Jobs growth
2021 Dec21 vs Dec20 Rsdn+75k, Nonres Bldgs +61k, Nonbldg +24k
but annual averages tell a much different story
AVG21 vs AVG20 Rsdn+153k(+5.3%), Nonres Bldgs +28k(+0.8%), Nonbldg +9k(+0.9%)
Dec vs Dec simply compares jobs at 2 points in time, without the benefit of what occurred in the other 11 months of the year, so does not tell us what took place over the year. The annual average gives a much clearer indication of jobs growth over the year because it accounts for the peaks and dips of all 12 months during the year.
Jobs average over the year 2021 increased +2.3%. After adjusting for inflation, total volume in 2021 is down -2.5%. Residential volume for 2021 is up +7.4% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8.1%.
If jobs are increasing faster than volume of work, productivity is declining. For example, nonres bdgs volume declined 11%, but nonres bldgs jobs increase 0.8%. That’s a 12% swing in productivity. Since labor is about 35% of the cost of a project, if productivity declines by 12% Then inflation rises by 12% x 35% = 4%. The most recent year drop in volume, while jobs increased, added 4% to nonres bldgs inflation for the year.
If jobs are increasing faster than volume of work (a negative impact) can we tell if it’s production employees or supervisory employees? BLS reports ALL construction jobs (~7.5million) and Production jobs (~5.5million). The difference between these two data sets is supervisory employees.
Looking at the average number of construction jobs in the last 4 years, the average of 2021 jobs vs the average of 2017 jobs, production jobs increased +5%, but supervisory jobs increased +12%.
Looking at 2021 vs 2019, in the past 2 years, production jobs decreased by -1.5%, but supervisory jobs increased +1.7%. During this period spending increased +3.5%, but after adjusting for inflation, volume declined -9%.
In 2011, supervisory jobs was 24% of all construction jobs. Now it is 35%. Growth in supervisory jobs has had a greater negative impact than production jobs on the spread between jobs and volume.
Jobs and Volume of work growth should move in tandem.
If jobs grow faster than volume, productivity is declining. When these plot lines grow wider apart with jobs on top, that is a sign of productivity decline. That’s part of inflation.
And finally, here’s one of the markers I use to check my forecast modeling, my forecasting performance tracking index. The light plot line is forecast predicted from my modeling. The dark plot line is actual construction spending. Even after any separation in the indices, the plots should move at the same slope. Almost without fail, the forecast model, estimated spending from cashflow, predicts the changes in direction of actual spending.
See the full report updated 2-11-22 to include year-end data.
Year End 2021 – Construction Forecast 2022 – Briefs
New Construction Starts, as reported by Dodge Data and Analytics, are up +13% for the total three years 2020+2021(actuals) + 2022(estm). Residential starts will be up +35%. Nonresidential Bldgs starts are at 0%. Nonbuilding starts are down -7%. This includes the forecast that has Nonresidential Bldgs and Non-Bldg starts both up +8% in 2022.
Construction Backlog leading into Jan 2022 vs Jan 2020 will be down -8%. Residential backlog will be up +34%, but Nonresidential Bldgs backlog will be down -14% and Non-Bldg backlog will be down -17%.
(Construction Analytics measures Backlog at the start of the year vs backlog at the start of the previous year. This is compared to ABC Backlog indicator, which measures current backlog compared to previous year’s revenue.)
Backlog at the beginning of the year or new starts within the year does not give an indication of what direction spending will take within the year. Backlog increases if new starts during the year is greater than spending during the year. An increase in backlog could immediately increase the level of monthly spending activity, or it could maintain a level rate of market activity, but spread over a longer duration. In this case, there is some of both in the forecast. It takes several years for all the starts in a year to be completed. Cash flow shows the spending over time.
Spending for 2021, with 10 months actual in year-to-date, is forecast up +7.4%. However, that can be misleading. Residential spending for 2021 is up 22% while Nonresidential Bldgs is down -5% and Non-Bldg is down -1.7%.
Spending includes inflation which does not add to the volume of work.
“This is the beginning of trying to work through supply chain problems…inflation will still get worse before it gets better ” Diane Swonk, Chief Economist Grant Thornton 11-12-21
My current and predicted Inflation rates:
- 2020 Residential 5%, Nonres Bldgs 4.8%, Nonbldg Infra Avg 4.5%
- 2021 Residential 14.2%, Nonres Bldgs 6.8%, Nonbldg Infra Avg 7.8%
- 2022 Residential 7%, Nonres Bldgs 4.5%, Nonbldg Infra Avg 3.7%
- There is greater chance for rates to move up than down.
After adjusting for inflation, total volume in 2021 is down -3%. Residential volume for 2021 is up +7% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8%.
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 will add to labor cost inflation.
Jobs average over the year 2021 increased +2.3%.
Spending Forecast for 2022 is expected to increase +2.5%. Residential spending for 2022 is forecast up +5%. Nonresidential Bldgs forecast is up +4%. Non-Bldg forecast is down -5%.
One important thing that happens when we find out inflation rose much faster than we would have thought, production hasn’t been as great as we thought.
When volume decreases and jobs increase, productivity is declining.
Many construction firms judge their backlog growth by the remaining estimate to complete of all jobs under contract. The problem with that, for example, is that Nonresidential Buildings spending (revenues) are expected to grow +4% in 2022, but after adjusting for inflation the actual volume of work is down about -1%. By this method, in part these firms are accounting for an increase in inflation dollars passing through their hands. Spending includes inflation, which does not add to the volume of work.
The Non-Building Infrastructure spending forecast for 2022 is more affected by a drop of -17% in starts in 2020 (2020 starts would have generated 30% of 2022 spending) than by any increase in starts in 2022 (which would generate only 15% of 2022 spending).
After adjusting for inflation, Residential volume for 2022 is forecast down -1.5% while Nonresidential Bldgs volume is forecast down -1% and Non-Bldg volume is forecast down -9%. Total volume for 2022 is forecast down -3%.
On average about 20% of new nonresidential buildings construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in future years. (For residential the spending curve is more like 70%-30%).
Nonresidential Buildings construction starts recorded 12 consecutive months (from April 2020 through March 2021) at 20% or more below the Q4’19-Q1’20 average of starts. Now 20 months after the onset of the pandemic, Nonres Bldgs starts have posted 16 down months and are still down 13% from Mar 2020.
In constant (inflation adjusted) dollars, as of Oct. 2021, Nonres Bldgs spending is 20% below the Feb 2020 peak. The bottom is expected in mid-2022.
If new construction starts in 2022 post an add of $100 billion in new starts for infrastructure, only about $20 billion of that would get put-in-place in 2022. The cash flow schedule for that $100 bil of new starts would extend out over 3 or 4 years. Most of that $100 bil would get spent in 2023 and 2024.
Current Final Demand pricing for Nonres Bldgs and Trades is highest on record. Prices support high inflation this year and next. Do not expect inflation to turn to deflation in 2022. The only time in 50 years that construction experienced deflation was in the period 2008 to 2011. At that time conditions were 10x worse than now.
An interesting question came up recently, related to the plot below, that prompted me to look at jobs data a little deeper. The question was, If jobs are increasing faster than volume of work (negative impact) can we tell if it’s production employees or supervisory employees? BLS reports ALL construction jobs (~7.5million) and Production jobs (~5.5million). The difference between these two data sets is supervisory employees.
Looking at the average number of construction jobs in the last 4 years, the average of 2021 jobs vs the average of 2017 jobs, production jobs increased +5%, but supervisory jobs increased +12%.
