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Pandemic Impact #8 – Construction Outlook

Analysis of a Recession Scenario 2020-2022

based on 6-1-2020 data

This analysis relies on the first available hard data reports to forecast the impact of a construction recession scenario caused by the current Covid-19 pandemic. This scenario does not assume a catastrophic failure of the U.S. economy, but does assume a large decline in construction activity in 2020 and 2021. Data always gets revised in the following months.

This analysis generates spending cash flows from current and assumed reduced new construction starts to then determine how new starts and spending may affect future construction activity.

What we Know Today

The revised construction spending report for March, released June 1st, showed no decline in spending from February. Census revised March construction spending from the initial report of up 1% to, still remarkably, level with February. https://census.gov/construction/c30/pdf/release.pdf

This was the estimated growth before the pandemic. Shutdowns began March 15th. This report seems to indicate construction was totally unaffected in March! This is hard to grasp. Just the shutdowns in Boston and San Francisco starting Mar 15. affected 300,000 jobs and would calculate to have erased over $2 billion in work from March total spending. By one estimate, we had already lost 300,000 to 400,000 construction jobs by Mar.31st. How spending could have increased is baffling.

The first hard jobs data reflecting Coronavirus impacts on the construction industry was the jobs report released in the first week in May which covers jobs from mid-March through mid-Apr. From March 15th to April 12th, construction lost 975,000 jobs, 13% of the workforce. Construction unemployment, which was below 5%, as low as 3.2%, is now at 16.6%. https://bls.gov/web/empsit/ceseeb1a.htm . I expect to see downward revisions to March spending. In addition to a 13% drop in the number of jobs, hours worked also dropped 3%, so the total worker manpower and hours worked output dropped 16%.

Ten states account for 80% of the 975,000 construction jobs lost between March 15th and April 12th. CA, FL, MA, MI, NJ, NY, OH, PA, TX & WA. Eight of those states are in top ten states for total number of construction jobs, MA and WA are not. https://www.agc.org/news/2020/05/22/construction-employment-shrinks-49-states-and-dc-april-new-association-survey-finds?

The next jobs report due out June 5th covers the period from April 13th through May 17th. Expect more downward movement in the jobs numbers. I expect most construction jobs were lost early and are included in the April report, so next report June 5th we may see only 400,000 more construction jobs losses for the period April 13 through May 17. (This report will be edited to reflect the June 5th jobs data.)

The loss of 975,000 jobs in a single month (if all jobs were lost for a full 30 days) at a rate of 60,000 jobs needed to put-in-place $1 billion in construction, equates to a loss of $16 billion in spending between March 15th to April 12th.

In one of the most baffling reports I’ve seen, Census posted April Construction Spending down only 3%. It is beyond explanation that construction spending for March was flat and April declined only 3% from March, while we’ve lost 16% of worker output.

Jobs vs Volume 2001-2020 monthly 6-2-20

The change from March to April Construction Spending versus Construction Jobs varies by the most in 30 years. This is highly suspect! Jobs (and hours) are down 16% but spending is down only 3%, for a variance of 13%. The largest variances on record back to Jan 1991, most of which occurred in 2005-2006, are: in 360 months, jobs and spending growth varied by >4% only 10 times, >5% only twice. The 20 yr average 0.1%.

Variances like what the data show for this month have never occurred. A more likely explanation is there is an anomaly in the data. Either construction did not lose 975,000 jobs in a month or spending in April dropped a lot more than 3%. I suspect the later.

Here’s what that April variance would mean. If construction jobs+hours drop by 16% but spending drops by only 3%, then productivity as measured by amount of work put in place per job increased by 13%, IN A MONTH, DURING A PANDEMIC.

If there is essentially no change in productivity, but due to restrictions and higher overhead, costs go up, then you must accept construction inflation just increased by 13% in one month. But there is no data yet showing unusual labor or material cost increases.

Or, if some portion of this discrepancy is due to a change in productivity and some part due to rapid inflation, the 13% variance is somehow split between these two issues.

The pre-pandemic construction seasonally adjusted annual rate (SAAR) spending forecast was for a rate of $1,395 billion from March through July. Assuming no unusual changes in jobs, productivity or inflation, the spending can be calculated from the number of jobs available to perform work. For pandemic impact based on job losses, we should see March SAAR spending at $1,350 billion. April construction spending should drop to under $1,200 billion from a high of $1,386 billion in February. I expect to see March spending get revised downward. I expect April spending to be revised down 6% to 10%. For these reasons, my forecast is not using the reported April spending data.

Pandemic Impact on Construction

This was the baseline forecast pre-pandemic. It shows considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

This plot shows actual spending through January 2020 and forecast spending for 2020 through 2022 based on the predicted cash flow from existing starts and projected starts pre-pandemic.

PRE-RECESSION SCENARIO FORECAST SPENDING

Spend Sector 2015-2021 monthly 3-5-20 

Backlog leading into 2020 was up 30% in the last 4 years, at all-time high. Although spending was forecast up only 4%/yr. the next two years, spending is at an all-time high. 80% of all nonresidential spending in any given year is from backlog. If new starts drop by 10%, that has only a 1.5% to 2% impact on total spending in the first year. The following year spending would be down 4% to 5%. Residential spending is far more dependent on new starts than backlog. Only about 30% of residential spending comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total spending by 7% in that year.

Residential construction starts peaked in 2018. Starts in 2019 are level yoy, but have been flat or in moderate decline since mid-2018. Spending was forecast up 5% in 2020 but down 1% in 2021.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Starts have moved sideways or in slight decline since mid-2018. 2019 starts are down 9% from 2018. Spending was forecast up 3% in 2020 and 2021.

Infrastructure starting backlog, by far the most robust, has increased 15%/year for the 3 years 2018-2020. Spending was forecast up 6% in 2020 and up 8% in 2021.

 

Recession Scenario

Regardless what may lead to a construction recession, in this case a global pandemic, it is the current high amount of work in backlog that will work hard to mute its effect.

When a recession occurs, new construction starts would be substantially reduced. Although some projects will be canceled or delayed mid-schedule, most projects already in construction would move on to completion.

Construction projects will most likely experience delays. Potential product shortages, delivery delays and shutdowns will drive up costs and extend project schedules.

Projects in planning may be canceled due to drop in demand, decline in capital or slowdown in economy. Retail stores may cancel expansion, educational facilities may delay starting new construction, transportation facilities may postpone later phases of long planned growth.

This recession scenario does not assume a catastrophic failure of the economy.

This pandemic recession forecast is based on the following:

  • April spending is forecast and not carried as reported due to reasons cited.
  • New construction starts are reduced by 12% in 2020 and increased by 8% in 2021. Starts are better in nonresidential than residential, best in infrastructure.
  • 25% of work in backlog is delayed 2 months. Delayed work restarts in May but takes until November to fully get back to February level of activity.
  • 3% of the work in backlog gets canceled.

This plot shows the resulting change in spending. Only the estimated spending to the right of the dateline changes.

RECESSION SCENARIO FORECAST SPENDINGSpend Sector Recession 2015-2022 6-3-20

Residential construction spending would drop 11% from $566 billion to $506 billion in 2020 and then drop 18% from $550 billion to $453 billion in 2021. Residential is far more dependent on new starts within the year for spending than on backlog.

Nonresidential Buildings spending drops 8% in 2020 from $469 billion to $434 billion and then drops 2% from $475 billion to $468 billion in 2021.

