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Construction Spending Forecast 2015 – 2016 Both Up 11%

The data continues to get tighter with each new release.  This forecast is updated Dec 5th to include US Census October spending released Dec. 1 and Dodge Data & Analytics construction starts October released Nov. 20.

The six major nonresidential buildings markets reported here represent 90% of all nonresidential buildings and the three infrastructure markets represent 75% of all nonbuilding infrastructure.  This gives a good picture of which markets contributed the most (least) to 2015 growth and which will offer the most (least) support to 2016 growth.

My forecast is construction spending for 2015 will total $1.069 trillion supported by an 18% increase in nonresidential buildings spending. For 2016 expect spending to total $1.187 trillion with increases of 15% in both residential and nonresidential buildings.

With the October spending results included,  robust data allows predicting 2015 year-end results with great confidence.  For the 2016 forecast, new starts booked through December 2015 will contribute 75% to nonresidential buildings spending, 55% to residential spending and 80% to spending on nonbuilding infrastructure.

Spend Summary post totals and markets 2015 2016

This forecast may be revised slightly for the upcoming Winter Construction Economics report.

 

Construction Spending – Reports of It’s Death May Be Greatly Exaggerated

Is activity climbing or declining?  Will costs go up or down? Will we have a winter slowdown? Where are the markets headed? I read an article this morning that stated “momentum is losing steam.” Is it?

I’ve been gathering Construction economic reports for comparison and I see some predictions for 2016 that frankly are only about what I’m predicting for 2015. To be fair, there are reliable predictions that indicate growth similar to what I predict. When data was available for two thirds or better of 2015 total activity there were still predictions for how specific markets would finish the year that varied by as much as 20% to 30%. In one instance the year-to-date actual through September has already exceeded the year end estimate from one firm. Surprising, once that much actual year-to-date information is in hand that there could be that much variation.

And how will markets perform in 2016?  Here’s a few examples from a variety of sources; educational, healthcare, lodging and manufacturing all have more than one estimate for 2016 growth in the range of 0% to 4%, values that would not keep spending growth up with inflation, meaning volume would actually decline. My estimates for those markets are all 10% or higher. Variations of 10% to 15% in growth are common in the data.

So, here’s a few comments on predictions and on what to expect.

Unless something Earth-shattering happens, there is a select set of monthly data that statistically predicts the yearly outcome for total spending and market spending, within +/-1.5% for a smaller data set and within +/-1% for a slightly larger data set, but you have to wait longer to get that larger data set. It failed once in 14 years, by 1/2 of 1 percent. The same analysis can be performed individually for markets and sectors.  The potential variance increases for some markets to about +/-3%.

The Dodge Momentum Index and the AIA Inquiries index are leading indicators to potential future work.  They foretell activity in the Architectural Billings Index (ABI), which is a leading indicator to new construction starts. New starts provide the future cash flows for spending.

Spending in any given month is the sum of how much can be put-in-place generated by the cash flow from each of the project starts that got booked in the previous year or two, or three for long duration projects.  For the next month the unknown amount is only about 3% or 5% that will be generated by new starts in the most recent 30 days.  The remainder is already booked. Two months out the prediction includes 6% to 10% uncertainty, and so on.

Expect a winter slowdown. It’s not because of the weather. There may be additional repercussions if we experience severe weather, but the slowdown is predetermined because very large starts that got booked from a year to two years ago are reaching completion and dropping out of the monthly spending. Starts can be erratic.  This causes periodic fluctuations in monthly spending.  It’s normal.

Also what may not be apparent is what happens due to the difference in seasonally adjusted (SA) and not seasonally adjusted (NSA) values. Readers most often track the changes in SA values, but spending is generated from cash flow and cash flow is generated from the NSA values. Differences can be huge.  As an example, August starts with an SA of $300bil produce 50% more actual NSA dollar volume to cash flow than February starts with an SA of $300bil. This may cause erratic spending patterns.

Residential spending will slow several percent to a low point in February before resuming upward momentum to finish the year stronger than 2015. Periods of low start volumes need to work their way thru the system and this produces growth patterns with periodic dips.

Nonresidential buildings will slow only moderately in the next few months before we see 15% growth through the middle of the year, only to see another slowdown late next year, leading into a considerably slower 2017. Office new construction starts in 2015 are up 50% from 3 years ago, educational up 25% over same period. Manufacturing starts are down 70% in 2015 and that is still at the second highest ever recorded. Total spending is still strong in 2016 at 10% growth. Major contributions appear from institutional work in educational and healthcare. Office and manufacturing still provide very strong support to growth.

Infrastructure projects spending will decline for 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. I’m currently predicting spending will grow less than 2% in 2016, held down by a 10% drop in Power the second largest component of infrastructure work.

Mixed within the three sectors above are Private and Public spending. Residential is about 98% private and makes up about 50% of all private work. Along with manufacturing and large portions of power, commercial/retail, office and healthcare makes up nearly 90% of all private work.  Private growth is the sum of the parts, predicted at 10%+ for 2016. Public work is all or a large portion of highway/street, educational, transportation and sewage/waste. Along with small contributions from water and a portion of power, these markets comprise 80% of all public work. Again, the sum of parts shows growth at 8% in 2016.

From the middle of Q1’16 to the end of Q3 we will register an annual growth rate of 20%, but due to the dips at the beginning and the end of the year total 2016 construction spending growth will come in at 11%. Construction spending momentum is not losing steam. We are seeing the affect of a few years of erratic growth patterns and a shift from commercial to institutional work.

