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Census Construction Spending released today revises data back to Jan 2013. 2018 spending was revised up by $13bil or 1% to $1.307 trillion. I expected upward revisions to 2018 residential that did NOT materialize. Almost all revision is to nonresidential.
Sizable upward revisions were posted to nonresidential buildings and non-building infrastructure for 2015, 2016 and 2017. Educational increased by $5.5bil in 2017 and Manufacturing by $4.3bil. Manufacturing also increased in 2015 and 2016. Power increased by 8%-10% in both 2015 and 2016 but decreased by 8% in 2018.
Nonresidential revisions added $15 to $20 billion in 2015, 2016 and 2017. This helps explain what would be excess growth in labor over this period, absorbing about 100,000 jobs.
It is unusual there were no sizable revisions to residential, the first I can ever remember there being no revisions to residential spending totals. It is not uncommon to see $10-$15 billion/year revisions to past years in residential. In this release, there were no annual revisions greater than $1 billion. However, for 2018, renovations was revised down by $4bil and single-family up by the same $4bil. I wouldn’t be surprised if all years 2013-2018 get revised next year. Typical annual revision is about +2.5%.
Biggest 2018 revisions: Commercial +$6bil, +6.6%; Educational +$3.5bil, +3.7%; Amusement/Rec +$1.5bil, +5.3%; Power -$7bil, -7%; Sewage $1.9bil, +8.5%; Water Supply +$1.5bil, +10.8%; Manufacturing +$5.6bil, +8.7%.
Biggest 2017 revisions: Educational +$5bil, +6%; Amusement/Rec +$1.7bil, +6.8%; Manufacturing +$4.3bil, +6.5%. Public Works +$5bil, +13%.
After revisions, 2018 construction spending growth was up (2.7% to 4.4%) in all sectors but still less than the increase in inflation (4% to 5%), so real market activity declined in all sectors. Average spending for 2018 was up 3.3%, but average construction inflation in 2018 was 4.8%, so real volume decreased by 1.6%.
Real market growth declined in all three major market sectors, Residential, Nonresidential Buildings and Non-building Infrastructure, however, performance varies by market. For example, in the Nonresidential Buildings sector, Educational, Healthcare and Manufacturing markets (almost 50% of the Nonres Bldgs sector) spending increased only 1% or less. With an average Nonres Bldgs Inflation rate of 5.1%, real volume in these three markets declined 4% to 5%. But Lodging, Office and Commercial markets spending increased 8% to 10%. After subtracting 5.1% inflation, real volume in these markets increased 3% to 5%.
For the Nonresidential Buildings sector, spending in 2018 increased by 4.4%, but nonres bldgs average inflation was 5.1% (i.e., Construction Analytics 5.1%, Turner 5.6%, RLB 4.6%, Mortenson 7.4%, PPI Bldgs 4.0% ). On average, nonres bldgs real volume in 2018 declined by 0.7%.
For the Residential Buildings sector, spending in 2018 increased by 2.7%, but res bldgs average inflation was 4.3%. On average, residential bldgs real volume in 2018 declined by 1.6%.
For the Non-building Infrastructure sector, spending in 2018 increased by 2.7%, but non-bldg infra average inflation was 5.6% (i.e., Highway 6.7%. Powerplants 3.2%, Pipelines 2.1%). On average, non-building infrastructure real volume in 2018 declined by 1.6%.
In 5 years from Jan 2011 through Dec 2015, total construction spending increased 40% but after inflation volume increased only 22%. Jobs adjusted for hours worked increased 21%, almost in balance. However, in the following 3 years from Jan 2016 through Dec 2018, spending increased 16%, but after 13% inflation, volume increased only 3%. Jobs adjusted for hours worked increased 12% during that 3-year period. Starting 2011, jobs exceeded work volume. At the end of 2018, the jobs/work volume imbalance was even greater.
Residential spending 2018 did get some monthly revisions, but the total was NOT revised up and unusual monthly variances were not revised away. This leaves 2018 with four months in which the spending varied from the statistical monthly average by more than 3 Std Dev. There are no other years outside of the 2006-2009 residential recession in which there were ANY monthly variances from statistical average reaching 3 Std Dev. For 60 months 2013-2017 the largest variance was 1.8 Std Dev.
Residential construction spending in 2018 looks more like the 2006-2009 recession than any growth years from 2001 to 2019. After the Feb 2018 high, spending declined in seven of the next ten months, then in 2019 declined in four of the next six months.
Residential construction spending declined in the last five consecutive quarters. The most recent quarter averaged $510 billion. The post-recession high was reached in Q1 2018 at $575 billion. Q2 2019 is down 10% from Q1 2018. July 2019 is down 12% from the Feb 2018 high.
Residential spending is forecast to increase through the end of 2019 but then is expected to decline in the 1st half 2020. The low by mid 2020 could match the current low of $510 billion. That would result in 7 out of 9 declining quarters.
Census doesn’t show the Renovations line item. Reno = (Total Rsdn minus SF+MF) is where the biggest residential declines occurred in 2018, down -$4bil, -2.3%. Residential Reno is down 13% in 2019 YTD.
Total all construction jobs including supervisory jobs is now only 3% below pre-recession high. However, volume of work adjusted for inflation is still 18% lower than pre-recession high. From the 2006-2007 pre-recession peak until now, non-supervisory jobs have recovered to within 6% of the previous high and supervisory jobs are now 7% higher than pre-recession high.
