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Behind The Headlines – Construction Backlog

January 16, 2017 12:46 pm / Leave a comment

1-16-17

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.

starts-vs-spending-2011-2017-dec-2016-2-1-17

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.

Backlog Cashflow pdated 3-21-17

See Also Construction Backlog 2017 3-21-2017

 

Infrastructure Outlook 2017 – Construction Spending

January 12, 2017 12:23 pm / Leave a comment

1-12-17

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.

spend-nonres-infrastructure-dec-2016-2-1-17

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.

index-of-actual-spending-and-starts-cash-flows-2012-2017-as-of-oct-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.

infrastructure-major-mrkts-2013-2018-2-1-17

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.

  • Also See Infrastructure & Public Construction Spending

Forecast 2017 Construction Spending

January 7, 2017 7:38 am / Leave a comment

1-7-17

This is my initial forecast for 2017. Census final revisions to Oct., Nov. and Dec. 2016 spending will not be posted until February, March and April. I will then update the 2017 forecast to reflect better input. Then, with the June 1, 2017 release of spending, Census will post revisions to all 2016 spending. The 2016 record will then be updated.

2-1-17 Updated to include Dec 2016 data

spend-forecast-2017-dec-2016-2-1-17

Total construction spending in 2017 will reach $1,236 billion supported by a 4th consecutive year of strong growth in nonresidential buildings. The monthly rate of spending will range from near $1.2 trillion in January to $1.3 trillion at year-end.

Spend ALL 2013-2018 2-1-17.JPG

Nonresidential Buildings spending in 2017 will increase to $447 billion, 9.1% over 2016. The most recent 3-month average seasonally adjusted annual rate (SAAR) is $420 billion, only 5.5% below the peak of $444 billion in 2008. By midyear 2017 the SAAR will reach a new all-time high and it will finish the year near a SAAR of $460 billion. Office spending will lead 2017 with 30%+ growth. Commercial, Lodging and Educational markets are all expected to post strong gains over 10%.

For details on Nonresidential Buildings, See Behind The Headlines – Nonres Bldgs Construction Spending and Nonresidential Bldgs 2017 Forecasts Comparisons

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.

For Non-building Infrastructure details see Infrastructure Outlook 2017

Residential will increase only moderately to $485 billion, adding 4.8% over 2016. That follows on three years of substantial growth averaging 17%/year. More than any other sector residential work is more dependent on new starts within the current year to generate spending, approximately two thirds of all spending within the year.

spending-by-sector-2013-2017-2-1-17

Office building new starts through August were up only 6% year-to-date but starts in September reached the highest in years. The 2016 starts finished at +37% providing the highest amount of work in backlog going back at least 8 years. Lodging starts in 2016 finished up nearly 40%, Healthcare up 20% and Amusement/Recreation up 35%.

Power project starts dropped 30% in 2016 but from the highest amount 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 positive spending in 2017. Almost half of all the spending in 2017 is generated from projects that started in 2014 and 2015.

starts-vs-spending-2011-2017-dec-2016-2-1-17

See Also 2016 Construction Spending 1-3-17

and Are We at New Peak Construction Spending?

Behind The Headlines – Construction Data

December 2, 2016 11:34 am / Leave a comment

12-2-16

Just a few important facts here (that you won’t read in the headlines).

