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Is Infrastructure construction spending near all-time lows? This question is raised because I saw comments to this affect recently posted on a major national construction professional organization twitter feed.
First, this raises several other questions:
- Exactly what construction markets are being referenced as infrastructure?
- Does this reference include public work only, or both public and private?
- Are educational and health care being included as infrastructure?
- Does this reference constant inflation adjusted spending?
The construction markets typically referred to as infrastructure, in order of largest to least volume, include; Power, Highway, Transportation, Sewage/Waste Water, Communications, Water Supply and Conservation. Sometimes also considered are Educational (3rd after Highway), Healthcare (after Transportation) and Public Safety (2nd smallest).
If only public work is included, everything changes. Most (90%+) of Power spending is private, so it represents less than 3% of public work. The largest contributors in this case are: Highway (32% of public work), Educational (25%), Transportation (11%), Sewage (8%) and Water Supply (4%). No other market is greater than 3% of public work.
And finally, is the reference to current dollars as originally spent within each year, or to constant inflation adjusted dollars, adjusting all historical expenditures to constant 2017 dollars? Any comparison to determine if real growth has occurred should be in constant dollars, in this case all adjusted to 2017.
Typical infrastructure, not including educational, healthcare or public safety, but including all public and private sector work produces this result:
However, the most likely reference is to typical public infrastructure, not including educational, healthcare or public safety. This scenario includes only the public sector work of typical infrastructure and eliminates private spending. This eliminates 90%+ of all power work and 100% of communications. So, for this scenario I’ve removed all power work and communications work. This is the result:
In both instances, the lows, whether using current or constant dollars, occurred between 1993 and 2004. The highs are recent, all occurring from 2007 to 2016. 2017 spending dropped somewhat from 2016.
To answer the question, Is Infrastructure construction spending near all-time lows? NO! Infrastructure construction spending is not at or even near all-time lows. In fact, if we extend our timeline back more than three years, it’s not even near recent lows. It is near all-time highs!
Infrastructure construction spending in August dropped to the lowest since November 2014. However, this was not unexpected. Cash flow models of infrastructure starts from the last several years show monthly spending dips and peaks. Current dips in spending are being caused by uneven project closeouts from several years ago. The actual current backlog is at an all-time high and spending will follow the expected cash flow.
Infrastructure starting backlog hit a new all-time high in 2017 and will again in 2018. Public Infrastructure new starts reached all-time highs in 2013 and 2015 and are on track to go higher in 2017. 80% of infrastructure spending within the year comes from backlog at the start of the year and that backlog may be comprised of jobs one, two, three and even four years old.
Infrastructure spending in 2017, although down slightly from the all-time high reached in 2015 and nearly equaled in 2016, will reach a new high in 2018.
(This analysis does not include any spending projections from an infrastructure investment bill).
Highway spending is currently benefiting from projects that started in 2015 but that have unusually high value and long duration. They contribute spending well into 2018 beyond the duration that typical projects have ended.
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. However, 2017 spending is still affected by uneven starts from two to three years ago, holding down gains in the 2nd half. Transportation will show only a 1% gain in 2017 but produces double digit gains in 2018.
Infrastructure construction spending is near all-time HIGHS and has been for the last several years. That is not meant to indicate there is no need for infrastructure investment. I think the need is well established. However, I’ve been writing about infrastructure for more than a year, pointing out the level of activity in this sector and the difficulty that will arise when we try to increase work volumes. The approach to adding new work and the discussions surrounding this approach should reference accurate data, and that should include an accurate representation of current workload and future ability to absorb more work.
For much more in-depth related to infrastructure construction see this post Infrastructure Spending & Jobs
You know those articles you’ve been seeing, “Worst year for construction spending since 2010″, well there’s some truth to that, BUT
2017 is the 6th year of the expansion. It has slowed, but… Here comes the BUT!