Non-building Infrastructure spending drops 5% in 2020 from $348 billion to $330 billion and then drops <1% from $378 billion to $376 billion in 2021.

By 2020, nonresidential buildings and infrastructure are back within 1% to 2% of baseline pre-pandemic spending. However, residential spending is set back $100 billion, back to the level of 2016.

Spend Recession 2020 Summary 6-2-20

Total all spending would drop from the current 2020 forecast of $1.380 trillion to $1.270 trillion. In 2021 and 2022, instead of baseline spending of $1.400 trillion, spending would drop to near $1.300 trillion, back to the level of 2018. The losses in the Great Recession, a total drop of almost $400 billion, set construction spending growth back 12 years.

The difference with shutdown vs a reduction in new starts is that work shut down is delayed. It will reduce total spending in that month in 2020 but will simply shift all remaining months and the end of the projects, which could occur in 2020, 2021 or later. If 50% of all U.S. construction shut down for two months, it would delay $100 billion worth of work, most of it from 2020 into 2021.

 Inflation

When we see spending increasing at less than the rate of inflation, the real work volume is declining. With typical construction inflation between 3% and 5% annually, a spending drop of -2.8% in 2020 may reflect a work volume decline of 6% to 8%. The extent of spending declines would impact the jobs situation.

Historically jobs declines of the same magnitude do not follow immediately after volume of work declines, therefore after the initial delayed job losses return to work, we would not expect to see much reduction in workforce in 2020.

What this will do to the construction inflation rate is hard to predict. Typically, when work volume decreases, the bidding environment gets more competitive and prices go down. However, if materials shortages develop, that would cause prices to increase. There have been reports that scrap steel shortages may result in a steel cost increase and numerous imported products are not available or in short supply. Firms that manufacture goods used in construction were closed temporarily, so their production was disrupted.

Add to these issues the fact that many projects under construction may have been halted for a period of time and many more may have experienced disruption. The delays may add several weeks to perhaps a month or two to the overall schedule and management cost goes up. I think in this case the materials availability issues and schedule delays will outweigh any decline in work available for bid. I expect inflation to range between 4% and 5% for 2020 and 2021, lower for residential work.

 

You can visit Ed Zarenski’s website,

Construction Analytics – Economics Behind the Headlines

at https://edzarenski.com/

Pandemic Impact #7 – Forecasts Based on Little Hard Data

5-8-20  The jobs report today shows construction lost 975,000 jobs last month.

AGC forecasts “virtually no new private starts except pandemic-related and emergency repair work.” This is probably the most pessimistic of forecasts but let’s look closer. Private construction comprises 75% of all construction work, but residential is 40% out of the 75%. In some cases residential work was allowed to continue, perhaps leading to a continuation of residential starts. Healthcare, Office, Warehouse (in Commercial/Retail), Data Center (in Office), Transportation and Manufacturing (Industrial) all have a large share of private work and all may include some critical projects for which starts may proceed. So, a large portion of new private starts might proceed.

Dodge forecasts new residential construction starts in 2020 will end down -12%,  commercial (90% private) down -16%, institutional (50% private) down -7%, Manufacturing/Industrial (100% private) down 22% and Non-building (40% private) down -16%.

ConstructConnect forecast for 2020 construction starts; Residential -29%, Nonresidential Buildings -32%, Non-building Infrastructure -17%. Total Construction starts for 2020 down 27%.

AIA Consensus of eight construction firms 2020 construction spending forecast for nonresidential buildings : Commercial -14%, Institutional -7%, Total Nonresidential Buildings -11%.

CBRE Research reported 70% of total under-construction industrial space nationally remained active. Most of these projects were deemed essential.

Here’s a sampling of Dodge construction starts through March for ten areas: Houston-Baytown-Sugarland, Phoenix-Mesa-Scottsdale, Ohio, Atlanta-Sandy Springs-Marietta, Boston-Cambridge-Quincy, California, Florida, New York-Northern New Jersey-Long Island, Pennsylvania, Seattle-Tacoma-Bellevue. These ten areas represent about one third of all U.S. construction starts. Compared to the same period 2019; Total construction starts are down 3.5%; Nonresidential Buildings down 2.5%; Non-building down 3.5%. Residential starts are up 10%. Only Seattle posted a decline in residential starts. 

From March 15th to April 12th, construction lost 975,000 jobs, 13% of the workforce. Not shown in the jobs plot below is that hours worked dropped 3%, so the total work output dropped 16%. Construction Unemployment, which was recently below 5%, as low as 3.2% in summer 2019, is now at 16.6%. The next jobs report covers the period from April 13th through May 17th. Expect more downward movement in the jobs numbers.

The U. S. Census March construction spending forecast was UP. It should not be up. I’ve stated this could potentially be due to insufficient real data input and more dependent on typical spending curves to fill in the blanks due to lack of response with real hard data input. I expect downward spending revisions to the March data. Here’s two examples to support my expectations:

  • In any given month about 15% of Residential construction spending comes from new starts that month. March Not Seasonally Adjusted (NSA) spending is historically 15% higher than Feb. But March backlog (without any project delays) was level, new starts in $ increased only 8% and new starts # of units fell 22%, yet March reported residential spending still increased 15%. With a level backlog (which assumes no shut downs) and a new starts below par, residential spending for March should not have increased by the normal historical amount.
  • Total NSA construction spending in March increased 9.6% from Feb, historically it would increase 10.5%, so that seems normal. However, in the last two weeks of March it is estimated workforce declined by 300,000+, 4%. It is unlikely construction recorded a 4% boost in productivity in Mar.

Jobs Pandemic 2020 thru 2021 5-8-20

There still is little hard data to go on, but based on what I’ve gathered to date, here is my Construction Analytics latest forecast.

Work in backlog that has been delayed, minimum 2 month delay, restart build up over a period of 8 months; Residential -30%, Nonresidential Buildings -28%, Non-building Infrastructure -22%, Total Construction delays -25%.

Work in backlog that has been canceled, Residential -3%, Nonresidential Buildings -3.4%, Non-building Infrastructure -2.2%, Total Construction backlog canceled -2.8%.

New Construction Starts in 2020 canceled, Residential -15%, Nonresidential Buildings -8%, Non-building Infrastructure -11%, Total Construction starts canceled -11%.

Construction Spending Forecast 2020 – Residential -2%, Nonresidential Buildings -4%, Non-building Infrastructure <-1%, Total Construction Spending 2020 -2.3%.

Spend Sector Pandemic 2015-2022 5-8-20

The loss of 975,000 jobs in a single month (if all jobs were lost for a full 30 days), at a rate of 60,000 jobs needed to put-in-place $1 billion in construction in one month (5000 jobs per $1bil pip/yr), equates to a loss of $16 billion in spending between March 15th to April 12th. Normally in this period spending would be $100 to $105 billion. We won’t see the hard spending data for this period until June 1st with first revision July 1st. A $16 billion drop would equate to a 1.25% decline in annual construction spending.

A recent AGC survey of contractors indicates:

  • 50% of respondents said an owner halted current work
  • 67% are experiencing project delays/disruptions
  • 49% said suppliers had notified them deliveries would be delayed or canceled
  • 28% reported that an owner canceled an upcoming project
  • 35% laid of workers

Just keep in mind, this is a survey of companies responding they have experienced these issues. It IS NOT an indication that 50% or 67% of all construction projects are halted or delayed. If a contractor has 10 ongoing projects and experiences a delay on three of them, or even one of them, he would have answered affirmative in the above survey. As an example, 35% of respondents reported they laid off workers and today’s jobs report shows the workforce dropped by 13%.

