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5-1-17 Updated construction spending forecast for 2017. Actual spending is included through March data, first release 5-1-17. Forecast spending includes predictions based on Dodge Data & Analytics (DDA) construction starts through March, released 4-21-17.
Reference Construction Economic Outlook 2017 posted January 2017
5-1-17 Update Overview
Construction Spending in March posted a seasonally adjusted annual rate (SAAR) of $1,218 billion, down 0.2% from February. February was revised UP by 2.3%, and March data is still subject to revisions, usually upward, the next two months. January was revised UP 1.6% from the initial release.
The 1st release of spending is always being compared to a previous month and a previous year that have already been revised, almost always up. Upward revisions to monthly construction spending in 2016 have been as high as 3.4% and for the year average 1.1%/mo. In the last 48 months, the 1st report of construction spending was down vs the prior month 20 times. The initial value was subsequently revised UP 47 times. After revisions, only nine months were down compared to the prior month.
Total Construction Spending for Q1’17 is 3.5% higher than I predicted in my initial 2017 forecast posted 1-7-17. Construction spending growth from Q4’16 to Q1’17 gives 2017 the 2nd best quarter to quarter start in 10 years, just shy of 2014 which posted the best spending growth since 2005. Nearly all the greater volume in spending over my original 2017 forecast is in residential construction, which, for the last four months, has posted much stronger new starts and spending than anticipated based on DDA projections.
Year over year total spending:
- Jan17r/Jan16 = 4.7%
- Feb17r/Feb16 = 5.5%
- Mar17/Mar16 = 3.6%
Based on history, it is likely that Mar17 will get revised UP. (note: with the 2nd release of March spending, the Mar17 year-over-year value was revised up from yoy 3.6% to 5.0%. The initial Apr17 yoy value was posted as up 6.7% from Apr16. Year-to-date total through April is up 5.8% over 2016, and that will most likely be revised higher.)
Total construction spending in 2017 is now forecast to finish at $1,263 billion, an 8.5% increase vs 2016, supported by a 4th consecutive year of strong performance in nonresidential buildings and a very strong start in residential spending. The SAAR of spending will range from near $1.2 trillion in January to $1.3 trillion in the 4th quarter.
A significant indicator for 2017 construction spending performance is that 2017 year-to-date (YTD) spending is up 4.9% compared to a very strong 1st quarter 2016. In the 2nd quarter 2016 spending dropped and did not return to the Feb-Mar 2016 level until Sept-Oct 2016. In 2017, although growth will slow (but still remain positive) in the 2nd quarter, by Sept-Oct spending will be 5% higher than March. The six months Apr-Sept 2017 compared to the same period 2016 will show growth of more than 8%.
The SAAR of spending on a “current dollar” basis (before adjusting for inflation) is now at an all-time high, just barely eclipsing the highs of early 2006. By the 4th quarter of 2017 spending will be 5% above the previous 2006 highs on a “current dollar” basis. However, on a “constant dollar” basis (adjusted for inflation) we are still 13%-14% below peak spending, perhaps five more years away from the real inflation adjusted 2006 peak.
The SAAR of Residential construction spending increased 6% in the last 3 months. It is up 5.3% from Q4’16 to Q1’17. March YTD (=Q1 2017 total) is up only 8.5% from Q1 2016, because Q1 2016 was exceptionally strong. I’m forecasting residential construction 2017 growth of 8% to 10%. Residential spending in 2017 is forecast at $512 billion, 10.2% higher than 2016.
Total Nonresidential construction spending is up 2% Q1’17 vs Q4’16 and up 2.5% vs Q1’16. Predicted cash flows indicate a strong growth pattern for 2017. I expect total nonresidential spending to finish the year up 7%. Nonresidential construction is better understood by looking at the parts, buildings and infrastructure.
Construction spending for Nonresidential Buildings in Q1’17 is up 1.6% vs Q4’16 and up 6.6% vs Q1’16. The most recent 3-month average seasonally adjusted annual rate (SAAR) is $427 billion, now less than 4% below the previous peak of $444 billion in 2008. By midyear 2017 the SAAR will reach a new all-time high and at year-end it will be near $460 billion.
Nonresidential buildings 2017 starting backlog on January 1, 2017 was 47% higher than at the start of 2014, the beginning of the current growth cycle. Spending within the year has two sources; that generated from new starts within the year and that generated from starting backlog. For nonresidential buildings, spending within the year from starting backlog has increased every year since 2014 and in 2017 it will be 42% higher than 2014.
