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Join us August 30 – September 1 in Dallas TX
I will be presenting to the plenary session on Main Conference Day 1, Tuesday August 31 on the following:
The State of Construction Post-Pandemic: Revealing Trends in Demand, Supply & Cost Escalation
• Revealing the economic reality and outlook in terms of construction volume and its impact on jobs and prices
• Identifying key metrics and data sources that will give you a reliable indication of inflation for your market
• Determining the likely impact of an Infrastructure Bill and other major construction investments on market forces
The 6th annual Advancing Preconstruction 2021 conference is North America’s largest gathering of contractors, design firms and clients looking to improve coordination of the design phase. You’ll hear how to align cost, schedule and project specifications to set projects up for success.
From conceptual estimating and winning work to constructability reviews and model-based quantity take-off, you’ll discover the latest technologies and workflows across five educational tracks.
New additions for 2021 include:
- Post-pandemic outlooks with a focus on cost escalation for major markets and bidding strategies
- Deep dives into estimating for specific CSI divisions including earthwork, steel, mechanical and electrical
- Benchmarking ways to conduct design reviews and maintain quality of coordination, including with remote working
- How direct material procurement, prefabrication, IPD and other trends could radically alter preconstruction and reduce costs
update 6-15-21 PPI for May
Post Great Recession, 2011-2020, average nonresidential buildings CONSTRUCTION INFLATION is 3.7%. Residential cost inflation averaged over 5% for the last 8 years.
The 30-year avg inflation rate (including recession) for Nonres Bldgs is 3.5% and for Residential it’s 3.4%.
The 30-year avg inflation rate (EXCLUDING recession years) for Nonres Bldgs is 4% and for Residential it’s 4.75%.
I expect non-residential buildings construction inflation in 2021 to range between 3.2% to 3.5%, with potential to be held lower. Expect residential inflation of 7% to 8% with potential to push slightly higher.
As of March 2021, PPI for materials inputs to construction is up 12% to 14% yoy, measured to last March before the bottom dropped out. The PPI Buildings Cost Index for final cost to owner is up only 2%.
Almost every construction market has a weaker spending outlook in 2021 than in 2020. Approx. 50% of nonres spending in 2021 is generated from 2020 starts.
- Nonres Bldgs starts fell 22% in 2020.
- Nonbuilding starts were down 15%.
- Residential starts were up 6%.
While there are several reasons that construction inflation will increase, downward pressure on spending will temper construction inflation.
as of 6-15-21, May PPI report > Inputs to Nonres Constr YTD21 +13.3%. Final Demand Nonres Constr YTD21 +2.7%. Five solid months of 2021 data shows the Input costs of materials IS NOT being passed along to final cost to owner. This could change, but for now final costs of construction are holding well below input costs.
A look back at Res, Nonres and Nonbldg construction inflation over the last 30 years shows rarely has there been any substantial increase in inflation when construction spending is headed down.
- Nonres Bldgs spending 2020 -2.0%, 2021 -7.7%, 2022 -4.5%
- Nonbuilding spending 2020 +2.8%, 2021 -1.3%, 2022 -3.2%
- Residential spending 2020 +12.2%, 2021 +17%, 2022 +4.8%
Over 30 years, looking at the 3 major sectors, Res, Nonres Bldgs and Nonbldg = 90 pcs of data. 27 out of 90 times spending decreased or stayed flat for the year. Only 3 out of those 27 times when spending was down/flat did inflation come in over 3%. Avg inflation for the 27 down/flat yrs is less than 1%. For those 27 times, only 3 times were PPI Inputs less than 2%.
An estimator must differentiate between “added quality” and inflation. Added components or increased level of finish are not inflation, but are picked up in the estimators increased unit costs. Inflation captures higher labor, mtrl, margin costs for same level of build out.
Granite counters and Italian tile floors vs PLam counters and vinyl floor coverings is an increase in quality, not inflation. Increased SqFt is an increase in quantity, not inflation.
7-21-21 June PPI data will probably drive up inflation cost in this report. SEE PPI as of June 2021
Download the full Inflation Report here
8-27-20 What impact will the pandemic have on Construction Inflation in 2020? Here’s Several inputs.
In April, and again in June, I recommended adding a minimum 1% to normal long-term construction inflation, to use 4% to 5% for 2020 nonresidential buildings construction inflation. Some of my peers were suggesting we would experience deflation. Only twice in 50 years have we experienced construction cost deflation, 2009 and 2010. That was at a time when business volume was down 33% and jobs were down 30%. Currently business volume and jobs are down 10% and by mid-2021 are forecast down 15%.