ConstructConnect has compiled a list, by state, of construction projects that have been delayed or canceled. From this list you can get an idea of the number of projects that have been delayed or canceled, but you cannot determine the amount or $ value of work that has been delayed or canceled. To get that level of detail, you would need to know the schedule for each job, the start date/end date and the amount of work already put-in-place.

There are no standard means of capturing the duration of delays or the $ value of delays or cancellations from backlog. We may never know the total value of work delayed/work canceled. This is what makes current forecasting so difficult.

See also these articles for all the analysis to date on the Impact of the Pandemic.

Pandemic Impact on Construction – Recession in 2020?

Pandemic Impact on Construction – Part 2

Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #4 – Construction Jobs Recovery

Pandemic Impact #5 – Restarting Construction

Pandemic Impact #6 – The Lost Month

Pandemic Impact #6 – The Lost Month

5-2-20

Expanding on one of the four recession impacts outlined previously, #4 New Starts – future capital spending plans canceled.

What is the impact on future construction spending if new construction starts stopped for a month?

To analyze this scenario, several assumptions must be made. The assumptions are the variables, and as you will see, the variables change with the market and the severity of the shutdown. It will be easy to see the impact of any other alternative once one scenario is modeled.

Assumptions:

1: An entire month of new starts is stopped. Later it can be determined what happens if only 50% stopped or only 25% stopped.

2: The average duration of jobs in this category is 25 months. Duration is different for each market and this will show the impact duration has on the outcome. Later it can be determined what happens if duration is 20 months or 33 months.

3: A straight line spending curve is assumed. That is, for a duration of 25 months 4% of the construction would be put-in-place each month. No, that is not how spending occurs, it actually follows a typical bell curve, but this allows us to visualize the impact. If duration were set at 20 months, 5% of spending would be p-i-p each month.

4: New Starts have been level indicating a steady stream of new work at the current level. New starts do vary up and down slightly each month, but prior to the pandemic impact the broad outlook was for not big changes from 2019 through 2021.

If an entire month of new starts at a level pace were to disappear, the volume that month would have added to each future month of spending disappears. For projects that have a 25 month duration, using a straight line spending curve, new starts in every month make up 4% of the spending in all future months until they are completed. The total spending in any given month is dependent on the spending contribution from the previous 25 months of projects started. Each month, a project that stated 25 months ago is completed, but a new project that started this month is added.

In this scenario, future spending is reduced by 4% per month for the next 25 months.

Now we can see what happens if only 50% of new starts disappear. If duration is kept at 25 months but only 50% of starts disappear for a month, then future spending will be reduced by only 2% per month for the next 25 months.

What happens if 100% of new starts for one month disappear but the type of project has an average duration of 33 months?

Projects with a 33 month duration contribute 3% of the monthly spending for the next 33 months. In this scenario, future spending will be reduced by 3% per month for the next 33 months. If duration is kept at 33 months but only 50% of starts disappear for a month, then future spending will be reduced by only 1.5% per month for the next 33 months. Long duration projects have a smaller monthly impact, but the impact lasts for a longer period of time.

Short duration projects such as housing have a more severe monthly impact, but the impact lasts for a shorter total duration. Projects with a 10 month duration contribute 10% of the monthly spending for the next 10 months. If 100% of new residential starts stopped for one month, future spending will be reduced by 10% per month for the next 10 months. If duration is kept at 10 months but only 50% of starts disappear for a month, then future spending will be reduced by only 5% per month for the next 10 months.

What happens if new starts shut down for two months? Double all the results above.

See also these articles for all the analysis to date on the Impact of the Pandemic.

Pandemic Impact on Construction – Recession in 2020?

Pandemic Impact on Construction – Part 2

Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #4 – Construction Jobs Recovery

Pandemic Impact #5 – Restarting Construction

 

Pandemic Impact #5 – Restarting Construction

4-18-20

Construction does not come roaring back in Q3 or Q4 2020. The seasonally adjusted annual rate of total construction spending will not return to the Jan-Feb 2020 level until at least 2023.

Spend TOTAL monthly 2018-2021 4-18-20 recession

I’ve outlined in previous “Impact” articles what we might expect for cash flow and backlog through 2020 and into 2021. After the resumption of work that had been halted, which for various reasons cited will take several months, and which is not all expected to return to a full level of pre-pandemic spending, a pull-back in new construction starts will hold spending nearly flat from Q3 2020 through Q2 2021. During that time nonresidential work will reach a post-pandemic peak but residential work will hit a post-pandemic low. Non-building Infrastructure work is not affected nearly as much and still shows spending growth leading into 2022-2023.

Spend Sector monthly 2018-2021 4-18-20 recession

The U.S. steel industry is in the most severe downturn since 2008, as steelmakers cut back production to match a sharp collapse in demand and shed workers. Capacity Utilization dropped from 82% to 56%. Steel manufacturing output has fallen by a third and industry executives and analysts expect production to drop further. Approximately 40% of all steel is used in the construction industry. Until production ramps back up to normal levels expect shortages or delays in delivery of steel products.

Firms currently engaged in NYC public design work have been directed to immediately halt all services. Why? The city is anticipating a $7.4 billion drop in tax revenue for this fiscal year and next. Tax revenues will be down across the entire economy. Expect other municipalities to reduce plans for future capital investment?

Dallas/Fort Worth International Airport officials may have to postpone or scale back the airport’s $3.5 billion capital expansion plan, including construction of a new Terminal F. (Fort Worth Star-Telegram) Expect to see more scaling back of long planned expansion projects due to losses in revenue and profits needed to support growth.

U.S. manufacturing output posts largest drop since 1946. Think of all the manufactured products that go into construction of a new home: Doors, windows, roofing, siding, wallboard, lighting, heating, plumbing fixtures, wire, pipe, cabinets, appliances, etc. How many of these will be in short supply leading to delays in completing new or restarted work?

The value of construction projects delayed or canceled has not yet been summarized, but surveys show the number of firms affected by delays and cancellations.

  • 79% were working on (transportation) projects that had been shut down by agencies.
  • 35% of AGC’s respondents indicated that they had received cancellation orders on projects issued by government or statewide agencies.
  • 60% received orders to halt or cancel current projects (or those starting within the upcoming 30 days) on private and publicly owned projects.
  • 11% of projects  in the preconstruction phase were canceled.
  • More than 40% of companies reported furloughing or terminating workers from offices and jobsites.

The Architectural Billings Index ABI survey for March, recorded the largest single monthly decline ever recorded (and that’s just for March). Billings at architecture firms plummeted in March as the ABI fell by 20.1 points to a score of 33.3 for the month (a score over 50 indicates increasing billings, a score below 50 indicates declining billings).The index dropped more in one month that it did in three years in the Great Recession. 36% of firms predict the pandemic will have a serious to devastating impact on their firm, while 66% anticipate that their annual revenue will be considerably lower than it is at present. Firms estimated that their billings would decline by 15% in April.

The ABI is a 9 month leading indicator, but I would suggest it’s usefulness as an indicator will be disrupted for at least the next 9 to 12 months. Certainly the current month and next few months of construction are not accurately indicated by the ABI from 9 months ago and it is unlikely that 9 months from now construction will experience a precipitous drop. Perhaps the ABI gives us an indication of the direction, up or down, that future construction will take, but not the magnitude. 

