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This is a summary of the main points on Infrastructure from several recent articles. Those articles detail current market conditions, growth already in backlog and future growth potential. The articles (linked here) are:
- Calls for Infrastructure Problematic
- Infrastructure & Public Construction Spending
- Infrastructure – Ramping Up to Add $1 trillion
- Infrastructure Outlook 2017 – Construction Spending
Non-building Infrastructure spending in 2016 will finish at $290 billion, down 1% from 2015. Negative drivers were Transportation, Sewage/Waste Disposal, Communications and Water Supply. However, Power and Highway/Bridge, 57% of all infrastructure, were both up. Spending based on projected cash flow from Dodge Data Starts predicted this drop.
- In 2017, Non-building Infrastructure, following two slightly down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets.
- Headlines point to a 6% decline in new infrastructure starts in 2017
- Starting backlog for 2017 increased 6% over 2016.
- The cash flow in 2017 from starting backlog will be up 10%.
Infrastructure currently has the highest amount of work in backlog in history. Starting backlog accounts for 80% of all spending within the year. Even with an anticipated decline in new starts in 2017, starting backlog for 2018 will still be at another new high. Spending from starting backlog is predicted to reach record levels in both 2017 and 2018.
- Total Construction spending for 2017 is more than $1.200 trillion.
- Infrastructure, public and private, is $300 billion, only 25% of total construction spending.
- Public is only 60% of all infrastructure, $180 billion, so 15% of total construction.
- Public Nonresidential Institutional Buildings referred to as infrastructure (Educ, HlthCr, Safety) adds another $95 billion, 8% of total construction.
The two largest markets contributing to public spending are highway/bridge (32%) and educational (25%), together accounting for 57% of all public spending. The next largest market, transportation, is only about 10% of public spending.
- Total Construction spending average constant $ growth post-recession is $50 billion/year. It exceeded $75 billion/year only once.
- Infrastructure, only 25% of total construction spending, increased by more than $25 billion in a single year only once. The average annual growth for the past 20 years (excluding recession yrs) is less than $10 billion/year.
- Public Infrastructure annual growth averages only $6 billion/year, has never exceeded $16 billion in a single year.
- Public Institutional Buildings annual growth averages only $6 billion/year, has never reached $20 billion.
Current backlog already accounts for 80% of all spending. Current spending growth from backlog (Public infrastructure + Institutional) is predicted to add $20 billion/year in work over the next two years. This will absorb some current jobs and create 100,000 to 150,000 new heavy engineering and nonresidential jobs.
For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 new construction jobs per year.
Any infrastructure plan added, for the most part, needs to be considered as added on top of the current spending plan, $20bil/yr next two yrs, already at all time highs.
- Average growth in total construction jobs is about 270,000 jobs per year. The largest growth was 400,000 in 1999.
- Average post-recession growth in public infrastructure + institutional jobs is about 35,000 jobs per year. The best growth was 50,000 jobs/year.
Current data predicts public institutional and infrastructure spending and jobs growth, already above the long term average, is expected to increase by $20 billion/year for the next several years.
Adding $20 billion/year more in spending for an infrastructure expansion plan would push total public work to double record levels. It’s doable, but would be difficult to achieve and is probably not sustainable at that rate.
One limiting factor will be jobs growth. Also, the supply chain may not have the capacity to increase so rapidly, especially to think the industry could continue to expand at a historical rate of growth for years to come. In years past, expansion like this has led to rampant inflation within the industry.
Adding $100 billion in a single year to public infrastructure and institutional work is unrealistic. That is greater than the maximum level of growth for the entire construction industry. The portion of the industry we are dealing with here is less than 25% of the entire industry.
Adding $100 billion, a one third increase in annual spending for this sector, would require the distribution network surrounding the industry to expand equally as fast. It would need 300,000 to 400,000 new jobs filled in a year, in a sector that has at maximum grown 50,000 jobs in a year. That’s unrealistic.
The public infrastructure subset of the construction industry appears too small to accommodate an increase of $10 billion/year and 40,000 new jobs/year over current growth. When the potential projects pool is expanded to include public institutional buildings, that total pool may then accommodate an increase of $10 to $15 billion/year over normal growth.
Excessively rapid growth will only take volume and jobs away from normal growth, generally leads to rapid inflation and has a devastating effect when a massive program ends and all those jobs disappear.
Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of the year. Projects in starting backlog could have started last month or last year or three years ago. The requirement is that those projects have not reached their end-date and some portion of the revenues generated by those projects is still ETC. The sum of all ETC represents current backlog.
A cash flow schedule of all ETC backlog and predicted new starts provides a tool to predict future spending. The $ reported here are the results of a cash flow analysis using Dodge Data & Analytics Construction Starts. Do keep in mind the DDA Starts value represents a survey of about 50% to 60% of the industry. While the percent change of values from year to year is relevant, the $ value does not compare directly to the actual spending $ values.
It is not enough to look at just the change in starts or the change in backlog to get an indication of the strength of the market. While continued growth in backlog is most important, the predicted cash flow from backlog and new starts is necessary for predicting future spending.