Looking at 2021 vs 2019, in the past 2 years, production jobs decreased by -1.5%, but supervisory jobs increased +1.7%. During this period spending increased +3.5%, but after adjusting for inflation, volume declined -9%.
In 2011, supervisory jobs was 24% of all construction jobs. Now it is 35%. Growth in supervisory jobs has had a greater negative impact than production jobs on the spread between jobs and volume.
And finally, here’s one of the markers I use to check my forecast modeling, my forecasting performance tracking index. The light plot line is forecast predicted from my modeling. The dark plot line is actual construction spending. Even after any separation in the indices, the plots should move at the same slope. Almost without fail, the forecast model, estimated spending from cashflow, predicts the changes in direction of actual spending.
Construction Spending Update 10-1-21
Construction Spending Actual through August 2021
Total Construction Spending compared to same period 2020 is now up 7.0% year-to-date (ytd). Residential spending continues to perform better than forecast and is now up 25.8% ytd. Nonresidential Buildings is now down -8.7% and Nonbuilding Infrastructure is down -3.8%, both improved in the last two months.
The single largest impact to the change in this forecast from last month is Residential. Spending continues to perform better than cash flow predicted from starts would indicate. For August, I expected residential spending to drop 1% compared to July, but it increased 0.4%. Also, it increased from an upwardly revised July. In this August spending report, residential spending was revised upwards in both June and July by 1% each month. That pushes the total up for my forecast for the year.
Highway also posted large upward revisions, +3% to June and +2% to July, but these revisions combined represent only $515 million. The Residential revisions alone total $2.2 billion, more than double the revisions to all other markets combined, including Highway.
Year-to-date through August, while residential is up 25.8%, all but one single nonresidential market is down. 15 of 16 nonresidential markets are down -8.7% for nonresidential buildings and -3.8% for nonbuilding infrastructure. Only Sewage/Waste Water is up 3.6% ytd., but that’s only 2% of all nonresidential construction. It’s half of the $ in the table item Sewer / Water / Conservation.
By year end I expect residential spending to finish up 20%, nonresidential buildings to finish down 7% and nonbuilding to finish down 3%.
Construction starts are slowly leading the way to recovery, with remarkable strength in residential, but construction spending, which is dependent mostly on starts from previous years (nonres bldgs starts in 2020 down -20%), will remain depressed for nonresidential construction well into 2022. New nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.
Residential starts gained only +3% in 2019, increased +6% in 2020 and are forecast up +9% in 2021 and +7% in 2022. Residential spending surprisingly increased +15% in 2020 to $638 billion and is forecast up +20% to $767 billion in 2021, but only +4% in 2022. Both residential starts and spending are at all-time highs. That is driving total spending to new highs.
Nonresidential Bldgs starts fell -4% in 2019, -21% in 2020 and are now forecast up +8% in both 2021 and 2022. New starts for 2021 are still -20% below the peak in 2018. Most of the fall off in starts in 2020 would have produced peak spending in 2021. Nonresidential Bldgs spending fell only -2% in 2020 but is expected to fall -7% in 2021 and -2% in 2022.
Comparing combined 2020 and 2021 starts, the only markets to show positive growth over 2019 are Commercial/Retail, +5% (due to warehouses) and Healthcare, +7% (due to hospitals). The average growth in starts of all other nonresidential buildings markets for 2020 x 2021 combined is still 35% lower than 2019. Public Bldgs increased in 2020 but fell back in 2021.
My forecast, ever since August 2020, has been showing a decline in nonresidential buildings spending on a long downward trend through 2021 and into 2022. That forecast was then and still is now correct. The nonresidential building spending plot below shows that spending has declined in 16 of the last 18 months. Spending hits a bottom in 2022.
Nonbuilding starts were up 3% in 2019, fell -15% in 2020 and forecast indicates +6% growth in both 2021 and 2022. Nonbuilding starts are 10% lower than 2019. Nonbuilding spending gained only +1% in 2020, but the forecast is down -3% for 2021 and is expected to drop -5% in 2022. Like nonresidential buildings, the large drop in 2020 starts would have had peak spending well out at the midpoints of those projects, many of which would have been in 2021 or 2022.
For more on construction starts SEE New Construction Starts as of Aug’21
Behind the Headlines
An anomaly in the data is the Manufacturing spending data versus expectations. In 2020, Dodge posted a 57% drop in new starts for Manufacturing. Since many of these type projects have long time spans to completion and peak spending is near the midpoint of a project schedule, most of the drop in spending from that huge loss of new starts would normally occur in years following the starts. I predicted the drop would occur in 2021 and 2022, expecting it would produce a 20% decline in spending in 2021. But year-to-date Manufacturing spending is down only 1%. It did produce an 11% decline in 2020 spending, but that is not the extent of the total loss. This puts into question either my forecast of when the drop would occur or percent decline in starts reported. You can’t have a drop of 57% in starts activity and get only a 1% decline in spending the following year. Based on spending in 2020 and 2021 ytd, my forecast model is indicating there may be a variance in 2020 starts data % of market captured.
Part of the difficulty with the manufacturing data arises from the fact that history shows only approximately $20bil/yr to $30bil/yr is captured in the new starts data reported and yet spending has been in the range of $70bil/yr to $80bil/yr. That means only about 25% to 35% of the total market activity is being captured in the starts data. But from this we need to predict 100% of the future spending. This % of total market captured in the starts data fluctuates up and down. So the difficulty is predicting actually how much of the market is captured, and that varies. The question is this: How much of the change in the starts data reflects an expected change in future market activity versus how much of the change in starts reported represents an unidentified variance in % of market captured. A variance in % of market captured in the data may not indicate a change in future market activity (spending). Since project schedules can be anywhere from less than 20 months to more than 4 years, any given year of actual spending could have some portion of that spending generated by project starts from the previous 4 or more years. It takes several years of actual spending to identify the differences in these two parts of the question. Only future data will help resolve this question.
Another set of data to question is residential starts. Currently, for 8 months through August, starts are up 18% over 2020. Starts began to climb in July 2020 and posted a very strong final 5 months of 2020. This year average starts to date is at all-time highs. But Dodge, in the 3Q21 Outlook, forecast 2021 residential starts up about 9%. In order for that to happen, for the remaining 4 months residential starts would need to drop 20% from the current average rate, 10% below the most recent month. That seems a bit unrealistic. That would set the monthly rate back to a point lower than anything experienced since the pandemic lows in Apr-May-Jun last year. It seems to me residential starts will finish quite a bit higher than that. I’m carrying 15% growth for the year in my forecast.
Recovery
Recovery in both nonresidential buildings and nonbuilding backlog begins to build in a few markets in 2021. Even though starts growth in % is greater than spending growth in %, overall spending in nonresidential buildings and non-buildings in dollars, not %, is exceeding new starts. Therefore both will begin 2022 with lower backlog than 2021. Total all nonresidential 2021 starting backlog dropped -9% from 2020. Starting backlog to begin 2022 will be down another -5%. Based on forecast growth in new starts, backlog increases 4% for 2023.
Aside from residential, recovery to the levels of revenue (spending) recorded in Q1 2020 or earlier won’t show up before 2024.
The following table shows ytd through August $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.
Impact of Pandemic Slowdown
The impact of reduced starts in 2020 is showing up in the 2021 year-to-date results. Total Nonresidential Buildings starts were down -20% from April 2020 through March 2021 compared to pre-pandemic high in Q1 2020. Nonres Bldgs starts improved from Apr-Jul 2021 and for those 4 months managed to equal the pre-pandemic high. However, the 2021 average year-to-date through August is still 14% lower than the pre-pandemic high. Nonbuilding Infrastructure starts returned to pre-pandemic high several months ago, but have since slowed.