See also these articles for all the analysis to date on the Impact of the Pandemic.

Pandemic Impact on Construction – Recession in 2020?

Pandemic Impact on Construction – Part 2

Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #4 – Construction Jobs Recovery

 

 

Pandemic Impact #4 – Construction Jobs Recovery

4-15-20  How will each of the 4 shutdown impacts affect construction?

An estimate of the amount of construction volume lost between March and April could be on the order of 10% to 12%. We won’t see April construction spending #s until June 1st, but a loss of 10% equates to about $10-$12 billion work stopped in a single month.

Associated General Contractors of America reported 40% of construction firms had furloughed or terminated workers by April 10.

  • 30% of firms said they had been asked by government officials to shut down jobs.
  • 53% of respondents said their projects have been delayed by owners.
  • 7% said owners had canceled their projects.

NAHB 4-15-20 Builder Confidence Posts Historic Decline

If they stop buying them, next they stop building them. I’m forecasting temp shut down of 15% of residential backlog and a 10% drop in new starts.

U.S. manufacturing output posts largest drop since 1946

Think of all the manufactured products that go into construction of a new home: Doors, windows, roofing, siding, wallboard, lighting, heating, plumbing fixtures, wire, pipe, cabinets, appliances, etc. How many of these will be in short supply leading to delays in completing new or restarted work?

Pandemic Construction Forecasting needs to account for 4 types of impacts.

  • 1 Work stoppage – stay at home, how deep is the work stoppage
  • 2 Work restart – % restart/month, how slow does work restart
  • 3 Work canceled – some work never restarts, how severe
  • 4 New Starts – future capital spending plans canceled, how cautious

Spend Sector monthly 2018-2021 4-18-20 recession

The initial shutdown cumulative total spending lowest point is in April-May 2020 due to the abrupt shut down. When work rebounds, it restarts gradually over a period of months. Some of the work that shut down will not restart. Also, reduced new starts lowers the cumulative total spending again in the first half of 2021, where residential spending hits it’s low point. Here’s the jobs impact of each.

  • 1 Work stoppage – stay at home, how deep is the work stoppage

From March 15th to April 15th, it is estimated that about 10% to 12% of all construction work stopped, or about $10-$12 billion work stopped in a single month. This work remains on hold as we assess when it is appropriate to reopen the economy. A $10 billion/month work stoppage shuts down 600,000 jobs/month from Mar 15 to Apr 30, perhaps longer.

  • 2 Work restart – % restart/month, how slow does work restart

For a number of reasons, all work will not restart immediately. I’ve modeled the work to restart over 6 months. If only 33% of the stopped work resumes in May, only 33% or 200,000 of the 600,000 lost jobs return, 400,000 remain shut down. If each month 100,000 more jobs restart, the net lost time over 6 months is 1,800,000 man-months or an average of 300,000 jobs for 6 months.

  • 3 Work canceled – some work never restarts, how severe

It’s possible some work will be put on hold for a long time or outright canceled. If 10% of all work that was forced to shut down does not restart, then about 1.5% of all work in backlog disappears. There was $1.3 trillion in starting backlog leading into 2020. A 1.5% decline in backlog amounts to almost $20 billion in work that might not restart. That workload would have taken place over the next 20-30 months, so it is equivalent to about $1 billion a month. Jobs lost would equate to 4000 to 5000 jobs for 20 to 30 months.

  • 4 New Starts – future capital spending plans canceled, how cautious

Dodge is now forecasting a 10% to 15% decline in new construction starts in 2020. (Prior to the pandemic, Dodge was forecasting a 4% drop in new 2020 starts). If new starts drop by 10%, that equates to a decline of about $130 billion in future work. That would be spread out over the next 3 years or so. On average that reduces jobs by about 20,000, but that loss lasts for the next 3 years.

 

Construction spending varies from month to month, but total annual rate of spending will not return to the Jan-Feb 2020 level until at least 2023. Construction jobs may not reach the Feb 2020 level again until 2024.

See also Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost

Pandemic Impact #3 – Jobs Lost, Inflationary Cost

4-9-20

See Also Pandemic Impact on Construction – Recession in 2020  3-20-20

See Also  Pandemic Impact on Construction – Part 2   3-31-20

See Also Pandemic Impact #4 – Construction Jobs Recovery  4-15-20

Today, with the unemployment claims report, we get an indication of the 3rd out of 4 weeks of the total April monthly jobs report. When the April jobs report is released on May 8th, it will cover the period March 15 through April 12. For the first two weeks, there were 10 million new unemployment claims and within that data, the Economic Policy Institute estimated there were 310,000 construction jobs lost. Today’s report show the three-week total is now 16 million claims. That could potentially indicate a total 500,000 construction jobs lost in three weeks, and that represents only 3/4ths of the April jobs report. There are still areas of the country that are just beginning to issue stay-at-home orders, so this trend will likely continue next week. When we see the next jobs report May 8th, we could see a total monthly loss of more than 600,000 construction jobs, a loss of more than 8% of the workforce. In the worst months of the 2008-2009 recession it took 5 months to lose over 600,000 jobs.

See Pandemic Impact #7 for an update on Jobs Lost

Jobs Recession Scenario thru 2021 4-11-20

History dating back 30 years shows that construction companies have always reduced jobs by less than the reduction in work volume lost. In the previous recession, work volume fell by 50% but jobs declined by only 35%. In other words, companies tend to retain more staff than the remaining workload will support. As a result, work put in place per job, a simple measure of productivity, goes down. This drives cost up.

Given the above, we can estimate the amount of construction volume lost between March and April could be on the order of 10% to 12%. We won’t see April construction spending #s until June 1st, but a loss of 10% equates to about $10-$12 billion work stopped in a single month. After four months averaging above a seasonally adjusted annual rate (SAAR) of $1.360 trillion, we could see March SAAR spending drop to $1.320 trillion and April down to $$1.280 trillion.

Pandemic Construction Forecasting needs to account for 4 types of impacts.

  • 1 Work stoppage – stay at home, how deep is the work stoppage
  • 2 Work restart – % restart/month, how slow does work restart
  • 3 Work canceled – some work never restarts, how severe
  • 4 New Starts – future capital spending plans canceled, how cautious

The initial Pandemic Recession Scenario developed in my 3-20-20 article included  a greater reduction in new starts, but did not factor in the widespread shutdown of commerce in March-April. This plot shows the shutdown, the big dip in the first half of 2020. The initial shutdown cumulative total spending (deepest) low point is in April-May 2020 due to the shut down which then rebounds with the restart of most, but not all, work. Then the cumulative total spending low point due to reduced new starts occurs in the first half of 2021, where residential spending hits it’s low point.

Spend Sector monthly 2015-2022 4-10-20 recession

 

Will Construction Experience Inflation or Deflation?

Although as of yet there is no solid information available on materials pricing or national reports on inflation, these issues may come up;

There is a cost to temporarily shutting down a job and then re-mobilizing. That cost definitely was not included in any budgets on any projects. That cost, already incurred, will be absorbed into the final cost of projects, inflating the original projected cost. That will become a factor adding to 2020 inflation.

Some analysts are suggesting there will be a large surplus of materials that will drive cost down. However, there are reports cautioning to expect shortages or long delays of materials due to the fact that some manufacturers have experienced the same shut downs as the industries that use their products. Production of all types of products has slowed with the lack of workforce. One recent article cited expectations of many shortages of electronic, mechanical and technology components, a large volume of which are imported. So there may be difficulties in getting components of electrical, plumbing, mechanical, controls or technology products needed to complete manufacturing of the products needed on jobs in the near future.

