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Caution Reading the Recent 2018 Construction Spending $

3-19-19

Construction Spending for Jan was just released March 13th at $1.287 trillion saar, up 1.3% from Dec. But…

the most notable numbers in this March report are BIG REVISIONS DOWNWARD TO NOV (-2.3%) AND DEC (-2.2%), particularly to residential.

Residential revisions Nov -3.9%, Dec -4.4%.

Nonresidential revised down -0.8% in both Nov & Dec.

2018 total spending currently at $1.293 trillion, 2% below expected.

If these residential reports are correct, we have been in a residential construction spending downturn, now down 12% since last May. I predict these numbers are suspect.

Current total residential spending for 2018 in this most recent report is $545 billion, up 2.6% from 2017. But after deducting 4.4% residential inflation, that means real residential construction volume would be DOWN -1.8% for 2018. Yet, new starts in 2018 were up 6% and new residential jobs increased 3.5%.

However, in 2018 residential spending, the monthly variances from statistical rates of spending look very similar to 2006, up thru May then down 15% to year end.

Cash flow models of construction starts data from Dodge Data for residential spending spread over time indicate residential spending should be UP 3% since May, not down!

Just a reminder, we had a huge upward revision to 2015 residential spending data in July 2016. The 2018 data gets a big revision on July 1, 2019.

The monthly spending data gets revised three times after the 1st release. In the mean time, it can be compared to the statistical averages to determine if 1st reports, or even 2nd reports of spending are in line with expectations. The current Nov and Dec residential construction spending data varies from the statistical average by 3 to 4 standard deviations. That’s highly unusual!

To understand just how unusual that is, let’s compare to how rare any monthly spending varies by 2 standard deviations (StdDev) from the statistical monthly average:

Non-Builiding Infrastructure has varied by 2 StdDev only 5 times in 18 years, only once in the last 15 years, even including recessionary years.

Excluding recessionary years, Nonresidential Buildings varied by more than 2 StdDev  only 12 times in 16 years and only 4 times in the last 8 years.

In both those data sets above, only twice ever in over 400 total months of data was the variance greater than 2.5 StdDev.

Excluding recessionary years, Residential Building monthly spending exceeded 2 StdDev from the average only 10 times in 14 years, all 10 times were in the last 8 years.

Recessionary years really skew the data. Non-building Infrastructure was the only sector not affected by the recession like all other construction. Residential spending was affected the most. In the four residential recessionary years, 2006-2009, residential monthly spending (in 48 months) exceeded 2 StdDev 28 times, 19 of those times 3 StdDev or greater.

In the residential data set, 5 of the 10 non-recessionary variances over 2 StdDev were in 2018. That simply does not occur in the historical data. That’s like having your teenage son grow an inch every year from 13 to 16 but then shrinking 2 inches in year 17. The average of those 5 unusual months in 2018 was 3.5 StdDev from the statistical average, with Nov and Dec posting the greatest variances since 2009.

The only time we’ve ever seen data like that was within the recession years of 2006-2009. So, either the 2018 residential data is foretelling the beginning of another recession, or the data, particularly the Nov and Dec data, will be subject to significant revisions, in this case upward.

Starts and cash flow expectations seem to indicate the 2018 data is currently being reported too low. I expect 2018 residential data will be revised up by $10bil to $15bil. We may not have that information until July 1, 2019.

 

 

2019 Construction Economic Forecast – Summary – Dec 2018

Construction Analytics 2019 Construction Economic Forecast

This Dec. 2018 Construction Economic Forecast analysis addresses New Construction Starts, Inflation, Cash Flow or distribution of construction work over time, Annual Backlog and Spending. New Starts is new work entering Backlog. Cash Flow gives the pattern of Spending. Inflation differentiates between Revenue and Volume. Backlog, which can be referenced to assess expected future Volume and Spending, provides an indication of when Volume occurs or in what year Revenues occur. Starts data is from Dodge Data & Analytics. Spending data is from the U.S. Census Bureau. Jobs data is from the Bureau of Labor Statistics. Inflation data is from the source labeled. Cash flow, Backlog and Inflation forecast data are developed internally. All data in this report is national level data. All forecast data is by Construction Analytics.

NOTE 12-6-18: Dodge Data and Analytics new construction starts for October, released 11-20-18, reached the 2nd highest seasonally adjusted annual rate ever, 2nd only to June 2018.  Most spending from these new starts will occur in 2020. U.S. Census construction spending for October posted large reductions to several months of residential spending. Construction Starts for October, the Dodge end-of-year report and October spending, all released between 11-21-18 and 12-3-18 significantly alter this analysis, by far most of the 2019 and 2020 changes are significant reductions in residential spending. See the 2019 Construction Economic Forecast – Nonresidential for detail on all nonresidential and non-building markets

This analysis was edited to include the most recent starts data and the U S Census October spending data.

Summary

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019. Spending in 2020 is forecast to reach $1.426 trillion.

01e summary

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020. Although residential spending is still increasing, growth has slowed to less than inflation. Real volume after inflation is declining.

Nonbuilding Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. Transportation spending provides strong growth for the next three years from record new starts in 2017 and the 2nd best year of starts in 2018. Public Works had strong growth in 2018 starts and Highway starts hit a new high in 2018.

27e sector plot for cover

In July of the following year the spending data for the previous two years gets revised. Those revisions are always up, although some markets may increase while others decrease. So, even though the current forecast for 2018 is $1,321 trillion, a gain of 6.0%, that will most likely increase.

Dodge Data construction starts are initially anticipated to finish 2018 flat compared to 2017. However, starts are always revised upward in the following year. I expect revisions will show 2018 starts increased by 4% over 2017. Even with revisions, 2018 starts will post the slowest growth since 2011. Starts increased 84% in the period 2012-2017, residential 150% and nonresidential buildings 80%. This forecast includes only a total of 10% new starts growth for the 3-year period 2018-2020.

Starting backlog, currently at an all-time high, increased on average 10%/year the last three years. For 2019 starting backlog is forecast up 10% over 2018. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Due to long duration jobs, 2019 nonresidential buildings starting backlog is up 50% in the last 4 years. Current indications are that 2019 backlog will be up 6%-8% across all sectors.

 

Construction Inflation Indices

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

Revenue is spending but real volume is spending minus inflation. Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long-term average inflation is 3.75%. Every year that spending dropped below 4% growth, nonresidential buildings real volume declined.

To differentiate between Revenue and Volume you must use actual final cost indices, otherwise known as selling price indices, to properly adjust the cost of construction over time.

Construction Analytics Nonresidential buildings inflation forecast for 2018 is 4.9%. Current reliable inflation forecasts range from 4.7% to 5.6%. Spending needs to grow at a minimum of 4.7% just to stay ahead of construction inflation. Inflation in this sector has been at 4% or higher the last four years.

Selling Price is whole building actual final cost. Selling price indices track the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor margins or overhead and profit.

Construction Analytics Building Cost Index, Turner Building Cost Index, Rider Levett Bucknall Cost Index, Beck Cost Index and Mortenson Cost Index are all examples of whole building cost indices that measure final selling price of nonresidential buildings only. The individual average annual growth for all these indices over the past 4-years is 4.6%/year.

Producer Price Index (PPI) for Construction Inputs is an example of a commonly referenced construction cost index that does not represent whole building costs. The PPI tracks material cost at the producer level, not prices or bids at the contractor as-built level.

Engineering News Record Building Cost Index (ENRBCI) and RSMeans Cost Index are examples of commonly used indices that DO NOT represent whole building costs yet are commonly used to adjust project costs. The ENRBCI tracks a limited market basket of labor and materials. RSMeans holds the quantity of materials and labor for a building constant. Neither index addresses contractor margins. However, they are useful in that they also publish input cost indices from many cities. This provides a reference to compare those cities to the national average, but still, only for a limited basket of labor and materials. Neither gives any indication of the level of market activity in an area.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for six years from 2013 to 2018 is 5.7%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and currently is near 5.5% in 2018. Anticipate national average residential construction inflation for 2018 at least 5.5 % to 6%.

Nonresidential Buildings indices have averaged 4% to 4.5% over the last five years and have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically has led to accelerated inflation.

There are clear signs of increasing construction activity and a tightening construction labor market.  The national construction unemployment rate recently posted below 4%, the lowest on record with data back to 2000. During the previous expansion it hit a low average of 5%. During the recession it went as high as 25%. The average has been below 5% for the last 18 months. An unemployment rate this low potentially signifies labor shortages. The Job Openings and Labor Turnover Survey (JOLTS) for construction is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.  Labor shortages cause contractors to pay premiums over and above normal wage increases to keep workers from leaving. Some premiums accelerate labor cost inflation but are not recorded in published wage data.

Recent news of tariffs has extended beyond just steel. I calculated a 25% tariff on raw steel would add 1% to the cost of nonresidential steel buildings. Hi-rise residential buildings, if building is structural steel, would fall in this category. Wood framed residential impact would be small. A 25% increase in mill steel could add 0.65% to final cost of building just for the structure. It adds 1.0% for all steel in a building. If your building is not a steel structure, steel still potentially adds 0.35%. 

Anticipate national average construction inflation for nonresidential buildings for 2018 and 2019, including steel impact, of 4.25% to 5.5%, rather than the long-term growth average of 4%. Adjust for any other yet unknown tariffs that may hit after Jan 1, 2019.

In the following plot, Construction Analytics Building Cost Index annual percent change for nonresidential buildings is plotted as a line against a bar chart background of the range of all other nonresidential building inflation indices. Usually the lows are formed by market basket input indices while the highs are formed by other selling price indices.

02 inflation bars

As noted above, some reliable nonresidential selling price indexes have been over 4% since 2014. Currently most selling price indices are over 5% inflation in 2018. Notice during that same period seldom did any input indices climbed above 3%.

