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At age 30, I couldn’t run a 7 minute mile.
I was a pretty good runner in high school and college, but really didn’t come into my own until later in life. It wasn’t until I practiced proper nutrition and learned how to train that things really came together. All of my best post high school times were in my 40s. In fact, age adjusted, all the best times of my life were in my 40s. This should give you some perspective. You are not on the downhill when you hit 40. You have years of potential in front of you. I’d like to set a challenge for some of my younger friends. You can do what ever you want. Set goals. Break your own records.
41 – 1 mile 4:41.7 2nd 40-49 Boston, Northeastern Track USATF NE
43 – 3000m 9:24.2 Boston, Northeastern Track USATFNE 5:02 mile
41 – 4 mile 21:20 2nd 40-49 Arnold Mills July4 Cumberland RI 5:20 mile
41 – 8k (4.97mi) 27:40 3rd team 40-49 National XC Champ Franklin Park 5:34
43 – 8.1 mile 45:08 1st master 40-49 Harvey’s Lake PA 5:34
40 – 10mi 55:13 11th, 1st 40-49 Narragansett RI Blessing of the Fleet 5:31
42 – 13.1mi 72:53 11th 40-49 New Bedford MA Half Marathon NE Champ. 5:34
45 – 20mi mark in marathon 2:00:08 at Burlington Vermont marathon 6:00 mile
45 – 26.2mi marathon 2:41:17 2nd master Burlington Vermont marathon 6:07
Just a few thoughts on forecasting construction spending
If we look at actual data through September, with ~75% of the actual annual construction spending already in the year-to-date and only 25% of annual spending in the estimate to complete in the 4th quarter, if forecasts for year-end totals are not already within 2.5% of the final, that means the projections for the final quarter are off by more than 10%.
Cash flows from construction starts are the strongest predictor of total spending next month. Projects that already started are in backlog. Backlog is used to develop projections for spending. For next month we already have 96% of all work in backlog. The remaining 4% will be new starts next month. For two months out we have 92% and for three months out we have 88% already in backlog. So, the uncertainty on spending in the near term is pretty low. Even averaged over a quarter rather than being exact every month, it takes a major event to have a big miss on projections for the next quarter.
Although exact monthly values in spending may be difficult to predict, trends for monthly changes in spending are easier to predict. Often these trends have very small changes month to month. Monthly changes in spending of +/- 5% are uncommon and changes of +/- 10% are quite rare.
Some forecasts I’ve seen for construction spending would demand that month to month changes in the final quarter exceed 20% to 30%. It’s just not going to happen folks.
For all of 2014-2015-2016
- Total Construction jobs increased from 5,950,000 to 6,700,000, +12.6%
- Total Construction spending increased from $960bil to $1,170bil, +22%
BUT, much of that spending increase is inflation. We need to compare to constant dollars which = Volume. Inflation was particularly high in residential work, over 15% for the 3 years, which means $1.00bil in spending 3 years ago would be worth more than $1.15bil today. Converting everything to constant Oct 2016 dollars, after inflation we get:
- Total Construction volume increased from $1,070bil to $1,170bil, +9.4%
So, for the 3 years, jobs increased by 12.6% while real work volume increased by 9.4%.
A more thorough analysis, which takes hours worked into consideration, shows from the Jan 2011 bottom of the recession in construction to current, both jobs and volume have increased equally by 28%. But jobs growth is often out-of-balance with real volume growth. In the beginning of the recession years of 2008-2011 firms let go of people much faster than work volume declined. 2009 showed a big gain in productivity. By 2010-2011 firms hadn’t let go enough to match the loss in spending. Then from 2012-2014 workload grew faster than firms filled jobs. Since 2011 we are sort of on an even keel.
For the last 3 years, jobs increased more than real construction volume. I pointed this out in my last detailed jobs report. The 6 months from Oct 2015 – March 2016 encompassed the fastest new construction jobs growth period in a decade. It’s no surprise to me that jobs growth has been slow since March this year. Frankly, I wouldn’t be the least bit surprised if it remains slow for awhile. When we look at jobs growth vs. volume growth, there is reason to believe that slow jobs growth is not entirely due to labor shortages. Part of the blame is due to recent over-hiring.