Worldwide shipping and moving of all types of products that arrive in shipping containers has been drastically disrupted. By Mar 1 shipping at the Port of Los Angeles was already down 25%. This will cause delays in imported product deliveries which will either result in the need to use alternate products, time extension to completion or need for accelerated schedule.

There will be some difficulty associated with staffing back up to previous levels. As workers are cut from jobs, some will immediately begin to seek other available work with some potentially leaving the construction industry permanently. Although wage negotiations may be held in check, some contractors may offer incentives to secure sufficient labor to support the completion of their projects, driving up the cost of labor. Also worker productivity will be reduced to accommodate new rules instituted to insure worker health safety and distancing.

The restart is going to cause bottlenecks. Every job will be requesting delivery of needed products at the same time. The supply-side system is not designed to handle that massive influx of all-at-the-same-time orders and deliveries. This will result in materials delivery delays and/or priority order added premiums.

Along with materials issues, we can expect once projects come back on-line, some owners are going to ask for accelerated schedules to meet critical end dates. Any move to accelerate project schedules will add cost to labor. In fact it could add considerable cost. If a project is shut down for two months and the owner asks to make up 1 month, it takes more than one month of overtime to accomplish that.  All overtime, including second shift work, has some lost productivity associated with it, so you never get hour for hour production on overtime hours. If the owner wants to try to meet the original scheduled end date, or make up even some of the delay, all the cost of overtime and lost productivity inflates the original cost.

Management cost to see the projects through delay, ramp back up and finally reach completion, probably at a time extension, increases beyond the original proposed staffing and time on the job.

It will take several months, perhaps even the remainder of the year, to see a trend in new construction starts. Expect capital investment plans in new building projects to increase in some markets (i.e., healthcare) but to decline in others (hospitality). Many companies will experience dramatically reduced revenues and profits which will cause them to reassess plans for future capital investment. If capital investment declines overall, which I expect it will, the amount of construction activity next year will decline. Early discussions of infrastructure investment, if increased investment comes to be reality, could change this outcome. Markets could be a bit more competitive next year if the volume of work out for bid declines. That would have a tendency to offset some of the inflationary measures listed above.

Dodge Data & Analytics on 4-9-20 released their  first indications of recession analysis. Dodge predicts a 10% to 15% decline in new construction starts in 2020, but then an increase in all sectors in 2021. Dodge tracks new starts only, so does not project the spending impact of a decline in starts or of project delays.

Repeating what I stated in a previous article, What all this will do to the construction inflation rate is hard to predict. If materials shortages or delivery delays develop, that would cause prices to increase. Also, many projects that were already under construction were halted for an undetermined period of time. The delays may add several weeks to a few months to the overall schedule. These issues all add cost to a project as describe above. Looking to the future, if new starts work volume decreases, then the bidding environment gets more competitive and prices go down. However, I think in this case the materials availability issues, potential labor availability, productivity and schedule delays will outweigh any decline in work available for bid. For the short term, I would suggest to add a minimum of 1% to all baseline inflation rates for 2020 and 2021. Further assessment of future bidding environment will be required.

The first hard data on construction jobs won’t be issued until May 8th when we will get mid-March to mid-April jobs, and not until June 1st for April construction spending activity. April activity will be revised to a better number on July 1st. So the construction industry is really at a disadvantage not knowing the real impacts for several months.

 

 

Pandemic Impact #2 – Canceled vs Delayed

 

3-31-20

Pandemic Impacts – Part 2 – Delayed Jobs vs Canceled Jobs

See Also  Pandemic Impact on Construction – Recession in 2020 3-20-20

See Also Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost 4-9-20

Construction spending for February will be released tomorrow. It will not show any impacts yet from Coronavirus shutdowns. We will see the first indications of impact when March spending gets released on May 1st.

 

There will be two distinct and very different impacts reflected in the construction starts, spending and jobs numbers. 1st will be project delays. These are projects that were put on temporary hold for a month or several months. These have an immediate impact of reducing current activity. But at some point activity resumes. 2nd will be canceled projects due to companies that lost revenues and curtailed capital spending.

Consider an example: A delayed project that has 10 months remaining to completion gets put on hold for 3 months, Mar, Apr and May. If it resumes in June, the end date, instead of finishing in December 2020 as the original schedule indicated, gets pushed out to March 2021. Most of the spending still occurs in 2020 with only the final 3 months going into 2021. The months of Mar, Apr and May experience large reductions in spending, but 2020 experiences only a small reduction in spending for the final 3 months of closeout that get pushed in 2021. That adds a small amount to spending in 2021. Big reduction in Mar, Apr, May spending. Small reduction in 2020 spending. Small increase in 2021 spending.

Now consider the example of a canceled project: Companies that lost revenues due to shutdowns will quickly begin to reassess plans for capital expenditures. Some projects planned for a new start in 2020 or 2021 will be canceled. Companies will need to regain solid footing before reestablishing plans for expansion and growth. For every 10% drop in new construction starts, total construction spending drops by $125 billion, spread over a period of approximately 3 years. A 20% drop in new starts is a $250 billion drop in new spending. On average 20% of the lost spending occurs in the 1st year, 50% in the 2nd year and 30% in the 3rd year. Canceled projects have a dramatic impact on the construction industry, and the greatest impact (except for residential projects which have a shorter duration) is not felt in the first year, it’s felt in the second year.

Each loss of $1 billion of spending in any given year equates to a loss of 5000 jobs in that year. That’s 5000 job-years. A loss of $1 billion in spending in one month would be a loss of 60,000 jobs for a month.

A 10% drop in new construction starts, or $125 billion over three years, could be spread out in this manner: down $25 billion in year 1: down $62.5 billion in year 2 and down $37.5 billion in year 3.  In the 1st year, we could see a loss of 125,000 jobs. But in the 2nd year, jobs are down over 300,000, so an additional 175,000 jobs are lost. In year 3 jobs are down only 187,000, less of a decline than in year 2, so we start to recover jobs. The average jobs loss is 200,000 jobs for 3 years.

Current spending is about $120 billion per month in the most active months, less in winter months. A delay of 10% of current workload, about $12 billion in a single month, would temporarily sideline 12 x 60000 = 720,000 jobs for one month, a massive disruption in a month. If the delay goes for two months, the average job loss for the year would show up as equivalent to 720,000 / 12 x 2 = 120,000 jobs for 1 year.

Jobs delayed due to work delayed would eventually be added back at a later point in time. Not that more jobs get added, but that the end-date of the project gets pushed out, so jobs delayed up front get pushed later, with some perhaps pushed into next year. 

Pandemic Impact on Construction – Recession in 2020?

This analysis attempts to develop the resulting impact of a construction recession scenario caused by the current Covid-19 pandemic. The scenario presented does not assume a catastrophic failure of the U.S. economy, but does assume a large drop in construction activity in 2020 and 2021.

This analysis generates spending cash flows from current and assumed reduced new construction starts to then determine how spending may affect future construction activity.

Impact of Pandemic on Construction

Analysis of a Recession Scenario 2020-2022

by Ed Zarenski  3-20-20

The change around us is happening so fast, in my opinion, no one is ready for what comes next.

The world is struggling to get the upper hand in a pandemic, travel is coming to a near halt, stock markets are down 30% in a month, universities have sent students home, schools and businesses are closed until further notice, events all around the country are being canceled and people are being instructed to stay home and limit social contact.