Spend ALL 2014-2016 PLOT 12-1-15

 

Predictions – 2015 Spending for Nonresidential Construction Markets

Compiled in one neat table, here are 2015 predictions from eleven construction data firms for spending growth in nonresidential markets. Several firms provided mid-year estimates and recent estimates. Some provided only mid-year and some just recent estimates. Midyear estimates are separated so changes can be seen to current estimates.

Actual spending put-in-place for September year-to-date (YTD) became available November 2nd and new construction starts for October became available November 23rd.

There is a wide range of variance in predictions with the closest spreads at 9% and the widest spreads in lodging and manufacturing markets. It will be interesting to look back at this chart when the final numbers for 2015 become available in February 2016 to see how we did.

  • One recent estimate published in Engineering News Record (ENR) magazine 11-16-15 lists 7% growth for manufacturing buildings. Each of the first nine months in 2015, the year over year growth has ranged between 40% and 60%, so the huge growth expected has been apparent for some time. Even if the last three months drop 15% below the current average we will still finish the year up 40%.
  • For growth in educational buildings to fall to only 3%, the last three months would need to drop 15% below the current six month average, a change we will not very likely see.
  • The spread on lodging is 18%, from the low estimate of 15% to high of 33%.  YTD lodging through nine months is up 31% over last year. To finish at less than 25% growth in 2015, spending for the next three months would need to drop 20% from current levels.

We get a chance to tweak these numbers a little tighter when October spending gets released on December 1st.

Spend Compare MARKETS 11-23-15

 

Construction Spending Projected 2015 Totals

Here’s a comparison of projections for total construction spending in 2015.

Spending Predictions TOTALS Nov2-15

My numbers (GBCo) include the latest actual construction spending data released Nov. 2nd for September spending.  This updated projection also includes revised future spending based on Dodge Data & Analytics construction starts released at the DDA Outlook 2016 conference Oct. 30th.  My prediction for total spending in 2015, now at $1.075 trillion, hasn’t changed much (up 0.7%) since August.  However, for next year my projection has increased from $1.150 to now expecting total spending of $1.190 trillion in 2016.  The 2016 projection will be further refined in my year-end report.

With the September spending values in the data, the statistical average predicted spending for 2015 is $1.073 trillion. My cash flow analysis by sector predicts 2015 will finish at $1.075 trillion. In 11 out of 14 years, the actual final value has been within 0.5% of the predicted.

The statistical analysis gives a predicted range for total 2015 annual spending between $1.066 trillion and $1.086 trillion. The actual spending total has not fallen outside the statistical range since 2001, as far back as I’ve been tracking the data.

Here’s a summary of predictions for several of the major markets.  Again, my predictions from earlier in the year haven’t changed too much.

Spending Predictions MARKETS Nov2-15

In today’s data release from U.S. Census, spending for manufacturing buildings was lowered in both July and August, and September came in lower than I expected.  That is the primary mover in the lower prediction for nonresidential buildings. Spending for manufacturing buildings is at an all-time high. Through September, spending on new manufacturing buildings has already reached an all-time annual high.  Manufacturing buildings helped 2015 spending for nonresidential buildings reach 19% growth but this won’t continue and I expect 2016 growth of 10%.

Residential spending has been a nice surprise to the upside.  The current rate of growth for the last 12 months  is 17%/year and this rate of growth is expected to continue again in 2016.

Spending Predictions TOTALS GRAPH Nov2-15

Heard at Dodge Data Outlook 2016, Oct. 30, 2015

Dodge Data & Analytics Outlook 2016 event held in Washington DC, October 30, 2015.

A brief summary of comments heard and information from my notes.

Art Gensler – Founder Gensler

How do you control 5000 people?  Hire good people and get out of their way.

People value what they pay for and ignore what they get for free.

Beth Ann Bovino – U.S.Chief Economist, Global Economics & Research, Standard & Poor’s

Domestic economy is strong and strengthening.

Jobs are stronger – Quits rate is at a 7 year high.

Housing starts are up – Home prices are up.

Wages are struggling and we have a historical 38 year low labor participation rate.

Ted Hathaway – CEO Oldcastle BuildingEnvelope

We increased wages significantly to keep people from leaving.

The cost and disruption is huge if you lose a valuable member of a team.

Dan McQuade – President, Construction Services, AECOM

Three emerging trends

Global collaboration

Investing capital with clients and partners

Better collaboration with vendors & suppliers. Treat subs and vendors as partners.

Larry Kudlow – Economist and Senior Contributor CNBC

Our biggest problem – We do not have strong steady economic growth.

Corporate profits were high after recession but have declined last three quarters. Profits were likely responsible for the stock market rise.

Bob Murray – Vice President, Economic Affairs, Dodge Data & Analytics

The DMI is reflecting the institutional dip has ended and now beginning to grow, although slowly.

New construction starts 2013 = 11%, 2014 = 9%, 2015 = 13%p

Actual $ put-in-place 2013 = 7%, 2014 = 5%, 2015 = 10%

New starts that declined in 2015 Warehouses, Stores, Public Bldgs, Manufacturing

New Starts that increased in 2015 Residential, Hotels, Highway, Electric-Gas-Power

Expectations for 2016

Total new construction starts up 6%.

Residential up 16%, single family will grow faster than multifamily.

Commercial up 11%, led by warehouses and stores

Institutional up 9%, led by educational

Manufacturing down 1%, but from very high 2014 and 2015

Power down 43% from extreme high starts in 2015

Construction cycles may be indicating we have years of growth left in the current cycle.

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