10-4-17 – Construction numbers are at all-time highs! Slowing or not, activity is very strong. Looking behind the headlines, here’s what we see;
Residential construction spending is slowing the most, from +11% in 2017 to only +2% in 2018 after six years averaging 13%/yr. Nonresidential buildings spending this year just kept up with the rate of inflation (4%), none-the-less, it’s at record highs. It doubles that rate of growth to 8% in 2018. Non-building infrastructure, down 2% in 2017, next year expect growth of 10%+, coming from long duration jobs.
The real performance numbers in Infrastructure are completely hidden. Spending was near flat for three years. But during that time, contrary to every other sector which experienced inflation of 15%, Non-building Infrastructure experienced deflation of 7%. (Gee, didn’t I read somewhere that activity within a sector is a primary driver of inflation?) Anyway, flat spending means volume really increased by 7% during that time. Spending by itself never tells the whole story!
There were some expected dips in spending recently, Manufacturing, Power, Highway, and there will be more in early 2018. BUT, there are also expected boosts in spending, Office, Commercial/Retail. Some of these already have matched up with the forecast, and there are more to come in 2018, Power, Transportation.
All Nonresidential Backlog is at record highs.
Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2017 and again in 2018. For four years, from 2010 to 2013, all nonresidential backlog remained fairly constant. Since then, backlog for infrastructure is up 30% and for buildings it’s up 60%. (75% to 80% of nonresidential spending within the year comes from backlog at the start of the year. For residential, 70% of spending comes from new starts within the year.) Buildings will hit spending records in both 2017 and 2018. Infrastructure spending will hit a new high in 2018.
Ignoring for the moment that comparing any month to the same month last year can be grossly misleading as to the direction the markets are headed (for reasons explained in other recent posts on this blog), 2017 total spending growth is the lowest % yr/yr growth since 2011 (not 2010). Does that make it “worst”?
Spending will gain +5.6% in 2017, the least gain in six years. Last year was +6.5%, 2013 was +6.6%. The average for the last six years is +8%. So 2017 is the worst. Pretty damn good worst!
Data released 10-2-17
Preliminary Report August Construction Spending
August construction spending was posted today at $1.218 trillion, up 0.5% from the 1st revision to July.
- Residential spending is up 0.5% from July, up 12.3% YTD.
- Nonresidential Buildings spending is up 1.8% from July, up 4.5% YTD.
- Non-building Infrastructure is down 0.5% from July, down 3.4% YTD.
Year-to-date through August posted at $806 billion, up 4.7% from same period 2016.
What you should know – Revisions:
Since the bottom of the recession in January 2011, through June 2017 (78 months), spending vs the prior month was 1st reported down 42 times. Values were revised up 64 times, but not all months turned positive. After revisions, spending was down vs the prior month fewer than 20 times.
Monthly values are revised the next two months after initial release. Spending has been revised UP 15x in last 18 months. The average revision in following two months is +1.0%. This table shows the growth before and after revisions this year. Notice, spending was 1st reported down vs the prior month 5 times through June. After revisions spending is down only twice.
All values for the year are revised again in following May data report. The final revision has been UP 49 of the last 53 months. Average post-annual revision 2016 +2.2%; 2015 +4.3%; 2014 +4.4%. The average post-annual revision for the last 4 years is just over 3%.
Year-over-year and year-to-date comparisons of construction spending are generally understated by about 2% to 3% until the final revision of spending data is posted in May the following year.
Year-to-date construction spending through August is posted at $806 billion, up 4.7% from same period 2016. However, the post-annual revision has already been applied to all months in 2016. The same revision will not be applied to 2017 data until May 2018 data is published next year, so current YTD is always understated. Based on post-annual revisions for the last 4 years, adjustments range between +2% and +4%. The most recent six months has averaged +2.4%. So YTD 2017 spending will very likely increase and could be in the range of 6% to 8%.
Market Specific Revisions
Specific markets vary both higher and lower than the average revision. For example Power has been revised on average +10%, while Educational was revised less than 2%. Highway and Transportation revisions have averaged less than 1% over the last 18 months.