03 inflation pct

Every index as published has its own base year = 100, generally the year the index was first created, and they all vary. All indices here are converted to the same base year, 2017 = 100, for ease of comparison. No data is changed from the original published indices.

04 inflation index

Non-building Infrastructure indices are far more market specific than any other type of index. Reference specific Infrastructure indices rather than any average.

These links point to comprehensive coverage of the topic inflation and are recommended reading.

Click Here for Link to a 20-year Table of 25 Indices

Click Here for Cost Inflation Commentary – text on Current Inflation

 

Current$ vs Constant$

Comparing current $ spending to previous year spending does not give any indication if business volume is increasing. The inflation factor is missing. If spending is increasing at 5%/year at a time when inflation is 4%/year, real volume is increasing by only 1%.

The current Nonresidential buildings forecast of spending growth at 6.0% for 2018 would suggest that after inflation, nonresidential buildings construction volume is growing slightly.  So expect volume growth in 2018, but next year 4.3% inflation and no spending growth is signaling a volume decline in 2019.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Nonresidential jobs increased by 27% during that period, 15% greater than 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.

When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007. In 2005 constant $ volume reached a peak at $1,450 billion. At current rates of growth, we would not eclipse the previous high before 2022.

05 current constant

Spending in current $ is 14% higher than the previous 2006 high spending.

Volume after adjusting for inflation is still 14% lower than the previous 2005 high volume.

 

Jobs and Volume

The period 2011-2017 shows both spending and jobs growth at or near record highs.

A spending forecast of 6.6%+ in 2018, or an increase of $83 billion in construction spending, demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction “volume”. But construction jobs growth seems to closely follow growth in spending. Construction jobs have increased by 400,000 in a year only four times in the last 50 years, each time accompanied by one of the four highest spending growth increases in 50 years. However, $80 billion in added spending is not the same as $80 billion in volume, and jobs needed is based on volume.

Although spending will increase 6.6%, construction inflation has been hovering near 4.5% for the last five years. Real volume growth in 2018 after inflation is expected to be near 2% or only $26 billion. That would mean the need, if there are no changes in productivity, is to add only about 130,000 additional jobs in 2018, a rate of growth that is well within reach. That is less than the average jobs growth for the last seven years.

Construction added 1,400,000 jobs in the last 5 years, an average of 280,000/year. 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.

Total spending increased 60%+ since 2010, but with 30% inflation. Real total volume since 2010 has increased by only about 30%. Jobs also increased by 30%, in balance with need. But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 50% since 2010 with 35% inflation. Nonresidential volume since 2010 has increased by only 15%. Jobs increased by 27%, 12% in excess of volume growth.

Residential spending increased by 125% since 2010, but after 40% inflation, real residential volume increased by 85%. Jobs increased by only 40%, 45% short of volume growth.

Residential construction labor cannot be directly compared to residential volume because

  • Some residential high-rise jobs, for example structure, are performed by firms whose primary activity is commercial construction. Those jobs are classified as nonresidential.
  • Buildings that are multi-use commercial retail and residential, even lo-rise, may be built by contractors whose firms are classified nonresidential labor. The construction spending would be broken out to residential and nonresidential, but the labor would not.
  • Some residential immigrant labor is not counted

For these reasons, it is best to simplify comparisons of spending activity to total labor.

For more on Jobs see Construction Jobs and Residential Construction Jobs Shortages

 

New Construction Starts

New construction starts for the six months in the 1st half 2018 reached an all-time high.

New Construction Starts three-month average for May-Jun-Jul is $840 billion, all-time high.

Year-to-date (YTD) 2018 starts are currently reported as up only 2% from 2017, but 2017 starts through September have already been revised up by 9%, 10% in nonresidential buildings, 16% in non-buildings and 3% in residential. 2018 starts will not be revised until next year. Revisions have always been up.

Revisions for the last 10 years averaged more than +7%/yr., with most of the upward revision in nonresidential buildings. Revisions to nonresidential buildings have been greater than 10%/year for the last 7 years. Therefore, 2018 starts growth is very likely under-reported.

All construction starts data in this report references Dodge Data & Analytics Starts Data.

Dodge releases its first forecast of next year’s starts every year in the 4th quarter. Last year the first forecast for 2018 was for starts to increase 3% to $765 billion. 2018 starts, based on data as of September, could reach $806 billion, but at first appearing to show no gain from 2017. That’s because 2017 has already been revised up by $50 billion. After 2018 revisions are posted next year, 2018 starts could reach $830-$840 billion. Dodge forecast 2019 starts at $808 billion, no change from 2018. This will be subject to two upward revisions.

  • Previous year starts always later get revised upwards. Therefore, current year starts YTD growth is always understated. This analysis compensates for that.
  • New starts will generate record high starting backlog for every sector in 2019.
  • Even a low forecast for starts in 2019 produces record backlog for 2020.

For nonresidential buildings spending, long duration jobs can sometimes have a 5 to 6-year schedule. On average most years have at least some projects start that will be under construction for 4 years. For an entire year’s worth of starts, approximately 20% of the spending occurs in the year started, 50% in the next year, 25% in the third year and only 5% in the fourth year or later year. Residential starts contribute spending into the third year. This means that nonresidential spending growth in 2019 is still being affected by starts from 2016 and residential growth from starts in 2017. This also means that nonresidential spending growth in 2019 is still being affected by starts from 2016.

The next two plots show the 3-month moving average and trend line of starts for Residential and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending. It is the rate of change in starts cash flows that provides a predicting tool for spending.

06 starts two plots

The plot below is an index. The plot shows greater accuracy in the forecast when the slope of the predicted cash flow and actual spending plot lines move in the same direction. It’s not the spread between the lines that gives any indication. If the slope of the lines is the same, then the cash flow accurately predicted the spending.

The light green line for nonresidential buildings spending estimated from starts cash flow shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows close to the pattern estimated from cash flows.

07 starts index

Starts are sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate the volume of spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

 

Starting Backlog

Nonresidential Buildings starting backlog at the beginning of 2018 reached an all-time high. For nonresidential buildings this backlog will contribute spending until the end of 2021. 2019 Backlog is forecast to increase 8%. For purposes of this analysis, I’ve set only moderate or low increases in starts for 2020 and 2021, so this forecast may hold down the future backlog and spending forecast. However, backlog leading into 2019 is up 70% in 5 years.

08e nonres bklg

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or several years ago.

  • 75%-80% of all Nonresidential Buildings spending within the year will be generated from projects in starting backlog.
  • 80%-85% of all Non-Building Infrastructure spending within the year will be generated from projects in starting backlog.
  • 70% of All Residential spending within the year is generated from new starts, but this is weighted because 85% of all residential work is short duration single family and renovation work.
  • 65% on long duration Multifamily Residential spending within the year will be generated from projects in starting backlog.

09 start bklg plot

Non-building Infrastructure starting backlog at the beginning of 2018 reached an all-time high. Some of this is very long-term work that will contribute spending until the end of 2025. In fact, more than half of all spending in 2019 comes from projects that started prior to Jan 2018. 2019 Backlog is forecast to increase 10%. Backlog is up 45% in 5 years but is up 50% in just the last 3 years.

10e infra bklg

Multifamily residential has a longer duration and a greater percentage of spending comes from backlog. But, due to the shorter duration of projects, about 75% of single family and residential renovation spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much short-term residential spending within the year.

11e Cashflow Forecast RSDN ALL 12-1-18

 

Cash Flow

Simply referencing total new starts or backlog does not give an indication of spending within the next calendar year. Projects, from start to completion, can have significantly different duration. Whereas a residential project may have a duration of 6 to 12 months, an office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also by old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,321 billion, a spending increase of 6.0% over 2017. The forecast for 2019, based on a minimal increase in starts, is $1,341 billion, an increase of only 1.5% over 2018. Dodge initial November 2018 forecast for 2019 construction starts is for $808 billion, no gain over 2018. However, subsequent revisions may increase that a few percent.

The following table illustrates the difference between Starts and Cash flow. It shows Manufacturing Bldgs. projects in backlog as of October 2018 and predicted starts in 2018 through 2021. Note there are sometimes vast differences between amounts of Starts, whether already in Backlog at beginning of year or New Starts within the year, and Cash Flow from Backlog and New Starts.

12e mnfg bklg cashflow

Cash Flow modeling predicted a huge decline of -16% in manufacturing spending in 2017. This was in stark contrast to seven other economic analysts who predicted spending would be between -7% and +7%, for an average of +0.4% as reported in the January 2017 AIA Consensus. Manufacturing spending actually ended the year at -13.0%. Obviously, there is no correlation between a 25% increase in new starts within the year and a predicted -16% drop in spending. The actual -13% drop in 2017 spending reflects a return to normal after an unusually large volume of spending in 2015 and 2016 that was generated by a record volume of starts in 2014.

Note that new manufacturing starts were up 27% in 2017 and could be up 18% in 2018, yet 2018 spending is forecast to increase only 1.5%. This is due to projects that started several years ago but are now coming to an end. They are dropping out of the monthly cash flows and holding down 2018 spending even though starts have been up substantially for two years. This substantial volume of new starts in 2017 and 2018 will be providing a boost to spending in 2020 and 2021.

 

Spending

Total of All construction spending is forecast to increase 6.0% to $1.321 trillion in 2018 and 1.5% to $1.341 trillion in 2019 and 6.3% to $1.426 trillion in 2020.

13e spend sectors

Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.

The following table clearly shows there is not a correlation between starts in any year with spending in either the current or the following year. The practice of using construction starts directly to predict spending can be very misleading in an industry that relies on data for predictive analysis to plan the future. Not only does it not predict the volume of spending in the following year, it does not even consistently predict the direction spending will take, up or down, in the following year. It’s a false indicator and it’s not a good use of data.