We won’t get the first hard data of Coronavirus impacts on the construction industry spending and jobs until reports released in first week in May which will cover jobs mid-March thru mid-Apr and spending for March. The first hint at what we might expect regarding slowdown could be the Dodge construction starts for March which comes out around Apr 20. But spending and jobs from work in backlog coming out in the May reports could be better 1st indicator.

Firms that manufacture goods used in construction may be closed temporarily, so they are producing less. Shipping of products on world markets has slowed or stopped completely. Materials supplies will soon be affected. Construction projects will most likely experience delays. Product shortages, delivery delays and shutdowns will drive up costs and extend project schedules.

Projects in planning may be canceled due to drop in demand, decline in capital or slowdown in economy. Retail stores may cancel expansion, educational facilities may delay starting new construction, transportation facilities may postpone later phases of long planned growth.

As I sit here writing this, the city of Boston this morning announced that ALL non-essential construction projects are to shut down today. That’s nearly all projects. Boston accounts for $22 billion/year in construction spending, 80% of all construction in the state of Massachusetts, 60% of all work in MA-CT-RI, 50% of all New England. This affects well over 100,000 jobs.

Also, the San Francisco Bay area has been directed to shelter-in-place, essentially shutting down all nonessential construction work. This impacts approximately 200,000 construction jobs and amounts to about double the volume of work as Boston.

We can expect more locations to issue directives such as these in the near future.

How Can We Measure the Effects Due to Covid-19 Impacts?

Let’s first establish the baseline. The starting baseline is my current construction spending and backlog forecast for 2020-2021 which includes 2019 total spending and new construction starts through February. There is considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

The best indicator of future construction activity is the sum of the projected monthly cash flows generated by all the construction starts that have been recorded.

This plot shows the correlation between projected cash flow from starts and actual spending.

Starts CF 2015-2022 3-17-20 BASELINE
baseline forecast

Recession What If? Starting Baseline 

To begin, we can look at the current forecast of new starts, backlog and spending.

Construction Starts in 2018 were up 4% and prior to that were up 10%/yr. 2019 starts including revisions are up 4%. 2020 starts are forecast down 4%. Current Backlog is up 30% in the last 4 years, at all-time high. Although spending is forecast up only 4%/yr. the next two years, spending is at an all-time high.

Residential construction starts peaked in 2018. Starts in 2019 are level yoy, but have been flat or in moderate decline since mid-2018. Spending is forecast up 5% in 2020 but down 1% in 2021.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Starts have moved sideways or in slight decline since mid-2018. 2019 starts are down 9% from 2018. Spending is forecast up 3% in 2020 and 2021.

Infrastructure starting backlog, by far the most robust, has increased 15%/year for the 3 years 2018-2020. Spending is forecast up 6% in 2020 and up 8% in 2021.

It is important to understand when spending from backlog occurs. Average cash flow curves for nonresidential work show about 15%-20% of spending from new starts occurs in the year started and about 40%-50% occurs the following year. 80% of all nonresidential spending in any given year is from backlog. If new starts drop by 10%, that has only a 1.5% to 2% impact on total spending in the first year. The following year spending would be down 4% to 5%.

Residential spending is far more dependent on new starts than backlog. Only about 30% of residential spending comes from backlog and 70% from new starts. If residential new starts drop 10% that impacts total spending by 7% in that year.

Recession Scenario

When a recession occurs, new construction starts would be substantially reduced. Although some projects will be canceled or delayed mid-schedule, most projects already in construction would move on to completion. Most of the cut back comes from a reduction in new starts.

In the great recession, residential starts dropped 70% from 2005 to 2009, down from $400 billion to $110 billion.  Nonresidential Buildings starts dropped 35% from 2008 to 2010. Nonbuilding starts fell only 6% in 2009. Total All Spending declined 30% from $1.160 trillion in 2006 to $788 billion in 2011.

Regardless what may lead to a construction recession, in this case a global pandemic, it is the current high amount of work in backlog that will work hard to mute its effect.

No analyst had been indicating huge declines in new construction starts within the next few years. At worst, some suggested a moderate slowdown. Prior to today, data seemed to agree with a moderate slowdown.

Although Dodge is forecasting the $ value of housing starts down 6% in 2020, Housing Starts # of units as reported by US Census in Q4 2019 are at a post-recession high, reducing the likelihood of such a decline.

Dodge 2020 forecast for new nonresidential buildings starts is down 2.5%.

This recession scenario does not assume a catastrophic failure of the economy.

It is unknown how much existing or new work might get canceled. To get an idea how a recession might impact construction spending, this analysis reduces new construction starts by 20% in 2020 and 10% in 2021 from the baseline. That’s about the average of what occurred in the great recession, although then it was far greater in residential and much less in non-building infrastructure. Only once in the last 20 years, other than the great recession, did new construction starts drop more than 5% in any sector in a year.

So initially, compared to the baseline forecast, there would be 20% less work to bid on in 2020 and 10% less in 2021. But that is not how spending, or revenues, would react. Backlog and spending schedule curves determine the impact on spending, or revenues.

Here’s the resulting change in the spending plots. Only the estimated spending to the right of the dateline changes.

Starts CF 2015-2022 3-17-20 RECESSION
RECESSION SCENARIO

Residential construction spending would drop about 14% in 2020 and then drop 13% in 2021 below the baseline scenario. Residential is far more dependent on new starts within the year for spending than on backlog. That’s why residential spending drops quicker than all other work.

Nonresidential Buildings spending ends 2020 4% lower than it would have under the baseline scenario but then drops 12% in 2021 and 10% in 2022. Backlog going into 2020 in this sector is strong and therefore, even though spending is 4% lower than baseline, 2020 still posts a spending gain of 1.5%. 2021 declines 8% and 2022 gains 1%.

Non-building Infrastructure spending ends 2020 3% lower than it would have under the baseline scenario but then drops 9% in 2021 and 10% in 2022. Non-building Infrastructure has so much work in backlog that this sector still posts a spending gain of 6% in 2020 and 1% in 2021. It declines by 2% in 2022.

The major declines in 2020 are residential since most residential spending comes from new starts within the year, but for all other work, the strength of backlog going into 2020 pushes most of the declines out to 2021 and 2022.

Total all spending would drop from the current 2020 forecast of $1.365 trillion to $1.260 trillion. In 2021 and 2022, instead of baseline spending of $1,370 trillion, it would drop to $1.230, back to the level of 2016. The losses in the Great Recession, a total drop of almost $400 billion, set construction spending growth back 12 years.

Not only did Boston shut down non-essential construction projects but also New York and California have done the same. Boston accounts for about $20 billion/year in construction spending, but NY and CA together account for about $280 billion. Let’s assume CA and NY and Boston shut down all but critically essential construction for 1 month. Let’s say that is 80% of all construction. That represents a shutdown of $20 billion of construction in one month’s time.

The difference with temporary shutdowns vs a reduction in new starts is that work shut down is delayed. It will reduce total spending in that month in 2020 but will shift the entire schedule of spending out by some number of months. Upon resuming, some will still occur in 2020, and some very likely gets pushed into 2021 or later, but eventually all of the delayed work will get completed. If 20% of all U.S. construction shut down for one month it would delay $25 billion worth of work by one month. If 20% of all 2020 U.S. construction new starts get canceled, it would reduce future workload by $250 billion, spread over the next three years. 