  1. Jobs have increased by 23% since the recession bottom January 2011. Construction spending has increased 52% in same period.
  2. Adjusting jobs for hours worked and spending for inflation, both work output and constant volume construction grew at 28% since recession bottom.
  3. Residential construction jobs are down 22% from the 2006 peak. In constant $ after inflation, real residential volume of work is down 39%.
  4. Nonresidential buildings construction jobs are down 8% from the 2008 peak. In constant $ after inflation, real nonres bldgs volume of work is down 17%.
  5. Construction spending average for the last 3 months is at a 10 year high. Construction volume in constant $ after inflation is still 18% below 10 years ago.
  6. Census construction data is ALWAYS revised in the following two months after initial release. Census updates all the values for the previous year, usually with the May data release (on July 1) the following year.
  7. In 2016, 7 times the first release of spending showed a decline vs the previous month. After revisions, the values show no declines vs the previous month.
  8. In the last 36 months, there were 16 spending releases that originally showed a decline vs the previous month. After revisions there were no mo/mo declines.
  9. It’s hard to add $100 billion in new construction spending in one year. Since 1993 it’s happened only 3 times; 2004, 2005 and 2015.
  10. 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.
  11. It takes about 6,000 jobs to put-in-place $1 billion of construction in a year. $100 billion in new work would require 600,000 new jobs in a year. The largest construction jobs growth ever recorded is about 700,000 jobs in 2 years.
  12. Now think of #9, #10 and #11 in terms of ONLY the Infrastructure sector. Infrastructure, about 25% of total construction spending, added spending 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. The average growth in jobs (excluding all recessionary years because they would make the result approach zero) is about 25,000/year.
  13. The Aug-Sep-Oct 3mo average of construction starts for Nonresidential Bldgs (by Dodge Data) is the best 3mo since Q1 2008. Q1 2008 was the PEAK of the nonresidential buildings construction boom.
  14. More infrastucture projects started construction in the 1st 6mo of 2015 than any time in history. This will boost infrastructure spending through 2017. Infrastructure spending is low in 2016 due to a low volume of starts in 2014.

 

Saturday Morning Thinking Outloud #1 – Infrastructure

October 29, 2016 12:06 pm / Leave a comment

10-29-16

Can the construction industry even accommodate adding $1 trillion of new infrastructure spending over 10 years?

It takes about 5000-6000 new jobs to support $1 billion of new construction work for a year. For infrastructure the number is lower. So $100 billion per year continuous for next 10 years would support about 400,000 new jobs for 10 years. Well, that’s not how it will happen, so let’s look a little closer.

  • Historically the fastest rate of growth in spending takes about 3 years to increase 50%. That is for selected markets, never for the entire industry.
  • Infrastructure spending grew 50% in 4 years from 2004 to 2008, when that sector was half the size what it is today.
  • Infrastructure, about 25% of total construction spending, added spending 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.
  • Historical growth in jobs rarely exceeds 300,000 new jobs per year. It has never averaged that rate of growth for more than a 3 year stretch. That is for the entire industry.
  • Spending after inflation (real volume growth) for all construction increased an average of $50 billion per year for the last 4 years. The same is expected in 2017.
  • Jobs increased an average of 250,000 per year for the last 4 years.
  • We could expect approximately the same growth in volume and jobs in 2018.

So here’s what we know. The entire construction industry has been growing on average at about $50 billion in volume and 250,000 jobs every year in recent data. Even with the addition of a new influx of infrastructure work, most of that other growth is not going to go away. But how much growth can the entire industry accommodate without bursting at the seams. Let’s make some broad assumptions to see what happens.

Let’s assume for the next 10 years the normal rate of new construction growth gets cut in half. In reality it probably wouldn’t, but we need to push some numbers to extremes to see what happens. So normal new volume, not including any boost from new federal infrastructure spending, might only grow at $25 billion per year and that would absorb 100,000-125,000 new jobs per year. That accounts for HALF of the entire industry volume growth and jobs growth. How much room does that leave for new growth or expansion in industry growth rates?

If we fill the difference with work from added new infrastructure spending, we can add $25 billion per year in new infrastructure spending and that will add about 100,000 new jobs per year. To account for how the work might be contracted out, let’s just assume in the first year we commit to $250 billion in contracts that are spread over 10 years to get to $25 billion a year in spending. In the 2nd, 3rd and 4th years we could also commit each time to another $250 billion in 10 year contracts that spread the spending out to $25 billion per year for 10 years.