Nonresidential Buildings spending in 2017 is forecast at $447 billion, 9.0% above 2016. Office spending will lead 2017 with 25%+ growth. Commercial, Lodging and Educational markets are all expected to post strong gains over 10%.
For details on Nonresidential Buildings, See Behind The Headlines – Nonres Bldgs Construction Spending and Nonresidential Bldgs 2017 Forecasts Comparisons
Construction spending for Nonbuilding Infrastructure Q1’17 is up 3.8% vs Q4’16, but down 1.8% vs Q1’16. Nonbuilding infrastructure 2017 growth is expected at about 4%-5%.
Non-building Infrastructure, following two down years, will increase by 4.8% to $305 billion. Infrastructure growth is being led by a very high volume of power generation and pipeline work, up only slightly from Q1’16, but up 10% from Q4’16. Although new infrastructure starts were down in 2016 and are expected to decline again in 2017, the amount of work in backlog at the start of 2017 is the highest its ever been and spending in 2017 is forecast at an all-time high.
For Non-building Infrastructure details see Infrastructure Outlook 2017
Private spending is the highest since Q1 2006. Public spending YTD 2017 vs 2016 is down 7% ONLY because the 1st quarter of 2016 was the highest quarter since 2010, elevated due to highway and bridge spending. Educational and Highway/Bridge, the largest two components, make up almost 60% of public spending. The quarterly average of Public spending has been increasing since Q2’16. By the end of Q2’17 YTD public spending will be up 2.5%.
For all of 2017 Private spending will increase 9%. Public spending could increase 7%, with half the gains coming from educational spending.
Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of the period. The sum of all ETC represents current backlog. While continued growth in backlog is most important, the predicted cash flow from backlog and new starts is necessary for predicting future spending.
Revenues from starting backlog account for 75%-80% of all nonresidential construction spending within the year. Not only was nonresidential starting backlog at the highest ever coming into 2017, but also spending from backlog is predicted up by 5% and 2017 new starts are predicted up 8%.
Due to the shorter duration of residential projects, nearly 70% of spending within the year is generated from new starts. Unlike nonresidential, backlog does not contribute nearly as much spending within the current year. If no new work started within the year, within a matter of a few months there would be no backlog ETC left to support the industry.
Construction starts, which generate construction spending (cash flow) over the next several years, were originally reported in 2016 as up only 1% from a remarkably strong 2015. However, Jan-Feb-Mar 2016 starts have recently been revised up by a whopping 16%, and the historical trend is that every monthly value in the previous year for the last eight years has been revised up. This adds to predicted cash flow, so has an immediate affect of raising predicted 2017 spending. 2016 revisions-to-date and expected revisions are on track to raise 2016 starts up to 6% growth over 2015.
Starts that are being reported for the current year are always being compared to a previous year that has been revised up, so starts growth is always understated. So far, starts for the 1st quarter of 2017 have been much stronger than expected. Starts year-to-date are down 1.5% from the upward revised 2016 totals, however the historical revision has been in the range of 3.5% to 5%. So, the actual growth in new starts has been remarkably strong, better than forecast in October, and is adding to the basis for increased forecast in future 2017 and 2018 spending.
Housing Starts (# of units started as reported by U.S. Census) can be erratic from month to month and short term changes in growth can sometimes be misleading. Trends should be looked at over longer term periods. New monthly starts on a seasonally adjusted annual rate (SAAR) basis for the last eight months through January 2017 have now averaged over 1,200,000. For the last four months starts have averaged 1,250,000. Permits have been following a similar pattern. Although starts versus permits varies considerably in some months, statistically they follow the same growth pattern. Growth in the number of new starts has been 5% to 25% per year due to erratic movement but in the longer term has averaged 18%/yr over six years since January 2011. We experienced an un-sustained start to recovery in 2010, but essentially we went through a protracted bottom between 500,000 and 600,000 new starts that lasted all throughout 2009-2010.
Dodge Data reports SAAR new residential construction starts by contract value in current dollars (not inflation adjusted). Unadjusted growth for the same six-year period increased from $120 billion SAAR to over $300 billion SAAR, or at an annual rate of over 25%/year. However, there was 25% residential cost inflation during that period. In constant 2016$, Dodge new residential starts growth averages 20%/year for six years since January 2011.
Now let’s look at construction spending, actual dollar value of work put-in-place. Here’s where the data has a disconnect.