Residential Construction jobs are up 78,000 in the past year, ~3% growth in jobs, but residential construction volume in the same period dropped 8%. Considering residential construction spending is down 8% ytd, residential construction inflation is up minimum 2-3%, so volume is down 10%-11%, and residential jobs are up 3%, 2019 will be the worst year for residential productivity declines since the period 2006-2009.
Rider Levett Bucknall national average construction cost inflation is currently up 2.6% for the 1st 6 months 2019, 5.2% annualized. It’s up 5.7% year over year. This is in line with Turner Construction’s quarterly Building Cost Index, also up 2.6% year-to-date, annualized 5.2%, and up 5.5% year over year. These are both nonresidential building final cost inflation indices.
The PPI average Final Cost of 4 Nonresidential Trades for the 1st 6 months is up 2.9%, annualized at 5.8%. The PPI average Final Cost of 5 Nonresidential Buildings for the 1st 6 months is up 2.6%, annualized at 5.2%.
Forecasting construction spending in 2019 up less than 2%, and composite construction inflation of 4.2%, real volume for 2019 will be down about 2.5%.
The share of total residential construction spending on renovations remained fairly stable from 2013 thru 2018 between 34% and 37% at an average rate of 36%, substantially lower than 2009-2012 when it ranged between 42%-48% and averaged 45%. The 2019 share of residential spending on renovations is forecast to reach 40%. Only 50% of all spending is single-family residential. Keep that in mind when referencing residential jobs to housing units.
With the release of data for July 2019 on September 3, 2019, un-adjusted construction spending data will be revised back to January 2013. Expect revisions to 2018 construction spending, in particular, I expect significant revisions to RESIDENTIAL spending in 2018. Residential construction spending in 2018 recorded 5 individual months in which the spending reported by Census varied from the statistical monthly avg by greater than 3 standard deviations. In 19 years, the only time reported spending has ever exceeded 3 standard deviations from the normal statistical monthly average was during the 2006-2009 recession. I expect all of these to be revised away.
Due to the delay in release of construction spending revisions, which would normally have been published July 1st, my midyear construction forecast will be delayed. There’s more to it than just updating 2018 spending. The spending data helps prove the new starts data, which then supports the forecast. Preparation of the midyear forecast begins after the release of the data update September 3rd.
What’s Happening In Construction Starts? YTD total is down 8% from 2018, BUT
These markets recently posted the best construction starts 12 month totals ever over the noted period. Much of the spending from these starts occurs in 2020.
- Manufacturing from Jun18>May19
- Office May18>Apr19
- Educational Jun18>May19
- Public Works May18>Apr19
These very long duration markets posted best new starts ever; Highway Dec 17>Nov18, up 25% compared to the prior 12 months which was the the 2nd best 12mo ever, with peak spending from those starts expected in 2020, and Transportation (2yrs) Jan17>Dec18, up 25% from the prior 2 years, but with the peak 12 months up 35% from the prior 2 years, with peak spending 2020.
2020 Starting Backlog for these six markets will be up an average of 25%, at the highest starting backlog ever for each of the six markets.
Non-building Infrastructure construction starts increased 46% over the last 5 years (since lowpoint Q2 2014). Non-building Infrastructure spending increased 7% in 2018 and is forecast to increase 13%/yr for both 2019 and 2020. Big increases in Highway, Transportation and Public Works.
The markets dragging on construction spending are Commercial/Retail, Power and Residential. My forecast shows Commercial Retail declining from now through 2020, but hidden in that is the fact that Stores are down but Warehouses are up; Power which slows to finish flat next year; Residential construction starts peaked in Q1 2018. Year-to-date 2019 starts are down 9% from 2018. Although YTD spending is down 8%, we will see some improvement in the 2nd half 2019. Residential spending should finish down 5% in 2019 and shows very little improvement in 2020.
Keep in mind the affect if inflation. If spending in a particular market drops 5% AND there is 5% inflation, the real market volume is down 10%. All nonresidential inflation indices are currently between 4% and 5% and are expected to remain near 4% in 2020. Residential inflation is currently near 3.5%.
Construction volume (spending inflation adjusted) hit a 3-year low in Nov-Dec-Jan. Annual volume since Dec 2015 increased 8% but then dropped 7%. Volume for the last 2 years increased less than 1%. Most of the decline to the low was residential. Nonresidential buildings and Non-building Infrastructure were flat. All three sectors are expected to improve slightly in the 2nd half 2019, although real residential volume will still be down 9% in 2019 and 2% in 2020. Nonresidential Buildings and Non-building Infrastructure will post 6% and 9% increases in volume for 2020.
Construction Markets 2019 YTD Volume +/- (Volume = Spending – Inflation)
- TOTAL ALL -5%
- Residential -12%
- Manufacturing +5%
- Office +4%
- Lodging +3%
- Amusement/Rec +4%
- Public Safety +4%
- Highway +8%
- Transportation +3%
- Public Works +12%
- Commercial -13%
- Educational -3%
- Healthcare -5%
- Power -4%
- Communication -13%
8-15-19 edits – added plots
In early 2007, residential construction volume had already dropped 20% and total construction volume was down 10%, (the annual averages would not show this dramatic drop but a monthly plot would), yet construction job openings and labor turnover survey (JOLTS) was peaking at a 6 year high. From Jan 2007 to Jan 2008, construction had already lost 250,000 jobs. All of that was in residential construction. At the time, nonresidential construction was still growing.