By year 4, we’ve added $100 billion per year in new spending that will stretch out for the next 6 to 10 years ( note: this pushes spending $1 trillion out to 13 years). This spread of money over time, or cash flow, results in increased spending in the government infrastructure markets by 50% in 4 years, matching the best ever industry growth rates. We’ve increased jobs by 100,000 per year for 4 years to a total of 400,000 new jobs and they will all have funds to continue work for the next 6 to 10 years. All that just due to added infrastructure spending.

But let’s not forget the rest of the industry. This would push total spending growth and total industry jobs growth to the highest rates of growth on record. So this is a scenario that is unlikely to be achieved, and it’s not very likely that growth like that could be sustained for very long. It’s also not likely the rest of all the new growth in the industry is going to get cut in half to leave room for new added infrastructure work. So, it’s possible total growth over the next 4 years would be less than anticipated here. This allows for no downturn at any time in the next 10 years.

It begins to seem like it might be pretty difficult to add $1 trillion in spending to the infrastructure construction sector, which is only 1/4 of the entire industry, to be spent in the next 10 years.

When sometimes we push numbers to extremes just to see what happens, we get an unexpected picture of what might, or might not, be possible.

Construction Spending 2016 – Midyear Nonresidential Markets

September 8, 2016 5:13 pm / Leave a comment

Construction Spending 2016 – Nonresidential Markets

9-8-16

Refer here to the Construction Spending 2016 Midyear Summary

Nonresidential Buildings 

Nonresidential Buildings spending for July totaled a SAAR of $403 billion, down slightly from June but up 1.3% from the May dip. Spending YTD for nonresidential buildings through July is up 8.0% over 2015. The current 3-month average of $403 billion is up slightly from the 1st quarter but is still 9% below the peak in 2008.

How does actual spending YTD compare to my early 2016 forecast?

Nonresidential Bldgs predicted YTD $236.9b,  actual YTD $228.1b (-$8.8bil, -3.7%).

Nonresidential Buildings spending for 2016 predicted in Dec 2015 $439.2b. Now with YTD data through July forecast spending for 2016 is $410.9b (-$28.3bil, -6.4%).

Total Nonresidential Buildings construction spending increased 9.7% in 2014 and 13.8% in 2015 and will grow 8.5% in 2016 and 6.3% in 2017.

nonres-bldgs-and-infra-asof-jul16

Nonresidential Buildings Spending History

  • 5 years 2004-2008 up 64%
  • 3 years 2006-2008 up 45%
  • 3 years 2009-2011 down 36%
  • 2 years 2014-2015 up 25%

 

Manufacturing construction spending YTD is down 2.6% from 2015. However, that is because 2015 manufacturing construction spending reached all-time highs after record new starts in 2014, some of which will extend spending into 2017. 2016 is on track to reach the second highest year of spending on record, only slightly below 2015.  Although new starts YTD in 2016 are down 75% from 2015, that will have most affect next year. A very large volume of starts in mid-2014 and early 2015 will generate spending extending into the 2nd half of 2016and early 2017. Total manufacturing construction spending for 2016 will finish 2% below 2015. Due to declining new starts in 2015 and 2016, spending in 2017 will drop more than 10%, and yet still be the 3rd highest year on record. Manufacturing construction represents 19% of total nonresidential buildings spending.

mnfg-asof-jul16

Office construction spending YTD is up 22% from 2015. Although new starts are currently down slightly from last year, starts are expected to grow 4% for 2016. Office starts have been strong since 2013. Vacancy rates peaked in 2010 and demand for office space has been increasing. A large component of office construction is data centers. Although we may see a few months of spending declines in late 2016, the large volumes of spending generated by several years of strong starts will keep total spending high. Office construction spending increased 23% in 2014 and 19% in 2015 and it will grow 23% in 2016 and 15% in 2017. Office construction represents 17% of total nonresidential buildings spending.