In 2015, nonresidential buildings starts were very high in the beginning of the year and dropped off in the later part of the year. In 2016 it’s just the opposite. This skews year-to-date total comparisons and for most of this year makes it appear as if there may be no growth in new starts.
Here’s a simple example:
Let’s say 4 months in 2016 had starts of $6, 8, 10 and 12 billion and the same months in 2015 had starts of $10, 9, 8 and 7 billion. The year-to-date change for 2016 vs 2015 after the 1st month (6 vs 10) is down 40%. After two months it’s 14 vs 19 (6+8 vs 10+9), down 26%. In the 3rd month 2016 has better performance than 2015 (10 vs 8), but the year-to-date (24 vs 27), down 11%, is still strongly influenced by the earlier months. But in the 4th month we get 36 vs 34 and finally the year-to-date shows 2016 growth of 6% over 2015. That is the current scenario.
Construction Starts for nonresidential buildings for the 1st 4 months in the 2nd half of 2016 (Jul-Oct) are 30% higher than the average of the 1st half 2016 and almost 40% higher than the same 4 months in 2015, and yet the year-to-date % change 2016 vs 2015 is ZERO.
To keep from being misdirected, year-to-date comparisons require knowing not only the direction of the current year trend but also the direction of the previous year trend.
The most recent 3 month (Aug-Sep-Oct) average of nonresidential buildings construction starts by Dodge Data represent the best 3 months since Q1 2008. Although year-to-date performance of zero growth would seem to indicate a slow down, starts are doing just fine. I’m forecasting the final two months of the year to be up 40% from 2015.
But wait, there’s more!
Every year, starts from the previous year are adjusted, always higher. 2016 starts won’t be adjusted up until 2017. But that means all current 2016 (un-adjusted) starts are being compared to 2015 that has already been adjusted up. This causes the year-to-date comparison to be always understated. The average adjustment to nonresidential building starts for the last few years has been about +5%. If that trend remains consistent then next year we should see that 2016 starts were approximately 5% higher than first posted and growth was really much better than current values would seem to indicate.
With 10 months of data in hand, year-to-date starts for nonresidential buildings show no change from 2015. However starts are doing very well and I’m predicting the 2016 volume of starts will lead to 8% growth in spending in 2017.
Why the big slow down in construction jobs this Year? Is work volume on the decline? Are labor shortages to blame?
These days, the most talked about reason for slower jobs growth is the lack of experienced workers available to hire. In fact, recent surveys indicate about 70% of construction firms report difficulty finding experienced workers to fill vacant positions and the Job Openings survey has been at highs for several months. That certainly cannot be overlooked as one reason for slower jobs growth, but that is not the only reason?
Although recent growth has slowed, even with all this talk of difficulty finding experienced construction workers, there has been very good jobs growth. For the 5 ½ year period from the low point in January 2011 to the present (August 2016) we added 1,240,000 construction jobs.
- Jobs increased by 23% in 5 ½ years.
- Spending growth increased 52% in that same 5 1/2 years.
Why is it that jobs don’t increase at the same rate as construction spending? Because much of that spending growth is inflation, not true volume growth. Volume is construction spending minus inflation. To get volume, convert all dollars from current $ in the year spent into constant $ by factoring out inflation.
- Spending growth is not a true measure of increase in real volume.
- Jobs growth should not be compared to spending growth.
Now that we have spending converted to volume, we need to adjust jobs to get real work output. The total hours worked affects the entire workforce so has a significant impact on output.
- Jobs is not a true measure of work output.
- Jobs x hours worked gives total work output.
Spending must be factored to remove inflation and jobs should be factored to include any change in hours worked.
- In the 5 1/2 years from Jan 2011 to mid 2016, real construction volume and jobs/hours real output both increased by 28%.
Now we see over the long term, job/hours and real volume are moving in tandem. But there are always short term periods when they do not and that causes ups and downs in productivity.
In 2014-2015, jobs/hours grew by 11%, the fastest growth for a two-year span in 10 years. Real volume of work increased by 16% producing a real net increase in productivity. But productivity had declined significantly in 2010 and 2011. It’s not unusual to see productivity balancing out over time. In part, this is due to companies balancing their total employees with their total workload.