Nonresidential buildings volume would peak in late 2008 and non-building infrastructure peaked in early 2009. By that time, in Q1 2009, residential volume was down 60%. Even though nonresidential construction was peaking, total construction was down 25%.
In 2008 construction jobs declined by another 500,000, about 90% residential jobs. JOLTS dropped to half of the 2007 peak high. It was over the next year or so that all construction began to decline, jobs would drop in all sectors and JOLTS would plummet to an all-time low.
The point is this: The construction recession began with the decline of residential construction in 2006-2007, at a time when JOLTS was at a 6-year high. Jobs declines lagged the decline in real construction volume (the annual average plot shows this well).
It is remarkable how residential construction volume from the Q1 2006 peak to Q1 2007 had dropped 20% but residential jobs increased by 6%. JOLTS was peaking at a 6 year high. Although total construction jobs increased in 2006, jobs started to decline in the 2nd half 2006 and would drop 200,000 in 2007. JOLTS continued to show job openings increasing from mid-2006 to mid-2007. Neither jobs growth nor JOLTS reflected what was occurring in real construction volume and certainly did not give any leading indication of what was on the horizon.
The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from May 2012 through May 2019, construction added 1,870,000 jobs, an increase of 33%, the 2nd strongest jobs growth period ever recorded, not far behind 1993-99 when jobs and volume grew equally (JOLTS was not tracked before 2000). In the four years 2003-2006, just prior to the great recession we added 1 million jobs and volume growth kept up with jobs for the first three years, but then the residential recession started and volume began to plunge. However, JOLTS increased from 2003-2007. These three periods mark the best periods of jobs growth in the last 30 years.
During the last seven years, unlike 1993-99 or 2003-05, when jobs and volume grew equally, construction volume (spending minus inflation) increased by only 22%, far less than the 33% jobs growth. While contractors continue to report difficulty filling jobs, the pace of jobs growth is near an all-time high and is out-pacing the growth in volume of work to support those jobs. JOLTS increased every year during this period.
Now fast forward to 2019. Construction spending growth for the previous two years, 2017 + 2018, increased 4.5% + 5.0%. But inflation during this period was 4.4% + 4.8%. Real construction volume for the last two years increased less than 1%. But jobs increased by nearly 8% and JOLTS more than doubled from 2016 to the end of 2018.
This is a real head-scratcher. Volume has not increased for two years, yet jobs are up 8% and the indicator for job openings is increasing. This is not at all what the data should be showing.
In fact, from the 2006-2007 pre-recession peak until now, non-supervisory jobs have recovered to within 7% of the previous high, but construction volume is still 18% below the previous peak. Total all construction jobs is only 3% lower than the pre-recession high.
Just as the data showed in 2007, the data at the start of 2019 shows that we are top-heavy construction jobs that are not supported by real growth in construction volume.
8-3-19 > added plot > Plot below shows the same data as the above two plots, only plotted monthly, with all data from 2001 thru 2019 on one plot. From 1991 to 2000, jobs vs volume disparity was only 1%. This plot sets Jan 2001 to zero baseline for both jobs and volume. By Dec 2006 the disparity was 20%. This plot shows construction jobs growth vs volume growth now has a wider disparity than Jan 2007 when we were leading into the Great Recession. By far, the largest portion of this growing disparity is residential. In the last 24 months residential volume has decreased by 12% but residential jobs have increased by 7%. To be fair, that doesn’t include some nonresidential jobs that were actually doing residential work.
Construction volume, (spending inflation adjusted to constant $ volume) hit a 3-year low in Dec-Jan.
8-3-19 > added 12 month trailing jobs plot. Jobs growth rate, although showing some minor up months, has been declining since Q3 2018. As of July 2019, the 12 month trailing total of new construction jobs has dropped almost 50% in 9 months. If we maintain the current rate of jobs growth (avg 15k/mo in 2019), within the next three months we will hit a six-year low. I’m expecting growth to slow, so we may hit that six-year low next month, in the August data.
With construction spending in 2019 predicted up only 2%, and forecasting 4.5% construction inflation for 2019, real volume for 2019 will be down 2.5%. Jobs thru April are already up 1.2% year-to-date. So the gap is widening.
We are in the third year of no increase in construction volume. But jobs have continued to grow and JOLTS is at an all-time high. These data sets should not occur at the same time. But this is exactly what occurred prior to the great recession after which we experienced a devastating drop in jobs. However, compared to the construction volume measured by inflation adjusted spending, both the changes in jobs and the JOLTS indicator of job openings seemed to lag real activity by about a year.
Even if we do not experience a construction recession similar to 2008-2011, the current situation may be signaling that we could experience a jobs correction with the slightest downturn. If a jobs correction does not materialize then we are headed for a period in which we will solidify the highest ratio of jobs per volume of work put-in-place as measured in the last 50 years.
See also these articles:
Construction Spending for April came in at $1.299 trillion. Current spending has been stable for the last three months but at a level 1% to 2% lower than this time last year. That should change to positive growth as the year goes on because the 2nd half of 2018 was declining while the 2nd half of 2019 should increase.