At the start of 2011, total residential spending had a monthly SAAR of $240 billion and at the end of 2016 was $470 billion, an increase of 16%/year for 6 years. To find real volume growth those values must be adjusted for inflation. After adjusting for inflation, the actual spending volume growth in 2016$ from 2011 through the end of 2016 increased from $305 billion to $465 billion, an increase of 52%, or an average increase of 9%/year for 6 years.
Furthermore, the number of residential construction jobs reported by BLS increased only 33% over that time, an average growth rate of less than 6%/year.
What could explain these differences?
The low rate of jobs growth compared to spending growth is partially explained by the fact that in the preceding few years, even though about 1.5 million jobs were lost, 40% of the workforce, staff was not reduced nearly at the same rate that residential construction volume declined (55%). There remained significantly more staff on payrolls than was needed to complete the amount of volume that was being built during the residential recession. When growth resumed, spending increased at a much faster rate than new jobs were added and the excess labor slack was reduced. I suspect also that a portion of the labor vs spending difference is explained by the fact that not all jobs are captured by BLS. It has been suggested that a large percentage of residential workforce in some southwestern states is undocumented.
The variance between starts and spending is a bit more complicated. We need to look at completions vs starts, the mix and size of housing units being built and the amount of spending related to renovations.
The most commonly reported housing statistic is housing starts. Also in that data series is housing completions. Housing completions are always lower than starts. For the last five years completions have averaged almost 15% less than starts. While the growth in starts averaged 18%/year, growth in completions from 2011 through 2016 averages less than 15%/year.
From 2011 to 2016 the average number of new single family (SF) units started increased from about 450,000 to 800,000. During that same period multi-family (MF) starts increased from 100,000 to 440,000. The percentage of MF units in total construction grew from 18% to 36% of total.
On average MF units are about half the size of SF units. Although the average size of SF homes increased about 10% during this period, the growth in the number of smaller MF units exceeded that of larger MF units by a factor of 2x. The ratio of smaller MF units doubled.
The share of MF units as a percent of all units doubled and the ratio of smaller vs larger MF units doubled. The total square feet of housing being built increased but did not grow at the same rate as the number of units. The average size of all units is getting smaller and therefore the constant cost per unit went down.
I suspect the increased ratio of smaller MF units and the percent increase of MF within the total number of all housing units has a big influence on the overall average cost per unit of total housing. That with the lower growth rate in completions helps explain why spending is not increasing at the same rate as overall number of housing unit starts. We are building more units per dollar spending because average unit size is smaller.
There is one more hidden factor to look at. That is, residential construction spending includes renovations. From 2009 through 2012 renovations totaled 45% of all residential spending. It began to decrease in 2013. For the last three years, renovation spending accounts for only 33% of all residential construction spending. Renovation spending has no comparable # of units or total square feet associated with it.
The impact this has, since the share of renovations spending is declining, is to increase the percent growth in residential spending attributable to housing units to greater than the 9% calculated above. Removing renovations work from total spending shows growth in real inflation adjusted spending specific to housing units averaged about 13%/year for 6 years.
Summarizing everything from above, since 2011:
On the surface it looks like this:
- Housing Starts # of units increased at 18%/year
- Residential new starts in unadjusted dollars increased 20%/year
- Residential construction spending increased 16%/year
After adjusting both units and spending we get:
- Inflation adjusted total residential spending increased 9%/year
- Inflation adjusted spending on units (excluding renovations) increased 13%/year
- Growth in the # of housing units completed increased 15%/year
- Share of Multifamily units has increased
- Average size of multifamily units has decreased
- Average size of all housing units being completed has grown smaller
- The growth in the number of units completed can exceed the growth in spending because the average constant value cost per unit has decreased
The growth in the number of housing unit starts is NOT an indicator to use for forecasting growth in residential construction spending or constant volume. Increases in the number of units alone will not give a realistic indication of growth in residential jobs or spending. The rate of growth in completions, combined with the ratio of the sizes of units, not just size of SF homes but average size of all SF and MF units, has a significant influence on the spending volume and can only be compared to inflation adjusted spending specific to units, that is, total spending minus renovations.
Dodge Data New Construction Starts in December fell off the pace of growth we had in the previous few months due entirely to a large drop in Energy Infrastructure starts. Total of all starts for 2016 finished as the highest year since 2005. Un-adjusted 2016 totals are only 1% higher than 2015, but 2015 totals have already been adjusted up, so this is an unequal comparison. Annual adjustments are always UP and average about +4% per year. After 2016 totals get adjusted up we might see 2016 growth of 4% to 5% over 2015.