The magnitude of spending declines would impact the jobs situation. History shows that job declines of the same magnitude do not follow immediately with volume declines, therefore we would not see an equivalent reduction in workforce in 2020. But spending declines in 2021 and 2022 could lead to a loss of about 500,000 to 750,000 jobs. Over the course of the great recession we lost 2.3 million jobs.

You can read more about the job situation here.

To summarize:

This is a WHAT IF? Analysis.

Assumption that new construction starts drop 20% in 2020 and 10% in 2021 lower than the baseline forecast.

This would cause total construction spending to drop 8% in 2020, 12% in 2021 and 7% in 2022 from the previously established baseline forecast.

The spending declines measured in dollars, measured from the previously established baseline forecast, are: down $100 billion in 2020, down $140 billion in 2021 and down $100 billion in 2022.

This could lead to a loss of about 500,000 to 750,000 jobs for three years.

 

What this will do to the construction inflation rate is hard to predict. Typically when work volume decreases the bidding environment gets more competitive and prices go down. However, if materials shortages develop, that would cause prices to increase. Add to these issues the fact that almost every project currently under construction may be halted for a period of time, the delays may add several weeks to perhaps a month or two to the overall schedule. I think in this case the materials availability issues and schedule delays will outweigh any decline in work available for bid. I would add a minimum of 1% to all baseline inflation rates for 2020 and 2021.

“None of us have much of a sense what the economy will be in 2021.” Fed Chair Jerome Powell 12-11-19

See Also   Pandemic Impact on Construction – Part 2   3-31-20

See Also Pandemic Impacts – Part 3 – Jobs Lost, Inflationary Cost   4-9-20

 

WHAT IF? Construction Recession 2020

8-15-19

Talk these days isn’t whether or not we may slip into another recession, but when. Analysts are watching for signals. On any given day you can read articles pointing to why we are or why we are not headed into another recession. But, I wrote an article similar to this 3 years ago, so that opinion has been around awhile. I’m not taking a position here. I would just like to get a rough idea of implications, so I tested some data.

What would happen to this current construction recovery if we slip into recession?

If you think of a recession as having an immediate affect on total construction, like a quick drop in materials prices or cost of buildings, think again. Construction is sort of like an aircraft carrier, it takes a long time to turn around.

My starting baseline is my current construction spending and backlog forecast for 2019-2020 which includes YTD Spending and Starts through June. All spending and starts are current$, unadjusted for inflation. There is considerable strength in Nonresidential Buildings and Non-building Infrastructure starts and spending. There is weakness in residential.

NORMAL FORECAST current to Jul 2019 with no modifications

Spend Forecast 2018-2022 Baseline 8-15-19

NORMAL FORECAST spending plots for the next 18 months.

Spend Sector 2017-2020 8-14-19

Recession What If? Starting Point

The best indicator of future construction activity is the projected cash flow generated by all the construction starts that have been recorded. Construction starts mark the beginning of spending on new projects.  Projects can take many months to reach completion, and the cash flow varies over the project time.

For the 2020 forecast, we can look at new starts and backlog.

Construction Starts YTD total as of June is down 8% from 2018. That’s expected to improve by year end.

Residential construction starts peaked in 2018. Starts have been sideways or in light decline since mid-2018. Year-to-date June 2019 starts are down 9% from 2018. Avg SAAR for 1st 6mo 2019 is $315bil, same 6mo last year was $340bil. Starting backlog is down 5% from 2017 to 2019. Spending is forecast down 5% in 2019 and up only 1% in 2020.

Nonresidential Buildings starting backlog increased 10%/year for the 4 years 2017-2020. Prior to this recession scenario analysis, nonresidential buildings spending was forecast up 10% in 2020 and 6% in 2021.

Infrastructure starting backlog has increased 15%/year for the 3 years 2018-2020. Prior to this recession scenario analysis, non-building infrastructure spending was forecast up 12% in 2020 and 8% in 2021.

For nonresidential buildings, 80% of all spending in any given year is already in backlog from starts prior to that year. For non-building infrastructure it’s 85%. Starting Jan. 1, 2020, 80% to 85% of all nonresidential spending in 2020 is already on record in backlog. For residential, only 30% of spending in 2020 is in backlog at the start of the year. Due to shorter duration, spending is more dependent on new starts within the year.

Backlog starting 2020 for the following six markets is at the highest starting backlog ever for each of the six markets. Also, these six markets account for 1/3rd of all construction spending. Much of the spending from these starts occurs in 2020.

These markets posted the best construction starts 12-month totals ever (in noted period).

  • Manufacturing from Jun18>May19,  up 36% in two years
  • Office May18>Apr19,  up 8%/yr for the last 4 years
  • Educational Jun18>May19,  monthly rate for 12 of the last 16 months increased by 20%.
  • Public Works May18>Apr19,  increased 30% in the last 24 months.

These very long duration markets posted best new starts ever.

  • Highway Dec 17>Nov18, up 25% compared to prior 12 months, which was the 2nd best 12mo ever, with peak spending from those starts expected in 2020.
  • 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.

Growth in new starts and backlog for the last three years (2017-2018-2019):

  • Manufacturing starts up 44%, backlog up 62%
  • Office starts up 30%, backlog up 62%
  • Highway starts up 45%, backlog up 70%;
  • Transportation starts up 64%, backlog up 138%;
  • Public Works new starts up 45%, backlog up 72%.

In the last two years, Commercial/Retail market starts are down 18% and 2020 starting backlog will be down 11%. The only other declines in 2020 starting backlog are Amusement/Recreation (-1%) and Power (-5%).

So, we are starting 2020 with the highest backlog on record after several years of elevated starts. However residential work is already down slightly while non-building infrastructure work is super-elevated. It is this elevated backlog that will mute the impact of a recessionary downturn.

What If? we reduce new starts

If a recession were to occur, it would substantially reduce future construction starts. Most, if not all, projects already started would move on to completion, but new starts will be cut back. However, the last “construction” recession started in 2006-2007 with declines in residential work. New starts in nonresidential buildings kept increasing into 2008. The “nonresidential” spending recession did not start until 2009, three years after the beginning of the residential decline.

To get an idea how another recession might affect construction spending, I kept all backlog growth predicted through 2019, but I reduced future new construction starts, for two years, starting Jan 2020. I’ve started the reductions for all sectors at Jan. 1, 2020 because residential starts and spending have already been in decline for more than a year.

  • Residential starts reduced by 15% in 2020 and by 5% more in 2021
  • Nonresidential buildings reduced by 20% in 2020 and by 10% more in 2021
  • Infrastructure projects reduced by 10% in 2020 and by 5% more in 2021

This is only about 20% of the residential declines we experienced from 2006 to 2009, but I’m not anticipating another residential massacre. Residential has already been in decline for 12 months. The nonresidential buildings decline now is only half of 2008-2010. I reduced infrastructure by the least since there was only moderate decline in infrastructure work in 2009-2010, yet still I’ve reduced infrastructure twice as much as 2009-1010.  I allowed for a 3% increase in new starts in 2022 across buildings sectors and a 2% increase in infrastructure.

 

The Recession Scenario Results

The recession 2020 scenario keeps 2019 forecast intact and reduces new starts by 15%-20% in 2020 and 5%-10% in 2021, so imparts a two year downturn. It’s effects, begun Jan.1, 2020 could be translated over time, if say the same scenario started but 12 months later. Negative reaction in the market is quickest to happen for residential, delayed a year for nonres buildings and takes longest (2 years) for infrastructure, for reasons of longest duration type work and highest prior rate of backlog growth.