Due to the large drop in new nonresidential buildings starts from Apr 2020, that continued at a level down -20% until March 2021, some markets will be affected by a downward trend in spending for two to three years.
The greatest downward impact from a -20%, year-long loss of starts in nonresidential spending will be felt throughout 2021 and into 2022.
Construction Analytics has been describing this situation and provided plots showing what would occur in nonresidential buildings spending since August 2020. A review of the historical forecasts will show those forecasts mostly correct. The plot below, Construction Spending by Sector, shows the current forecast and actual data through August 2021. The explanation and the plotted data have been similar since last year.
Over the next 9 months, every sector will post more down months (in spending) than up months, although the declines will be most noticeable in nonresidential buildings. The plot line for Nonresidential Buildings may not look like much is going on, but in a minute you will see the magnitude of that downward sloping line.
Overall performance forecast by sector has changed very little since May of this year.
While most markets recover to positive new starts growth in 2021, spending growth lags, showing the downward trend in 2021 as a result of lost starts in 2020.
This next plot changes the scale so the nonresidential buildings spending data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps to visualize the dramatic decline in nonresidential buildings spending. From Apr through Dec 2020, nonresidential buildings spending fell at a rate of 1.75%/month. Jan 2021 and Mar 2021 are the only up months since Feb 2020. From Apr 2021 through Aug 2021, the rate of spending fell at 1.25%/month. Currently, the annual rate of spending is 17% below the pre-pandemic peak. By midyear 2022, the annual rate of spending will be -20% lower than the pre-pandemic peak. It could take two to three years after that to recover to the pre-pandemic level of spending.
A typical batch of new nonresidential construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the calendar year gets spent in the year started, 50% in the next year and 30% in years following. Total nonresidential buildings starts in 2020 were down -20% ($90 bil in spending) and nonbuilding starts were down -10% ($35bil). Under normal conditions, we know how much of that $125 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential buildings starts, depressed for 13 months, posted starts indicating recovery beginning in April this year.
Infrastructure
Let’s assume INFRASTRUCTURE BILL new starts begin in Jan 2022, and let’s also assume $100 billion worth of work gets awarded in 2022. That’s $100 billion of starts in 2022. Only a maximum of 20% (the 1st year portion of the cash flow 20/50/30) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in 2022, only 20% of that or only $20 billion would get spent in 2022. So, there will be very little impact on total 2022 construction spending as a result.
That changes dramatically for the second year. For 2023 we get 50% of the spending from 2021 starts and 20% from 2022 starts, so $70 billion in spending, growth of $50 billion.. That’s already more than the industry can handle.
Total Public Infrastructure and Public Institutional, the total public work pool for which infrastructure investment is a potential, represents a total LESS THAN $350 BILLION annually, less than 25% of all annual construction. Average growth is $12 billion/year. Looking back to 1993, this subset has never exceeded $35 billion in growth in a single year. If we award (start) $100 billion in new work each year for the next 5 years, we would cap out the growth rate for spending in this subset of work, with no room for any additional new starts from any other sources. The work would be completed after 8 years.
Forecasting Reliability
All the forecast spending in the data above is developed from monthly cash flow of new starts. This plot shows the history of the cash flow forecast (the light colored line) to the actual spending growth (the darker line). The cash flow forecast has been predicting the drop in nonres bldgs spending since last year. Although actual spending is somewhat more uneven, the forecast accurately predicts the direction spending is headed.
2021 Midyear Forecasts
Here’s how my (Construction Analytics) midyear spending forecast compared to various firms’ data published in the AIA Midyear Forecasts and how we all compare to the current August year-to-date spending. The year-to-date (ytd) performance provides insight into expected final 2021 performance. For example, the year-to-date Educational spending is -10.6% with 8 months of spending recorded. You can see in the table, one firm had forecast that educational will finish up 3.5% for the year. (Not shown here, but the AIA Consensus for Educ. is -2.1%). With 8 months of actual ytd data and only 4 months remaining (estimate to complete or etc), we can tell what would be needed in the remaining 4 months to get to any particular estimate.
To finish the year up +3.5%, for the next 4 months Educational spending would need to average +32% year-over-year (yoy) growth per month over last year to swing from currently down -10.6% to up +3.5% . Well, Educational spending is down 16% from the 2020 high, has been averaging down 11% yoy for the last 7 months, has fallen 7 of the last 8 months and is down mo/mo an average of 1.5%/mo for the last 6 months. With this performance over the past year, the probability is not likely at all that Educational construction spending is going to flip from a negative yoy -10.6% to an avg of +32%/mo for the remaining 4 months to finish the year up +3.5%. (To meet the AIA Consensus for Educ., the final 4 months would need to swing to +15%/mo). While there are some good estimates, there are many more examples like this in the AIA forecasts.
In 2020, more of Construction Analytics midyear forecasts by market were closer to the final actual than any other firm reporting in the AIA Midyear Outlook. Here’s the 2021 midyear forecasts compared to the current August year-to-date. Every forecast in the AIA Midyear 2021 report predicts 2022 nonresidential buildings spending will increase. See my spending forecast table above in this report where I’ve projected many nonresidential market down in 2022.
JOBS DATA has been updated with the jobs data release on 10-8-21
SEE Construction Jobs Outlook 10-11-21
Construction Spending 2021 Update 8-2-21
Construction Spending Actual through June 2021
Total Construction Spending is up 5.4% year-to-date (ytd) from the same six month period 2020. Residential is up 24.5%, Nonresidential Buildings is down -10.1% and Nonbuilding Infrastructure is down -5.4%.
The single largest impact to the change in this forecast from last month is Highway and Street. Highway spending in June fell 5%, while my forecast was predicting a gain of +3%. I then lowered my forecast for the rest of this year.
Year-to-date through June, while residential is up 24.5%+, all but one single nonresidential market is down. 15 of 16 nonresidential markets, 98% of combined total nonresidential market value, are down a total of -8%. Only Sewage/Waste Water is up 2.5% ytd. That’s half of the $ in the table item Sewer / Water / Conservation. For the remainder of the year, the rate of nonresidential decline will slow to -4%.
Construction starts are leading the way to recovery, but construction spending, which is dependent mostly on starts from previous years (nonres bldgs 2020 down -20%), will remain depressed for nonresidential construction well into 2022. New nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.
It is remarkable that both total new construction starts and total construction spending are UP for 2021, but that needs further explanation.
Residential starts increased +9% in 2020 and forecast up +19% in 2021. Residential spending increased +15% in 2020 and is forecast up +18% in 2021 and up +7% in 2022. Both residential starts and spending are at all-time highs. That is what is driving the totals to new highs.
Nonresidential Bldgs starts fell -4% in 2019, -21% in 2020 and are forecast up only +2.5% in 2021. 2021 starts are still -22% below the peak in 2018. Nonresidential Bldgs spending fell only -2% in 2020 but is expected to fall -8% in 2021 and -5% in 2022.
Nonbuilding starts were flat in 2019, fell -15% in 2020 and forecast indicates +4% growth in 2021. Nonbuilding starts are 11% lower than 2019. Nonbuilding spending gained only +1% in 2020, but forecast fell -3% in 2021 and is expected to drop -5% in 2022.
The Total Construction Spending plot doesn’t show enough detail. As described above, more detail is needed to understand what is going on. The sector plot below shows residential up and nonresidential down..