Residential starts in 2016 posted the best year since 2005-2006. Residential starts bottomed in 2009 and have now posted the 7th consecutive year of growth. New starts show an increase of only 6% for 2016, but that follows several years of growth averaging more than 20%/year. I expect after adjustments 2016 residential starts will be revised to 8% growth. Spending has bounced 90% off the bottom in large part due to 17%/year average growth in 2013-2014-2015. Because both starts and spending growth have been so strong, recent percent growth rates are smaller. Expect only 5% spending growth in 2017.
Nonresidential Building new starts in December remained consistent with October and November. Although well below the yearly highs reached in August and September, the final three months helped carry 2016 totals to an 8-year high. Nonresidential Buildings starts for the last six months averaged the highest since the 1st half of 2008. Total starts as posted are up only 4% from 2015 but nonresidential buildings has been subject to the largest adjustment of all sectors. I expect after adjustment nonresidential buildings will show a 2016 increase of about 8% to 9%.
These six Nonresidential Buildings markets, which make up 80% of all nonresidential buildings spending, posted the following growth in starts leading into 2017: Office +37%, Lodging +40%, Educational +11%, Healthcare +21%, Commercial Retail +11% and Amusement/Recreation +21%. For the last 3 years spending combined growth in these six markets has ranged between 9%/yr and 12%/yr. For 2017, expect spending growth of 14%.
Manufacturing, which has an 18% market share of nonresidential buildings, saw new starts decline by 38% in 2016. However, in 2014 and 2015 this market posted the fastest growth of any market in a decade and posted the two highest years on record. In 2015 spending increased 33% to the highest ever recorded for manufacturing buildings. Spending is down 4% in 2016 and is expected to decline 13% more in 2017, but 2017 will still be the 3rd highest year of spending on record.
Non-building Infrastructure monthly new construction starts in December fell to a 10-year low. However, due to strong performance throughout the year, and even though total starts fell 11% from 2015, total Infrastructure starts for 2016 came in at the second highest year on record. 2015 was up 27% from 2014. So, even though headlines will point to an 11% decline in 2016, due to the distribution of spending from backlog, 2017 will post the largest spending increase in 3 years. I expect after adjustments the 2016 decline will be revised up by 3 points to -8%.
Power and Highway/Bridge/Street make up two thirds of non-building infrastructure spending. Power project starts dropped 33% in 2016, but from the highest annual total of starts on record. In 2015, Power starts increased 150% to an all-time high and Highway/Bridge/Street finished just shy of a 6-year high. In the 1st five months of 2015, a years worth of Power projects started and they are not yet completed. That volume is still contributing to infrastructure spending in 2017. It was not unexpected that starts in these markets would be down for 2016. The amount of monthly spending from projects started in 2014 and 2015 in this sector will contribute to spending for several years to come. Spending in 2017 will be the highest ever in this sector, up 4% from 2016.
Dodge Data published new construction starts for January 2017 on Feb 22. Starts are up 12% from December; +1% in residential, +16% in nonresidential buildings and +44% in non-building infrastructure. December was revised slightly. Among the major changes for this January: electric utility +285%; misc public works +222%; transportation terminals +768% (mostly LaGuardia airport terminal); offices +26%; manufacturing -69%; educational -18%.
A major revision was posted to January 2016 starts. They were revised up in total by 23%, a huge move equal to about 1/3 to 1/2 of what we would normally see for a total annual revision. For the last 4 years the annual revision to new starts has averaged +4%. January 2016 residential starts were revised up 9%, nonresidential buildings up 21% and non-building infrastructure up 49%. Even with that, current January 2017 starts are up 10% from January a year ago.
Prior to the data release on Feb. 22, non-building infrastructure 2016 starts were down 11% from 2015. You will note in my commentary above I predicted that would be revised to show only an 8% decline. After one month it has already been revised to only an 8.6% decline. I now expect after all months of 2016 infrastructure starts are revised 2016 will show only a 6% decline from 2015.
Summary 2016 Construction Spending
Total Construction Spending for July reached a seasonally adjusted annual rate (SAAR) of $1.15 trillion, level with June which was revised upwards by $20 billion or nearly +1.8%. Monthly spending always gets revised in subsequent months. This year every month but May, which remained nearly unchanged, has been revised upwards, by an average of +1.4% and as much as 3.4%. Monthly values are subject to revision for two months after the first release and once again in May of the following year.