The Turner Construction Cost index for the Q2 is down 1% from Q1, effectively reporting 0% increase in the index year-to-date. But the Turner index year-to-date (avg Q1+Q2=1183) is still 3.6% higher than the average of Q1+Q2 2019 and 2.3% higher than the avg for all of 2019 (1156). So, while the index appears to show no gains in 2020, through the first six months it is already up 2.3% above the average 2019 index. http://turnerconstruction.com/cost-index
The Rider Levitt Bucknall Q2 2020 index is up 1.6% ytd, up 4.6% from the Q1+Q2 2019 average and up 3.1% above the 2019 average. https://s28259.pcdn.co/wp-content/uploads/2020/07/Q2-2020-QCR.pdf
The U.S. Census Single-Family house Construction Index is up 3.6% year-to-date through July. July 2020 is up 4.2% over July 2019. https://www.census.gov/construction/nrs/pdf/price_uc.pdf
Producer Price Index items for July construction reported by AGC on 8-11-20. Inputs to Nonres construction are down ytd -1.0% through July. Final Demand Nonres Bldgs is up 1.8% ytd through July. See https://www.agc.org/learn/construction-data/construction-data-producer-prices-and-employment-costs and https://edzarenski.com/2020/07/14/producer-price-index-year-to-date-june-july-2020/
UPDATE 10-14-20 NAHB reports thru September (Residential) Building Materials Up 4.4% in 2020. See PPI charts. Increases for lumber and ready-mix concrete are noted. LUMBER “Over the last five months, the PPI for softwood lumber has nearly doubled (+90.9%). Sharply higher lumber prices have added more than $17,000 to the price of an average new single-family home since mid-April.” CONCRETE “Prices paid for ready-mix concrete (RMC) rose 1.5% in September (seasonally adjusted), a monthly increase the magnitude of which is atypical of the commodity. The national PPI for RMC has increased by more than 1% just five of the 135 months since the end of the Great Recession. The average annual change in prices paid for RMC was 2.6% over the last decade.” https://www.eyeonhousing.org
R.S.Means quarterly cost index of some materials for the 2nd quarter 2020 compared to Q1: Ready-Mix Concrete 0%, Brick and Block +3%, Steel Items -2%, Wood products +3%, Roof Membrane +7%, Insulating Glass +6%, Interior Finishes -2%, Plumbing Pipe and Fixtures +7%, Sheet Metal +7%. https://www.rsmeans.com/landing-pages/2020-rsmeans-cost-index
U.S. manufacturing output posts largest drop since 1946. Think of all the manufactured products that go into construction of a new building: Concrete, steel, doors, windows, roofing, siding, wallboard, lighting, heating systems, wire, plumbing fixtures, pipe, valves, cabinets, appliances, etc. We have yet to see if any of these will be in short supply leading to delays in completing new or restarted work?
There have been reports that scrap steel shortages may result in a steel cost increase. The U.S. steel industry is in the most severe downturn since 2008, as steelmakers cut back production to match a sharp collapse in demand and shed workers. Capacity Utilization dropped from 82% to 56% in April. Now in mid-August, CapU is up to 61%, still very low. Steel manufacturing output fell by a third and is still down more than 25%. Until production ramps back up to normal levels there may be shortages or delays in delivery of steel products.
Since Q1, the cost of lumber has increase 120%, so expect residential inflation to increase faster than nonresidential. https://eyeonhousing.org/2020/08/average-new-home-price-now-14000-higher-due-to-lumber/ and revised http://nahbnow.com/2020/08/average-new-home-price-now-16000-higher-due-to-lumber/
Contractors have been saying they have difficulty acquiring the skilled labor they need. This has led to increased labor cost to secure needed skills.
But most important, this SMACNA report quantifies that labor productivity has decreased 18% to meet COVID-19 protocols. https://www.constructiondive.com/news/study-finds-covid-19-protocols-led-to-a-7-loss-on-construction-projects/583143/
Labor is about 35% of project cost. Therefore, just this productivity loss equates to 18% x 35% = 6.3% inflation. Even if, for all trades, the average lost time due to COVID-19 protocols is only half that, the added inflationary cost to projects is 3% above normal. I expect the Turner Nonres Bldgs index will reflect some added labor cost in the next two quarterly releases.
Post Great Recession, average nonresidential buildings inflation is 3.9%. For the last five years it’s 4.5%. Residential cost inflation averaged 4.1% and 4.5% for those periods. The 30-year average inflation rate for nonresidential buildings is +3.75%.
Almost every 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 starts are down.
Typically, when work volume decreases, the bidding environment gets more competitive and prices go down. However, if materials shortages develop or productivity declines, that could cause prices to increase.
Add to these issues the fact that many projects under construction have been halted for some period of time and many more have experienced at least short-term disruption. The delays may add either several weeks to perhaps a month or two to the overall schedule, in which case management cost goes up, or it could add overtime costs to meet a fixed end-date.