Recovery in both nonresidential buildings and nonbuilding backlog begins to build in a few markets in 2021. But overall, spending in nonresidential buildings and nonbuilding is exceeding new starts, therefore both will begin 2022 with lower backlog than 2021. Total all nonresidential 2021 starting backlog dropped -13% from 2020. Starting backlog at beginning of 2022 will be down another -8%. Backlog increases for 2023.
Aside from residential, recovery to the levels of revenue (spending) recorded in Q1 2020 or earlier won’t show up before 2024.
The following table shows ytd through June $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.
Impact of Pandemic Slowdown
The impact of reduced starts in 2020 is showing up in the 2021 year-to-date results. Total Nonresidential Buildings starts were down -20% in 2020. Nonres Bldgs starts for the 1st 6 months of 2021 are level with 2020, still down -8% from the pre-pandemic high in Q1 2020. There is some good news! Nonres Bldgs starts in Q2 2021 are now back above the pre-pandemic high, indicating recovery underway. Nonbuilding Infrastructure starts were down -10% in 2020, but returned to pre-pandemic high several months ago.
Due to the large drop in new starts from Apr 2020, that continued at a level down -20% to March 2021, some nonresidential markets will be affected by a downward trend in spending for two to three years.
The greatest downward impact from a -20%, year-long loss of starts on nonresidential spending will be felt throughout 2021 and into 2022.
Over the next 9 months, every sector will post more down months (in spending) than up months, although the declines will be most noticeable in nonresidential buildings.
Overall performance by sector has changed very little since May.
While most markets recover to positive new starts growth in 2021, spending growth lags, showing the downward trend in 2021 as a result of lost starts in 2020.
This next plot changes the scale of the spending plot so the nonresidential buildings data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps immensely to visualize the decline in nonresidential buildings spending. By midyear 2022, the annual rate of spending will be -20% lower than the pre-pandemic peak. It could take two to three years after that to recover to the pre-pandemic level of spending.
A typical batch of new construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the year gets spent in the year started (or over the 1st 12 months), 50% in the next year ( next 12 mo) and 30% in years following. Total nonresidential buildings starts in 2020 were down -20% ($90 bil in spending) and nonbuilding was down -10% ($35bil). Under normal conditions, we know how much of that $125 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential buildings starts, depressed for 13 months, posted strong starts indicating recovery beginning in April this year.
If INFRASTRUCTURE BILL starts don’t begin until the 2nd half of 2021, only 30% (of the 1st year cash flow 20/50/30 that is based on 12mo) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in the 2nd half 2021, only 30% x 20% or only about 6% would get spent in 2021. That’s $6 billion, or less than 1% of annual construction spending. So, there will be very little, if any, impact on 2021 construction spending as a result.
Total Public Infrastructure and Public Institutional, the total public work pool for which infrastructure investment is a potential, represents a total LESS THAN $350 BILLION, only 25% of all construction.
All the forecast spending in the data above is developed from monthly cash flow of new starts. This plot shows what the history looks like when comparing the cash flow forecast to the actual spending growth. Although actual spending is somewhat more uneven, the forecast accurately predicts the direction spending is headed.
JOBS DATA updated 8-6-21
Construction Jobs for July are expected to increase. Jobs are now down 3 consecutive months. Comparing jobs year-over-year in residential is strongly skewed by the rapid declines then rapid growth in 2020. That did not occur in nonresidential. July posted an increase of 11,000 jobs. Year-to-date thru July construction is up by 21,000 jobs. Jobs are down -227K (-3.0%) from Feb 2020 peak. Hours worked are down less than -1%, equivalent to about 50,000 jobs. Expect this downward trend to accelerate into year end.
Construction spending minus inflation (Volume) supports jobs. Most of the increase in residential construction spending this year is INFLATION. Nonresidential spending and volume are both down. There is no meaningful increase in total construction volume to support jobs growth.
Don’t ignore inflation. While residential spending is forecast UP 19% in 2021, 11% of that is inflation. Real volume is up only +8%. Nonres Bldgs volume after inflation is forecast down -12%, Nonbuilding volume down -7%.
If you are still measuring your business growth by change in revenue, you’re including inflation as part of your growth. Inflation is simply more paper dollars exchanging hands, not growth.
Total construction jobs through July measured from peak pre-pandemic (Feb 2020) are down 3%. Volume growth (spending minus inflation) from Feb 2020 to July 2021 is down 6%. Since the onset of the pandemic, we now have 3% more jobs than we have volume of work to support those jobs. The result is a 3% loss in productivity.
Residential change in revenue from Feb 2020 to July 2021 is up +28%. But the real change in volume after inflation is up only +13%. Residential jobs are up only 3%. This is where the greatest need is currently.
Nonresidential Buildings change in revenue from Feb 2020 to July 2021 is down -15%. After inflation, the real change in volume is down -19%. Nonres Bldgs jobs are down only -7%. This is considerable excess jobs to support the current work.
Nonbuilding Infrastructure change in revenue from Feb 2020 to July 2021 is down -10%. After inflation, the real change in volume is down -17%. Nonres Bldgs jobs are down only -6%. This is considerable excess jobs to support the current work.
The need identified in residential, and likewise the excess identified in nonresidential are not as extreme as both seem. There are a large number of jobs classified as nonresidential that actually perform residential work. Any large firm, and all it’s employees, regardless of the job they perform, if they primarily work on nonresidential buildings, is classified nonresidential for the purpose of the jobs count. However, the buildings they work on are always classified as to building type. This often occurs in several large primarily nonresidential trades such as concrete, structural steel and HVAC, when working on multifamily high-rise buildings. These crossover jobs are not separable from the major classification.
In constant $ (spending adjusted for inflation), even though residential constant $ volume is up 13% from Q1 2020, current total $ volume of all types of work, residential and nonresidential, is 6% lower than the peak average in Q1 2020. Total all $ volume will fall another 5% by year end 2021.
Construction spending is on track to increase 4.7% in 2021 over 2020. But after taking out inflation, spending minus inflation in 2021 will be DOWN 2%. Residential spending increases $115 billion (+18%), but after 11% inflation residential volume increases only $50 billion. All nonresidential spending decreases $49 billion but after adjusting for 4%+ inflation real nonresidential volume is down $86 billion. Total construction volume (spending minus inflation) is expected to decline 5% from May to Dec. Construction Jobs are expected to follow suit.
Construction volume growth is falling due to huge volume of nonresidential starts (-22%) that disappeared in 2020. The affect of those lost starts, which would have had peak spending in mid-2021, is such that the volume of work is declining throughout 2021.
Of concern is that since Feb 2020, total construction volume has recovered to a point that is down 7%, but jobs have increased back to a level that is down only 3%. Jobs are increasing at a rate that is closer to the growth in construction spending, which is substantially greater than the rate of growth of construction volume.
Jobs are increasing faster than the volume of work (which supports jobs). What are the implications of this to the construction industry? The industry as a whole now expends 4% more labor (jobs) to put-in-place every $1 billion worth of work than it did in Feb 2020. That impacts job total labor cost. That is lost productivity and impacts inflation.
Although residential jobs are currently increasing, nonresidential jobs will continue to fall, dropping another 4% over the next 12 months. If jobs growth follows more closely to volume growth, which it should, this time next year construction could be down another 200,000 jobs.