Residential spending YTD is down 8%
Nonresidential Buildings spending ytd increased 3.5%
Non-building Infrastructure spending ytd is up 6%
In 2017 construction spending increased 4.5%, but inflation was 4.4%. Real construction volume increased only 0.1%. In 2017, construction jobs increased 3.4%.
In 2018 with 4.8% inflation and only 5% spending growth, real construction volume increased only 0.2%. In 2018, jobs increased 4%.
Considering 4.5% construction inflation for 2019 with spending predicted up only 2%, real volume will be down 2.5% from last year. Jobs thru April are up 1.2%.
Revenue growth looks like 5%/year but it’s all or nearly all inflation. We’ve grown top heavy jobs by 10% in less than three years.
Now well into the third year of jobs growth exceeding growth in work volume, unsupported jobs growth will eventually lead to downward correction in construction jobs. Maybe in 2019.
6-7-19 BLS released Construction Jobs for May, up 4,000. But March and April were both revised down by a total of 13,000. Only 26,000 jobs have been added in the last 4 months. That’s the slowest jobs growth for any four months since 2012. In 2018 jobs increased by an average 26,000/month.
From Jan 2017 to April 2019, jobs growth exceeded construction volume by 10%. The last four months is the slowest 4mo in seven years.
Is this the beginning of a jobs slowdown? Are greater job losses on horizon? The last two years look remarkably similar to 2005-2007 when jobs were still increasing rapidly but already residential construction was well into a downturn.
Residential construction spending saar for April 2019 = $506bil. April 2018 was $570bil. Down 9%. Monthly spending is down 10 of last 12 months. Current $ spending is indicating a 3% drop for 2019. After inflation, that would indicate an 8% drop in real 2019 residential volume.
Residential spending for Q1 2019 is 11% below Q2 2018. The decline is about half in single family and half in renovations. Multi-family spending is up 8% ytd (but accounts for only 12%-13% of all residential spending). Total spending for the first four months of 2019 is the lowest residential spending saar for any 4mo in more than two years.
I’ve posted reasons why I expect upward revisions to residential spending, but I question if revisions can offset the current decline from 2018. With a deficit near 10%, it now looks like residential construction spending will NOT post any gains in 2019 and could finish the 2nd consecutive year of zero growth or real volume decline.
In real volume, after adjusting for inflation, residential construction through April is down 13% year over year. We haven’t posted a volume decline like that since 2009. Perhaps revisions will recover half that decline, but not all. Contrary to the decline in real volume, in the last year residential construction jobs are UP 3.5%.
Educational spending will finish 2019 much stronger than current spending but the yearly totals will only make slight gains over 2018. There was an uneven distribution of spending curve peaks contributing less in the 2nd half of 2018 that is now behind us. 2019 spending is supported by a steady stream of strong starts that began in late 2017 and extended into summer 2018. Jun-Jul-Aug 2018 starts posted the best 3mo total starts ever and peak spending from those starts occurs from April 2019 to Jan 2020. I’m predicting 3% growth in 2019 and 9% in 2020. Some of the expected stronger spending in 2020 could move into 2019. Current spending is up 6.6% ytd over 2018. Most spending in 2020 comes from projects that start in the 1st half of 2019. So far in 2019 starts are up 15% ytd over 2018.
Commercial spending is currently down 4.5% ytd. It will move slightly lower before it improves, finishing the year down 2%. Both store and warehouse starts dropped in 2018. 2020 may not get more than a 2% gain in spending. Commercial starts are seeing strong gains from distribution centers (warehouses, which are in commercial spending). Since 2015 the 10% decline in retail stores is being hidden by the 50% increase in warehouses, which are at an all-time high. Stores are down 10% from the peak in 2016. Warehouses are down 5% in 2018 but increased 500% from 2010 to 2017.
Manufacturing spending, up 10% year-to-date, currently appears stronger than it is expected to finish the year. Backlog is still very strong, but a drop in peak spending from the schedule of cash flows will lead to a period of moderate spending declines from March through September. After that, manufacturing spending increases steadily through the end of 2020. Initial forecast was for 2% growth in 2019. Current expectations are that manufacturing will finish the year up 6%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+.
Office spending, currently up 9% ytd, similar to manufacturing, could post several months of moderate declines from June to November, but then rebound with a steady stream of increases through 2020. In fact, my forecast shows office spending will remain flat or post a slight declines in 6 out of the next 7 months and finishes the year near the same monthly rate of spending as we are at now. Office spending is expected to finish 2019 up 6% or less. Initial forecast was up 6% for 2019. New starts in 2018 were up 11% to a new high, but much of the peak spending, from over-sized long-duration projects, will benefit 2020 when I expect to see spending growth of 7%.
Healthcare starts dropped back a bit in 2018, finishing 9% down. This slowed spending to remain flat for 2018 and 2019. Spending ytd is up only 1% from 2018. Backlog increased 11% for 2017 and 8% for 2018, but with the slowdown in new starts in 2018, 2019 backlog will be down slightly. New starts need to increase in 2019 to see growth in 2020 starting backlog.