From October 2015 through March 2016, jobs growth was exceptional. 214,000 construction jobs were added in 6 months, topping off the fastest 2 years of jobs growth in 10 years. That is the highest 6-month average growth rate in 10 years. That certainly doesn’t make it seem like there is a labor shortage. However, the jobs opening rate (JOLTS) is the highest it’s been in many years and that is a signal of difficulty in filling open positions.
- For the 6-month period including Oct’15 thru Mar’16 construction gained 214,000 jobs, the fastest rate of consecutive months jobs growth in 10 years. Then, after 3 months of job losses, July, September and October show modest gains.
I would expect growth such as we’ve had for two years and then that 6 month period to be followed by a slowdown in hiring as firms try to reach a jobs/workload balance. It appears we may have experienced that slowdown. Jobs declined for four of five months from April through August. Keep in mind, this immediately follows the fastest rate of jobs growth in 10 years. But it also tracks directly to three monthly declines in spending. (I predicted this jobs slowdown in my data 9 months ago. I predicted the 1st half 2016 spending decline more than a year ago).
It is not so unusual to see jobs growth slowed for several months. It follows directly with the Q2 trend in spending and it follows what might be considered a saturation period in jobs growth. The last two years of jobs growth was the best two-year period in 10 years. It might also be indicating that after a robust 6 month hiring period there are far fewer skilled workers still available for hire. The unemployed available for hire is the lowest in 16 years.
If spending plays out as expected into year end 2016, then construction jobs may begin to grow faster in late 2016. However, availability could have a significant impact on this needed growth.
Availability already seems to be having an effect on wages. Construction wages are up 2.6% year/year, but are up 1.2% in the last quarter, so the rate of wage growth has recently accelerated. The most recent JOLTS report shows we’ve been near and now above 200,000 job openings for months. With this latest jobs report, that could indicate labor cost will continue to rise rapidly.
As wages accelerate, also important is work scheduling capacity which is affected by the number of workers on hand to get the job done. Inability to secure sufficient workforce could impact project duration and cost and adds to risk, all inflationary. That could potentially impose a limit on spending growth. It will definitely have an upward effect on construction inflation this year. If work volume accelerates, expect labor cost inflation to rise rapidly.
I publish a lot of analysis for various construction data. I also read many other articles posted by other pundits in the industry, including MSM news sources. What I would say regarding construction data is this; an informed knowledge of construction data and how it’s used helps you understand if some article you are reading is accurate or relevant.
What I try to do here is not only report on the latest significant construction data, but also explain how the data must be used to make accurate and valuable analysis.
Here’s just three examples of how news analysts get it wrong:
> Post new construction starts as if those numbers represent construction spending.
A new start this month worth $10 billion adds a huge amount to the starts this month and will most certainly drive up the mo/mo and yr/yr starts numbers. But that new project could take 24 or 36 or 48 months to complete, so we can’t discern the impact on spending until we cash flow the value of the project which gives us the spending over its complete life span. In any given month the total amount of all spending is the summation of the spending this month from all the projects still ongoing that have started in previous months. Spending next month is 95% dependent on the flow of projects that started over the last 24 or 36 months.
> Suggest that two to three months of declines in spending indicates a downturn.
One of the biggest factors that determines spending this month is the values contributed this month from all the previous starts not yet completed. In a sector such as nonresidential buildings, in which the average duration of a project might be 24 months, the amount of spending this month gets some contribution from projects that started in each of the previous 24 months. One of the greatest influences on spending in any given month is the fluctuation (which could have occurred many months ago) in the amount of starts. So sometimes when we see a monthly spending dip it has nothing to do with a current declining trend in overall spending, but might have more to do with erratic new starts up to 18-24 months ago.
Starts can be quite erratic. Although we might see annual starts climbing at a modest rate of 6% or 7% per year, within that year we might see starts increase or decline by 50% or 100% from month to month. This is normal. But what it does to spending, particularly when a very large volume of project spending (from some month in the past that had huge new starts) finishes and drops out of the current spending, it causes dramatic fluctuations from month to month. Much of what we see in month to month changes in spending was predetermined months ago by the pattern of starts.
Normal rates of new starts, if always constant in growth rate, would create a constant rate of growth in spending. Erratic rates of change in starts create erratic changes in spending when those projects come to an end.