2021 Midyear Forecasts
Here’s how the current year-to-date spending performance, as of June data, compares to various firms’ Midyear Forecasts. The ytd provides insight into expected final 2021 performance. For example, the year-to-date Educational spending is -10.8% with 6 months of spending recorded. One firm has forecast educational will finish up 3.5% for the year. With only 6 months remaining (estimate to complete or etc), here’s how the remaining 6 months would need to perform for that to happen.
[(forecast% x 12) – (YTD% x 6)] /6mo etc = [(+3.5% x 12) – (-10.5% x 6)] /6 = [(+42) – (-64)] /6 = 106/6 = +17.6%.
For the next six months Educational spending would need to average +17.6% growth over last year to swing from currently down -10.8% to end the year up +3.5%. Well, Educational spending is down 16% from the 2020 high, has fallen 9 of the last 13 months and is down an average of -1.5%/mo for the last 5 months. With this performance over the past year, the probability is exceedingly low that Educational construction spending is going to flip from a negative monthly rate of spending to an avg of +17%/mo for the next six months to finish the year up +3.5%. There are numerous examples like this in the forecasts.
AIA Midyear Consensus 2021
7-16-21
The AIA Midyear Consensus solicits the nonresidential buildings construction spending forecast from a number of firms and publishes those results and the Consensus average. The table posted here includes all the AIA forecasts and Construction Analytics 7-2-21 forecast.
https://www.aia.org/articles/6416440-outlook-has-improved-for-construction-spen
Also included in this table is the year-to-date (ytd) actual spending through May. With 5 months of actual data, that ytd result should sway any forecast for any market estimate of year end result. A review of several years of history over all markets shows there are very few instances in the historical data where year end performance swings by more than 10% from ytd at month 4 or 5. Normal variances for about 80% of instances are in the range of 3% to 5%. So with few exceptions, at 5 months into the year, we could estimate year end will be within +/-5% of year-to-date. And yet, there are many instances in these forecasts that are outside that expected range.
The question is, can we determine, how accurate are these forecasts? Some rudimentary checks and balances, and some simple proportional math, provide the answer.
If you forecast a construction spending mrkt to finish 2021 at -30%, but the ytd after 5 months is -5%, the next 7 months would need to average near -50% to get to -30%. With the change in the yoy rate less than -3%/mo, it can’t happen.
If you forecast a construction spending market to finish 2021 at +3.5%, but the ytd after 5 months is -11%, the next 7 months would need to average +14% above Jun-Dec 2020 to get there. That’s a 25%/mo swing from the current rate that would need to hold steady for 7 months.
Likewise, If you forecast a construction spending market to finish 2021 at +11%, but the cum ytd after 5 months is -3%, the next 7 months would need to average +21% above Jun-Dec 2020 to get there. That’s a 24%/mo swing from the current rate for 7 months. Swings like that just don’t happen.
Another market with a glaring example, this time in almost every forecast. Lodging forecasts in the AIA Consensus range from -14% to -20%, with one wild estimate at -43%. Construction Analytics forecast for Lodging is -26%. The year-to-date is -27%. Well, from April to December 2020, spending fell at a rate of 4%/month. In the 1st 5 months of 2021, spending has been down slightly, still hovering near the December low. There are no indications that spending is poised for a rebound. In fact the forecast calls for spending to continue falling through 2021. The current monthly rate of spending averages -25%/mo from 2020. In order to hit any of the forecasts between -14% and -17%, the current rate of spending would need to flip by 15 to 20 percentage points for all of the remaining 7 months of 2021. Spending would need to increase at a rate of 2.5% per month for the next 7 months. This is a good time to remind everyone that Lodging construction starts last year dropped 45%, so the trend is down, not up. Current indications are that spending will decline 9 out of the next 12 months.
The forecasts in this Consensus report have numerous examples like those above. Nonresidential Bldgs actual ytd for the 1st 5 months is -10.5%. Consensus forecast for 2021 is -3.9%. The next 7 months each would need to avg +1% over 2020 to get there. The monthly rate of spending is currently -6% to -10% below 2020 and has fallen 13 of the last 15 months. That’s not going to flip to +1% immediately and stay at that level for 7 months.
The argument cannot be used that monthly data should not be compared to 2020 because of the rapid decline due to shutdowns skewing all the data. That did not occur in nonresidential buildings. Nonres bldgs spending declined 5% in April, but then it averaged a steady -1.5%/mo decline for the remainder of 2020. As of May 2021, spending is right where it was in December, still 16% lower than March 2020. There are no huge down months in 2020 to which 2021 spending would be compared resulting in a large increase to year-to-date percent.
At midyear, the ytd values give some indication of how the year will end. There are a few examples in historical data in which a market did swing by 10% or more from midyear to year-end, but there is less than 10% chance of a market varying by more than 10% and more than an 80% chance markets vary by only 3% to 5%. Rarely does -2% become +8% or +7% become -3%.
11-1-21 updated table added Here’s the same Midyear forecasts with year-to-date updated to September spending. Only the year-to-date has been updated in this table. All forecasts are as posted in July.
6 out of 8 construction spending forecasts for nonresidential buildings reported in the AIA Midyear Outlook Jul’21 could now only be realized IF construction spending YOY for the next 3 months turns positive, in some cases it would need to grow to +10% to +12% YOY for the next 3mo. Currently, YOY is -7%. Construction spending YOY has been near -8% to -7% for last 4 months. The next 5 months is forecast to improve, but improves only to -4%, does not turn positive. There are no indications in the forecast that total nonres bldgs YOY spending will turn positive this year.
And here’s the 2021 Midyear Forecasts compared to the Final 2021 spending.
Compare Current Construction Forecasts
Compare Construction Analytics current construction spending forecast to the most recent forecasts by FMI and ConstructConnect.
Construction Analytics (CA) and ConstructConnect (CCon) forecasts include year-to-date spending. FMI report is titled 2021 2nd quarter edition, but also states based on 4th quarter 2020 actuals.
Both FMI and CCon forecasts have not yet been updated to include 2019 and 2020 revisions released on 7-1-21.
Construction Analytics forecast includes 2019 and 2020 revisions and includes May ytd spending.
Spending Total Put-in-place Forecasts for 2021 range from $1,422 billion (FMI) to $1,574 billion (CCon). Construction Analytics (CA) forecast is $1,526 billion. This is quite a wide spread. Here’s a few of the major differences:
Residential CA = $741 bil, FMI = $627 bil, CCon = $728 bil
Educational CA = $99 bil, FMI = $103 bil, CCon = $108 bil
Healthcare CA = $48 bil, FMI = $49 bil, CCon = $53 bil
Power CA = $110 bil, FMI = $120 bil, CCon = $137 bil
Transportation CA = $56 bil, FMI = $54 bil, CCon = $65 bil
https://edzarenski.com/2021/07/01/construction-spending-2021-thru-may/
https://www.constructconnect.com/blog/quarterly-u.s.-put-in-place-forecast-report-summer-2021
The FMI forecast for residential appears to not yet have been updated to reflect record spending from October through May. I’d expect that will soon be updated. Residential spending year-to-date (ytd) is up 23% and has averaged a seasonally adjusted $740bil for the past 7 months. For the remainder of the year it’s expected to decline about 0.5%/month, but residential spending will still finish 2021 well over $700 billion.
For Power to end up at CCon = $137bil in 2021, considering the ytd through May is already -7%, the remaining 7 months of the year would need to average up 30%. Markets don’t jump that much higher and maintain that level for the next 7 months.
The spread of Spending Put-in-place Forecasts for 2022 ranges over an even wider difference, from $1,355 billion (FMI) to $1,703 billion (CCon). Construction Analytics (CA) forecast for 2022 is $1,533 billion. This is an exceptionally wide spread with some obvious areas of attention.