Commercial construction spending YTD is up 11% from 2015.  Commercial new starts have been increasing slowly for the last 4 years. Spending will remain nearly flat for the next several months and is forecast to grow very slowly through mid-2017, then taper off slightly. Commercial construction had its biggest years in 2012-2013-2014 with growth of 11%, 12% and 18%. Total commercial construction spending for 2016 will finish 9% higher than 2015 and 2017 will grow 3% to 4%. Commercial construction represents 18% of total nonresidential buildings spending.

Lodging construction spending YTD is 29% higher than 2015. Lodging construction spending has exceeded the growth rate of all other markets. Starting in 2012 annual spending increased 19%, 25%, 24% and 30%. However, during that time lodging averaged only 5% of total nonresidential buildings spending. It now represents just under 7%. Total lodging construction spending forecast growth for 2016 is 25%. For 2017 expect spending growth of only 8%.

comm-asof-jul16

Educational construction spending YTD is up 4.8% from 2015.  Educational buildings spending experienced the longest downturn of any market, declining for 5 consecutive years from 2009 through 2013. It has been slow to recover with 2015 showing the first real growth of only 4.8%.  2014 marked the beginning of the turn but registered growth of less than 1%. New starts posted 15% growth in 2014 and then slowed to only 4% growth in 2015. However, a large volume of those starts occurred in late 2014 and then again in early 2015. The timing of these starts generates a lot of spending in late 2016. I expect spending in the 2nd half 2016 to grow 5% over the 1st half. Total educational construction spending for 2016 will finish 8% higher than 2015 and 2017 will grow 9%. Educational construction spending is the largest component of nonresidential buildings representing 22% of total nonresidential buildings spending. Before the 5 years of declines it represented 30% of nonresidential buildings spending.

Healthcare construction spending YTD is up only 2.3% from 2015.  Healthcare new starts since 2011 increased only in 2014. Spending may see some moderate declines in late 2016 before resuming slow growth in 2017. Changes and uncertainty in the healthcare climate are having a dampening effect on spending growth. Total healthcare construction spending for 2016 will finish only 2% higher than 2015 and 2017 will grow 3% to 4%. Healthcare construction represents 10% of total nonresidential buildings spending.

Amusement/Recreation construction spending YTD is up 10.1% from 2015.  New starts were very strong in 2013 and 2014 and generated strong spending increases of 10% and 18% in 2014 and 2015. However, starts in 2015 declined slightly and 2016 starts to date have been flat. Spending through 2016 will remain strong but we will experience moderate declines in the 1st half of 2017. Total Amusement/Recreation construction spending for 2016 will finish 12% higher than 2015 but 2017 will grow only 2%. Amusement/Recreation construction represents 5% of total nonresidential buildings spending.

institu-asof-jul16

 

Non-building Infrastructure

Non-building Infrastructure spending for July fell to a SAAR of $289 billion, down slightly over for the last four months. YTD spending through July is up only 1.3% over 2015. Spending began to slow in April and May and is now at the 2016 low. The current 3-month average is down 4% from the 1st quarter. However, spending on non-building infrastructure reached an all-time high in the first half of 2014 and has remained near those highs through 2015 into the 1st quarter of 2016.

How does actual spending YTD compare to my early 2016 forecast?

Non-building Infrastr predicted YTD $156.2b,  actual YTD $160.5b (+$4.3bil, +2.8%).

Non-building Infrastrusture spending for 2016 predicted in Dec 2015 $293.2b. As of July data forecast spending for 2016 is $297.3b (+$4.1bil, +1.4%).