The last time nonresidential buildings experienced a decline in starting backlog was 2013, Total construction spending on nonresidential buildings in 2013 registered a weak 0.8% gain. Since 2013, nonresidential buildings starting backlog is up 60%, reaching a new all-time high at the beginning of 2017. The previous high in 2009 was $241 billion. In 2016 it was $230 billion. For the start of 2017 it is $248 billion.
Revenues from starting backlog account for 75% of all nonresidential buildings construction spending within the year. If no new work started within the year, by year end there would be only 25% of the total in backlog needed to support the industry.
Not only is starting backlog higher coming into 2017, but also spending from backlog is predicted up by 5% and 2017 new starts are predicted up 8%. New starts are very strong in Office, Lodging, Educational, Healthcare and Amusement/Recreation.
This supports my predictions that 2017 will be another banner year for spending on nonresidential buildings, up a strong 10% from 2016. Similar growth is expected in 2018. This will produce a new high in current dollar spending, but will still be 15% below the constant $ all-time highs.
(edit 3-21-17 updated table)
Non-building infrastructure experienced declines in starting backlog in 2012 and 2015. Fortunately, in both of those years, new starts were up. For the last eight years infrastructure starting backlog has been near $200 billion, +/- $10 billion. In 2008, the last pre-recession year, backlog stood at $178 billion. At the beginning of 2017, non-building infrastructure backlog is at an all-time high, $243 billion, up 36% from 2008. In the last two years starting backlog is up 20%.
Revenues from starting backlog account for 80% of all non-building infrastructure construction spending within the year. However, because infrastructure projects are long duration, only about 60% of total backlog gets spent within the year. If no new work started within the year, by year end there would still be 55% of the total in backlog needed to support the industry.
In 2016, although starting backlog was up, new starts were down and spending from backlog was also down. That cemented a decline in spending in 2016. New starts in 2016 declined for power, highway, transportation and public works, but due to long duration projects contributing to strong backlog in these markets, spending will be up in all except public works. New infrastructure starts in 2017 are predicted down 5%, but spending from backlog is predicted to increase by more than 10%, and that more than offsets the decline in new starts. 2017 will post a solid gain of 4% to reach a new high in spending and that is expected to increase again in 2018.
Residential new starts hit bottom in 2009 and starting backlog hit bottom in 2010. Residential on average has the shortest duration and new starts has a dramatic impact on the amount of available work. Both new starts and backlog are up about 300% from the lows. New residential starts have increased every year since the 2009 bottom, but are still lower than 2006.
Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much. If no new work started within the year, within a matter of a few months there would be no backlog ETC left to support the industry.
Coming into 2017, starting backlog is up, and new starts are up and spending from new starts is up. But the rate of growth in new starts and spending from new starts is slowing. This is not unexpected after 4 years (2012-2015) of new starts growth averaging greater than 20%/year. The last two years it’s 12%/yr. This leads to a prediction of future spending increases ranging between 5% to 7% for the next two years.
Few analysts are talking about current forward looking conditions and the problems such a massive infrastructure construction spending program might cause.
Every major construction agency is currently seeing monthly infrastructure construction spending drop and is calling for promptly initiating a $1 trillion infrastructure spending program. Infrastructure spending has been flat to down slightly for the last seven months. But infrastructure spending is notoriously uneven. I’d like to see increased construction spending as much as the next guy, but there are issues that need to be taken into account. I see problems down the road.
I’ve written about this before here Infrastructure – Ramping Up to Add $1 trillion and here Infrastructure & Public Construction Spending and Conor Sen wrote about it recently in a Bloomberg View article Math Will Kill Trump’s Infrastructure Plan. Some assumptions of increasing infrastructure spending by $100 billion and maintaining that level for the next 10 years are a pipe dream. Only three times in history has the “entire” construction industry ever increased by $100 billion in one year. The infrastructure sector, only 25% of all construction, does not have the capacity to grow by $100 billion in a year.
One of the big issues a massive expansion and abrupt program end causes is the need for a huge growth in the workforce, and that could be difficult particularly at a time when the non-working unemployed pool is near an all-time low. But perhaps more important, when all that expansion spending comes to an end, there is no long term ongoing backlog for all that labor to go to, so it results in massive job losses. Very large volume new starts and abrupt ending causes devastating disruption in the industry.
Here I will address spending and volume growth.
The infrastructure sector of construction is only 25% of all construction. Growth has exceeded $20 billion/year only three times and average growth (without recessionary declines) is $12.5 billion/year. But most of that was driven by the power market, which is 80% private. Power contributes 1/3rd of all infrastructure spending. Only 60% of all infrastructure is publicly funded. That public subset of work in the last 25 years has grown by $20 billion/year only once and with all the negative recessionary years eliminated growth would average less than $10 billion/year.
To repeat, because this provides a concept of the capacity of the industry, the entire infrastructure sector has an average growth rate of $12.5 billion/year and the public infrastructure sector less than $10 billion/year. And that’s taking out all the down years. It’s worth a note here that although I have conveniently removed down years from the data to get an average positive-year growth rates, infrastructure spending has never grown continuously for more than five consecutive years without experiencing a down year. The last 5 years 2012-2016 shows 3 years up 20%, then 2015 and 2016 were both down 1% to 1.5%. At the end of 2016, down 2.5% from the high in 2014, spending is still near all-time highs. In constant 2016$, The high was Q1’16 at $300 billion. The average lately is $280 billion, but expect to be back over $300 billion by Jan 18.