14 spend vs starts

 

Residential Buildings Spending

Residential construction spending for 2018 was recently revised down and starts for 2019 are expected flat to down slightly. The forecast is now for an increase of 5.6% to $562 billion in 2018, 0.5% to $564 billion in 2019 and 2.3% to $577 billion in 2020.

Residential spending in 2018 slows after six years of growth all over 10%/year. Average spending growth the last seven years is 12%/year. Although Residential 2019 construction spending is still increasing slightly 0.5%, growth has slowed to less than inflation of 5%. Therefore real 2019 residential volume after inflation is forecast to decline by 4%+, the largest real volume decline since 2009. In 2018 residential spending increased 5.6%, but after inflation real volume increased only a fraction of a percent.

Residential spending in 2018 is 50% single family, 13% multi-family and 37% improvements. In 2011, improvements were 48% of residential spending.

Single Family Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts.

11e Cashflow Forecast RSDN ALL 12-1-18

Total starts for the last 6 months are the highest since 2006, but % growth has slowed considerably. New starts in 2017 which initially posted only 2% growth have already been revised up to 4%. I expect that to be revised up to 5%. Growth of 7% is expected for 2018. Slower growth is now expected after 5 years (2012-2016) of starts increasing at an average 20%/year. Multi-Family Residential spending is more dependent on backlog.

15e Cashflow Forecast RSDN MF ONLY 12-1-18

Residential spending hits a 12-year high in 2018. Residential spending reached a current $ peak of $630 billion in 2005. 2018 pending is still 10% below that peak. In constant $, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant $, 2018 spending is still 27% below the 2005 peak.

16 res nonres plot

 

Nonresidential Buildings Spending

Nonresidential Buildings construction spending is forecast to increase 5.8% to $444 billion in 2018, dip -0.2% to $443 billion in 2019 and climb 8.9% to $482 billion in 2020. Office (which includes data centers) and Amusement/Recreation support the 2019 but there is downward pressure from slowdowns or timing of cash flow in Manufacturing, Lodging, Healthcare and Educational. Educational, Healthcare, Recreation, Office and Manufacturing all support growth in 2020.

17e spend nonres bldgs

18 nonres bldgs plot.JPG

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached as high as $440 billion in 2017 but averaged only $419 billion in 2017. In 2018 it will reach a high of $430 billion but average only $424 billion. The yearly average recently peaked at $431 billion in 2016. Constant $ spending or real volume growth shows all years from 1996 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $ 2018 is still 20% below that 2000 peak.

19 nonres cur con

 

Non-building Infrastructure Spending

Non-building Infrastructure construction spending is forecast to increase 7.2% to $316 billion in 2018, 5.5% to $334 billion in 2019 and 9.9% to $367 billion in 2020. The forecast growth for 2019 will be supported by Transportation and Public Works but will be held down somewhat by Highway. Transportation terminals and rail project starts both increased more than 100% in 2017 and both are long duration projects types that will contribute spending for several years. Environmental Public Works had strong 20% growth in 2018 starts and Highway starts hit a new high in 2018.

20e spend nonbldg

Non-building Infrastructure construction spending in constant $ (inflation adjusted $) reached $311 billion in 2016, an all-time high, but then dropped to $296 billion in 2017. In 2018 it will reach $302 billion. Constant $ spending or real volume growth has been within +/- 3% for the last 5 years.

21 nonbldg cur con

Non-building Infrastructure spending, always the most volatile sector, in mid-2017 dropped to 2013 lows. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

22 infra plot

Current backlog is at an all-time high, up 10%+ each of the last 3 years, and spending is expected to follow the increased cash flows from the elevated backlog. 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. Transportation spending is projected to increase 20-25%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 8%. 2019 and 2020 are forecast to increase 5% to 6%.

 

Public Infrastructure and Public Institutional

Less than 60% of all Non-building Infrastructure spending, about $170 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

About 25% of all Nonresidential Buildings spending, about $110 billion, is publicly funded, mostly Educational. Nonresidential buildings spending makes up almost 40% of Public spending.

  • Infrastructure = $300 billion, ~25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $170 billion. Private Infrastructure = $130 billion.
  • Power and Communications are privately funded infrastructure.
  • Nonresidential Buildings is 25% public (mostly institutional), 75% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $100 billion, mostly Education ($70b).

23 pub prv spend.JPG

 

Public Infrastructure + Public Institutional = $280 billion, 23% of total construction spending.

Public Infrastructure + Institutional average growth is $12 billion/year. It has never exceeded $30 billion in growth in a single year.

See also Publicly Funded Construction

See also Down the Infrastructure Rabbit Hole

24 pub prv share

Public Spending

Total public spending for 2018 is projected to finished up 9.5% at $320 billion. Every major public market is projected to finish up for 2018. By far, the largest Public spending increases for 2018 are Highway, Transportation, Sewer and Waste Disposal and Water Supply.

25e pub prv sectors

The two largest markets contributing to public spending are Highway/Bridge (32% of total public spending) and Educational (25%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending. Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

Educational is 80% public, Transportation 70%, Amusement/Rec 50% and Healthcare 20% public. Power is about 6% public, along with few other smaller shares.

Public spending hit a 4-year low in mid-2017. It has been increasing since then and is now near an all-time high. I’m expecting to see strong growth through 2020.

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 growth are Educational (+15%) and Transportation (+35%), with a combined total forecast 20% growth in public spending.

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.

26e pub bklg

For a Full Formatted PDF of this Report click

2019 Construction Economic Forecast – Summary – Dec 2018

 

Link to the 2019 Nonresidential Forecast Report

2019 Construction Economic Forecast – Nonresidential – Nov 2018

Construction Spending June 2018

8-1-18

U. S. Census posted Construction Spending for June at a seasonally adjusted annual rate (SAAR) of $1,317 billion, down 1.1% from an upwardly revised May.  Year-to-date, June spending is up 5.1% from 2017.

May was revised UP 1.7% from the 1st release posted 7-2-18. April was revised UP 0.8%.

https://www.census.gov/construction/c30/pdf/release.pdf

Construction Spending for the 1st half 2018, in Current $, averages $1,307 billion. This is an all-time high, well above the pre-recession high spending of $1,205 billion posted in the 1st quarter of 2006. Spending has been above the 2006 high since the 4th quarter 2016. Spending total is expected to average $1,330 billion for 2018.

Constant $ shows volume reached peak during the 2nd half 2005 and 1st half 2006, with  2005 posting the peak year. 2018 constant $ inflation adjusted spending is still 14% below the 2005-2006 peak.

Spend current vs constant 2018 8-2-18

Total spending year to date through June is $620 billion. Historically, only 47% of annual spending occurs in the 1st 6 months. Jan, Feb and Mar are the weakest months of the year, while Jul, Aug and Sep are the strongest spending months. Therefore, this indicates a 2018 total annual spending of $1,328 billion. This agrees very close to my total 2018 spending forecast.

The headline from the St Louis Fed > Total construction spending fell 1.1% in June, the largest monthly drop in more than a year. Just remember, spending subsequently gets revised 3x and final vs 1st release has been revised UP 79 times in the last 84 months.

Top performing construction spending markets 2018 year-to-date through June are Transportation +14.3%, Public Safety +12.1%, Lodging +10.7%,  Water Supply +9.7%, Sewage and Waste Disposal +9.2%, Residential +8.1% and Office 6.8%.

The only markets down year-to-date are Religious -9.1%, Manufacturing -8.7% and Power -0.4%. Religious building as a percent of total is so small (1/4 of 1%) it has negligible effect on total annual performance. However, Manufacturing and Power make up about 15% of total construction.

Residential, Office, Commercial/Retail, Lodging, Highway and Environmental Public Works (Sewage, Water, Conservation) are all ahead of expectations for the 1st half of 2018.

June construction spending data shows an unusual $9 billion (SAAR) monthly decline (-9.3%) in Educational spending. This is several billion greater than the largest decline reported during the recession, so this looks like an anomaly in the data. There has never been a monthly decline like this in the Educational market since I’ve been tracking data, back to 2001. It is double the largest non-recession decline. I expect it will be revised up substantially at some point in the future.

Transportation is another market that appears to be unusually low for June. Because the monthly variance is not wildly out of balance it passes in obscurity. But here’s what we should see. Transportation (terminals and rail) new starts in 2016 increased 34% and then in 2017 increased 120%. Most of those projects will be completed in 3 years or less, but a number of the huge projects (no less than 15 projects ranging from $1 billion to $4 billion each) have a duration of 4 to 8 years. Even with long duration cash flow spreading out the spending for all those big projects, my analysis still predicts Transportation spending up 30% in 2018. Year-to-date through June, Transportation spending is up only 14%. I’ve forecast it should be up 18%. That’s a total shortfall of about $1 billion (SAAR ~$12 billion), or about 7%/month, for 3 months. April, May and June spending are all below expectations. I expect future revisions will increase current values. Also, we will see a big jump in year-to-date over the next three months since we are currently at an SAAR above $50 billion (and increasing) and Jul-Aug-Sep were the three lowest months in 2017, below $43 billion. Also, 2017 values were revised up 4%/month after the close of the year.

Manufacturing spending as of June is reported down 8.7% year-to-date from 2017.  That decline will slowly turn positive in the second half of the year to finish up 2%. Spending is currently at an SAAR above $65 billion and expected to increase through December. In 2017, spending started the year above $70 billion but decreased to $60 billion by year end. Increasing values in the 2nd half 2018 compared to decreasing values in 2017 will continually increase the year-to-date performance in the 2nd half of 2018.