Total Non-building Infrastructure construction spending increased 8.8% in 2014 but decreased 1.5% in 2015. It will grow only 1.2% in 2016 but then 9.6% in 2017.

nonres-bldgs-and-infra-asof-jul16

Non-building Infrastructure Spending History

  • 7 years 1995-2001 up 56%
  • 4 years 2005-2008 up 60%
  • 3 years 2009-2011 down 8%
  • 3 years 2012-2014 up 19%

 

Power construction spending YTD is up 6.0% from 2015. Power new starts are erratic. Also some power projects are very long duration from start to finish. In 2012 starts totaled over $50 bil., in 2013 only $30 bil. and in 2014 less than $25 bil. In 2015 starts reached an all-time high of $56 bil. The power construction spending pattern for 2012-2015 was +30%, -4%, +18%, -16%. Many of the starts in 2012 supported 18% spending growth in 2014, yet not much of the record year of starts in 2015 supported spending in 2015. Although new starts in 2016 are forecast to drop by 30%, that’s still over $40 bil. and more than in 2013 or 2014. Part of the reason for a drop in spending in 2016 is the tailing off of projects that started in previous years combined with the fact that 2013 and 2014 were “lean” years. Cash flow of starts determines spending and it follows the erratic flow of starts. A very high volume of starts in early 2015 will generate spending extending out through 2019. I’m forecasting total power construction spending for 2016 will finish only 1.2% higher than 2015 and 2017 will increase 7%. Power construction represents 32% of total non-building infrastructure spending.

Highway/Bridge/Street construction spending YTD is up only 2.5% from 2015. Some highway and street projects are long duration from start to finish. Although new starts in 2015 increased by 11%, that was significantly unbalanced with two very high months of new starts in the 1st quarter and below average starts for almost the entire 2nd half of 2015 and the 1st half of 2016. The very high months have starts with much longer duration so do not add significantly to monthly spending, they spread the spending over a longer period of time. Spending has declined in 8 out of the last 12 months. I’m expecting declines in 6 out of the next 12 months. Yet the plus months will still carry both 2016 and 2017 to spending growth. I’m forecasting total highway/bridge/street construction spending for 2016 will finish 4.5% higher than 2015 and 2017 will increase 8%. Highway/Bridge/Street construction represents 32% of total non-building infrastructure spending.

Transportation/Air/Rail construction spending YTD is down 2.4% from 2015. YTD spending is 9% lower than what I had predicted in my early 2016 forecast. There is a disconnect between where Dodge reports transportation starts and how U S Census reports transportation spending, so it is difficult to directly relate the two. I’m forecasting total transportation construction spending for 2016 will finish 2.5% higher than 2015 and 2017 will increase 6%. Transportation construction represents 16% of total non-building infrastructure spending.

infra-asof-jul16

 

Construction Spending 2016 – Midyear Summary

September 7, 2016 2:55 pm / Leave a comment

Summary 2016 Construction Spending

9-7-16

Total Construction Spending for July reached a seasonally adjusted annual rate (SAAR) of $1.15 trillion, level with June which was revised upwards by $20 billion or nearly +1.8%. Monthly spending always gets revised in subsequent months. This year every month but May, which remained nearly unchanged, has been revised upwards, by an average of +1.4% and as much as 3.4%. Monthly values are subject to revision for two months after the first release and once again in May of the following year.

This plot, Construction Spending vs New Starts Cash Flows, shows actual spending (SAAR) by sector through July 2016 and projected trends of spending out to July 2017.

starts-vs-spending-9-7-16

Previously I wrote that we should expect a short duration downturn in spending occurring between January and March. The expected monthly spending cash flows that would be generated from uneven new starts over the last two years indicated that a slowdown in spending would occur during the first quarter 2016. As it turns out, first quarter spending was much stronger than expected, averaging $1.17 trillion SAAR, primarily due to outstanding results in February and March for residential spending. But then April and May experienced significant declines, dropping to an average of only $1.14 trillion SAAR, down almost 3% from Q1. Now with June and July spending both up 1% from the April and May lows, it looks like we may be past that short duration downturn.

Total Construction Spending year-to-date (YTD) through July is up 5.6% over the same seven months 2015. Spending slowed in April and May from a 1st quarter average of $1.17 trillion that reached close to a 10 year high and falls just 4% short of the all-time high. However, it must be noted, that compares unadjusted current dollars, values of all dollars current in the year spent.