Infrastructure currently has the highest amount of work in backlog in history. Current backlog already accounts for 80% of all spending in 2017 and 60% of spending in 2018. Even with an anticipated decline in new starts in 2017, starting backlog for 2018 will still be at another new high. Spending from starting backlog is predicted to reach record levels in both 2017 and 2018. Early indications are that 2019 will repeat the same but that will depend on new starts in 2017 and 2018. Ignoring 2019 and beyond for the moment, for the next two years we are looking at record levels of spending on infrastructure.
The projected growth rate in infrastructure spending for the two-year period 2017-2018 is expected to reach the largest growth since the period 2005-2008. Construction Analytics (this analyst), FMI and ConstructConnect all predict growth between 10% and 13% or between $30 and $40 billion for this two-year period. My forecast does not include any spending input from a future infrastructure spending plan.
I said earlier that adding $100 billion and maintaining that level of spending for the next ten years is an unrealistic approach. Essentially, that would create an instantaneous need for 400,000 new jobs in the 1st year and then provide no jobs growth for the next nine years. Construction jobs can’t grow that fast. The maximum jobs growth ever achieved for all infrastructure was 50,000 jobs in a year. And now it’s worth repeating, only 60% of infrastructure is public work.
I’ve suggested another scenario for how it might be possible to ramp up to spend $1 trillion. In another article, Infrastructure – Ramping Up to Add $1 trillion, I laid out how it could be done in 13 years if spending were increased by $10 billion each year. I’ll add here that the entire infrastructure sector has not added a total of $1 trillion new spending in 25 years, so it’s quite unreasonable to assume it could be done in 10 years.
Infrastructure spending for 2017-2018 is about to exceed the historical average growth rate. Any infrastructure plan will replace some, but not all, of the currently planned new work. But it won’t replace any work already in backlog, which is at record levels and still contributes to spending over the next four years. So any infrastructure plan, for the most part, needs to be added on top of the current spending plan.
It would be extremely difficult to increase spending by another $10 billion/year when current spending is already expected at record levels. In fact, the look ahead for 2018 has spending already increasing by more than $20 billion. There is nothing in our history to suggest we could double the growth rate and sustain that level of spending. Of course, this will point back to the discussion of balance of jobs/volume and available labor in a potentially tight labor market.
The public infrastructure subset of the construction industry appears too small to accommodate a plan to add $1 trillion in spending, even when it only increases at $10 billion/year and absorbs 40,000 new jobs/year. Either the base that we hope to grow needs to be larger from the very beginning (Can public educational buildings be considered part of the plan?) or the rate of growth needs to be slower. Excessively rapid growth will only take volume and jobs away from normal growth, generally leads to rapid inflation and has a devastating effect when a massive program ends and all those jobs disappear.
Everything above here is based on new infrastructure plan spending “increasing” total construction spending. The plan is very difficult to achieve. However, if the $1 trillion dollars were used to fund projects that are already within the $150 to $170 billion in new public infrastructure projects that start every year, then there are no issues at all as to how fast or how much in funds can be spent. But that provides for no growth to the industry not already accounted for in the normal growth rate and it provides no new jobs. It simply funds projects that would have been built otherwise and funds the workers already in the industry to keep working. I don’t think this is what everyone has in mind.
For more on this discussion see Infrastructure Spending & Jobs
Infrastructure work does not normally grow in leaps and bounds.
Seldom does infrastructure construction spending grow by more than $10 billion in a year. Rarely does it grow by more than $20 billion.
Currently at about $300 billion a year, infrastructure represents only about 25% of all construction spending. The infrastructure sector is comprised of the longest duration type projects such as energy, highway/bridge, transportation terminals, railway and water/waste water resource development. It is not unusual for projects to take four to five years to reach completion.
Increasing new construction starts by $40 billion for new infrastructure work in any given year on average might add only $8 to $10 billion in spending in each of the next four or five years. To increase spending by $10 billion a year we would need to increase new starts by $40 billion every year. We’ve only ever come close to adding $40 billion in new starts once, in 2015.
In 2015, new infrastructure starts increased by $38 billion or 27%, due to an increase of $13 billion in new power generation plants and an increase of $21 billion in new LNG plants and port facilities. That will keep infrastructure spending growth elevated throughout 2018 and 2019. Measuring a total increase of 250% in power projects, that is a scenario unlikely to be duplicated in coming years.
2017 spending comes from: 10% 2014 starts; 35% 2015; 35% 2016 and 20% new.
Although new infrastructure starts were down in 2016 and are expected to decline again in 2017, the amount of work in backlog at the start of 2017 is the highest its ever been and spending in 2017 is forecast at an all-time high. Spending in 2018 from backlog will increase again and 2018 will hit another all-time high. There are no annual declines in spending predicted for the next four years. Some very large public infrastructure projects that started in 2014, 2015 and 2016 still contribute large amounts to spending in 2017 and well into 2018.