Power, similar to manufacturing, posted the highest spending for 2017 early in the year, then declined. In 2018, the 1st half posted the lowest spending, so the year-to-date is currently low. Increased spending in the 2nd half 2018, compared to the lowest values of the year in 2017, will boost year-to-date spending every month through year end. Although year-to-date spending through June is down 0.4%, the total for the year could finish up 9%.

Manufacturing and Power highlight one of the biggest shortfalls of judging expected performance based on year-to-date change. It is important to look at the trend line expected in the current year versus the trend line in the previous year. If they diverge, then year-to-date change will not give a clear indication of expected performance in the current year.

Total spending has increased from an average of $1,254 billion in Q4’17 to $1,292 billion in Q1’18 to $1,321 billion in Q2’18, growth of 3.0% and 2.25% the last two quarters. I’m expecting the rate of monthly spending will be above $1,360 billion by year end. The total spending forecast for 2018 is $1,330 billion.

Residential single family spending is up 9% YTD. Multifamily is down ~1%. Total residential spending is forecast to reach $566 billion in 2018, growth of 6.4% over 2017.

Nonresidential Buildings spending YTD totals $207 billion, up only 1.9% from 2017. It is being held down by Manufacturing which is currently down 8.7% from 2017. Also, the anomaly in Educational spending, explained above, contributes to the current low performance. 2018 forecast is $445 billion, 6.2% growth over 2017, with best growth in Lodging 13%, Office 11% and Amusement/Recreation 9%.

Non-building Infrastructure will post the best year of growth since 2014 to reach a new all-time high at $319 billion. Transportation, by far, will show the best growth, nearly 30% above 2017.

Spend Sector 2015-2019 8-9-18

 

June Construction Starts Reach New Highs 7-25-18

 

 

New Construction Starts May 2018 Near All-Time High

6-20-18

Dodge reported May new construction starts at a seasonally adjusted annual rate of $778,000 million, up 15% from April. Also, year-to-date starts total $294,000 million, 3% lower than the same 5 months of 2017.

However, 2018 numbers will not be revised until next year and 2017 numbers through May have already been revised up 13%, up about 18% in nonresidential and 6% in residential. So the potential that YTD numbers remain 3% below 2017 is very small.  Revisions to previous year’s numbers have averaged more than +7% for the last 5 years with most of the upward revision in nonresidential.

Revisions to 2017 year-to-date have already resulted in a 4% increase in both 2018 and 2019 starting backlog.

Although Dodge, in its midyear report, is predicting 2017 starts at a total of $763,000 million, the current rate of revision seems to indicate 2017 starts could reach closer to $800,000 million. Forecast 2018 total starts will increase only slightly over 2017.

Keep in mind, unlike the Census spending data which captures 100% of all spending, the new starts data is a sampling of project starts, representing about 60% of total work volume. For this reason, the actual starts dollars cannot be used directly to represent spending. However, the change in predicted cash flow from starts can be used to predict the change in spending.

From Sept’17 through May’18 new construction starts reached the highest average since 2004 and are just below an all-time high. Residential starts posted the best 6 months average since 2006, up 8% from the prior 6 months. Both nonresidential buildings and non-building infrastructure are lower than recent highs. Both could finish the year with starts at a decline of 4% to 5% below 2017 totals, but they are both still near the best year of starts on record.

Starts totals near new highs is in current $. If  2004$ were represented in constant 2018$, the total would be 40% higher due to inflation. So, after adjusting for inflation, today we are still 40% below that 2004 high point.

  • TOTAL All Construction Starting Backlog for 2018 reached an all-time high, increased 35% in the last three years, 14% in the last year.
  • Nonresidential Buildings 2018 starting backlog is the highest ever, up 50% in four years, up 17% from 2017.
  • Non-building Infrastructure 2018 starting backlog is the highest ever, up 45% in three years, up 16% from 2017.
  • Residential work within the year comes mostly from new starts within the year, only 30% from starting backlog.

The erratic nature of new construction starts belies how smoothly those projects feed into backlog and monthly spending.

Starts 2011-2018 nonbldg 6-23-18 Starts 2011-2018 nonres bldgs 6-23-18

Backlog shows fairly constant growth for the last 5 or 6 years. Spending in any given month includes projects started and entered into backlog from 1 month ago to 3 or 4 years ago. In some non-building cases, projects are in backlog for 6 to 8 years, so project starts that appear as a high spike enter backlog and spending and produce a constant upward slope. Most spending within the year in nonresidential work comes from backlog. Most spending in residential work comes from new starts.

Backlog incld Res Starts 2005-2019 6-23-18

The cash flow model of all previous jobs underway already in backlog and all new starts shows the current predicted spending. Starting backlog for 2018 plus new starts in 2018 minus all spending in 2018 generates the forecast work remaining in backlog for the start of 2019.

The predicted spending plot will be added here after July 1 Census spending release.

Much more to come in next few days. edz

2018 Construction Spending Forecast – Mar 2018

3/15/18

Preliminary data is in for total year 2017 construction spending, 2017 construction starts and 2018 starting backlog. The following forecast is developed using the current data.

2018 Construction Spending Forecast – Mar 2018

A brief note on 2017.

2017 Spending Wrap Up

Total construction spending in 2017 now stands at $1.233 trillion, an increase of 4.0% over 2016.

Residential spending, up 10.5% for the fifth consecutive year above 10% growth, leads all construction spending in 2017 for the seventh consecutive year. Nonresidential Buildings finished the year up 2.3%. Only Non-building Infrastructure did not improve over 2016, down 3.8% for the year. However, Non-building Infrastructure had been at an all-time high for the previous two years.

2017 spending finished below my forecast due to performance in Educational, Office, Power and Highway, four of the five largest markets which together make up half of all nonresidential spending. All came in lower than forecast. However, some of these markets are prone to very large post-annual upward revisions and that has the potential to add to 2017 spending when those revisions are released in July 2018. For instance, in the July 2017 revisions, Power spending for the previous year, 2016, was revised up by 10%.

History shows spending has been revised up 53 times in the last 60 months. I expect to see future revisions smooth out spending in unusually low periods and increase total 2017 spending above this forecast. Both April and July preliminary spending appear statistically too low. The average post-annual total spending revision for the last five years is +2.8%. The post-annual revision to 2016 was only 2.2%. Revisions due for release on July 1, 2018, if even only a +1% revision to 2017, would adjust total 2017 spending up to $1,245 billion. This would slightly alter the 2018 forecast.

Spend ALL 2011-2019 3-11-18

2018 Spending Total All Construction

Total All 2018 construction spending is forecast to increase 7.6% to $1.330 trillion.

Nonresidential Buildings spending forecast for 2018, up 9%, will be supported by Manufacturing and Educational. Non-building Infrastructure returns to strong growth of 8%, with potential to hit a new all-time high due to very large projects in Power and Transportation. Residential spending in 2018 slows to growth under 6% after six years all over 10%/year.

Dodge Data 2017 construction starts increased 3% from 2016. However, starts are always revised upward in the following year. I expect revisions will show 2017 starts increased by more than 6% over 2016. Even with that revision, 2017 starts posted the lowest growth since 2011, weighted heavily by the slowdown in residential starts.

Total starting backlog for 2018, currently at an all-time high, has increased on average 10%/year the last three years. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Public share of new construction starts are up only 10% in 3 years. But due to long duration job types, 2018 starting backlog is up 30% in the last 3 years.

None of this spending forecast includes any projections for potential work from future infrastructure stimulus.

Spend Summary 2013-2020 Dec2017 3-11-18

Current$ vs Constant$

Construction spending reached a new current $ high in 2017 at $1,236 billion. The previous high in current $ was $1,161 in 2006. Spending first 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%.

Although 2018 current $ spending will reach $1,330 billion, after adjusting for 4.5% to 5% inflation, 2018 constant $ volume will increase to only $1,270 billion. When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007. In 2005 constant $ volume reached a peak at $1,450 billion. At current rates of growth, we would not eclipse the previous high before 2022.

While spending in current $ is 7% higher than the previous high spending, volume is still 14% lower than the previous high volume.

For more on Inflation Adjusted spending see Construction Spending is Back

Spend current vs constant 2018 3-4-18

Jobs and Volume

The period 2011-2017 shows both spending and jobs growth at or near record highs.

A spending forecast of 7%+ in 2018, or nearly $100 billion in construction spending, demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction volume. Construction jobs have never increased by 500,000 in one year. However, $100 billion in added spending is not the same as $100 billion in volume, and jobs growth is based on volume.

Although spending will increase 7%-8%, construction inflation has been hovering near 4.5% to 5% for the last five years. Real volume growth in 2018 after inflation is expected to be near 3% or $40 billion. That would mean the need, if there are no changes in productivity, is to add only about 200,000 additional workers in 2018, a rate of jobs growth that is well within reach. That is less than the average jobs growth for the last seven years.

Construction added 1,339,000 jobs in the last 5 years, an average of 268,000/year. 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, Nov17-Feb18. 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.

Jobs vs Volume 2011-Jan2018 3-16-18

Total all spending increased 55% since 2010, but there was 30% inflation. Real total volume since 2010 has increased by only 25%. Jobs increased by 30%, 5% in excess of volume growth. But the results are much different for Residential than Nonresidential.

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.

For more on Jobs see Construction Jobs and Residential Construction Jobs Shortages

Residential Buildings Spending

Total Residential spending in 2017 finished at $523 billion, up 10.6% from 2016. This is the 5th consecutive year that residential spending exceeded 10% annual growth. Average spending growth the last six years is 13%/year.

Residential spending in 2017 was 50% single family, 13% multi-family and 37% improvements. In 2011, improvements was 48% of residential spending.

Census does not include flood damage repairs (house shell remains intact but gut renovate) in improvements but does include full flood damaged structure replacements (structure rebuild permit classified as new) in improvements.