This plot, Construction Spending vs New Starts Cash Flows, shows actual spending (SAAR) by sector through July 2016 and projected trends of spending out to July 2017.
Previously I wrote that we should expect a short duration downturn in spending occurring between January and March. The expected monthly spending cash flows that would be generated from uneven new starts over the last two years indicated that a slowdown in spending would occur during the first quarter 2016. As it turns out, first quarter spending was much stronger than expected, averaging $1.17 trillion SAAR, primarily due to outstanding results in February and March for residential spending. But then April and May experienced significant declines, dropping to an average of only $1.14 trillion SAAR, down almost 3% from Q1. Now with June and July spending both up 1% from the April and May lows, it looks like we may be past that short duration downturn.
Total Construction Spending year-to-date (YTD) through July is up 5.6% over the same seven months 2015. Spending slowed in April and May from a 1st quarter average of $1.17 trillion that reached close to a 10 year high and falls just 4% short of the all-time high. However, it must be noted, that compares unadjusted current dollars, values of all dollars current in the year spent.
When comparing inflation adjusted constant dollars, all dollars adjusted to the same point in time, we can see 2016 spending is still 18% below the 2006 highs.
Total spending YTD through July is slightly ahead of what I predicted back in December, but it’s slightly below what I expected for May, June and July . I expect 2nd half spending to average above $1.2 trillion SAAR, but slightly lower than I originally forecast.
I’ve revised my 2016 spending forecast down slightly to total $1.190 trillion, up 7% from $1.112 trillion in 2015.
How does actual spending YTD compare to my prediction at the beginning of the year?
- Total predicted YTD through July $638.2b, actual YTD $647.7b (+$9.5bil, +1.5%).
- Residential predicted YTD $245.1b, actual YTD $259.2b (+$14.1bil, +5.8%).
- Nonresidential Bldgs predicted YTD $236.9b, actual YTD $228.1b (-$8.8bil, -3.7%).
- Non-building Infrastr predicted YTD $156.2b, actual YTD $160.5b (+$4.3bil, +2.8%).
Where are the revisions?
The single largest reduction in spending is in Nonresidential Buildings Manufacturing. Although there are other variances, that could account for the entire revision downward. Predicted construction starts for Manufacturing was lowered by nearly 35% after the initial start-of-year forecast was made.
Non-building Infrastructure spending increase is being supported by a 20%+ increase in power, which I didn’t expect. New starts for power projects have increased more than 20% since the initial forecast.
Residential construction had unusually large gains in February and March, almost all of that in residential renovations, offset only partially in April through July by declines mostly in new single-family housing.
Here’s my revised 2016 spending forecast based on YTD spending and new construction starts through July, compared to my prediction in December 2015.
- Total predicted Dec 2015 $1,206.2b, July 2016 $1,189.9b (-$16.3bil, -1.4%).
- Residential predicted Dec 2015 $473.8b, July 2016 $481.8b (+$8.0bil, +1.7%).
- Nonresdntl Bldgs predicted Dec 2015 $439.2b, July 2016 $410.9b (-$28.3bil, -6.4%).
- Non-bldg Infrastr predicted Dec 2015 $293.2b, July 2016 $297.3b (+$4.1bil, +1.4%).
Spending and construction starts are often confused by some analysts who refer to starts data as spending. Starts represent total project value recorded in the month the project begins. To determine spending activity, starts values must be spread out over the duration of the projects. Spending is dependent on cash flows each month generated from all previous construction starts. Cash flows expected based on Dodge Data construction starts are indicating a return to growth in spending in the 2nd half 2016. (See chart above Index Actual Construction Spending vs New Starts Cashflows).
Spending Breakout by Sector
Residential construction spending for July totaled a SAAR of $452 billion, remaining near level for the last four months. Residential spending YTD through July is up 6.5% over 2015. Spending slowed in April and May from a very strong 1st quarter average that reached close to a 10 year high. The current 3-month average is just 1% below the 1st quarter and is still at its highest since the 2nd half of 2007 but is 10% below the current dollar all-time high in 2006. I’m still expecting some upward revisions to June or July residential spending.