When comparing inflation adjusted constant dollars, all dollars adjusted to the same point in time, we can see 2016 spending is still 18% below the 2006 highs.

spend-current-vs-constant2016-plot-apr2016

Total spending YTD through July is slightly ahead of what I predicted back in December, but it’s slightly below what I expected for May, June and July . I expect 2nd half spending to average above $1.2 trillion SAAR, but slightly lower than I originally forecast.

I’ve revised my 2016 spending forecast down slightly to total $1.190 trillion, up 7% from $1.112 trillion in 2015.

How does actual spending YTD compare to my prediction at the beginning of the year?

  • Total predicted YTD through July $638.2b,  actual YTD $647.7b (+$9.5bil, +1.5%).
  • Residential predicted YTD $245.1b,  actual YTD $259.2b (+$14.1bil, +5.8%).
  • Nonresidential Bldgs predicted YTD $236.9b,  actual YTD $228.1b (-$8.8bil, -3.7%).
  • Non-building Infrastr predicted YTD $156.2b,  actual YTD $160.5b (+$4.3bil, +2.8%).

Where are the revisions?

The single largest reduction in spending is in Nonresidential Buildings Manufacturing. Although there are other variances, that could account for the entire revision downward. Predicted construction starts for Manufacturing was lowered by nearly 35% after the initial start-of-year forecast was made.

Non-building Infrastructure spending increase is being supported by a 20%+ increase in power, which I didn’t expect. New starts for power projects have increased more than 20% since the initial forecast.

Residential construction had unusually large gains in February and March, almost all of that in residential renovations, offset only partially in April through July by declines mostly in new single-family housing.

Here’s my revised 2016 spending forecast based on YTD spending and new construction starts through July, compared to my prediction in December 2015.

  • Total predicted Dec 2015 $1,206.2b,   July 2016 $1,189.9b (-$16.3bil, -1.4%).
  • Residential predicted Dec 2015 $473.8b,   July 2016 $481.8b (+$8.0bil, +1.7%).
  • Nonresdntl Bldgs predicted Dec 2015 $439.2b,   July 2016 $410.9b (-$28.3bil, -6.4%).
  • Non-bldg Infrastr predicted Dec 2015 $293.2b,   July 2016 $297.3b (+$4.1bil, +1.4%).

Spending and construction starts are often confused by some analysts who refer to starts data as spending. Starts represent total project value recorded in the month the project begins. To determine spending activity, starts values must be spread out over the duration of the projects. Spending is dependent on cash flows each month generated from all previous construction starts. Cash flows expected based on Dodge Data construction starts are indicating a return to growth in spending in the 2nd half 2016. (See chart above Index Actual Construction Spending vs New Starts Cashflows).

starts-vs-spending-table-9-8-16

Spending Breakout by Sector

Residential  construction spending for July totaled a SAAR of $452 billion, remaining near level for the last four months. Residential spending YTD through July is up 6.5% over 2015. Spending slowed in April and May from a very strong 1st quarter average that reached close to a 10 year high. The current 3-month average is just 1% below the 1st quarter and is still at its highest since the 2nd half of 2007 but is 10% below the current dollar all-time high in 2006. I’m still expecting some upward revisions to June or July residential spending.

Residential spending just experienced the strongest three-year stretch of spending growth on record, up 60% in 2013-2014-2015. After taking out inflation, volume growth was only 31%, but that is still the strongest ever for three consecutive years. Spending growth in 2016 will reach only +9%. After adjusting for inflation that represents volume growth of less than +4%, the slowest in 5 years. New starts YTD (as reported by Dodge Data) although down from the 1st quarter, are still near post-recession highs. Starts from late 2015 and early 2016 will still be generating spending into early 2017. 2017 will repeat nearly identical to 2016. What we may be seeing is that it might be difficult to register another year of very high percentage growth in 2016 or 2017 because it is being measured against the 2015 10-year high. Another factor limiting very high growth may be a limited supply of labor to expand the workforce.