2022 Residential CA = $779 bil, FMI = $567 bil, CCon = $781 bil
2022 Nonresidential Buildings CA = $421 bil, FMI = $432 bil, CCon = $474 bil
2022 Nonbuilding CA = $333 bil, FMI = $356 bil, CCon = $448 bil
note: Transportation and Communication carried in nonbuilding for like comparison.
At this time of year some firms will present midyear forecasts. My latest report is May ytd data released July 1. With the August 2nd and 6th spending and jobs releases for June we have half a year of data, I’ll base a midyear report on that. I don’t expect any big change since the May data. Not all midyear forecasts will have the same ytd data, so could vary in that respect. So, watch for the midyear forecasts!
Here’ is a link to the results of 8 firms forecasts at Midyear 2020 compared to actual revised final 2020 spending. Also here is the same firms 1st forecast for 2021 compared to actual year-to-date 2021
Construction Spending 2021 updated 7-2-21
Construction Spending Actual through May 2021
Total Construction Spending is up 4.6% year-to-date (ytd) from the same five month period 2020. Residential is up 23.4%, Nonresidential Buildings is down -10.5% and Nonbuilding Infrastructure is down -5.8%.
This analysis includes spending revisions to 2019 (up $26bil, +1.9%) and 2020 (up up $37bil, +2,6%).
In the 1st 3 months of 2020, spending had reached an all-time high averaging a SAAR of $1,521 billion.
In the 1st 3 months of 2021, spending again hit a new all-time high averaging a SAAR of $1,544 billion. In May, spending is $1,545 billion.
Year-to-date through May, while residential is up 23%+, 15 of 16 nonresidential markets, 98% of total nonresidential market value, are down a total of -8.6%. For the remainder of the year, the rate of nonresidential decline will slow to -4%.
Construction starts are leading the way to recovery, but construction spending, which is dependent mostly on starts from previous years (2020 down -22%), will remain depressed for nonresidential construction well into 2022. Recovery in backlog begins to build in a few markets in 2021. However, new nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.
Aside from residential, recovery to the levels of revenue (spending) recorded in Q1 2020 won’t show up before 2024.
The following table shows ytd through May $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.
The impact of reduced starts in 2020 is showing up in the 2021 year-to-date results. Total Nonres Bldgs starts were down 22% in 2020. Nonbldg Infrastructure starts were down 13%. Some of these markets will be affected by a downward trend in spending for two to three years.
2020 starts for select markets:
- Amusement -38%
- Commercial/Retail -14%
- Office -20%
- Lodging -50%
- Manufacturing -57%
- Power -38%
The greatest downward impact on spending will be felt in mid-2021. Over the next 9 months, every sector will post more down months than up months, although the declines will be most noticeable in nonresidential buildings.
For the next few months the residential year-to-date comparison will be skewed. It is going to increase due to the steep fall-off in spending back in April and May 2020. Then, months of strong growth, a total +38% in 7 months in residential from May 2020 onward, with no equivalent growth increase this year, will cause ytd comparisons to decrease. So, even though residential spending is not forecast to increase any more in 2021, residential spending will peak at +25% year-to-date in the May-June data (due to the steep decline in spending in 2020) before falling back to end at +16% ytd for year end.
While most markets recover to positive new starts growth in 2021, spending growth lags, showing the downward trend in 2021 as a result of lost starts in 2020.
This next plot changes the scale of the spending plot so the nonresidential buildings data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps immensely to visualize the decline in nonresidential buildings spending. By midyear 2022, the annual rate of spending will be 20% lower than the pre-pandemic peak. It could take two to three years after that to recovery to the pre-pandemic level of spending.
A typical batch of new construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the year gets spent in the year started, 50% in the next year and 30% in years following. Total nonresidential buildings starts in 2020 were down -22% ($100bil in spending) and nonbuilding was down -13% ($50bil). Under normal conditions, we know how much of that $150 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential buildings starts, down now for 12 months, posted some hint of recovery in April.
If new infrastructure bill starts don’t begin until the 2nd half of the year, only 25% to 30% (of the 1st year 20/50/30 that is based on 12mo) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in the 2nd half 2021, only 30% x 20% or only about 6% would get spent in 2021. That’s $6 billion, or less than 1% of annual construction spending. So, there will be very little if any impact on 2021 construction spending as a result.
In constant $, spending adjusted for inflation, even though residential constant $ volume is up 13% from Q1 2020, current total $ volume of work is 5% lower than the peak average in Q1 2020. This will fall another 5% by year end 2021.
JOBS DATA updated 7-2-21
Construction Jobs for June (May16 thru June12) are down slightly (-7,000) from May. May was revised down slightly (-6k) and April (-4k) revised down slightly. Jobs are now down 3 consecutive months. Comparing jobs year-over-year is strongly skewed by the rapid declines then rapid growth in 2020. Year-to-date thru June construction is up only 10,000 jobs. Jobs are down 238K (-3.1%) from Feb 2020 peak. But also, hours worked dropped -1.3%, equivalent to another 100,000 jobs. Expect this downward trend to accelerate into year end.
Construction spending minus inflation (Volume) supports jobs. All of the increase in construction spending this year is INFLATION. There is no meaningful increase in construction volume to support jobs growth.
Construction spending is on track to increase 3.8% in 2021 over 2020. But after taking out average 6% inflation, spending minus inflation in 2021 will be DOWN 2%. Residential spending increases $103 billion (+16%), but after 8% inflation residential volume increases only $47 billion. All nonresidential spending decreases $47 billion but after adjusting for 4% inflation real nonresidential volume is down $77 billion. Total construction volume (spending minus inflation) is expected to decline 5% from May to Dec. Construction Jobs are expected to follow suit.
Although residential jobs are currently increasing, nonresidential jobs will continue to fall, dropping another 4% over the next 12 months. This time next year construction could be down another 200,000 jobs.
2021 Construction Economic Forecast – Summary
Initial Construction Outlook 2021, 2-5-21, based on data from:
- Actual Jobs data includes BLS Jobs to Jan 16th, issued 2-5-21
- Forecast includes US Census Dec 2020 year-to-date spending as of 2-1-21
- Forecast includes Dodge Outlook 2021 and Dec construction starts 1-19-21
SUMMARY – CONCLUSIONS
Construction Spending drives the headlines. Construction Volume drives jobs demand. Volume is spending minus inflation. Current outlook shows the most recent peak volume was 2017-2018. Total Volume is forecast to decline every year out to 2023, but Residential is rising, Nonresidential is falling.
When spending increases less than the rate of inflation, the real work volume is declining. Nonresidential buildings spending for 2020 is down -2%, but with 3% to 5% inflation, volume is down 5% to 7%. The extent of volume declines would impact the jobs situation.
STARTS – BACKLOG – SPENDING
By far the greatest impact of the pandemic on construction is the massive reduction in new nonresidential construction starts in 2020 that will reduce spending and jobs in that sector for at least the next two years. Residential continues to increase.
- 2020 new starts declined -8%. Res +7%, Nonres Bldgs -24%, Nonbuilding -14%.
- New starts for residential reached an all-time high in 2020. Expect up +5% in 2021.
Nonresidential construction starts in backlog at the beginning of the year provide for 75% to 80% of all spending in 2021. New starts in 2020 were down 24% for buildings and 14% for non-buildings, so backlog is down. It would be difficult to show any scenario that has these sectors up in 2021.