Increasing infrastructure spending by $10 billion a year would require adding about 35,000 to 40,000 new construction jobs per year. To accommodate all growth since the recession bottom, this sector averaged adding only 20,000 new jobs per year. Current spending growth is predicted to add $40 billion in work over the next three years and this will absorb all new heavy engineering jobs growth. The non-building infrastructure sector does not have the capacity at this time to increase spending by another $10 billion/year over its current growth rate, nor does it have the capacity to add an additional 40,000 jobs per year.
This summary of current projected spending does not include any future infrastructure work that might be generated from a proposed $1 trillion spending plan.
It is important to note here that 90% of all work in the power sector is private work. Only 60% of infrastructure work is publicly funded. However, some nonresidential building is publicly funded.
Public spending is not all public works projects.
Most public work is infrastructure, or public works projects. However, not all infrastructure is public work and not all public work is infrastructure. The power market is the largest infrastructure market. But, already noted above, power work is mostly private. So the market responsible for one third of all infrastructure work is 90% private. Educational projects, typically considered nonresidential buildings, are 80% public and 20% private.
The two largest markets contributing to public spending are highway/bridge (32%) and educational (25%), together accounting for 57% of all public spending. The next largest market, transportation, is only about 10% of public spending.
Two of the three largest annual growth increases ever recorded in public spending were driven by educational spending. In the third largest growth year, highway just barely edged out educational spending for the top spot.
If educational work were to be considered part of future infrastructure expansion, then the maximum capacity to increase public infrastructure spending obviously increases. Together with other public works projects this could potentially provide a large enough market base to increase public infrastructure spending by $10 billion a year over and above the growth already in backlog or anticipated. But most of the added work would need to be to the education market. Even with potentially adding educational market work to the infrastructure expansion plan, the hope of expanding infrastructure spending by another $10 billion/year remains difficult at best.
Any increase to future work needs to be considered as over and above the spending growth patterns already due to work in backlog and new starts anticipated. This plot of predicted public spending does not include any future infrastructure work that might be generated from a proposed $1 trillion spending plan. About 80% of all spending in 2017 is already in backlog. About 50% of all the spending from Jan. 2018 through Jan. 2020 will already be in backlog by Jan. 2018.
The following article is an extension of this discussion Calls for Infrastructure Problematic
2-17-17 Behind The Headlines
- From the Jan 2011 bottom of the recession in construction to current, both net jobs (jobs x hours worked) and volume (spending after adjusted for inflation) have increased equally by 28%.
- Growth of only 100,00 to 140,000 new jobs in 2017 would be the slowest growth in 5 years and will look like a hiring slowdown. Some might attribute it to lack of available workers. In large part it may be due to a balancing of workforce to real volume growth.
- Staffing patterns (appear to) lag changes in work volume.
- These six Nonresidential Buildings markets, which make up 80% of all nonresidential buildings spending, posted the following growth in starts leading into 2017: Office +37%, Lodging +40%, Educational +11%, Healthcare +21%, Commercial Retail +11% and Amusement/Recreation +21%
- Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current nonres bldgs growth cycle.
- Office construction starting backlog for 2017 (projects under contract as of Jan 1, 2017) is the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began.
- For 2017, the amount of construction spending (on manufacturing buildings) from starting backlog has dropped 25% from the level of 2016. Even an increase of 50% in new 2017 starts would not make up for that loss.
- More infrastructure projects started construction in the 1st 6mo of 2015 than any time in history. This will boost infrastructure spending through 2017.
- As measured in comparable constant dollars, No, we are not back to previous levels of spending. We will probably not return to previous highs before 2020.
- The entire construction industry best growth rate ever achieved (in 2016 constant$) absorbed $1 trillion in new spending over 5 years. Infrastructure has not absorbed $1 trillion newly added work in 25 years.
- long term best average rates of growth (indicate) we could increase infrastructure spending through new stimulus between $7 billion to $10 billion a year
- Construction spending, from 1st release to last revision of data, has been revised upward every month since August 2013. That would indicate the first reports of an “unexpected decline” almost always get revised up in following months.
- In the last 36 months, there were 16 Census construction spending releases that initially showed a decline vs the previous month. Five months showed a decline vs the previous year. After revisions every month was revised up from the original posted amount. There remained only 2 significant mo/mo declines. There were no remaining year/year declines.
- Current year YTD “not-yet-revised” values for new construction starts are always compared to the previous year YTD “revised values” which has the affect of making current year growth appear lower than it should. In the last 10 years the YTD revisions to previous year values have never been down.
- Residential starts in 2016 posted the best year since 2005-2006. Residential starts bottomed in 2009 and have now posted the 7th consecutive year of growth.
- Total construction spending in 2017 will reach $1,236 billion supported by a 4th consecutive year of strong growth in nonresidential buildings.
- Office construction reached a new all-time high in September 2016. Spending will be in the range of +20% to +30% year over year growth for 2017 with total coming in at $91 billion.