Total Nonresidential SAAR spending for July is $701 billion, down slightly from June, but monthly SAAR has varied only +/- 1% for the last six months. YTD spending compared to 2015 is up 5.1%. Nonresidential spending also slowed in April and May but is now up 1.5% from those lows. The current 3-month average is up slightly from the 1st quarter and is just 3% below the pre-recession 2008 current dollar high.

Nonresidential Buildings spending for July totaled a SAAR of $403 billion, down slightly from June but up 1.3% from the May dip. Spending YTD for nonresidential buildings through July is up 8.0% over 2015. The current 3-month average of $403 billion is up slightly from the 1st quarter but is still 9% below the peak in 2008.

Non-building Infrastructure spending for July fell to a SAAR of $289 billion, down only slightly over for the last four months. YTD spending through July is up only 1.3% over 2015. Spending began to slow in April and May and is now at the 2016 low. The current 3-month average is down 4% from the 1st quarter. However, spending on nonbuilding infrastructure reached an all-time high in the first half of 2014 and has remained near those highs through 2015 into the 1st quarter of 2016.

9-7-16

Public spending average for the 1st six months of 2016 is the highest since 2010 and is up 10% from the 2014 low point. YTD public spending is up 0.2% from 2015. All of Highway plus 80% of Educational makes up 55% of all public construction spending. The next largest markets, all of Sewage/Wastewater plus 70% of Transportation accounts for only 19% of public sending. All other markets combined make up less than 20%.

The biggest mover to total public spending this year is educational spending. Public educational spending is up only 4.0% YTD, but because it represents almost 25% of all public spending, it’s has a bigger net impact of +1.0% on moving the trend up than any other single public market. Public commercial spending is up 36.6% YTD but has only a 1% market share of public work. Highway and street is up 2.6% YTD. At 30% of total public that results in a net move of +0.8%. Office, public safety, power, sewage/waste disposal and water supply are all down YTD by a combined -5.3%. At a combined market share of 21% that nets a -1.1% reduction in YTD public spending.

Private spending is dominated by a 52% market share of residential work. At 6.6% growth that nets 3.4% growth in private spending. Several of the nonresidential building markets have high YTD growth (and/or a large market share of private work); lodging +30%, office +27%, Amusement +22%, commercial +10% and power +8%.  These five markets combined represent 29% of private spending and combined are up +15% YTD for a net impact of +4.4% to private work.

For a base of reference, here’s a few points in spending history.

Total Construction Spending

  • 8 years 1998-2005 up 77%
  • 3 years 2003-2005 up 32%
  • 3 years 2008-2010 down 30%
  • 4 years 2012-2015 up 41%

Residential

  • 8 years 1998-2005 up 133%
  • 3 years 2003-2005 up 57%
  • 3 years 2007-2009 down 60%
  • 3 years 2013-2015 up 60%

Nonresidential Buildings

  • 5 years 2004-2008 up 64%
  • 3 years 2006-2008 up 45%
  • 3 years 2009-2011 down 36%
  • 2 years 2014-2015 up 25%

Non-building Infrastructure

  • 7 years 1995-2001 up 56%
  • 4 years 2005-2008 up 60%
  • 3 years 2009-2011 down 8%
  • 3 years 2012-2014 up 19%

 

See this post for expanded details on Construction Spending – Nonresidential Markets – Buildings and Infrastructure

See this post for expanded details on Construction Inflation

Construction Forecast 1st Look – What To Expect in 2016?

January 14, 2016 3:00 pm / Leave a comment

Construction spending may reach historic growth in 2016.

There are currently six estimates available forecasting 2016 total construction spending ranging from 6% to 10% growth, with an average of 8.7%. My forecast is 9.7%.