Construction has yet to experience the greatest downward pressure from the pandemic. After hitting a post-pandemic spending high in December, spending and jobs losses won’t hit bottom until 2022. Nonresidential declines outweigh Residential gains.
- Spending forecast for 2021 is up +1.4%, but nonresidential buildings is down -11%.
- Almost all gains in spending are due to large 12%/yr gain in residential.
The largest declines in 2021 spending are Lodging -37%, Amusement/Recreation -26%, Manufacturing -19% and Power -15%.
PROJECT COST ESCALATION – INFLATION
- Inflation for nonresidential buildings near 4% the next few years. Residential 5% to 6%.
VOLUME – JOBS
Construction Jobs annual average for 2020 is down 220,000 jobs. The current spending forecast is indicating that December 2020 was the highpoint for jobs. Residential jobs will be up in 2021, but Nonresidential Buildings jobs are down steep. Net jobs will be down 15 of next 18 months. Forecast 2021 net annual average jobs losses of -200,000. Nonresidential Buildings 2021 jobs losses will outweigh residential gains.
Selected slides from Feb 2021 Construction Outlook Presentation
EdZ Econ Feb 2021 SAMPLE SLIDES PDF
Read More 2021 Construction Economic Forecast
2021 Construction Economic Forecast
Initial Construction Outlook 2021, 2-5-21, based on data from:
- Actual Jobs data includes BLS Jobs to Jan 16th, issued 2-5-21
- Forecast includes US Census Dec 2020 year-to-date total spending as of 2-1-21
- Forecast includes Dodge Outlook 2021 and Dec construction starts 1-19-21
This analysis utilizes Dodge Data & Analytics construction starts data to generate spending cash flow to then determine how spending may affect future construction activity.
When spending increases less than the rate of inflation, real work volume is declining. In 2020, nonresidential buildings spending is down -2%, but with 3% inflation, volume declined 5%. The extent of volume declines negatively impacts the jobs situation. A 5% decline in Nonresidential Buildings volume impacts $22 billion worth of work and more than 100,000 jobs. In 2021, spending is forecast down 11%, volume down 14%.
2021 Residential spending will climb about 13%, up $80 billion to $695 billion. Nonresidential Buildings spending is forecast to drop -11% to $410 billion, a decline of $50 billion. Non-building spending drops -2% to $343 billion, a decline of only $8 billion.
By far the greatest impact of the pandemic on construction is the massive reduction in new nonresidential construction starts in 2020 that will reduce construction spending and jobs for at least the next two years. Although nonresidential buildings spending is down only -2% for 2020, the 15% to 25% drop in 2020 new construction starts will mostly be noticed in lower 2021 spending.
New Construction Starts
Total construction starts for 2020 ended down -8%, but Nonresidential Buildings starts finished down -24% and Non-building Infrastructure starts are down -14%.
Residential starts finished the year up +7% from 2019.
Most nonresidential buildings markets and residential new starts are forecast to increase 5% in 2021. Nonbuilding starts will increase 10% in 2021.
In the Great Recession, beginning in Q4 2008, nonresidential buildings new construction starts fell 5%, then fell 31% in 2009 and 4% in 2010. Spending began to drop by Dec 2008, then dropped steadily for the next 24 months. Spending dropped 40% over that next two years. During that period, residential starts and spending fell 70%.
In 2020, nonresidential buildings starts fell 24%, but the six months from Apr-Sep, starts fell 33%. Starts are forecast to fall 4% in 2021. Nonres Bldgs spending began to decline in Aug, is now down 10% from Feb high and is forecast to drop steadily the next 20 months, for a total decline of 25%. This time around residential starts and spending are increasing.
Over the final 5 months of 2020, new Residential construction starts posted 4 of the 5 highest monthly totals since 2004-2006. Residential new starts finished 2020 at a 15-year high, with almost 50% of new activity for the year posting in the final 5 months, which will put a lot of that spending into 2021. Total 2020 residential starts are up 7%, but the average for the last 5 months is up 10% from the same period 2019. There is a large portion of 2021 spending from that last 5 months of starts, that will be up 10%.
Nonresidential Buildings new construction starts in 2020 averaged down 24%: Manufacturing -57%, Lodging -46%, Amusement/Recreation -45%, Education -12%, Healthcare -7%. Most of the spending from those lost starts would have taken place in 2021, now showing up as a major decline in spending and work volume.
Manufacturing starts in 2020 fell 57%. Manufacturing projects can have a moderately long average duration, because some projects are 4-5 years. So, projects that fell out of the business plan starting gate in 2020 caused a drop in starting backlog of -32% for 2021 and -33% for 2022. It should not be hard to see how that leads to a huge decline in construction spending the next two years. The same thing happened with Amusement/Recreation and Lodging, although lodging tends to have shorter duration, so affects mostly 2021.
Commercial/Retail starts in 2020 dropped 16%. But this group includes warehouses which finished the year up +1% and warehouses is 60% of the total market. All other Commercial/Retail ended 2020 down 35%.
Non-building Infrastructure new construction starts in 2020 averaged down -13%. Power -37%, Transportation -22%. Highway (along with residential) was the only market to gain new starts in 2020, +8%.
Power new starts fell 37% in 2020, but Power backlog has not increased since 2018. Even though Power new starts in 2021 are forecast to increase 13%, that’s not enough to push spending to positive.
Transportation starts declined -22% in 2020. But Transportation backlog increased 50% over the last three years. There is a large volume of Transportation projects currently in backlog, and although backlog does drop slightly for 2021, spending is supported by the large volume of starting backlog and a forecast for increased new starts in 2021.
The following NEW STARTS table shows, for each market, the current forecast for new construction starts. With exception of residential, spending in all other markets, due to longer schedules, is most affected by a decline in new starts, not in the year of the start, but in years following. As we begin 2021, some effects of reduced starts have not even begun to show up in the data. A 24% decline in new nonresidential starts in 2020 results in a huge decline in spending and jobs in 2021-2022.
Almost every nonresidential construction market has a weaker spending outlook in 2021 than in 2020, because approximately 50% of spending in 2021 is generated from 2020 starts, and 2020 nonresidential starts are down 24%, with several markets down 40%. Starts lead to spending, but that spending is spread out over time. An average spending curve for nonresidential buildings is 20:50:30 over three years. Only about 20% of new starts gets spent in the year they started. 50% gets spent in the next year. The effect of new starts does not show up immediately. If new nonresidential buildings starts in 2020 are down 24%, the affect that has in 2020 is to reduce spending by -24% x 20% = – 4.8%. The affect it has in 2021 is -24% x 50% = -12%. In 2022-2023 the affect is -24% x 30% = -7.2%.
Starting Backlog
Starting backlog is the estimate to complete (in this analysis taken at Jan 1) for all projects currently under contract. The last time starting backlog decreased was 2011.
Backlog leading into 2020 was at all-time high, up 30% in the last 4 years. Prior to the pandemic, 2020 starting backlog was forecast UP +5.5%. Due to delays and cancelations, that has been reduced to +1.8%, still an all-time high. Starting Backlog, from 2011-2019, increased at an avg. rate of 7%/year.
If new construction starts are greater than construction spending in the year, then for the following year starting backlog increases. It’s when new starts don’t replenish the amount of spending in the year that backlog declines. And that is the case this year.
Total starting backlog is down -10% for 2021 and -5% for 2022. 2021 Starting Backlog is back to the level in 2018. In 2022, backlog drops to the level of 2017.
Nonresidential Buildings new starts declined by -24% in 2020 resulting in starting backlog drops -19% for 2021 and drops -9% for 2022.