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 % growth has slowed considerably. New starts in 2017 posted only 2% growth, but I expect that to be revised up to at least 4%. Similar growth of 6%-7% is expected for 2018. Slower growth is now expected after 5 years (2012-2016) of new starts increasing at an average 20%/year.

Spend Sector 2015-2018 3-11-18

Residential 2018 spending growth is forecast to increase only 6% after five years over 10%. Total residential spending in 2018 is forecast at $552 billion.

Residential spending will reach a 12-year high in 2018. Residential spending reached its current $ peak of $630 billion in 2005. Current 2018 pending is still 13% below that peak. In constant $, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant $, 2018 spending is still 27% below the 2005 peak.

Residential buildings construction spending in constant $ reached $523 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1996 through 2007 had higher volume than 2017. Volume reached a peak $748 billion in 2005. Only the years 2004-2006 had higher spending in current $. The 2005 current $ peak of $630 billion is still 17% higher than 2017, but 2017 volume is still 30% lower than peak volume.

Spend 1985-2020 Residential 3-15-18

Nonresidential Buildings Spending

Nonresidential Buildings spending in 2017 finished at $419 billion, up only 2.7% from 2016.

2017 spending finished below my forecast due to performance in Educational and Office. Educational starts increased 6%+/year for the last three years, but spending increased only 4%/year the last two years. Office starts increased nearly 30% in 2016, but spending increased only 3% in 2017. I suspect either big upward revisions to 2017 spending or large increases in backlog will boost 2018 spending in these two markets.

Spend Nonres Bldgs 2013-2020 Dec2017 3-28-18

Nonresidential Buildings new starts are up 60% in four years. 2018 starting backlog is the highest ever, up 15% from 2017. Nonresidential Buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle.

Backlog incld Res Starts 2005-2018 3-15-18

Starting backlog has increased for five years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for five years at an average 9%/year.

For 2018, Educational spending is projected to increase 14%, the best increase 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.

Nonresidential Buildings spending in 2018 is forecast to reach a new high, $459 billion, an increase of 9.5% over 2017, surpassing the previous 2008 high. Educational and Manufacturing make up 55% of the growth.

For the Full Expanded 2018 Construction Spending Forecast – Nonresidential Bldgs 

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. In 2018 it will reach $439 billion. Constant $ spending shows all years from 1996 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $ 2018 is still 18% below that 2000 peak.

Spend 1985-2020 Nonres Bldgs 3-15-18

Non-building Infrastructure Spending

Total non-building infrastructure spending in 2017 dropped to $293 billion, down 3.7% from 2016.

Non-building Infrastructure spending, always the most volatile sector, dropped to yearly lows from June through September, the lowest since November 2014. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

Spend Infra Jan15 to Jan19 3-11-18.JPG

Current backlog is at an all-time high and spending is expected to follow the increased cash flows from the elevated backlog. Environmental Public Works (Sewage/Waste disposal down 14%, Water Supply down 9% and Conservation/Dams & Rivers down 7% in 2017) posted the largest declines in 2017 and accentuated the declines in the infrastructure sector. The sector was expected to increase in the last quarter 2017. All three markets posted increases in the 4th quarter, up 8% over the 1st nine months of 2017.

Non-building Infrastructure 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. 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. Transportation spending is projected to increase 20-25%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 8%.

Spend Nonbldg Infra 2013-2020 Dec2017 3-11-18 

Non-building Infrastructure will reach a new high for spending in 2018. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. A 3.5% decline in 2017 was more of a decline than expected, but there may still be upward revisions to the preliminary total.

Non-building Infrastructure spending in 2018 is forecast to reach $319 billion, an increase of 8.6% over 2017.

My forecast for 2018 is predicting every infrastructure market will post gains, but it is the Power and Transportation markets that account for most of the growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Spending growth in the Power market is not quite so apparent. Combined Power new starts are down for both 2016 and 2017, but the spending gains are coming from projects that started in 2015, a year in which starts were up over 120%.

Adjusted for inflation, spending in 2018 will be nearly equal to the all-time highs reached in 2015 and 2016.

Non-building Infrastructure construction spending in constant $ reached $294 billion in 2017. Recent highs were posted in 2015 and 2016 at $305 billion and $304 billion and 2018 is expected to reach $319 billion. Previous spending adjusted to equivalent 2017$ shows that 2008 and 2009 were both just slightly higher than $300 billion. Constant $ volume reached a peak $313 billion in 2016. Spending in current $ hit new highs in 2015 and 2016. This is the only sector that has current $ and constant $ at or near all-time highs.

Spend 1985-2020 NonBldg Infra 3-15-18

Public Infrastructure and Public Institutional

Only 60% of all Non-building Infrastructure spending, about $170 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

Only about 25% of all Nonresidential Buildings spending, about $100 billion, is publicly funded, mostly Educational.

  • Infrastructure = $300 billion, 25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $170 billion. Private Infrastructure = $130 billion.
  • Power and Communications are privately funded infrastructure.
  • Nonresidential Buildings is 25% public (mostly institutional), 75% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $100 billion, mostly Education ($70b).

Spend PubPriv 2017 totals detail 3-13-18

Public Infrastructure + Public Institutional = $270 billion, 23% of total construction spending.

Public Infrastructure + Institutional average growth is $12 billion/year. It has never exceeded $30 billion in growth in a single year.

See also Publicly Funded Construction

See also Down the Infrastructure Rabbit Hole

Spend Public Share 2-25-18

Public Spending

Public construction is a subset of Nonresidential Buildings and Non-building Infrastructure and about 1% of Residential.

The two largest markets contributing to public spending are Highway/Bridge (32% of total public spending) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending. Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

2017 spending was down 1%, but has been at or near the all time high for three years.

Total public spending for 2017 finished flat at $284 billion with most major public markets down for the year. By far, the largest Public spending declines in 2017 are Sewer and Waste Disposal which is 7% of public markets, it was down 16% and Highway/Bridge, down only 3.5%, but Highway is 32% of all public spending.

Public spending hit a low in June 2017. It has been increasing since then, Public Educational, in the second half 2017 up 10% from the low point, now at a post recession high.  We can expect to see another six months of growth before spending levels off in mid-2018.

Spend Public-Private 2013-2020 Dec2017 3-11-18

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 growth are Educational (+15%) and Transportation (+35%), with a combined total forecast 20% growth in public spending.

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.

Total Public 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 almost 60% of the Public spending growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Educational new starts total for the last three months posted the highest quarter in at least seven years. The 2nd highest quarter was also within the last 12 months, so still contributes fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.

Spend Public Infra-Insti 2015-2020 3-11-18

Public spending is 10%, $30 billion, below 2009 all-time highs, most of the deficit coming from declines in Educational, Sewage/Waste Water and Water Supply. In 2018, Highway and Transportation are at all-time highs.

 

 

Click here for a formatted printable PDF Construction Spending Forecast – Summary Mar 2018

See these posts for additional info

2018 Construction Spending Forecast – Nonresidential Bldgs  

Starts Trends Construction 2018 Forecast – Fall 2017  11-8-17

Backlog Construction 2018 Forecast – Fall 2017  11-10-17

For more on Jobs see Construction Jobs / Workload Balance 11-7-17 

For effects of inflation see Constant Dollar Construction Growth 11-2-17

Construction Activity Notes 4-25-18

Notes on March 2018 Construction Spending

 

 

 

Construction Economics Brief Notes 3-10-18

3-10-18

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.

Construction Jobs

Residential Construction Jobs Shortages

Construction Spending is Back

 

Inflation

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.

Inflation in Construction 2018 – What Should You Carry?

 

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.

Construction Spending is Back

 

Spending

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%.

2018 Construction Spending – Briefs 1-26-18

 

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.

Publicly Funded Construction

Down the Infrastructure Rabbit Hole

 

For the latest info see 2018 Construction Spending Forecast – Mar 2018

 

 

2018 Construction Outlook Articles Index

Articles Detailing 2018 Construction Outlook

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These links point to articles here on this blog that summarize end-of-year data for 2017 and present projections for 2018.