Total construction spending, forecast to grow 9.7% in 2016, could reach a total 30% for the three years 2014-15-16. The only comparable periods in the last 20 years are 29% in 2003-04-05 and 27% in 2013-14-15.

The current nonresidential buildings construction boom could become an historic expansion. Nonresidential buildings spending is forecast to grow 13.7% in 2016. Added to 8.8% in 2014 and 17.1% in 2015, the three-year total growth could reach 40% for 2014-15-16. The only comparable growth periods in the last 20 years are 40% in 2006-07-08 and 32% in 1995-96-97.

For perspective, residential spending increased 46% in 2013-14-15, similar to only one comparable period in the last 20 years, 48% in 2003-04-05.

Non-building infrastructure projects, in two of the last three years have barely shown any gains entirely due to declines in power plant projects. This will repeat in 2016.

This is still the 1st or 2nd most active 3 year period of growth in construction in more than 20 years, and it’s already been ongoing since 2013-2014. With the forecast for 2016, spending growth could reach a new three-year high.

From the middle of Q1 2016 to the end of Q3 2016, total spending will post six to eight months at an annual growth rate of 20%, but due to the dips at the beginning and the end of the year, total 2016 construction spending will finish at 9.7% growth. Construction spending momentum is not yet losing steam. We may be seeing the effects of a few years of erratic growth patterns and a shift from more rapidly changing commercial and residential work to slower growth institutional work.

 

Index of Actual Spending and Starts Cash Flows 2012-2017

Residential spending will slow several percent early in 2016 before resuming upward momentum to finish the year with 12% growth, slightly less than growth in 2014 and 2015. Periods of low new start volumes need to work their way thru the system and this produces growth patterns with periodic dips. The upward momentum will carry into 2017.

Nonresidential buildings spending will slow moderately in the next few months before we see a 15% growth rate through the middle of the year, only to see another slowdown late in 2016. Major contributions are increasing from institutional work in educational and healthcare markets. Office, commercial retail, lodging and manufacturing will decline considerably from 2015 but still provide support to growth.

Infrastructure projects spending will decline over the next six months due to the ending of massive projects that started 24 to 42 months ago. There will be large advances in spending midyear before we experience another slowdown later in 2016. Following a 0.5% increase in 2015, spending will increase only 1.2% in 2016, held down by a 10% drop in power projects, the second largest component of infrastructure work.

Construction added 1.0 million jobs in the five years 2011-2015.  800,000 jobs were added in the last three years. To support forecast spending, jobs need to grow by 500,000 to 600,000 in 2016-2017. Growth in nonresidential buildings and residential construction in 2014 and 2015 led to significant labor demand which has resulted in labor shortages in some building professions. Demand in 2016-2017 will drive up labor cost and may slow project delivery.

Spending growth, up 35% in the four-year period 2012-2015, exceeded the growth during 2003-2006 (33%) and 1996-1999 (32%) which were the two fastest growth periods on record with the highest rates of inflation and productivity loss. Construction spending growth for the period 2013-2016 is going to outpace all previous periods.

Construction inflation is quite likely to advance more rapidly than some owners have planned. Long term construction cost inflation is normally about double consumer price inflation. Construction inflation in rapid growth years is much higher than average long-term inflation. Since 1993, long-term annual construction inflation for buildings has been 3.5%, even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8%. 

For the last three years the nonresidential buildings cost index has averaged just over +4% and the residential buildings cost index just over +6%, however, the infrastructure projects index declined. The FWHA highway index, the IHS power plant index and the PPI industrial structures and other nonresidential structures indices have all been flat or declining for the last three years. This provides a good example for why a composite all-construction cost index should not be used to adjust costs of buildings. Infrastructure project indices often do not follow the same pattern as cost of buildings.

Anticipate construction inflation of buildings during the next two years closer to the high end rapid growth rate rather than the long term average.

 

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