The recession affects are muted by the fortunate starting point of record high backlog. Residential construction spending will experience two to three declining quarters each of the next three years. But beyond Jun 2022, residential stabilizes and resumes growth. Residential is the only sector to post quarterly spending declines in 2020. Nonresidential buildings posts the 1st quarterly decline in Q1 2021 and has at least seven consecutive quarters of declines before flattening out in Q4 2022. Non-building Infrastructure experiences the 1st two consecutive quarters of decline starting Q4 2021 and reaches a low in Q4 2022. Due to the unevenness of growth, Total Construction spending increases through Q1 2020, posts two declining quarters in 2020 and three consecutive quarters of declines in each of 2021 and 2022.  

RECESSION FORECAST spending plots for the next 30 months.

Spend Sector 2017-2021 RECESSION 8-15-19

Here’s a reminder of the amount of reductions in new starts. I kept all backlog growth predicted through 2019, but I reduced future new construction starts, starting Jan 2020. I’ve started the reductions for all sectors at Jan. 1, 2020 because residential starts and spending have already been in decline for more than a year.

  • Residential starts reduced by 15% in 2020 and by 5% more in 2021
  • Nonresidential buildings reduced by 20% in 2020 and by 10% more in 2021
  • Infrastructure projects reduced by 10% in 2020 and by 5% more in 2021

We still see an 11% increase in backlog in 2020, because we did not reduce 2019 starts, but spending from reduced new starts in 2020 drops 2020 cash flow within the year to slow growth of 2%. Reference the baseline spending chart to see prior to reducing starts 2020 spending was forecast to increase 7%.  Backlog drops 7% in 2021 and then 11% in 2022. This model predicts a 4% decline in construction spending in 2021 (baseline was +3%) and a 5% drop in 2022 (baseline was -1%), setting us back to the level 2016-2017.

Cashflow Forecast TOTAL RECESSION 8-15-19

Starting Backlog is down 4.4% for 2023, but even modest new starts growth of 3% helps partially offset the decline in spending. Spending never drops below the level posted in 2015-2016.

The last recession started with residential in 2005 and ended with nonresidential in 2011. Total decline during that period set total spending back 12 years, although the setback was 15 years for residential, 7 years for nonresidential buildings and only 4 years for infrastructure. This mild recession causes a setback to 2015-2016 levels, back 6 years, and less for infrastructure.

RECESSION FORECAST current to Jul 2019 with reduced starts 2020-2021

Spend Forecast 2018-2022 RECESSION 8-15-19

 

Residential construction would drop about 6% in 2020 and then drop another 8% in 2021. Residential is far more dependent on new starts within the year for spending than on backlog. That’s why residential spending drops quicker than all other work.

Cashflow Forecast RECESSION Residential 8-15-19

 

Nonresidential buildings gain 5% in 2020 but then drop 6% in 2021 and 12% in 2022. The strength of backlog going into 2020 pushes most of the declines out to 2021 and 2022.

Cashflow Forecast RECESSION NonRes Bldgs 8-15-19

 

Non-building Infrastructure has so much work in backlog that this sector still posts spending gains in 2020 and 2021. It drops 8% in 2022. The strength of backlog going into 2020 pushes much of the declines out 2022.

Cashflow Forecast RECESSION NonBldg Infra 8-15-19

The baseline forecast would have produced spending increases of 9% from 2020-2022. The recession scenario indicates a 7% decline. That magnitude of turn around would impact the jobs situation. We would probably not see any reduction in workforce in 2020 but the spending declines in 2021 and 2022 could lead to a temporary loss of about 200,000 jobs in 2021 and 300,000 jobs in 2022.

Educational 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. 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  Both store and warehouse starts dropped in 2018. 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 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. After that, manufacturing spending increases steadily through the end of 2020. Current expectations are that manufacturing will finish the year up 8%. 2020 will be an extremely strong growth year, spending potentially increasing 20%+. Reductions in starts won’t show up as negative spending until 2022.

Office spending is expected to finish 2019 up 7% or less. 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 8%-11%.

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.

Highway/Street/Bridge starts hit an all-time high in 2018. Current 2019 progress shows new starts leveling off. Starting backlog increased 70% in the last 3 years leading into 2020. A lot of this is long duration backlog that will provide for large increases in spending in from 2019 to 2021.

Environmental Public Works (Sewage, Water supply and Conservation) new starts all declined from 2014 through 2017. Then all showed 14% gains in 2018 and the forecast is +15% in new starts in 2019.

 

 

IF Another Recession, What Would Happen to Construction?

8-15-19 See WHAT IF? Construction Recession 2020

1-27-16

The wheels of construction turn slowly.

There is plenty of talk these days of whether or not we may slip into another recession. On any given day you can read several articles pointing to why or why not we are headed into another recession. I’m not trying to take a position here. I would like to get a rough idea what would happen to this current construction recovery if we do slip into recession.

A starting baseline for this discussion is my forecast for 2016; total spending up 10%. nonresidential buildings up 14% after a 17% increase in 2015, residential up 12% following 13% in 2015 and non-building infrastructure up 1% for a total less than 2% in 2015-2016. So, you can see I’m not predicting a recession.

If you think of a recession as having an immediate affect on total construction, like a quick drop in materials prices or cost of buildings, think again. Construction is sort of like an aircraft carrier, it takes a long time to turn around.

The best indicator of future construction activity is the projected cash flow generated by all the construction starts that have been recorded. Construction starts represent the beginning of spending on new projects.  Projects can take many months to reach completion.  Some portion of the total project spending occurs in every month over the full duration of the project from start to completion.

We start 2016 with a backlog of projects that will generate about 70% of all the cash flow in 2016. It’s likely that most if not all of the projects already started would move on to completion.  But new starts will be cut back.

To get an idea how another recession might affect construction spending, I kept all backlog as is but I reduced future new construction starts for the next two years (2016 and 2017) by 30% for residential and nonresidential buildings, and 15% for infrastructure projects.  This mimics the declines we experienced from 2006 to 2009.  I then allowed for a 5% increase across all sectors in 2018.

The result is a 5% drop in construction spending in 2016, still higher than 2014, but then a 10-15% drop in 2017 setting us back to near the same level as 2013.

These spending declines would cause a temporary loss of about 400,000 to 500,000 jobs.

Nonresidential buildings could still eke out a slight gain in 2016 but would drop 20% in 2017.  Residential construction would drop about 5% in 2016 and then drop another 10-15% in 2017. Nonresidential infrastructure work would decline 10% in 2016, but then rebound to no change in 2017.

After two years of declines, in 2018 nonresidential buildings would climb back to near even with 2017, residential would grow 5% and infrastructure would remain flat.  Total 2018 spending would climb only 2% over 2017 and would still only reach spending in 2013.

So, a 30% decline in activity for two consecutive years starting today would set us back four to five years, but the major affect would not be felt until 2017. If that were to happen, obviously spending would be revised, but also I would have much different predictions for inflation and jobs.

There’s a reason we see the dips and rises on the chart in both 2016 and 2017. It reflects the decline in the rate of new starts plus the remainder of old backlog finishing at varying end-dates. Also, given a constant amount of seasonally adjusted new starts, there is a difference in the actual amount of starts in winter months vs summer months.  This plays out over time as dips and rises in spending. Spending activity will not be smooth in a recession.

Nonres tot 2015 and 2016

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