Spend current vs constant 2018 3-4-18

Most Recently Published

July Construction Starts Fall but 3moAvg at New High

Construction Spending June 2018 8-1-18

June Construction Starts Reach New Highs 7-25-18

Construction JOLTS – What’s wrong with this picture? 7-10-18

What Jobs Shortage? 7-6-18

Construction Spending 2016-2017 Revisions 7-1-18

New Construction Starts May 2018 Near All-Time High 6-24-18

Construction Spending April 2018 – 6-1-18

Notes on March 2018 Construction Spending 5-2-18

Construction Activity Notes 4-25-18

2018 Construction Spending Forecast – Nonresidential Bldgs 3-28-18

2018 Construction Spending Forecast – Mar 2018

Construction Economics Brief Notes 3-10-18

Construction Spending is Back 3-9-18

Construction Jobs 3-8-18

Publicly Funded Construction 2-28-18

PPI Materials Input Index 2-20-18

Down the Infrastructure Rabbit Hole 2-16-18

Inflation in Construction 2018 – What Should You Carry? 2-15-18

Residential Construction Jobs Shortages 2-3-18

2018 Construction Spending – Briefs 1-26-18

Cautions When Using PPI Inputs to Construction! 1-15-18

Indicators To Watch For 2018 Construction Spending? 1-10-18

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

Backlog 2018 Construction Forecast Fall 2017 11-10-17

Starts Trends 2018 Construction Forecast Fall 2017 11-8-17

In What Category is That Construction Cost? 11-15-17

Construction Jobs / Workload Balance 11-7-17

Constant Dollar Construction Growth 11-2-17

Is Infrastructure Construction Spending Near All-Time Lows? 10-10-17

Summary

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-26-18

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

Construction Spending is Back 3-9-18

2017 Results

2018 Construction Spending Forecast – Mar 2018

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

2018 Starting Backlog & New Starts

2018 Construction Spending – Briefs 1-24-18

Backlog 2018 Construction Forecast Fall 2017 11-10-17

Starts Trends 2018 Construction Forecast Fall 2017 11-8-17

Construction Starts and Spending Patterns 9-26-17

2018 Spending Forecast

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-26-18

So, About Those Posts “construction spending declines…” 10-4-17

Construction Spending Almost Always Revised UP  5-1-17

Nonresidential Buildings

2018 Construction Spending Forecast – Nonresidential Bldgs 3-28-18

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-24-18

Nonres Bldgs Construction Spending Midyear 2017 Forecast 7-24-17

Residential

2018 Construction Spending Forecast – Mar 2018

Residential Construction Jobs Shortages 2-3-18

Infrastructure Outlook

2018 Construction Spending Forecast – Mar 2018

Down the Infrastructure Rabbit Hole 2-16-18

2018 Construction Spending – Briefs 1-24-18

Is Infrastructure Construction Spending Near All-Time Lows? 10-10-17

Infrastructure – Ramping Up to Add $1 trillion 1-30-17

Calls for Infrastructure Problematic 1-12-17

Public Construction

2018 Construction Spending Forecast – Mar 2018

Publicly Funded Construction 2-28-18

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

Infrastructure & Public Construction Spending 3-5-17

Materials

PPI Materials Input Index  2-20-18

Jobs

Construction Jobs 3-8-18

Residential Construction Jobs Shortages 2-3-18

Construction Jobs / Workload Balance 11-2-17

Construction Jobs Growing Faster Than Volume 5-5-17

Inflation

Inflation in Construction 2018 – What Should You Carry? 2-15-18

Constant Dollar Construction Growth 11-2-17

Construction Inflation Index Tables UPDATED 2-12-18

Construction Cost Inflation – Commentary  updated 2-13-18

US Historical Construction Cost Indices 1800s to 1957

 

 

Residential Construction Jobs Shortages

2-3-18

During the period  including 2011 through 2017, we had record construction spending, up 50% in 5 years, moderate inflation reaching as high as 4.6% but averaging 3.8%, record construction volume growth (spending minus inflation), up 30% in 5 years and the the 2nd highest rate of jobs growth ever recorded.

Residential spending was up 90% in 5 years, but real residential volume up only 50%. Residential inflation, at 6%/year, was much higher than all construction. Jobs increased only 33%.

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 1993-1999 with the highest 5-year growth ever of 1,483,000 jobs. That same 93-99 period had the previous highest spending and volume growth. 2004-2008 would have reached those lofty highs but the residential recession started in 2006 and by 2008 spending had already dropped 50%, offsetting the highest years of nonresidential growth ever posted.

The point made here is the period 2011-2017 shows spending and jobs at or near record growth. Although 2017 slowed, there is no widespread slowdown in volume or jobs growth.

This 2011-2017 plot of Construction Jobs Growth vs Construction Volume Growth seems to show there is no jobs shortage. In fact it shows jobs are growing slightly faster than volume. But that just does not sit well with survey data from contractors complaining of jobs shortages. So how is that explained?

Jobs vs Volume 2011-2017 2-1-18

There have been cries from some quarters, including this blog, that the answer lies in declining productivity. There seems to be plenty of workers, but it now takes more workers to do the same job that took fewer in the past. As we will see, that is part of the answer, but doesn’t explain why some contractors need to fill vacant positions. To find data that might answer that question about a jobs shortage we must dig a little deeper.

The total jobs vs volume picture masks what is going on in the three major sectors, Residential, Nonresidential Buildings and Non-Building Infrastructure. A breakout of jobs and volume growth by sector helps identify the imbalances and helps explain construction worker shortages. It shows the residential sector at a jobs deficit.

7 years 2011-2017  – % Jobs growth vs % Volume growth

  • Totals All Construction  Jobs +31%, Volume +30%
  • Nonres Bldgs  Jobs +27%, Volume +19%
  • Nonbldg Hvy Engr  Jobs +21%, Volume +12%
  • Residential  Jobs +40%, Volume +54%

The totals show jobs and volume almost equal, data that supports the 2011-2017 totals plot above and what we would expect in a balanced market. But severe imbalances show up by sector. Both nonresidential sectors show jobs growth far outpaced volume growth. Residential stands out with a huge deficit, with jobs way below volume growth.

Just looking at 2017 growth shows the most recent imbalances.

2017 % jobs growth vs % volume growth

  • Totals All Construction Jobs +3.4% Volume -0.8%
  • Nonres Bldgs Jobs +3.3% Volume -1.6%
  • Nonbldg Hvy Engr Jobs +1.7% Volume -6.0%
  • Residential Jobs +3.5% Volume +4.2%

Census recently released initial construction spending for 2017, totaling $1.230 trillion, up only 3.8% from 2016. What is somewhat disconcerting is that 2017 construction spending initial reports growth of 3.8% do not even match the total inflation growth of 4.6% for 2017, indicating a -0.8% volume decline. However, as does always occur, I’m expecting upward revisions (estimated +2%) to 2017$ construction spending on 7-1-18. If we don’t get an upward revision, then 2017 will go down as the largest productivity decline since recession. Even if we do get +2% upward revision to 2017$ spending, 2017 volume would be revised up to +1.2% and jobs growth will still exceed volume growth.

Let’s look a little deeper at the data within the sectors. Each chart is set to zero at Jan 2011 so we can see the change from that point, the low point of the recession, until today. At the bottom of each chart is shown a Balance at start. That represents the cumulative surplus or deficit of jobs growth compared to volume growth for the previous 10 years prior to Jan 2011. If there are no changes in productivity, or no surplus or deficit to counteract, then jobs should grow at the same pace as volume.

There are slight differences between the data in the three sector charts and the total construction chart. The sector charts use annual avg data and the totals chart uses actual monthly data.

Jobs vs Volume 2011-2017 NonResidential Bldgs 2-3-18

Jobs vs Volume 2011-2017 NONbuilding 2-3-18

 

Nonresidential Buildings and Non-building Infrastructure, over seven years and the most recent three years, show jobs increasing far more rapidly than volume. Nonresidential Buildings started 2011 with a surplus of jobs after the recession, but Infrastructure started 2011 with a substantial deficit of jobs. Only in this last year did Infrastructure jobs reach long-term balance with work volume.

Nonresidential Buildings started 2011 with a 13% surplus of jobs and more than doubled it in the seven years following. I’ve suggested before it could be that a part of this surplus is due to companies hiring to meet revenue growth, and not inflation adjusted volume. Although nonresidential spending actually increased 43%, volume since 2010 has increased only 12%. Since 2010 there has been 30% nonresidential buildings inflation, which adds zero to volume growth and zero need for new jobs. A 43% increase in spending could lead companies to erroneously act to staff up to meet spending, or revenue, more than needed for the 12% volume increase.

Jobs vs Volume 2011-2017 Residential 2-3-18

This plot for residential work shows from 2011 to the end of 2017, we’ve experienced a 20% growth deficit in jobs. How many residential jobs does this 20% growth deficit represent? From Jan 2011 through Dec 2017, residential jobs increased from approximately 2,000,000 to 2,700,000. So the base on which the % growth increased over that time is calculated on 2,000,000. An additional 20% growth would be a maximum of 400,000 more jobs needed to offset the seven year deficit. But what about the imbalances that existed when we started the period?

During the residential recession from just 2005 through 2010, residential volume declined by 55%, but jobs were reduced by only 38%. For the entire period 2001-2010, total volume of work declined by 14% more than jobs were reduced. Some of the surplus jobs get absorbed into workforce productivity losses and some remain available to increase workload. It’s impossible to tell how much of that labor force would be available to absorb future work, so for purposes of this analysis an estimate of at least 5% seems not unreasonable. That would mean for 2011-2017, instead of a need for an additional 20% more jobs, the need could be reduced by 5% or 100,000 jobs.

This analysis shows a current deficit of 300,000 to 400,000 residential construction jobs. While it does also show nonresidential buildings jobs far exceed the workload and there are more than enough surplus jobs to offset the residential deficit, there would be several questions of how transferable jobs might be between sectors.

  1. Are there highly technical specialty jobs in Nonresidential Buildings that would not be transferable to Residential?
  2. What is the incidence of specialty workers engaging in work across sectors? i.e., job is counted in one sector but working in another sector.
  3. What has been the impact of losing immigrants from the construction workforce?
  4. Is the ratio of immigrant workers in Residential much higher than Nonresidential?
  5. Is the pay more attractive in Nonresidential construction?
  6. What, if any, percentage of the Residential workforce is not being counted? Day labor?

One thing is known for certain,  high-rise multifamily residential buildings may often be built by a firm that is classified primarily as a nonresidential commercial builder. Therefore, some jobs that are counted as nonresidential are really residential jobs.

I think most of these would have a more negative impact on Residential jobs. However, there is some possibility that the overall deficit may not be quite as high as available data show (points 2 and 6). And there is always the possibility that we’ve crossed a threshold that has led to new gains in productivity, although to some extent, the stark differences between Residential and Nonresidential Buildings data might counter that proposition.

These two following report references both document that there is a large unaccounted for shadow workforce in construction. This workforce is probably mostly residential.