- It’s real damn hard to add $100 billion in new construction volume in a year. After adjusting for inflation, construction volume has never increased by $100 billion. It has increased by $75 billion 4 times and 3 more times by $50 billion.
- If you want to avoid misusing a cost index, understand what it measures.
- Selling Price, by definition whole building actual final cost, tracks the final cost of construction. Selling price indices should be used to (adjust costs for inflation so you can) compare costs over time.
How long would it take to accommodate adding $1 trillion of new infrastructure construction spending?
I read this in another recent article on the topic; “If passed, the ripple effect of an estimated $100 billion a year in new infrastructure construction would undoubtedly be felt throughout the industry.”
The article seems to imply the industry could absorb $100 billion in new infrastructure work and maintain that $100 billion added spending for 10 years. The infrastructure sector could not accommodate that massive amount of instantaneous growth. Let’s look at maximum historical rates of growth to understand why.
To really understand construction growth rates we need to look at all historical spending in constant dollars (inflation adjusted).All constant dollars in this analysis are converted to 2016$.The following spending historical data goes back to 1993. Jobs data goes back to 1970.
- Construction Industry total spending fastest rates of growth:
- Maximum growth one year, 2015, +$107 billion, in 2016$= $87 billion
- 2011 – 2015, 4 yrs, +$324 billion, in 2016$ = +$240 billion = $60bil/yr.
- 1995 to 1999, 4 yrs, +$200 billion, in 2016$ = +$200 billion = $50bil/yr.
- Infrastructure Sector spending fastest rates of growth:
- Maximum growth one year, 2007, +$40 billion, in 2016$= $36 billion
- 2005 – 2008, 3 yrs, +$87 billion, in 2016$ = +$52 billion = $17bil/yr.
- 1997 – 2001, 4 yrs, +$50 billion, in 2016$ = +$46 billion = $15bil/yr.
- Construction Industry Jobs fastest rates of growth:
- Maximum growth one year, 1999, 397,000 jobs
- 4 years from 1995 to 1999, average 317,000 jobs/year.
- 3 years from 2012 to 2015, average 266,000 jobs/year.
- Infrastructure Sector Jobs fastest rates of growth:
- Maximum growth one year, 2004, 65,000 jobs
- 3 years from 2003 to 2006, average 48,000 jobs/year
- 3 years from 2011 to 2014, average 26,000 jobs/year
The fastest one-year growth for the entire construction industry is $87 billion in 2015, but the fastest growth rate is never maintained for long. The period 2011-2015 is the highest average rate of growth at $60 billion/year. The entire industry has had jobs growth of more than 300,000/year only 6 times since 1970. 1995 to 1999 is the only period to average over 300,000 jobs/year longer than 2 years.
The entire construction industry best growth rate ever achieved (in 2016$) absorbed $1 trillion in new spending over 5 years. Infrastructure has not absorbed $1 trillion newly added work in 25 years.
The fastest one-year growth for the Infrastructure sector is $36 billion in 2007, but the highest average rate of growth is $17 billion/year. The current rate of growth since the recession is $10 billion/year. The infrastructure sector has had jobs growth of more than 40,000/year only 3 times since 1993. Maximum jobs growth hit 65,000 in 2007. The best average jobs growth is 48,000 jobs/year and that has not occurred in the last 10 years. It’s the only period with average growth more than 26,000 jobs.
Let’s assume the fastest rates of growth can be duplicated once again. Let’s also assume that longer term growth will come closer to the long term average highs. So, infrastructure growth might reach $36 billion in a given year but could fall back to an average growth of $17 billion/year. Jobs could grow by 65,000/year but would probably average less than 48,000/year.
However, even with the addition of a new influx of infrastructure work, most of the other growth, which has been fairly constant for the last 25 years, is not going to go away. Since the recession, infrastructure has been increasing at $10 billion/year and jobs have been increasing 20,000/year. Assuming we maintain that level of normal infrastructure growth, then the remainder is what we might expect to accommodate in growth from new infrastructure stimulus.
If we could achieve maximum rates of growth we could increase infrastructure additionally through new stimulus by $26 billion/ year and increase jobs by 45,000/year.
If we could maintain long term best average rates of growth we could increase infrastructure through new stimulus by $7 billion/year and increase jobs by 28,000/year. Even if a portion of the normal growth goes away, it looks like the infrastructure sector could only accommodate adding about $10 billion/year in new stimulus work.
It must be noted that a large portion of infrastructure spending is private work, not publicly funded. Power is 90% private, 10% public. Highway is 100% public. Transportation is 30% private, 70% public. Sewage, Water and Conservation are 100% public. Communication is 100% private.
Fully 35% of all infrastructure work is private. Most of the huge increases in spending over the years are associated with the Power market. So this analysis counters any argument that publicly funded infrastructure can grow much faster. In fact, if only public works were taken into account, spending targets here would need to be reduced by 35% and the total duration to complete would be increased by 50%.
A cash flow schedule of all newly added work provided the plan needed to balance spending. All new work is assumed to take 4 years to complete. In the first year, $40 billion of new work starts, but only $10 billion gets spent. Spending flows at the rate of $10 billion/year for 4 years. New starts are added at a rate to continuously increase spending by $10 billion/year. By the 5th year we need to add $80 billion in new starts to get $20 billion in spending since all of year 1 work is now completed.