Healthcare construction spending for 2018 is forecast to finish at $42 billion, an increase of only 0.2% over 2017. Considering the recent range between 3.5%-5% inflation, healthcare real volume has declined every year since 2012 with exception of 2017 which gained only 0.3%. It will decline again in 2019 with a forecast 0.6% gain in spending, but with a 4.5% rate of inflation. Dependent on how starts materialize in 2019, 2020 could realize the 1st big spending and real volume increase in 8 years.
Transportation starts have two main parts, Terminals and Rail. Some analysts include transportation in nonresidential buildings. That does not consider the following: airports include not only land-side terminals but also air-side runway work; rail includes platforms and all railway right of way work, which includes massive civil engineering structures. About half of all transportation spending is rail work. Construction Analytics follows U S Census construction spending reports which include all terminals and rail in Transportation.
Terminals and rail starts reached record highs in 2017 and record backlog in 2019. 2019 starting backlog is four times what it was in 2015.
However, much of that backlog is very long duration project spending that will occur in future years. Some of the project starts in 2016 and 2017 have an eight-year duration. From Oct’16 through Oct’18 there were sixteen $billion+ new project starts and seven $500million+ new starts. Some projects started in this period have peak spending occurring in 2020 and 2021.
Transportation spending is up 8% ytd but could post several slow months in mid-2019. Spending in 2018 is forecast to finish up more than 19%. Spending for 2019 is expected to finish up only 4% but then increase at least into mid-2021. 2020 and 2021 could see increases in spending of 15% to 20%/year.
Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 50% in the last 4 years leading into 2019. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.
Highway construction spending ytd is up 17%. Spending is forecast to increase 16% in 2019 and 10% in 2020. 2021 may see an increase of 10% in spending.
Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed gains in 2018 and the forecast is more gains in 2019. All these projects are public spending and saw no real gains in spending from 2010 through 2017. Spending ytd 2019 is up 16% to 20% for this group. I’m predicting 2019 spending will finish up 22% and 2020 spending is now forecast to increase 17%.
For the two years 2017-2018, the Total All Construction posted Revenue +9.8%, Volume after adjusting for inflation +0.3%, and total Jobs +7.6%.
Breaking out these numbers by sector,
Nonresidential Buildings — Revenue +5.9% Volume -3.1% Jobs +8.2%
Non-building Civil — Revenue +3.8% Volume -3.6% Jobs +10.0%
Residential Buildings — Revenue +17.1% Volume +5.6% Jobs +8.2%
Similar to a pattern that occurred in the pre-recession spending boom, jobs growth is more closely matched to revenue growth than it is to real volume growth. Overall, for the last two years, construction jobs growth far outpaces construction volume growth.
In the nonresidential sectors, while revenue was positive, after spending is adjusted for inflation, real volume was down 3% to 4%. Yet jobs increased 8% to 10%.
Residential spending (revenue) was up 17%, but after inflation real volume was up only 5.6%. Residential jobs increased 8%. If we look at residential since 2011 we see persistent growth in volume greater than jobs. But all residential jobs are not captured.
When we look at Nonresidential Buildings we see jobs growth far exceeds volume growth. However, there are some jobs related to residential work that are captured in the nonresidential jobs number, any work on high-rise residential buildings performed by contractors whose company is generally classified as nonresidential, particularly structural, and it is impossible to break out those jobs.
It is difficult to square the consistent jobs growth in excess of volume growth with the long ongoing narrative of jobs shortages. I suppose it could be argued that it is a “skilled” jobs shortage, a lack of workers with the needed experience. But we would have to look back to the period 2000-2004 to find a time when jobs growth was balanced with volume growth. There are several other articles on this blog documenting the variance back to 2000.
Here’s a link to a twitter thread on the May release of the April Jobs report showing the differences for the last 12 months.
A brief explanation added to answer the question of the difference between Spending (or Revenue) and Volume.
If your company revenues are increasing at a rate of 7% per year at a time when construction inflation is 5%, your business volume is increasing only 2% per year. If you hire support staff to support 7% growth in revenues, you would be grossly over-staffed. Inflation adds nothing to business volume. If you do not factor inflation into your growth projections, you are not forecasting growth properly. Spending is revenue. Volume is spending (revenue) minus inflation.
If a contractor is building houses that last year cost $250,000 to build a 2500sf house, but this year it cost $275,000 to build the same house on the lot next door, the volume did not change. Both sets of dollars represent the cost of the same house, but the most recent house cost 10% more due to inflation. It does not take any more workers to build the house this year than it did last year. Inflation changed the dollars of revenue that changed hands, but inflation added nothing to business volume.
Volume is measuring the amount of work completed, not the cost of the work completed. This blog post compares the number of jobs added to the amount of work added. Adjusting for inflation removes the variable of cost.
Catch my interview on Constructech TV with Peggy Smedley, along with Bernie Markstein. We are talking about the Economics of Construction.
Bernie covers Trade and Tariffs and the cost affect of steel, lumber and aluminum tariffs on residential and nonresidential construction.
I talk about growth in construction spending, infrastructure markets that are leading the way, the capacity to absorb more work and the impact on labor and the rate of growth of labor versus real construction volume.
In the 24 months from May 2016 to May 2018, Construction Volume went up 3.0%. Jobs went UP by 8%, 500,000 jobs. Spending in that 24 month span increased by just over 12%, but inflation for that period across all construction averaged 9%, hence real volume increased only 3%. That’s a $35 billion increase in volume, enough new work to support 175,000 to 210,000 new construction jobs.