Pew Research Center – “Share of Unauthorized Immigrant Workers in Production, Construction Jobs Falls Since 2007” 

NAHB’s HousingEconomics.com “Immigrant Workers in the Construction Labor Force”

and these more recent reports adds volumes of data on immigrant labor

NAHB’s Jan 2018 Report on Immigrant Labor in Construction

Pew – U.S. Unauthorized Immigrant Total Dips to Lowest Level in a Decade NOV 2018

Unemployment and productivity includes only jobs counted in the official U.S. Census Bureau of Labor Statistics (BLS) jobs report.  Both these reports document a large, unaccounted for shadow workforce in construction. By some accounts, 40% or more of the construction workforce in California and Texas are immigrant workers. Immigrants may comprise between 14% and 22% of the total construction workforce. It is not clear how many within that total may or may not be included in the U.S. Census BLS jobs report. However, the totals are significant enough that they would alter some of the results commonly reported.

The best way to see the implications that the available data do show is to look at productivity. The simplest presentation of productivity measures the total volume of work completed divided by the number of workers needed to put the volume of work in place, or $Put-in-Place per worker. In this case, $ spending is adjusted for inflation to get a measure of constant $ volume, and jobs are adjusted for hours worked.

As the Residential jobs deficit increases vs workload, this plot shows that $PIP is increasing. That makes sense. The workload continues to increase and the jobs growth is lagging, so the $PIP per worker goes up. For Nonresidential Buildings, the rate of hiring is exceeding the rate of new volume and therefore the $PIP is declining.

Prod $PIP by Res Nonres only 2001-2017 2-4-18

In boom times, residential construction adds between 150,000 and 170,000 jobs per year and has only twice since 1993 added 200,000 jobs per year. In the most recent several years expansion, residential has reached a high of 156,000 jobs in one year but has averaged 130,000 per year over 5 years. So it’s pretty unlikely that we are about to start adding residential construction jobs at a continuous rate of 200,000+ jobs per year.

If residential jobs growth were to increase by 50,000 jobs per year over and above current average growth, it would take 6 to 8 years to wipe out the jobs deficit in residential construction.

This problem is not going away anytime soon.

For more history on jobs growth see Is There a Construction Jobs Shortage?

For more on the imbalances of Res and Nonres jobs see A Harder Pill To Swallow!

For some hypotheses as to why nonresidential imbalances continue to increase see Construction Spending May 2017 – Behind The Headlines

Spending Summary Construction Forecast Fall 2017

3-15-18 see also  2018 Construction Spending Forecast – Mar 2018

12-2-17

Summary

Total construction spending in 2017 will reach $1,236 billion, an increase of 4.2% over 2016. Residential spending is above 10% growth for the 5th consecutive year.

Year-to-date construction spending growth through October is 4.1%.

Residential leads construction spending growth in 2017 for the seventh consecutive year, up 10.6%. My Nonresidential Buildings forecast has been lowered since July but finishes the year up 2.8%. Only Non-building Infrastructure will not improve over 2016, down 3.7% for the year. However, Non-building Infrastructure has been at an all-time high for the previous two years.

Spend ALL 2011-2018 12-3-17

This forecast is down slightly since July due to reductions in both nonresidential buildings and non-building infrastructure. Educational, Office, Power and Highway, four of the five largest markets which together make up half of all nonresidential spending, were all lowered.  Some of these markets are prone to very large post-annual upward revisions and that has the potential to add to 2017 spending when those revisions are released in July 2018. In the July 2017 revisions, Power spending for 2016 was revised up by 10%.

History shows spending has been revised up 51 times in the last 55 months. I wouldn’t be surprised to see future revisions smooth out spending in unusually low periods (April and July) and increase total 2017 spending above this forecast. I suspect revisions in July 2018 may show 2017 spending as high as $1,250 billion. The average post-annual total spending revision for the last five years is +2.3%. The total revision to 2016 was only 2.2%.

None of the spending detailed in this analysis includes any projections of potential work from future infrastructure stimulus.

Total construction spending in 2018 is currently forecast to reach $1,334 billion, an increase of 8.0% over 2017. For the first time since pre-recession, Non-building Infrastructure will lead all spending with potential to increase by 10% growth over 2017.

Non-building Infrastructure is forecast to lead 2018 spending with an increase of 10.2% due to very large projects in Power and Transportation. Nonresidential Buildings growth is strong for 2018, forecast up 9.3%. Residential spending in 2018 slows to only 5.7% growth after six years averaging 13%/year.

Total spending will reach a new high in 2018 for the third consecutive year. However, in constant $ adjusted for inflation, spending is just back to the level of 2008. The all-time constant $ high was reached in 2005. Adjusted for inflation, 2018 will still be 12% below that level. At current rates of growth, we would not eclipse the previous high before 2022.

Spend Summary 2017-2018 Oct 2017 12-2-17

Growth of 8% in 2018 or $100 billion in construction spending demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction volume. Construction jobs have never increased by 500,000 in one year. However, $100 billion in added spending is not the same as $100 billion in volume, and jobs grow based on volume. Although spending will increase 8%, construction inflation has been hovering near 4.5% to 5% for the last five years. Real volume growth in 2018 after inflation is expected to be just over 3% or $40 billion. That would mean the need, if there are no changes in productivity, is to add about 200,000 additional workers in 2018, a rate of jobs growth that is well within reach since that is below the average jobs growth for the last seven years.

Residential Buildings Spending

Total Residential spending in 2017 will finish at $523 billion, up 10.6% from 2016. Residential spending is above 10% growth for the 5th consecutive year.

Residential spending was expected to dip between May and October due to a low volume of work contributed from starts cash flows. The actual data shows, after reaching a seasonally adjusted annual rate (saar) of $536 billion in March, the high for the year, spending dropped 3% to 4% to as low as $515 billion saar three times and has averaged only $520 billion saar from April through October. New starts in Q1’17 reached an 11-year high, so I expect the rate of spending to increase at year end. Residential work will close out the year with 10.6% growth, the 5th consecutive year over 10%. Average growth the last six years is 13%/year.

Residential spending is 50% single family, 13% multi-family and 37% improvements.

Residential Improvements has posted 18% growth year-to-date. Single Family spending is up 9% while multi-family is up only 4%. That is compared to 2016 when improvements for the year finished up 10%, SF up 4% and MF up 5%. Census does not include flood damage repairs in improvements but does include full flood damaged structure replacements in improvements.

Total residential spending in 2018 slows to a forecast of $553 billion, only 5.7% growth over 2017.

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike Nonresidential, backlog does not contribute nearly as much to Residential spending within the year. New Residential starts in Q1’17 reached an 11-year high. Residential starts are at a post-recession high.

Residential spending will reach a 12-year high in 2018. Adjusted for inflation, all years from 1996 through 2007 were higher. Inflation adjusted spending is still 30% below the all-time high reached in 2005.

Spend Sector 2015-2018 12-3-17 

Nonresidential Buildings Spending

Total Nonresidential Buildings spending in 2017 will come in at $420 billion, up only 2.8% from 2016.

Commercial/Retail is expected to finish the year with +13% growth and Lodging +9%. An unexplained surprise was Office, which by early indicators was predicted to show large gains in spending. Two independent sources reported new office starts in 2016 up 25% to 30%. Starting backlog coming into 2017 was near or at an all-time high. Spending was forecast to jumped at least 20% in 2017. Instead, spending posted declines from May to September and is now forecast to finish with only a 4% gain. This market accounts for the single largest miss in my forecast posted in Feb 2017.

The only major nonresidential building in decline this year is Manufacturing. Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Spending stayed close to that level in 2016. Based on cash flows from starts, spending was expected to decline in 14 of the last 18 months. It declined in 11 of those months. We are at the point of turn-around with only one monthly decline predicted in the next three months and no spending declines expected next year. For 2017, Manufacturing new starts are up 35%.

Spend Nonres Bldgs 2017-2018 Oct 2017 12-2-17

Nonresidential Buildings starts in the six months from Aug 2016 to Jan 2017 posted the (then) highest amount of new starts since Jan-Jun 2008, also the year Nonresidential Buildings spending peaked. Then new starts in the six months Apr-Sep 2017 just surpassed both those previous peak highs.

Nonresidential Buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle. Starting backlog has increased for five years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for five years at an average 9%/year.

Total nonresidential buildings spending in 2018 is forecast to reach $458 billion, an increase of 9.3% over 2017. Office, educational and manufacturing make up 70% of the growth.

Nonresidential Buildings will reach a new high for spending in 2018, surpassing the previous 2008 high. However, adjusted for inflation, spending is 18% below the all-time high reached in 2000.

Non-building Infrastructure Spending

Total non-building infrastructure spending in 2017 drops to $293 billion, down 3.7% from 2016.

Non-building Infrastructure spending, always the most volatile sector, dropped to yearly lows from June through September. Infrastructure construction spending in August dropped to the lowest since November 2014. However, this was predicted. Cash flow models of Infrastructure starts from the last several years show current dips in monthly spending are being caused by uneven project closeouts from projects that started several years ago.

Current backlog is at an all-time high and spending will follow the expected increased cash flows from the elevated backlog. Environmental Public Works (Sewage/Waste disposal down 16%, Water Supply down 9% and Conservation/Dams & Rivers down 7%) posted the largest declines in 2017 and accentuated the declines in the infrastructure sector. The sector is expected to increase slightly in the last quarter 2017. In recent months there are already substantial gains being posted in Conservation and Transportation.

No future growth is included from infrastructure stimulus and yet 2018 is projected to increase by 10%.

Spend Infra Jan15 to Jan19 12-2-17

Total non-building infrastructure spending in 2018 is forecast to reach $324 billion, an increase of 10.5% over 2017. My forecast for 2018 is predicting every infrastructure market will post gains, but it is the Power and Transportation markets that account for almost all the growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Spending growth in the Power market is not quite so apparent. Combined Power new starts are down for both 2016 and 2017, but the spending gains are coming from projects that started in 2015, a year in which starts were up over 120%.