Residential spending just experienced the strongest three-year stretch of spending growth on record, up 60% in 2013-2014-2015. After taking out inflation, volume growth was only 31%, but that is still the strongest ever for three consecutive years. Spending growth in 2016 will reach only +9%. After adjusting for inflation that represents volume growth of less than +4%, the slowest in 5 years. New starts YTD (as reported by Dodge Data) although down from the 1st quarter, are still near post-recession highs. Starts from late 2015 and early 2016 will still be generating spending into early 2017. 2017 will repeat nearly identical to 2016. What we may be seeing is that it might be difficult to register another year of very high percentage growth in 2016 or 2017 because it is being measured against the 2015 10-year high. Another factor limiting very high growth may be a limited supply of labor to expand the workforce.
Total Nonresidential SAAR spending for July is $701 billion, down slightly from June, but monthly SAAR has varied only +/- 1% for the last six months. YTD spending compared to 2015 is up 5.1%. Nonresidential spending also slowed in April and May but is now up 1.5% from those lows. The current 3-month average is up slightly from the 1st quarter and is just 3% below the pre-recession 2008 current dollar high.
Nonresidential Buildings spending for July totaled a SAAR of $403 billion, down slightly from June but up 1.3% from the May dip. Spending YTD for nonresidential buildings through July is up 8.0% over 2015. The current 3-month average of $403 billion is up slightly from the 1st quarter but is still 9% below the peak in 2008.
Non-building Infrastructure spending for July fell to a SAAR of $289 billion, down only slightly over for the last four months. YTD spending through July is up only 1.3% over 2015. Spending began to slow in April and May and is now at the 2016 low. The current 3-month average is down 4% from the 1st quarter. However, spending on nonbuilding infrastructure reached an all-time high in the first half of 2014 and has remained near those highs through 2015 into the 1st quarter of 2016.
Public spending average for the 1st six months of 2016 is the highest since 2010 and is up 10% from the 2014 low point. YTD public spending is up 0.2% from 2015. All of Highway plus 80% of Educational makes up 55% of all public construction spending. The next largest markets, all of Sewage/Wastewater plus 70% of Transportation accounts for only 19% of public sending. All other markets combined make up less than 20%.
The biggest mover to total public spending this year is educational spending. Public educational spending is up only 4.0% YTD, but because it represents almost 25% of all public spending, it’s has a bigger net impact of +1.0% on moving the trend up than any other single public market. Public commercial spending is up 36.6% YTD but has only a 1% market share of public work. Highway and street is up 2.6% YTD. At 30% of total public that results in a net move of +0.8%. Office, public safety, power, sewage/waste disposal and water supply are all down YTD by a combined -5.3%. At a combined market share of 21% that nets a -1.1% reduction in YTD public spending.
Private spending is dominated by a 52% market share of residential work. At 6.6% growth that nets 3.4% growth in private spending. Several of the nonresidential building markets have high YTD growth (and/or a large market share of private work); lodging +30%, office +27%, Amusement +22%, commercial +10% and power +8%. These five markets combined represent 29% of private spending and combined are up +15% YTD for a net impact of +4.4% to private work.
For a base of reference, here’s a few points in spending history.
Total Construction Spending
- 8 years 1998-2005 up 77%
- 3 years 2003-2005 up 32%
- 3 years 2008-2010 down 30%
- 4 years 2012-2015 up 41%
- 8 years 1998-2005 up 133%
- 3 years 2003-2005 up 57%
- 3 years 2007-2009 down 60%
- 3 years 2013-2015 up 60%
- 5 years 2004-2008 up 64%
- 3 years 2006-2008 up 45%
- 3 years 2009-2011 down 36%
- 2 years 2014-2015 up 25%
- 7 years 1995-2001 up 56%
- 4 years 2005-2008 up 60%
- 3 years 2009-2011 down 8%
- 3 years 2012-2014 up 19%
See this post for expanded details on Construction Spending – Nonresidential Markets – Buildings and Infrastructure
Read my last few blogs and all of this is detailed, but this is worth a look.
Dodge Data Construction Starts cash flowed shows a predicted spending pattern.
Actual spending is shown to compare to the prediction.
For another residential input we have new housing starts. Here I’ve spread activity out from start to completion like a cash flow to get monthly activity. History compares to actual spending and future compares to Dodge New Starts cash flow.
The time flow of activity generated by housing starts is much more important than the monthly starts themselves. It prompts us to look at a much longer term trend of housing starts than just whether they have moved up of down in the last month or quarter.
Modeling for nonresidential buildings and non-building infrastructure appears more accurate than residential. It looks like my prediction of cash flow from Dodge residential starts needs to move 2-4 months to the left.