JOLTS (Job Openings and Labor Turnover Survey) job openings went up from 2.4% to 3.0%, up 50,000 openings. Jobs growth exceeded volume growth by more than double and yet job openings went up!
Not only did jobs growth of near 8% far exceed that needed to support the growth in new work, but also, because jobs growth was so strong, it should have reduced job openings.
What’s wrong with this picture?
Pretty obvious the numbers just don’t add up. First, since construction spending is always later revised up, in recent years by 2%, let’s be generous and assume spending will get revised up by 2%, and let’s keep inflation the same. That would result in a 5% increase in volume or closer to $60 billion in volume. That would support 300,000 to 360,000 new jobs, a need still well below the actual growth in jobs of 500,000.
No matter how we look at it, even generously supposing spending will later increase by 2%, jobs have increased greater than volume of work.
Companies predict job openings based on positions they need to fill within 30 days. But, what if their judgement of positions they need to fill is determined based on what they anticipate from increases in revenue, without taking inflation into consideration. Since revenue also includes inflation, which adds nothing to business volume, that would overestimate the need for new jobs. We’ve seen this before, in the last expansion.
2003-2006 construction spending increased by 35%, the most rapid increase in spending in over 30 years. But construction inflation during that four year period totaled over 30%, the most for four consecutive years dating back to 1978-1981. After adjusting for inflation real volume in 2003-2006 was up by less than 5%. Considering how high spending was and how much it felt like growth, there was surprisingly little. That did not hold back jobs expansion.
Construction firms added 15% to jobs, or 1,000,000 jobs during this period, more than 3x the actual need. Job Openings in the JOLTS report increased 100%+, from 100,000 to over 200,000. Firms hired far more than needed and kept increasing the report of job openings, even though they had already hired far more than required. In 2006, housing starts dropped 15%, residential spending dropped 25%, but residential jobs still increased by 6%. From 2003 to 2006, spending on nonresidential buildings increased by 20%, all of it inflation. Volume remained stagnant these four years, however jobs increased by 10%.
Clearly the increases in jobs during this period correlate more with spending than real inflation adjusted volume growth. This four-year period registered the largest productivity decline in over 30 years because the rate of jobs growth was much faster than volume growth.
For 2018-2019-2020, construction spending is currently forecast to increase 6.7%, 3.0% and 4.2%. But after adjusting for inflation, real construction volume is predicted to increase only in 2018 by about 2%. For 2019-2020 volume declines or remains flat.
An argument could be made that JOLTS openings is dependent on firms outlook for growth in the near future. For that, let’s look at predicted volume growth in 2nd half 2018 and in 1st half 2019. It is predicted spending will increase 1.5% in the 2nd half vs 1st half 2018. But adjusted for inflation, volume will decline by 1%. Likewise, for the 1st half 2019, although spending will increase, inflation will outpace spending and real volume will decline 1%. There is nothing in past data or forecast that would support an increase in forecast job openings.
See also What Jobs Shortage? 7-6-18 for related info.
Could it be that some firms are anticipating job needs based on spending, not on volume? Could it be that these firms are not adjusting revenues for inflation to get volume before using the data to prepare a business plan? This is not entirely anecdotal. In several presentations I’ve given over the years I’ve asked the audience, How many of you plan your business needs on your revenue? In a show of hands at a presentation to NHAGC, a large portion of the audience raised their hand.
If your construction company revenues are up 6% in a year when inflation is 5%, then your net volume is up only 1%. Your company jobs growth required is only 1%.
You cannot ignore the impact of inflation when forecasting jobs need.
Jobs report for June issued this morning. Construction Jobs are up slightly. But the real story is in the last year of growth. Jobs are up 282,000 since June 2017. All across the industry, pundits are screaming jobs shortage. But is there one?
The current spending growth has 2018 on a path to reach an increase of near 8% in spending. But that is not volume. Most of that is INFLATION and that ADDS NO VOLUME. Inflation in 2018 is predicted (already in the spending numbers) to come in about 5% to 6%. Volume is spending minus inflation. Volume in 2018 forecast 2%-3%. Jobs are up 4% since June 2017.
Jobs growth of 4% when net volume is increasing only 2%-3% shows jobs growth in excess of volume. In 2017, jobs increased 3.4% against spending growth of 4.5%. But ALL of the spending growth was inflation, so net volume was 0%. So jobs growth has outpaced volume growth for the last two years by 5%.
See also Construction JOLTS – What’s wrong with this picture? 7-10-18 for related info.
This plot sets the plot lines to zero starting at Jan 1, 2011 so the growth from the bottom of the recession can be visualized. We started Jan 2011 with an excess of jobs.
The plot below shows from Jan 2005 through Dec 2010, volume had dropped 15% more than jobs. So we started the recovery in 2011 with excess jobs compared to 2005.
When we look into the three major sectors, the numbers show shortages in residential and job excesses in nonresidential building and nonresidential infrastructure.
You can read much more detail on this in several other articles I’ve written. See this link Construction Jobs 3-8-18 for an article that includes all links to previous articles on the Jobs/Workload imbalance, has an explanation of how some residential jobs are counted in nonresidential and shows the volume/jobs plots for residential and nonresidential.