This table gives an indication of how cash flows. The full 13 year table is below.
I have assumed that inflation will add 4%/year to future spending. Five years from now the equivalent to adding $10 billion a year will be $12.2 billion a year. Due to inflation, we would spend $1 trillion to build the equivalent of $750 billion in today’s dollars. Increasing spending by the inflation adjusted equivalent of $10 billion per year, it would take 12 to 13 years to spend $1 trillion.
This scenario would push total infrastructure spending to the highest rates of long term growth on record. It’s not very likely growth like that could be sustained for very long. So, it’s possible total growth would fluctuate yet that we still keep our sights on achieving those long term growth rates. This allows for no economic downturn at any time in the next 10 years.
Another restraint to maximum growth rates is jobs. Infrastructure is only 25% of all construction. Maximum all construction jobs growth has exceeded 300,000/year a few times, but infrastructure jobs have increased by more than 40,000 only rarely and only once averaged over 40,000. While it takes about 5,000 to 6,000 workers to put-in-place $1 billion in construction, it takes only about 3,000 to 4,000 workers to put-in-place $1 billion of infrastructure. To reach maximum growth of $36 billion in infrastructure would require 110,000 to 140,000 new jobs per year, two to three times the long term growth. This analysis does not take into consideration any shortfall in jobs due to labor availability.
Setting spending growth to $10 billion/year results in 10 years of continuous record jobs and spending growth. Expectations of increasing infrastructure spending (not to be confused with starts) by $40 billion/year or $50 billion/year have not taken into consideration the maximum sustained growth rates in the industry. Talk of increasing infrastructure spending by $100 billion in a year is fantasizing.
In recent reading I came across a comment that both Educational and Health Care markets potentially could be included in Infrastructure funding. I take that to mean the public portion of those markets. Educational could be considered infrastructure and is 80% public ($70/$88bil). I would guess also Public Safety and Public Power could be included. Educational public spending is $70 billion/year. The others are $8 billion each. The short version of all the explanation above is that new infrastructure investment can grow a market at about half of the best total long term average growth of 10%/year. So these markets could absorb growth of about 5% or about $5 billion/year more.
More about Infrastructure written 3-6-17 Calls for Infrastructure Problematic
Stuff you won’t read in the headlines.
- Total Construction spending for the last 3 months is at a 10 year high. However, in constant inflation adjusted dollars, construction spending is still 16% below 10 years ago. Are We at New Peak Construction Spending?
- In the last 36 months, there were 16 Census construction spending releases that initially showed a decline vs the previous month. Five months showed a decline vs the previous year. After revisions every month was revised up from the original posted amount. There remained only 2 significant mo/mo declines. There were no remaining year/year declines. Construction Spending Gets Revised UP
- Nonresidential Bldgs new starts (by Dodge Data) in the 2nd half of 2016 posted the best #s since the pre-recession boom. New Construction Starts 2016
- Nonresidential construction spending within the year is far more dependent on construction starts from previous years than on new starts within the year. Only 20%-25% of all spending within the year comes from new starts within the year. Behind The Headlines – Construction Backlog
- If Nonresidential New Starts for 2017 fall short of projections by 10%, it would reduce total 2017 nonresidential spending by 2.0% to 2.5%.
- 25% of all spending on nonresidential bldgs in 2017 comes from projects that started in 2015.
- 25% of all spending on non-building infrastructure in 2017 comes from projects that started between July 2014 and May 2015. That unusually high period contributes more to 2017 spending than all new infrastructure starts in 2017. Infrastructure Outlook 2017
- Monthly rate of spending for nonresidential bldgs will reach a new all-time current dollar high by midyear 2017. Behind The Headlines – Nonres Bldgs Construction Spending
- In constant inflation adjusted dollars, 2017 nonresidential bldgs spending will still be lower than any year from 1995 to 2009, 16% below the 2000 peak. Behind The Headlines – Nonres Bldgs Construction Spending
- New construction starts in 2016 for Office buildings as compared to 2015 went from -1% year-to-date in July to +30% ytd in September. Good example that we need to be careful because monthly variation sometimes messes up those comparisons. New Construction Starts 2016
Dodge Data New Construction Starts in December fell off the pace of growth we had in the previous few months due entirely to a large drop in Energy Infrastructure starts. Total of all starts for 2016 finished as the highest year since 2005. Un-adjusted 2016 totals are only 1% higher than 2015, but 2015 totals have already been adjusted up, so this is an unequal comparison. Annual adjustments are always UP and average about +4% per year. After 2016 totals get adjusted up we might see 2016 growth of 4% to 5% over 2015.
Residential starts in 2016 posted the best year since 2005-2006. Residential starts bottomed in 2009 and have now posted the 7th consecutive year of growth. New starts show an increase of only 6% for 2016, but that follows several years of growth averaging more than 20%/year. I expect after adjustments 2016 residential starts will be revised to 8% growth. Spending has bounced 90% off the bottom in large part due to 17%/year average growth in 2013-2014-2015. Because both starts and spending growth have been so strong, recent percent growth rates are smaller. Expect only 5% spending growth in 2017.