Construction Spending Revisions After 1st Release Through August Data:
Every month this year except April has been revised UP. The April data looks like such an anomaly (largest monthly decline since the recession) that I expect next May we will see April get revised up by +1% to +1.5%. July data gets revised next month and I expect to see an additional +1% to +1.5%.
- Total Construction UP 49 of last 53 months, avg 3.7%/mo.
- Total Construction UP 17 of last 19 months, avg 2.5%/mo.
- Residential revised UP 30 of last 31 months, avg 6.8%/mo.
- Residential UP 18 of 19 avg 3.6%/mo.
- Commercial UP 18 of 19 avg 5.7%
- Educational UP 13 of 19 avg 1.7%
- Power UP 19 of 19 avg 10.7%
- Commercial/Retail May +6.7%, June +3.8%, July +3.7%
- Lodging May +4.3%, June +0.2%, July +1.4%
- Educational May -0.7%, June +3.4%, July -1.8%
- Transportation May +3.5%, June +2.1%, July -1.8%
2017 construction spending is expected to reach $1,252 billion, up 5.6% from 2016. Average annual rate of spending will increase to $1,300 at year end. I wouldn’t be surprised to see future revisions to Mar-Apr-May spending smooth out that erratic period and add to total $ 2017.
In my forecast, I rely on the revision data by market to add a conservative adjustment for expected normal revisions.
My current Forecast has spending year-to-date through August up nearly 6% over 2016. Spending in the 2nd half 2017 will increase 1.5% to 2% over the 1st half 2017 and will increase more than 5% over the 2nd half 2016.
- All sectors have already hit spending lows for the year and will increase 4% to 8% over the next six months.
- Infrastructure will finish the year with totals down 2%, but the annual rate of spending could potentially increase 8% from July to year end. 2018 shows 11% growth.
- Nonresidential Buildings may finish up 5% in 2017, the sixth consecutive year of growth. For 2018 expect 8% growth.
- Residential spending will be up nearly 12% for 2017, the sixth year over 9%. Spending growth in 2018 slows to 2%.
- Backlog and the share of spending within the current year from that backlog is at an all-time high for nonresidential buildings and non-building infrastructure.
- Public work for 2017 will finish down 1.5%. By far the largest public spending declines are in Environmental Public Works, especially Sewer and Waste Disposal.
- Public spending is headed for a sizable rebound in 2018, up 9%.
- Every large Public category is forecast to show solid growth from the 4th qtr 2017 through all of 2018.
- This analysis does not include any spending projections from an infrastructure investment bill.
- Largest declines 2017; Manufacturing -11% ytd; Environmental Public Works -16% ytd.
- Largest increases 2017; Office +10% ytd; Commercial +16% ytd; Residential +13% ytd.
See this article Construction Starts and Spending Trends 2017-2018 for more on spending trends
The AIA recently published the Nonresidential Buildings Consensus Forecast Midyear 2017 report. The consensus of seven firms projects spending growth for nonresidential buildings at 3.8% for 2017 and 3.6% for 2018. The largest growth in the AIA forecast for any building type for both years is 10% for 2017 Retail & Other Commercial. The highest reported total annual prediction from any firm is 4.4% for 2017 and 5.5% for 2018. AIA Midyear Consensus Report July 2017
Construction Analytics forecast for nonresidential buildings construction spending growth is +7.3% for 2017 and +10.7% for 2018. Growth in 2016 was 7.5%.
Year-to-date (YTD) spending for the 1st 5 months of 2017 is up +5.2%, led by Office and commercial, both near 15%. Estimate-to-complete (ETC) for the final 7 months is forecast at +8.1%. Total spending for Nonresidential Buildings in 2017 is forecast to increase 7.3% = $438 billion.
If spending were to slow to 3.8% growth for 2017, since YTD growth is already 5.2%, the rate of growth in the final 7 months would need to fall to only 2.4%. However, the predicted cash flow from construction starts shows very strong spending growth in the 2nd half 2017 and into 2018. Nonresidential Buildings construction starts for the last 12 months posted the highest average since 2007-2008. This is helping boost spending.