Residential construction jobs currently total 2,817,000. That’s 83% of the peak jobs year, 2006, which averaged 3,405,000 jobs. Volume of residential work, after adjusting spending for inflation, peaked in Q1 2006 at $780 billion. Volume in the 1st five months of 2018 averaged only $540 billion, only 69% of peak volume. Since the peak in 2006, residential jobs are at 83% of peak, but volume is only at 69% of peak. If we look only at growth since the bottom in Q1 2011, residential jobs have not kept up with volume growth. However, jobs have increase far more than volume compared to the previous peak.
Nonresidential building construction jobs currently total 3,388,000. That’s 99.7% of the peak jobs year, 2007, which averaged 3,397,000 jobs. Volume of nonresidential buildings work, after adjusting spending for inflation, peaked around Q42007-Q12008 at $530 billion. Volume in the 1st five months of 2018 averaged only $420 billion, only 79% of peak volume. Since the peak, non residential buildings jobs have returned to previous levels, but volume is only at 79% of peak. Nonresidential buildings jobs, whether we look at just from the 2011 bottom or we compare since the 2007-2008 peak have increased far more than volume.
The following link shows the jobs vs volume plots for residential and nonresidential.
Much more on this topic Construction Jobs
The AGC survey of contractors has been reporting difficulty hiring construction labor every year since 2012. Yet from June 2012 through June 2018 construction has added 1.5 million jobs, the 2nd strongest jobs growth ever recorded. It is 2nd to 1994-1999, the strongest construction expansion on record. We are currently in the 2nd strongest expansion, about equal to 1994-1999, but substantially stronger than 2000-2005.
AGC Aug 2018 survey >Eighty percent of contractors report difficulty finding qualified craft workers in latest AGC workforce survey: https://www.agc.org/news/2018/08/29/eighty-percent-contractors-report-difficulty-finding-qualified-craft-workers-
Brief notes on spending, starts, backlog, jobs and inflation from March and April tweets.
Nonresidential construction spending is not decelerating in 2018. Will see best growth since 14% in 2015.
Residential construction spending is slowing to +7% growth in 2018, after 6 consecutive years of strong growth averaging 13%/year.
Non-building Infrastructure forecast growth of 8% in 2018, potential to hit a new all-time high due to very large projects in Power and Transportation.
Public construction spending in 2018 is forecast to reach $307 billion, an increase of 8% over 2017, the best growth in 10 years. Educational and Transportation will contribute equally and together account for more than half of the Public spending growth in 2018.
In Oct 2016 and again in Feb 2017, I forecast Manufacturing spending would fall 13% in 2017 after hitting peak spending in 2015 from massive growth in new starts in 2014. At that time, the AIA consensus forecast (average of seven analysts) was that spending would increase +0.4%. By July the consensus had been revised to average -6.6%. I updated my forecast to -11.8%. Based on cash flows, from April 2016 through the end of 2017 I expected spending to decline in 17 of 21 months. It declined in 14 of those months. Manufacturing spending finished 2017 down 11.9%.
In Fall 2017, I predicted Manufacturing construction spending would increase +9% in 2018. However, through March, total construction starts for Manufacturing over the last 12 months would count as the 2nd highest year on record. Therefore I’ve recently revised my forecast up to +13% spending in 2018. I’m now expecting double digit % spending growth in both 2018 & 2019. The January 2018 AIA consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 spending will decline. My data shows increases in starts and backlog indicate large gains.
Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 24% in two years.
Nonresidential Bldgs 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% with 2018 spending forecast up 9%. Institutional accounts for 52% of 2018 construction spending growth, Commercial 27%, Industrial 21%.
80% of all nonresidential buildings construction spending forecast in 2018 is already in backlog projects at the start of the year.
New Construction Starts are booming (need to look past the mo/mo and ytd)
- Residential – 2 highest qtrs since 2006 in last 12 months
- Nonres Bldgs – 3 highest qtrs since Q1 2008 in last 15 months
- Nonbldg Infra – highet qtr since Q1 2015 peak in last 6 months.
Construction Starts data is regularly misinterpreted in common industry forecasting articles. Starts do not directly indicate changes in spending. A Forecast Cash Flow from Starts gives an indication of the rate of change in spending.
Educational new construction starts total from the last five months of 2017 posted the highest 5mo total starts in at least seven years, 13% higher than the next best 5mo. Jan 2018 monthly spending up 12% from 2017 mid-year low.
Healthcare construction starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. Spending will increase slowly.
Amusement/Rec construction starts avg of +15%/yr for 5yrs, up 30% in 2016, 5% in 2017. In last 6mo, Aug 2017 to Jan 2018, four very large billion$+ projects started, almost a year’s worth of new starts in 6mo. Backlog indicates 15%-20% spending increases for 2018 and 2019.
In 2010, Warehouse new construction starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010.
Lodging starting backlog up 13% for 2018, having already averaged increases of 30%/yr since 2015. Starting backlog jumped from $7 bil/yr in 2014 to $17 bil/yr in 2018, supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.
New construction starts for Manufacturing total for the last 12 months would count as the 2nd highest year on record. I’m now expecting double digit % spending growth in both 2018 & 2019. The consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 manufacturing bldg spending will decline.
Structural steel contract includes structural shapes, steel joists, metal deck, stairs and rails, about 10% of total building final cost.
Other steel in a building can include reinforcing steel, exterior metal wall panels, metal ceiling frames, wall studs, door frames, canopies, steel duct, steel pipe and conduit, about 6% of total building cost.