Nonresidential Building new starts in December remained consistent with October and November. Although well below the yearly highs reached in August and September, the final three months helped carry 2016 totals to an 8-year high. Nonresidential Buildings starts for the last six months averaged the highest since the 1st half of 2008. Total starts as posted are up only 4% from 2015 but nonresidential buildings has been subject to the largest adjustment of all sectors. I expect after adjustment nonresidential buildings will show a 2016 increase of about 8% to 9%.
These six Nonresidential Buildings markets, which make up 80% of all nonresidential buildings spending, posted the following growth in starts leading into 2017: Office +37%, Lodging +40%, Educational +11%, Healthcare +21%, Commercial Retail +11% and Amusement/Recreation +21%. For the last 3 years spending combined growth in these six markets has ranged between 9%/yr and 12%/yr. For 2017, expect spending growth of 14%.
Manufacturing, which has an 18% market share of nonresidential buildings, saw new starts decline by 38% in 2016. However, in 2014 and 2015 this market posted the fastest growth of any market in a decade and posted the two highest years on record. In 2015 spending increased 33% to the highest ever recorded for manufacturing buildings. Spending is down 4% in 2016 and is expected to decline 13% more in 2017, but 2017 will still be the 3rd highest year of spending on record.
Non-building Infrastructure monthly new construction starts in December fell to a 10-year low. However, due to strong performance throughout the year, and even though total starts fell 11% from 2015, total Infrastructure starts for 2016 came in at the second highest year on record. 2015 was up 27% from 2014. So, even though headlines will point to an 11% decline in 2016, due to the distribution of spending from backlog, 2017 will post the largest spending increase in 3 years. I expect after adjustments the 2016 decline will be revised up by 3 points to -8%.
Power and Highway/Bridge/Street make up two thirds of non-building infrastructure spending. Power project starts dropped 33% in 2016, but from the highest annual total of starts on record. In 2015, Power starts increased 150% to an all-time high and Highway/Bridge/Street finished just shy of a 6-year high. In the 1st five months of 2015, a years worth of Power projects started and they are not yet completed. That volume is still contributing to infrastructure spending in 2017. It was not unexpected that starts in these markets would be down for 2016. The amount of monthly spending from projects started in 2014 and 2015 in this sector will contribute to spending for several years to come. Spending in 2017 will be the highest ever in this sector, up 4% from 2016.
Dodge Data published new construction starts for January 2017 on Feb 22. Starts are up 12% from December; +1% in residential, +16% in nonresidential buildings and +44% in non-building infrastructure. December was revised slightly. Among the major changes for this January: electric utility +285%; misc public works +222%; transportation terminals +768% (mostly LaGuardia airport terminal); offices +26%; manufacturing -69%; educational -18%.
A major revision was posted to January 2016 starts. They were revised up in total by 23%, a huge move equal to about 1/3 to 1/2 of what we would normally see for a total annual revision. For the last 4 years the annual revision to new starts has averaged +4%. January 2016 residential starts were revised up 9%, nonresidential buildings up 21% and non-building infrastructure up 49%. Even with that, current January 2017 starts are up 10% from January a year ago.
Prior to the data release on Feb. 22, non-building infrastructure 2016 starts were down 11% from 2015. You will note in my commentary above I predicted that would be revised to show only an 8% decline. After one month it has already been revised to only an 8.6% decline. I now expect after all months of 2016 infrastructure starts are revised 2016 will show only a 6% decline from 2015.
tables updated 2-1-17
New Backlog is the total value of project revenues under contract that are about to start construction, or new starts. The entire value of a project is considered in backlog when the contract is signed. Projects booked in December 2016 or before are in backlog at the start of 2017. Simply referencing total backlog does not give a clear indication of spending within the next calendar year. Just because backlog is up going into a new year does not necessarily mean revenues will be up that year. You must understand some very important distinctions about backlog to determine how much revenue will occur within the next year.
Projects, from start to completion, can have significantly different duration. Whereas a residential home may have a duration of 8 or 9 months, an office building could have a duration of 18 to 24 months and a billion dollar infrastructure project could have a duration of 3 to 4 years.
Backlog at the start of 2017 could include revenues from projects that started last month or as long as several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of 2017 is not the total backlog amount recorded for the project at its start date, but is the amount remaining to complete the project or the estimate to complete (ETC).
The only way to know how much of total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects that have started in backlog. Then add up the amounts from all projects in each month to find the cumulative cash flow in that month, or in that year.
Construction Starts provide the values entering backlog each month. Except for residential, new project starts within the year contribute a much smaller percentage to total spending in the first year than all the backlog ETC on the books at the start of the year. New residential projects contribute the most to spending within the year started because generally residential projects have the shortest duration. Residential projects started in the first quarter may reach completion before the year is over. New infrastructure projects generally have the longest duration and may contribute some share of project value to backlog spread over the next several years.