We can expect some cost decline due to fewer projects to bid on, which typically results in sharper pencils. But we can also expect cost increases due to materials, labor cost, lost productivity, project time extensions, and/or potential overtime to meet fixed end-date.
I expect non-residential buildings inflation to range between 4% and 5% for 2020 and 2021, perhaps 5% to 6% for residential work.
A current article and several others, based on a sentiment survey, state that there will not be enough construction workers to support growing construction activity next year. I dispute that claim.
I’ve been writing about the disparity in jobs growth exceeding construction activity growth for more than two years. Construction activity has NOT been increasing to support jobs growth.
There are other construction forecasts that support my argument. It’s important to point out that my forecast is the HIGHEST for 2020. So, just keep in mind, if you consider any other forecast, the condition gets worse.
Seven of the eight firms that provided a forecast for the AIA Consensus Forecast are lower than Construction Analytics forecast for nonresidential work in 2020. AIA Consensus > marked slowdown for nonresidential building
ConstructConnect’s forecast is lower than my forecast for all sectors ConstructConnect’s Winter 2019-20 Put-In-Place Construction Forecasts
FMI’s forecast is lower for all sectors FMI U.S. Engineering and Construction Outlook: Third Quarter 2019 Report
Overall, Construction Analytics 2020 forecast shows a volume gain of 0.6%. Spending increase 4.6%, but average inflation is 4%. Therefore volume increases only 0.6%. That would support growth of about 50,000 jobs. Residential and Non-building Infrastructure show slight gains in 2020 but Nonresidential buildings volume is in it’s 4th year of decline.
ConstructConnect shows a total spending increase of 1.9% and FMI shows a total spending increase of 1%. Both show a slight gain in volume in at least one sector, but with expected inflation of around 4%, both would indicate an overall decline in volume and a decline in jobs.
Spending needs to increase greater than inflation to realize an increase in volume. If volume does not increase, there is no support to add jobs.
1-28-20 This original post, Inflation excerpt from the complete economic report – Construction Analytics 2020 Construction Economic Forecast – Jan 2020
8-25-20 See also Pandemic #14 – Impact on Construction Inflation
1-27-21 See 2021 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.
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 jobs 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 Great 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. Probably all of the core and shell and a large percent of interiors cost of a hi-rise residential building would remain the same whether the building was for residential or nonresidential use. This type of construction is totally dis-similar to low-rise residential, which in large part is stick-built single family homes. Therefore, use the residential cost index for single family but a more appropriate index to use for hi-rise residential construction is the nonresidential buildings cost 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
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 specific Infrastructure markets, such as pipeline or highway. This link refers to Infrastructure Indices.
Construction Analytics Building Cost Index
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
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.
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.
Non-building Infrastructure indices are far more market specific than any other type of index. Link here to Reference specific Infrastructure indices rather than an 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.
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
For the last three years 2017-2018-2019, construction spending increased 8%, but inflation was 14%. Volume DECREASED 6%. BUT Jobs increased 11%. This ought to leave some people concerned. In this plot of monthly data since 2015, the shaded box shows the period of concern, 2017-2019.
And average job openings was 70,000+ the last two years. The only other time a divergence like this has ever occurred is the years leading into the last recession.
In 2004-2005-2006, spending increased 30%, but inflation was 28%. Volume increased only 2%. BUT Jobs increased 13%. And job openings increased 20,000/yr. After 15 years of near balanced growth, by the end of 2006 jobs growth exceeded volume growth by 15%. In the next 10 years that disparity never corrected.
We can reset the zero baseline to 2006 to see what has happened since 2006.
From 2007 through 2017, jobs and volume were balanced. Since then, the plot below for 2017-2019 looks exactly like 2004-2006 above. So this could raise concern, because,
if we have just experienced a period in which jobs and volume have been nearly in balance (2007-2016), then if the volume of work is no longer increasing, there is no support for adding jobs. Remember, we started this period with 15% excess jobs, but after 10 years, we swallowed that lump.
This plot is the same data as the first plot, only annually vs monthly. This plot of annual data since 2011 shows not much out-of-balance from 2011 to 2017. The shaded box shows the period of concern, 2017-2019.
I had been predicting that jobs growth would slow and it has since Q4 2018. The plot below shows the average jobs growth rate for the preceding 12 months. The rate of jobs growth is now at a seven-year low. It could go lower. It probably should go lower, but nonresidential volume declines in 2020 while residential volume increases slightly, so there is a net growth. Non-building infrastructure work is expected to have strong spending and volume in the next two years due to years of backlog growth.
In almost 30 years of data, only six years are way out of balance, 2017-18-19 and 2004-05-06. Current data sure does not indicate there is a lot of construction work out there in need of additional workers. And if jobs are still growing, it certainly does not indicate there should be an increase in job openings, because volume is decreasing. In fact, by all measures, it should indicate job losses.