All steel (in a structural steel building) is at least 16% of total building cost. There are more hidden costs of steel in mechanical, electrical and plumbing equipment.
Raw mill steel is about one fourth the final cost of structural steel installed. A 25% increase in cost of mill steel could raise a structural steel subcontract bid price by 6.25%. At 10% of total building budget, that would raise total building cost by 0.625%.
A 25% increase in cost of mill steel could raise the other nonstructural steel costs by 6.25%. At 6% of total building budget, that would raise total building cost by 0.375%.
A 25% tariff on mill steel raises building cost inflation by at least 1%. That’s about $7.5 billion of unexpected cost inflation just in 2018.
Watch for unexpected impacts from steel tariffs, potentially adding 5% or more to total cost of bridges (plate steel). Also impacted, power industry, pipeline, transmission & communication towers, transportation.
Steel tariff could inflate the cost of the proposed $2.1 billion Gordy Howe International Bridge by $100 million. That would hurt the budget.
2018 Construction Spending Forecast – Nonresidential Bldgs construction spending in 2018 forecast to reach a new high, $459 billion, up 9% over 2017, passing the previous 2008 high. In constant $, 2018 will still be 18% below peak.
An estimator could be far off when indexing construction cost using a general cost index versus an actual selling price index.
Failure to account for the affect of inflation on the cost of construction could result in a failure to be profitable.
For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.
For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%. In 2013 it reached a 12-year high of 8%.
If you are hiring to meet your needs and you see that construction spending (revenue) has increased by 25%, do you hire to match revenue? No! Hiring requires a knowledge of volume growth, and revenue doesn’t show that. Revenue minus inflation shows volume.
Construction activity has a direct influence on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs.
Construction Jobs vs volume growth the last 5 years is nearly even, yet jobs imbalances exist within sectors. Nonresidential Buildings and Non-building Infrastructure show excess jobs while Residential shows a severe jobs deficit. But not all of the apparent deficit in residential jobs is real.
Are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.
In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This is residential space built using labor classified as non-residential commercial.
BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity.”
So, the mis-classified labor reduces the nonresidential excess and offsets a portion of the residential shortfall.
Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.
Construction added 177,000 jobs in the 4 months Nov’17-Feb’18. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.
Construction jobs pulled back 15k in March, but this follows the strongest month (Feb +65k) in 12 years, so not totally unexpected. I think Mar Construction jobs, (-15k), more likely a pause after Feb (+65k), strongest month in 12 years.
Jobs and Volume
The period 2011-2017 shows both spending and jobs growth at or near record highs.
Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.
Construction added 185,000 jobs in the last 4 months. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.
Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Jobs increased by 27%, 15% in excess of volume growth.
Residential spending increased by 110% since 2010, but after inflation, real residential volume increased by only 57%. Jobs increased by only 37%, 20% short of volume growth.
Times of rapid spending growth are usually accompanied by higher rates of inflation.
Historical 20-year average total composite construction inflation, without including recession years, is 4.2%. When including the recession years, the average is 3.5%.
For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.
For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%.
Inflation in the highway sector averaged only 2.5% for last seven years. The power sector has experienced 5% deflation over the last 4 years.
Current$ vs Constant$
Construction spending reached a new high in 2017 at $1,236 billion in current $. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.
Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.
After adjusting all spending to equivalent 2017$, we see that all years from 1997 through 2008 had greater volume than 2017. In 2005 volume reached a peak at $1,450 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.
Total All 2018 construction spending is projected to increase 8% to $1.330 trillion.
Spending measured in current 2018$ will reach an all-time high, however, measured in constant inflation adjusted dollars, will still come in 14% below the 2005 high. When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007.
Nonresidential Buildings new starts are up 60% in four years. 2018 starting backlog is the highest ever, up 15% from 2017. Spending for 2018 is projected to increase 9%. For 2018, Educational spending is projected to increase 14%, the strongest growth since 2007. Starting backlog increased 10%/year for the last three years. Manufacturing posted several very large project starts in 2017. Spending is projected to increase 12% in 2018.
Non-building Infrastructure 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. Spending for 2018 is projected to increase 8% to an all-time high. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Spending is projected to increase 20-25%/year for the next two years.
Public construction is a subset of both Nonresidential Buildings and Non-building Infrastructure. Due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 spending growth are Educational and Transportation with a combined total forecast 20% growth. Expect 2018 public spending to increase 6% to 8%, the best growth in 10 years.
Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts. Total starts for the last 6 months are the highest since 2006, but new starts in 2018 are projected at only +7%. Residential spending in 2018 is projected to increase only 6% after five years of increases over 10%.
Infrastructure and Public Work
Only 60% of all Infrastructure spending is publicly funded. That public subset of work averages growth of less than $10 billion/year.
The two largest markets contributing to public spending are Highway/Bridge (32%) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending.
Infrastructure construction spending is near all-time highs and has been for the last several years. Public spending is 10% ($30bil) below all-time highs, the largest deficits coming from Educational, Sewage/Waste Water and Water Supply.
Current levels of backlog and predicted new starts gives a projection that Public Non-building Infrastructure spending will reach an all-time high in 2018 and again in 2019.
For the latest info see 2018 Construction Spending Forecast – Mar 2018