The distinction between backlog, backlog ETC and cumulative cash flow is necessary to predict spending. For example:
We start the year with $100 billion of residential projects in backlog and $100 billion of infrastructure projects in backlog. All of the residential projects could have durations of 12 months or less. Therefore residential spending could total $100 billion within the year. However, the infrastructure projects could have durations of 2 years, 3 years or 4 years. Spending from infrastructure backlog this year might total only $50 billion with $30 billion in spending occurring next year and $20 billion the following year. Although both sectors start the year with the same total amount in backlog, we can see the amount spent within the year is determined by the duration of the projects and the cash flow schedule.
Backlog totals may not be a good indicator of total revenue spending within the year. In fact, backlog could be up and total revenues for the year could end up lower than the previous year. Unless you have a clear picture of the types and duration of projects that make up the backlog, you will not have a clear picture of spending activity in the coming year.
See Also Construction Backlog 2017 3-21-2017
2-1-17 Upated to include Decmber data
Non-building Infrastructure spending in 2016 will finish at $291 billion, down less than 1% from 2015. Spending based on projected cash flow from Dodge Data Starts predicted this drop. The negative drivers were Transportation, Sewage/Waste Disposal, Communications and Water Supply. Power, the largest infrastructure market at 34% of total sector spending, will finish up 3.3%. Highway/Street, 31% of total sector, will finish up 2%.
In 2017, Non-building Infrastructure, following two down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets. In the most recent quarter spending began to recover from 2016 lows posted in August and September. 2017 will be a record year for Infrastructure spending supported by spending generated from the Fixing America’s Surface Transportation Act and potentially the Water Resources Development Act.
Annual percent growth in new starts (backlog), by itself, is not necessarily a good indicator of spending in the following year. The duration of backlog must be known to forecast spending.
At the beginning of 2016, work in backlog had increased 9% over 2015, but because a large percentage was very long duration work, the amount of cash flow (work put-in-place) in 2016 from that backlog decreased from 2015.
At the beginning of 2017, work in backlog increased only 6% over 2016. What is significant though is that the amount of cash flow in 2017 from that backlog will be up 10%. That is being caused by long duration work-to-complete backlog from 2014 and 2015, which is dominated by spending in the power market. In the 1st five months of 2015, a years worth of Power work started and it’s not yet completed. It’s still contributing to infrastructure spending in 2017.
Although new starts in 2016 will finish down 6% from 2015, starts in 2015 were so strong that 2016 will still be a high volume of new starts. 2015 was up 25% from 2014. So, even though headlines will point to a 6% decline in new infrastructure starts in both 2016 and 2017, due to the distribution of spending from backlog, 2017 spending will post the largest growth in 3 years. 2017 will be a record year for spending on infrastructure, up more than 4% from 2016.
Infrastructure construction starts and spending is dominated by movements in Power and Highway markets. Power/Electric/Gas and Highway/Bridge/Street, about equally, comprise 65% of all infrastructure spending. Transportation/Air/Rail accounts for 15%. Sewage/Waste 8%, Communication 6%, Water 4% and Conservation 3%.
Power is 90% private, 10% public. Highway is 100% public. Transportation is 30% private, 70% public. Sewage, Water and Conservation are 100% public. Communication is 100% private.
Power project starts dropped 25% in 2016 but from the highest annual total of starts on record in 2015. In addition, power had very strong starts in late 2014. All of those very strong starts in late 2014 and all of 2015 are still ongoing in backlog and will contribute to strong spending in 2017. Almost half of all the spending in 2017 is generated from projects that started in 2014 and 2015. Power spending in 2017 will increase 2% over 2016 for a 6th consecutive year of near $100 billion in spending.
Highway/Street, the second largest public market, reached all-time highs in spending from the 3rd quarter 2015 through the 1st quarter 2016. After a 6 month slow down, spending in November again reached a new all-time high. Highway spending in 2017 will grow 5% over 2016.
Transportation hit all-time highs in spending all during the 2nd half of 2015. Spending declined by 6% in 2016 but is still the second highest year on record. It will again equal those 2015 highs throughout all of 2017. Transportation spending in 2017 will grow 6% over 2016.
Projected impact of proposed infrastructure stimulus:
- None of the starts or spending detailed above includes any projections of potential work from future stimulus.
- Infrastructure spending, about 25% of total construction spending, increased more than $25 billion in a single year only once. The average annual growth for the past 20 years is less than $10 billion/year. Although infrastructure growth is always erratic with no growth some years, the average growth for the last six years (post-recession) has averaged $10 billion/year. Some of those years included prior stimulus growth.
- The annual growth in PUBLIC Infrastructure has never exceeding $20 billion in a single year and averages only $7 billion.
- The average growth in infrastructure jobs (excluding all recessionary years because those years would make the result approach zero) is about 25,000 jobs per year.
- Based on infrastructure proportion of all construction, and on both all construction and infrastructure historical maximum rates of spending and jobs growth, it may be unrealistic to anticipate more than $10 billion/year growth in the infrastructure sector. ie., (from current total add $10bil yr1, $20bil yr2, $30bil yr3, etc.) See Infrastructure – Ramping Up to Add $1 trillion for more detailed explanation.