5-4-16 The cash flow plot for residential has been revised to use a different duration for SF vs MF vs Reno.
Housing starts can be erratic. It’s not unusual to see monthly housing starts fluctuate up or down by 10%, sometimes 20%. But what affect does this have on the flow of housing work? Not as much as you might think.
Although housing starts is in units, not dollars, we can create a “cash flow” to see how the new starts generate activity over future months. To see the flow of work I’ve created a simple time flow of starts to show the activity generated for new housing starts.
About 2/3rds of housing starts are single family units. These might have a construction duration ranging from 6 to 9 months. The remaining 1/3rd of starts are multifamily units. Those could have construction duration of anywhere from 8 months to 16 months and in some cases longer. For this simple analysis I’ve used a work flow duration of 2/3rds at 7 months and 1/3rd at 17 months. Varying the duration longer or shorter by a few months will not have a big effect on the outcome. It changes the slope of the growth rate but does not change the consistency of the growth pattern.
A time flow of housing starts shows growth rates of; 2013 +13%; 2014 +10%; 2015+12%. Actual construction spending shows growth of 2013 +19%; 2014 +14%; 2015+13%.
The chart above, “Housing Starts Monthly and Trend” shows the actual monthly starts values and a three month moving average. Monthly starts periodically peak and dip erratically. Look at February 2015, the biggest dip in 5 years. The 1st quarter 2015 was down 7% qtr/qtr. But then notice it took less than 4 months for starts to come right back to the trend line and the trend remained intact. 2015 finished up 11%. This is how the monthly housing starts (# of units) data goes.
The “Work Flow” chart plots the actual work load out over time from the month the work started to completion. The total work flow in any given month is the sum of the work contributed from starts in previous months that have yet to be completed. Residential work flow has averaged +12% for the last 3 years. In 2015, growth was 14%. The very steep climb in early 2013 activity reflects work generated from the 28% rise in new starts in 2012, the largest % increase in new starts in 30 years.
Starts in any given month have only a small % impact on the slope of change in every succeeding month until completion. This is the same concept as cash flow. Construction spending in any given month is the sum of all the ongoing projects from all previous months.
This next plot shows the same workflow, only Not Seasonally Adjusted, so it shows the winter dips in activity and the steeper rate of growth during the more productive months. Although the average slope of growth is similar to the SAAR plot, this shows the real total work activity in any given month varies from that shown by the SAAR plot. However, it is not erratic like the starts plot, it is smooth and repetitive year after year.
It would take a dramatic change in housing starts to significantly alter the progress of work flow and it would need to be a sustained change in starts. If a 20% decline is offset by an corresponding increase in the following month or months, then the future months of work flow will show little affect from the decline.
Construction spending may reach historic growth in 2016.
There are currently six estimates available forecasting 2016 total construction spending ranging from 6% to 10% growth, with an average of 8.7%. My forecast is 9.7%.
Total construction spending, forecast to grow 9.7% in 2016, could reach a total 30% for the three years 2014-15-16. The only comparable periods in the last 20 years are 29% in 2003-04-05 and 27% in 2013-14-15.
The current nonresidential buildings construction boom could become an historic expansion. Nonresidential buildings spending is forecast to grow 13.7% in 2016. Added to 8.8% in 2014 and 17.1% in 2015, the three-year total growth could reach 40% for 2014-15-16. The only comparable growth periods in the last 20 years are 40% in 2006-07-08 and 32% in 1995-96-97.
For perspective, residential spending increased 46% in 2013-14-15, similar to only one comparable period in the last 20 years, 48% in 2003-04-05.
Non-building infrastructure projects, in two of the last three years have barely shown any gains entirely due to declines in power plant projects. This will repeat in 2016.
This is still the 1st or 2nd most active 3 year period of growth in construction in more than 20 years, and it’s already been ongoing since 2013-2014. With the forecast for 2016, spending growth could reach a new three-year high.
From the middle of Q1 2016 to the end of Q3 2016, total spending will post six to eight months at an annual growth rate of 20%, but due to the dips at the beginning and the end of the year, total 2016 construction spending will finish at 9.7% growth. Construction spending momentum is not yet losing steam. We may be seeing the effects of a few years of erratic growth patterns and a shift from more rapidly changing commercial and residential work to slower growth institutional work.