Non-building Infrastructure will reach a new high for spending in 2018. This sector had posted a new high in 2015 and nearly equaled that in 2016. Adjusted for inflation, spending in 2018 will be nearly equal to the all-time highs reached in 2015 and 2016.

Spend Nonbldg Infra 2017-2018 Oct 2017 12-2-17

Public Spending

Total public spending for 2017 remains flat at $287 billion with most major public markets down for the year.

At midyear, I expected Educational and Highway to support a Public spending increase in 2017. Those gains did not materialize. A decline in Highway spending offset small gains in Educational.  By far the largest Public spending decline is in Sewer and Waste Disposal, down 16%.

Public spending hit the low for the year in July. It increased for the last three months, most recently by an 11% increase in Public Educational spending in October.  We are now near the high for the year and can expect to see another six months of growth before spending levels off in mid-2018.

Spend Public Only 2015-2018 12-2-17

When you see graphics that present Residential, Nonresidential and Public spending all on the same plot, they are not additive. Only Residential and Nonresidential can be added to reach total spending. Public is a subset of Nonresidential, composed partly of Nonresidential Buildings (~40%) and partly Non-building Infrastructure (~60%), with a slight amount of residential.

The two largest markets contributing to public spending are Highway/Bridge, 32% of total Public spending, and Educational, 25% of Public spending. The third largest market, Transportation, is only about 10% of Public spending.  Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, which accounts for 8%, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

All of Highway/Bridge is Public spending. Only 80% of Educational spending is Public and only 70% of Transportation is Public. Environmental Public Works markets are 99% Public.

Spend Public-Private 2017-2018 Oct 2017 12-2-17

Total Public spending in 2018 is forecast to reach $305 billion, an increase of 6.3% over 2017. Public spending in 2018 will reach the highest year over year growth since 2008.

Educational and Transportation will contribute equally and together account for almost 60% of the Public spending growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Educational new starts total for the last three months posted the highest quarter in at least seven years. The 2nd highest quarter was also within the last 12 months, so still contributes fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.

See this companion post for  Starts Trends Construction Forecast Fall 2017  11-8-17

After New Starts, dollars are tracked in Backlog, Backlog Construction Forecast Fall 2017  11-10-17

For more on Jobs and Workload see Construction Jobs / Workload Balance 11-7-17 

For effects of inflation see Constant Dollar Construction Growth 11-2-17

Starts Trends Construction Forecast Fall 2017

11-8-17

It all starts here! Construction Starts Generate Construction Spending.

2017 construction starts through September total $557 billion Year-to-date (YTD), even with 2016. If/when 2017 gets revised as expected it will then show +3% to +4% growth over 2016, but we won’t see that growth in the revision data until next year.

  • Previous year starts always later get revised upwards. Therefore, current year starts ytd growth is always understated.
  • Revisions for the period 2012-2015 averaged +4%.
  • Revisions to 2016 year-to-date through September are +10%.
  • Starts have been increasing at an average rate of 11%/year for the last 5 years.
  • Nonresidential Buildings and Nonbuilding Infrastructure are at or near all-time highs.
  • Residential starts are at a post-recession high.
  • New starts will generate record high 2018 starting backlog for every sector.

Nonresidential Buildings starts, averaged 13%/year growth for the last 4 years, even though there was a 1% decline in 2015. 2017 will post an 8% increase. The 6 months from Aug 2016 to Jan 2017 was the highest period of starts since Jan-Jun 2008, the year nonresidential buildings spending peaked. The 6 months Apr-Sep 2017 just surpassed both those previous peak highs. This will help support increases in nonresidential buildings spending for the next two years.

Infrastructure starts posted a higher value of new construction projects in the 1st 6 months of 2015 than any 6-month period in history. 2016 is down just 2% from the peak 2015 starts and 2016 is the 2nd highest starts on record. Those early 2015 starts will still generate 10% of all spending in 2018. After revisions, 2017 starts may set a new peak high. This would set up infrastructure as the strongest growth sector for the next two years.

Residential starts in 2016 posted the best year since 2005-2006. New starts in 2016 were revised up by 5% to show an increase of 10% growth over 2015. That follows five years of growth averaging 20%/year. Initial values posted for 2017 show starts up by only 3.5%, however, the average revision for the past few years has been +2% to +4%, so 2017 will get revised higher. New starts in Q1 2017 reached an 11 year high.

All construction starts data in this report references Dodge Data & Analytics Starts data.

Care must be taken to use Starts data properly. It is regularly misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

Cash flow is the best indicator of how much and when spending will occur. Cash flow from DDA starts gives a prediction over time of how spending from each month of previous starts will occur from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.

Index of Actual Spending and Starts Cash Flows 2015-2018 2-10-18

Nonresidential Buildings

Retail/Commercial starts may finish flat or up just slightly for 2017, but that is compared to peak starts in 2016. Starts for the 12 months Aug 2016 – June 2017 posted 10% growth over the previous 12 months. Retail/Commercial starts have been increasing every year since 2010. In 2010, Warehouse 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.

Office construction starts have been increasing since 2010 with the strongest growth period of new starts in the 12 months July 2016 – June 2017, the highest 12 months on record, 60% higher than the previous 12 months. That high-volume period of starts is going to elevate spending in both 2018 and 2019 to come in higher than 2017. Office starts averaged year-over-year (YOY) growth of 20%/year for the last five years. Data centers are included in Office.

Educational starts are up 7% in 2017. Starts have averaged YOY growth of 8%/year for the last two years and have had slow but steady growth since 2012. The growth in starts will support growth in spending or the next three years.

Office, Retail and Educational markets comprise 60% of all nonresidential buildings. They are collectively responsible for 70% of the increase in 2017 nonresidential buildings starts.

Healthcare starts have quietly increased to a record high over the last 12 months, up 30% for the 12 months through August vs the previous 12 months.

Lodging starts may be flat or will be up only slightly in 2017, but from 2010 to 2016 averaged over 30%/year growth for six years. In 2018, Lodging may return to  that six-year average growth.

Manufacturing is the only nonresidential building market that will NOT finish 2017 with new starts totals at or near post-recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. However, 2017 will post new starts 50% higher than initially predicted by Dodge.

Manufacturing spending was expected to fall in 2017 after peaking in 2015 from massive growth in new starts in 2014. Based on cash flows from starts, spending was expected to decline in 14 of the last 18 months. It did decline in 11 of those months. We are at the point of turn-around with only 1 monthly decline predicted in the next 3 months and no spending declines expected next year.

Non-building Infrastructure

Sewer/Water/Conservation, the three Environmental Public Works markets, posted declines in new project starts in 3 (sewer) or 4 of the last 4 years. Collectively, new starts in 2017 are the lowest in 5 years. Cash flow predicted from starts has been indicating spending declines since Q2-2016. In fact, spending has declined in 12 of the last 18 months. Cash flow still indicates more spending declines over the next 8 months.

Highway/Bridge/Street starts in the 2nd half of 2014 recorded the slowest rate of growth in the last 6 years. Starts that would normally be contributing spending through 2017 and into 2018 contributed a lower than normal volume of spending which will end in 2017. Had it not been for the extremely high volume of starts in the 1st 4 months of 2014, the most ever recorded in 4 consecutive months, 2017 spending would have dropped more than double the 4% spending decline now forecast.

Highway starts in the 1st 6 months of 2015 posted the next highest growth to early 2014. Spending in 2018 will benefit from those projects that started in 2015 but that have unusually long duration. They will contribute a higher rate of spending in 2018 beyond the duration that typical projects would have ended. It is not recent new starts but old backlog that is influencing 2017 and 2018 highway spending.

Transportation Terminal starts in the first three months of 2017 were more than three times higher than any three-month period in the previous five years. While this helped turn 2017 spending positive, 2017 is still affected by uneven starts from two to three years ago holding down gains in the 2nd half. Transportation will show only a 2% gain in 2017 spending but will post strong double digits gains in 2018 and again in 2019. Terminal buildings is reported in Dodge Starts in Other Institutional Buildings. However Census reports terminal spending in Transportation along with Rail and Dock spending. I adjust the starts data in my reports to conform to the Census construction spending reports.

Power market starts peaked in 2015 at an all-time high, up 142% from 2014 and more than the prior two years combined. The Power market was the prime contributor to the abnormally high infrastructure starts in the 1st 6 months in 2015. Power spending was down 6% in 2015 and up only 3% in 2016 because Power starts were also at an all-time high in 2012, just below the 2015 level, and those starts drove 2014 spending to an all-time high, but then spending from those old jobs tapered off in 2015.

Power starts dropped 11% in 2016 and are down slightly in 2017. Recently, there has been an unexpected large volume of power plant and pipeline starts that are driving 2017 power starts to come in about 40% higher than initially expected.

Even though Power starts have been declining since the 2015 high point, Power had several periods with an exceptionally high value of new starts, some of these periods 2x to 3x the normal rate of growth and a year or two longer duration than typical; late 2014, Jan-May 2015, Feb-Jun 2016 and again in Feb-Jul 2017. A large share of the cash flow, or monthly spending, from all those exceptional starts will occur in 2018 and 2019 and will drive spending to 10%+ gains.

Although starts are not tracked for Public vs Private, Highway, Educational, Environmental Public Works and Transportation make up more than 80% of all Public construction. Only Environmental Public Works starts are down. Educational, Transportation and Highway all have a positive outlook in new starts and predicted spending for 2018 which pushes public spending to post-recession highs.

Here’s how to use the Starts data and how it affects spending Construction Starts and Spending Patterns 9-26-17

Also, after New Starts, dollars are then tracked in Backlog, Backlog Construction Forecast Fall 2017  11-10-17

See the Spending Forecast Spending Summary Construction Forecast Fall 2017  12-2-17

 

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