1-17-20 Job Openings dropped from a recent average near 350,000 to 214,000 in Nov.
The deficit created in the last three years, a 17% disparity in jobs vs volume growth, is similar to the 15% deficit in 2006, preceded by a long period of jobs and volume growth in balance, then going quickly and hugely out-of-balance. That has major implications for labor cost inflation and productivity which could affect schedules, and that’s not the kind of inflation easily tracked in wages. But it’s real.
Assessing the impact of this next level tariffs on the cost of construction has now become a nearly impossible task. Tariffs are on PARTS use in manufacture of goods. Who (architect? engineer?) will identify what parts are included in which products used in the building?
For example, look at something simple like light fixtures. The shell, the ballast, the reflector, the shade, the lamps or the wiring could be made in China. Who identifies where parts are made? Who now estimates the share of tariff increase on those parts to determine tariff impact on cost of manufacturing the entire light fixture?
Expand that issue to a pump assembly with valves and pressure gauges. Who identifies which parts in the pump assembly come from what country? How does an estimator determine the cost of manufacturing the pumps, valves and gauges and determine what fraction of total cost has a tariff?
This will inevitably lead to inflation, but it will be hidden inflation, hard to determine if a manufacturer’s price increase for a product is substantiated. This is not like the tariff on mill steel, a 25% tariff on mill steel which represents 25% of final structural steel bid, which represents 10% of the building cost.
At the conceptual or schematic design phase of construction, all the products are not even identified. And the project start date might be two years out. It can’t possibly be determined with certainty what factor should be carried to cover cost increases due to tariffs.
Inflation factors and contingency factors will need to increase to cover unknown costs. This increases the share of the budget that is unidentified, always a contentious issues with owners. Frankly with the margins general contractors or construction managers get for services on a large construction project, these unknown factors, if understated in cost factors, could wipe out the total fee or profit for the job.
This is not a good position to be in, but I don’t yet see how it would be any different.
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Census released March spending today and from my point of view the numbers are showing a surprise downward shift. Nonresidential Buildings and Non-building Infrastructure both showed upward movement as expected but Residential spending posted the eight decline in nine months.
Construction Spending for March posted at $1.282 trillion, 1.5% below (my) expectations. Nonresidential increased BUT Residential is down 2% from Feb. Jan was revised down 4.6% and Feb revised down 5.6%.
Residential spending is now 8% below March 2018. The decline is about half in single family and half in renovations. Multi-family spending is up 11% year/year.
The only monthly gain in residential spending since July 2018 is in Dec, but in the nine months Jul to Mar spending is down 10%. Q1 2019 spending has dropped back to a level of Q1 2017. This is pushing my 2019 residential spending forecast into a decline, 1st decline since 2010.
I’ve posted reasons why I expect upward revisions to residential spending, but I question if revisions can turn around the current 10% decline from last July. It now looks like residential construction spending will NOT post any gains in 2019. That’s more serious than it first appears, since spending needs to increase at least 4% to 5% just to counter inflation. In other words, if residential spending in 2019 posts a 2% decline, real residential volume after inflation would decline by 6% or 7%.
In real volume, after adjusting for inflation, residential construction spending, as of March, is down 12.5% year over year. That hasn’t happened since 2009. Perhaps revisions will recover half that decline, but not all. Contrary to the decline in real volume, in the last year residential construction jobs are UP 3.5%.
Manufacturing currently appears stronger than it is expected to finish the year. Up 6% year-to-date and up 10% from last March, we could see those gains fall off over the next 6 months. Backlog is still very strong, but the schedule of cash flows from old jobs will lead to several months of moderate declines. Initial forecast was for 2% growth in 2019. Current expectations are that manufacturing will finish the year up between 2% to 4%. 2020 will be an extremely strong growth year.
Office spending, similar to manufacturing, could post several months of moderate declines. In fact, my forecast shows office spending declines in 6 out of the next 7 months and finishes the year at the same monthly rate of spending as we are at now. Office is up 8.4% ytd but I expect the year to finish up 4% or less. Initial forecast was up 6% for 2019. New starts in 2018 were up 11% but most of that spending will benefit 2020 when I expect to see growth of 6%.
Commercial spending is currently down 4.8% ytd and 7% lower than last March. It will move slightly lower before it improves, finishing the year down only 1% to 2%. 2020 may not get more than a 1% gain.
Educational spending will finish 2019 much stronger than current spending but the year will only make slight gains over 2018. Current spending is up 5.5% ytd over 2018 but that will taper off. However, the strong activity in the 2nd half of 2019 will lead to substantial growth in 2020.
More notes will be added in the coming days as I review all other markets in the spending report.
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