For Non-building Infrastructure, a drop of -14% in 2020 starts results in a drop of 9% in 2021 starting backlog and -5% for 2022.
Residential starting backlog for 2021 is up +12%. New starts are up 6%.
2021 backlog declines in every nonresidential market, except Highway.
80% of all nonresidential spending in any given year is from backlog and could be supported by projects that started last year or 3 to 4 years ago. 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.
Projects in starting backlog could have started last month or last year or several years ago. Many projects in backlog extend out several years in the schedule to support future spending. Current backlog could still contribute some spending for the next 6 years until all the projects in backlog are completed.
Reductions in starts and starting backlog lead to lower spending. Residential construction is going counter to the trend and will post positive results for new starts, backlog and spending for the next two years. Nonresidential buildings will experience the greatest reductions in new starts, backlog and spending through 2022.
Spending Forecast 2021
2021 Residential spending will climb about 13%, up $80 billion to $695 billion. Nonresidential Buildings spending is forecast to drop -11% to $410 billion, a decline of $50 billion. Non-building spending drops -2% to $343 billion, a decline of only $8 billion.
Most all the change in this forecast from previous is an increase to residential spending. Both recent starts and spending increased substantially since previous forecasts. When looking at Total Construction Spending for 2021, residential growth obscures the huge declines in nonresidential.
The monthly rate of spending for residential increased 33% in the 7 months from May to December. The last time we had growth like that was 1983. The last time we had rapid growth in residential work, 2013-2014 and 2004-2005, it took 2 years to increase 33%. Residential spending in Dec 2020 is 21% higher than Dec 2019.
Nonresidential Buildings spending drops -2% to -3% each quarter in 2021. Nonresidential Buildings spending as of Dec. 2020 is down 10% From Feb. 2020 and 8% from Q4 2019. By 3rd quarter 2021, nonresidential buildings spending is forecast down another 12% lower than Dec. 2020, or 20% below the Feb. 2020 peak. This tracks closely with the 24% decline in new construction starts in 2020.
Nonresidential Buildings construction will take several years to return to pre-pandemic levels. Although nonresidential buildings spending is down only -2% for 2020, the 15%-25% drop in 2020 construction starts will mostly be noticed in lower 2021 spending. Project starts that were canceled, dropping out of new backlog between April and September 2020, would have had midpoints, or peak spending, March to October 2021. Nonbuilding project midpoints could be even later. The impact of reduced new starts in 2020 is reduced spending and jobs in 2021 and 2022.
Almost every market has a weaker spending outlook in 2021 than in 2020, because of lower starts in 2020. Starts lead to spending, but on a curve. A good average for nonresidential buildings is 20:50:30 over three years. 20% of the total of all starts in 2020 gets spent in 2020 (yr1) and that represents also about 20% of all spending. 50% of the total value of 2020 starts gets spent in the following year, 2021. So, 50% of spending in 2021 is generated from 2020 starts. If starts are down 20% and 50% of spending comes from those starts, spending will be down 20% x 50% of the work.
For 2020, the biggest declines are Lodging (-14%), Manufacturing (-10%) and Amuse/Recreation (-7%). Commercial/Retail finishes up +4.2%, but this is entirely due to Warehouse, 60% of the total Commercial/Retail market. Office and Educational are down -4% and -1%. Nonresidential buildings takes the brunt of declines in both 2020 and 2021.
In 2021, every nonresidential building market is down from 2020, some markets down -10% to -20%. Educational, Healthcare and Office are all down -3% to -6%. Non-building infrastructure Power market is down -15%, but Transportation spending is up +10% due to strength in backlog from several multi-billion$ starts over the past few years.
Manufacturing projects have a moderately long duration. So, projects that fell out of the business plan caused a drop in starting backlog of -32% for 2021 and -33% for 2021. It should not be hard to see how that leads to a huge decline in construction spending the next two years. The same thing happened with Amusement/Recreation and Lodging, although lodging tends to have shorter duration, so affects mostly 2021.
A recent AGC survey of construction firms asked, how long do you think it will be before you recover back to pre-COVID-19 (levels of work)? The survey offered “longer than 6 months” as an answer choice. Less than 6 months was the right answer for residential, but my current forecast for full recovery of nonresidential buildings work is longer than 6 years.
Construction Spending drives the headlines. Construction Volume drives jobs demand. Volume is spending minus inflation. Inflation $ do not support jobs. Current outlook shows (recent) peak volume was 2017-2018. Volume is forecast to decline every year out to 2023.
Before we can look at the effect on jobs, we need to adjust spending for inflation. The plot above “Spending by Sector” is current dollars. Below that plot is adjusted for inflation and is presented in constant $. Constant $ show volume. Notice future residential remains in a narrow range after adjusting for inflation. No sector shows improvement in volume through Jan. 2023.
When we see spending increasing at less than the rate of inflation, the real work volume is declining. For example, with construction inflation at 3% annually, a nonresidential buildings spending decline of -2.1% in 2020 would reflect a work volume decline of 5.1%. The extent of volume declines would impact the jobs situation.
While 2021 Residential spending will climb about 13%, Nonresidential building spending is forecast to drop -11% and Non-building spending drops -2%.
But with 4% inflation, after inflation Residential Volume is up only 9%, Nonresidential Building is down 15% and Non-building is down 6%.
By far the greatest decline in volume is in the nonresidential buildings sector. The greatest losses in 2020 are Lodging, Manufacturing, Amusement/Recreation and Commercial/Retail (without warehouse). In 2021, every major nonresidential building market drops in volume, with staggering 30% declines in Lodging and Amusement/Recreation. Commercial/Retail and Manufacturing will drop -13% to -15%.
Here’s the same graphic as above, but in Constant $, so it’s inflation adjusted. That provides the change in volume of work.
Volume of Work
Residential construction volume dropped 12% from the January 2020 peak to the May bottom, but has since recovered 22% and now stands at a post Great Recession high, 10% above one year ago. Although residential spending remains near this high level for the next year, volume after inflation begins to drop by midyear.
Nonresidential volume has been slowly declining and is now down 10% from one year ago. By 3rd quarter 2021, nonresidential buildings volume is forecast down another 15% lower than December, or 25% below the Feb 2020 peak. This tracks right in line with the 24% decline in new construction starts in 2020. Most of the spending from those lost starts would have taken place in 2021, now showing up as a major decline in spending and work volume.
While construction spending in 2021 is forecast up 1.3%, after inflation construction volume is expected to decline 2.5%. Residential construction spending is forecast up 13%, volume up almost 9%, but 2021 nonresidential buildings spending is forecast down -11% leading to a decline in volume after inflation of -14%. Nonbuilding Infrastructure spending in 2021 declines -2.5%, volume drops -6%.
Nonresidential buildings volume declines of 14% project to a loss of over 400,000 jobs next year and non-building infrastructure is projected to drop 60,000 jobs, but Residential could experience growth next year of 250,000 jobs. That could net annual average jobs losses to -200,000. Job losses continue into 2022 with net volume declines of 4%.
Jobs are supported by growth in construction volume, spending minus inflation. We will not see construction volume return to Feb 2020 level at any time in the next three years. This time next year, volume will be 5% lower than today, 10% below the Feb 2020 level.
Download the complete 2021 Initial Forecast here
Along with this forecast document, See these related articles
2021 Construction Economic Forecast – Summary
Measuring Forecasting Methodology & Accuracy
Public/Private Construction Spending Forecast 2020-2021
Construction Analytics 