> Compare current $ this year to any $ from years past, without taking inflation into consideration.
I recently read an article that claimed construction was back to pre-recession levels. What really was being identified in that article was that current 2016$ were back to the level of current 2006$. That’s like saying $100 today buys you the same products that $100 bought you in 2006. I bet it wouldn’t be too hard to find a few examples where that would not be true.
Comparisons of dollars over time almost always need to be made using constant dollars, that is, adjusted for inflation and all converted to the same point in time, usually today. Sure spending today is up more than 50% off the bottom and in current dollars is higher than the previous peak in 2006. But if we adjusted those 2006$ for inflation the dollars spent in 2006 would be worth much more today. Although current dollars are now higher than any time in the past, after adjusting for inflation we are still 18% below peak spending.
Can the construction industry even accommodate adding $1 trillion of new infrastructure spending over 10 years?
It takes about 5000-6000 new jobs to support $1 billion of new construction work for a year. For infrastructure the number is lower. So $100 billion per year continuous for next 10 years would support about 400,000 new jobs for 10 years. Well, that’s not how it will happen, so let’s look a little closer.
- Historically the fastest rate of growth in spending takes about 3 years to increase 50%. That is for selected markets, never for the entire industry.
- Infrastructure spending grew 50% in 4 years from 2004 to 2008, when that sector was half the size what it is today.
- Infrastructure, about 25% of total construction spending, added spending more than $25 billion in a single year only once. The average annual growth for the past 20 years is less than $10 billion/year.
- Historical growth in jobs rarely exceeds 300,000 new jobs per year. It has never averaged that rate of growth for more than a 3 year stretch. That is for the entire industry.
- Spending after inflation (real volume growth) for all construction increased an average of $50 billion per year for the last 4 years. The same is expected in 2017.
- Jobs increased an average of 250,000 per year for the last 4 years.
- We could expect approximately the same growth in volume and jobs in 2018.
So here’s what we know. The entire construction industry has been growing on average at about $50 billion in volume and 250,000 jobs every year in recent data. Even with the addition of a new influx of infrastructure work, most of that other growth is not going to go away. But how much growth can the entire industry accommodate without bursting at the seams. Let’s make some broad assumptions to see what happens.
Let’s assume for the next 10 years the normal rate of new construction growth gets cut in half. In reality it probably wouldn’t, but we need to push some numbers to extremes to see what happens. So normal new volume, not including any boost from new federal infrastructure spending, might only grow at $25 billion per year and that would absorb 100,000-1250,000 new jobs per year. That accounts for HALF of the entire industry volume growth and jobs growth. How much room does that leave for new growth or expansion in industry growth rates?
If we fill the difference with work from added new infrastructure spending, we can add $25 billion per year in new infrastructure spending and that will add about 100,000 new jobs per year. To account for how the work might be contracted out, let’s just assume in the first year we commit to $250 billion in contracts that are spread over 10 years to get to $25 billion a year in spending. In the 2nd, 3rd and 4th years we could also commit each time to another $250 billion in 10 year contracts that spread the spending out to $25 billion per year for 10 years.
By year 4, we’ve added $100 billion per year in new spending that will stretch out for the next 6 to 10 years ( note: this pushes spending $1 trillion out to 13 years). This spread of money over time, or cash flow, results in increased spending in the government infrastructure markets by 50% in 4 years, matching the best ever industry growth rates. We’ve increased jobs by 100,000 per year for 4 years to a total of 400,000 new jobs and they will all have funds to continue work for the next 6 to 10 years. All that just due to added infrastructure spending.
But let’s not forget the rest of the industry. This would push total spending growth and total industry jobs growth to the highest rates of growth on record. So this is a scenario that is unlikely to be achieved, and it’s not very likely that growth like that could be sustained for very long. It’s also not likely the rest of all the new growth in the industry is going to get cut in half to leave room for new added infrastructure work. So, it’s possible total growth over the next 4 years would be less than anticipated here. This allows for no downturn at any time in the next 10 years.
It begins to seem like it might be pretty difficult to add $1 trillion in spending to the infrastructure construction sector, which is only 1/4 of the entire industry, to be spent in the next 10 years.
When sometimes we push numbers to extremes just to see what happens, we get an unexpected picture of what might, or might not, be possible.