Residential spending will slow several percent early in 2016 before resuming upward momentum to finish the year with 12% growth, slightly less than growth in 2014 and 2015. Periods of low new start volumes need to work their way thru the system and this produces growth patterns with periodic dips. The upward momentum will carry into 2017.
Nonresidential buildings spending will slow moderately in the next few months before we see a 15% growth rate through the middle of the year, only to see another slowdown late in 2016. Major contributions are increasing from institutional work in educational and healthcare markets. Office, commercial retail, lodging and manufacturing will decline considerably from 2015 but still provide support to growth.
Infrastructure projects spending will decline over the next six months due to the ending of massive projects that started 24 to 42 months ago. There will be large advances in spending midyear before we experience another slowdown later in 2016. Following a 0.5% increase in 2015, spending will increase only 1.2% in 2016, held down by a 10% drop in power projects, the second largest component of infrastructure work.
Construction added 1.0 million jobs in the five years 2011-2015. 800,000 jobs were added in the last three years. To support forecast spending, jobs need to grow by 500,000 to 600,000 in 2016-2017. Growth in nonresidential buildings and residential construction in 2014 and 2015 led to significant labor demand which has resulted in labor shortages in some building professions. Demand in 2016-2017 will drive up labor cost and may slow project delivery.
Spending growth, up 35% in the four-year period 2012-2015, exceeded the growth during 2003-2006 (33%) and 1996-1999 (32%) which were the two fastest growth periods on record with the highest rates of inflation and productivity loss. Construction spending growth for the period 2013-2016 is going to outpace all previous periods.
Construction inflation is quite likely to advance more rapidly than some owners have planned. Long term construction cost inflation is normally about double consumer price inflation. Construction inflation in rapid growth years is much higher than average long-term inflation. Since 1993, long-term annual construction inflation for buildings has been 3.5%, even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8%.
For the last three years the nonresidential buildings cost index has averaged just over +4% and the residential buildings cost index just over +6%, however, the infrastructure projects index declined. The FWHA highway index, the IHS power plant index and the PPI industrial structures and other nonresidential structures indices have all been flat or declining for the last three years. This provides a good example for why a composite all-construction cost index should not be used to adjust costs of buildings. Infrastructure project indices often do not follow the same pattern as cost of buildings.
Anticipate construction inflation of buildings during the next two years closer to the high end rapid growth rate rather than the long term average.
October housing starts released Nov. 18th didn’t come in as expected. The annual rate for October is 1,060,000 new starts vs 1,191,000 in September and 1,079,000 in October last year. BUT look a little deeper than just one month.
The last 4 months of starts have been pretty high, averaging 14% higher than the previous 4 months and 16% higher than the same 4 months last year.
Take a look at this chart. Monthly starts periodically peak and dip erratically. Look at February 2015, the biggest dip in 5 years. But then notice it took less than 4 months for starts to come right back to the trend line and the trend remained intact. This is how the monthly housing starts data goes.
So don’t get too alarmed over one month of data. Now if this downward trend were to continue for several months, go ahead get concerned, but that hasn’t been the pattern.
The latest New Housing Starts numbers were released today. Residential growth is looking good and based on several inputs, I’m predicting an increase in residential construction spending next year. But let’s take a look at the variance you might get when looking at different data sets.
All the data below represents residential construction growth for the period from January 2011 until current, the last 4 years 8 months
New Construction Starts in $ (by Dodge Data Analytics) +19%/yr
New Housing Starts (number of new housing units) +20%/yr
Total Construction Spending +12.5%/yr
Volume (construction spending minus construction inflation) +7%/yr
The obvious first question is why don’t all the data agree? Without a lot more information on housing that cannot be answered here, but there are a few reasons that can be considered as cause for variation;
- the average size of housing units being built
- the quality of the components built into the housing units
- the cost to the contractor for the materials used
- the cost of labor wages to build the housing unit
I’m sure there are other reasons to consider as this is not intended to be a complete list of what might cause variances between starts and spending, but it does highlight that starts does not give an exact indication of the growth in spending. There is a fairly consistent growth rate in starts of 20%/year and yet construction spending in current dollars has been growing at only 12.5%/year. Furthermore, a sizable portion of that spending growth is just for inflation. After inflation is taken out we see real construction volume in constant 2015$ has been growing at only 7%/year.
I don’t have an answer to explain these variances. I’m highlighting the data to show these variances exist and we can’t always rely on one data set exclusively. Perhaps this will initiate a discussion as to why these data vary by so much.