Outside of recession years, nonresidential buildings construction spending for the year dropped below 4% annual growth only twice in 24 years, since data has been tracked. In fact, right now spending needs to grow at 4.5% just to stay ahead of construction inflation. So any forecast of spending growth below 4.5% actually might suggest that construction is not expanding, but is contracting. All indications are that there are no recessionary effects right now and economic activity does not suggest we are headed for a non-recession low spending for nonresidential building construction. I don’t expect spending to drop to 4% growth for the next three years.
The pattern of nonresidential buildings construction starts for the last 30 months is indicating spending increases in the 2nd half of 2017 and is setting up 2018 for the highest ever starting backlog and record spending. Even if starts crash to zero growth for the remainder of the year, 2017 spending would drop by less than 1% and we still begin 2018 with record backlog.
New Office construction starts for the last 12 months are the best ever recorded, on track to reach a total 50% growth over two years. Retail/Commercial starts have averaged year-over-year (YOY) growth of greater than 10%/year for the last three years. Educational starts averaged YOY growth of 8%/year for the last two years. These three markets comprise 60% of all nonresidential buildings. Healthcare starts have quietly increased to a record high over the last 12 months. Every market except manufacturing will finish 2017 with new starts totals near or at post recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. All construction starts $ data in this report references Dodge Data & Analytics starts data.
Construction spending for Commercial/Retail, Lodging and Office construction all remain very strong with 2017 total growth near 15%. Educational (+9%) and healthcare (+4%) both show sizable gains after years of little to no growth.
92% of all construction spending in 2017 is already in backlog projects.
A scenario that would have Office spending drop down to 8.9% annual growth from the track it is on today (+15.4% YTD) would require a highly improbable and unprecedented non-recessionary decline in spending in the remaining months of 2017. To grasp the enormity of the decline needed, it would take canceling 8% of all ongoing office projects or new starts for the remainder of the year would need to drop by 50%.
Educational will show an increase in YTD gains in the 3rd quarter because increasing spending in 2017 will be measured against the lowest quarter (3rdqtr) in 2016. Healthcare may not show sizable YTD gains until 4th quarter, for which 2016 reached lowest spending of the year and 2017 will reach highest.
Total nonresidential buildings spending growth accelerates to 10+% in 2018, led by institutional and office spending.
Nearly all nonresidential buildings construction starts in 2016 are still contributing to spending. Since originally posted they have been revised up by 16%. Since most spending from new starts (approximately 50%) occurs in the year following the start, early spending projections based on original posted starts $ may understate 2017 spending.
Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure spending is quite erratic, while nonresidential buildings spending, with only slight variation, has been climbing at a strong steady pace for more than 4 years. Some analysts track nonresidential total spending, but these two sectors perform so differently it is important to break them apart to track trends. Buildings spending is up 2% from Q2’16 and up 5% YOY. In the 2nd half 2017 YOY spending is expected to reach 8% over the same months from 2016. Worthy of note is that non-building infrastructure spending, even though down slightly, just experienced two years of record highs. It will hold down the overall nonresidential total performance, but still finish 2017 near record highs.
See this article from February comparing my starting forecast compared to the Jan 2017 AIA Consensus Nonresidential Bldgs 2017 Forecasts Vary
7-6-17 Construction Spending May 2017 – Behind The Headlines
Headline – Construction Spending for May came in flat compared to April, up 4.5% vs May 2016.
In this latest May report, April spending was revised up by 1% and May 2016 was revised up by 3%. The average revision since Jan 2016 is 3%/month. May 2017 will be revised in each of the next two reports and again with the May report issued in July 2018.
Current unadjusted construction spending is always being compared to previous months revised spending and growth is almost always being understated. Spending has been revised UP 45 times in the last 4 years.
In 2016, the 1st report indicated monthly spending declined 8 times from the previous month. After revisions, spending declined only twice from the previous month. Most MSM articles declaring construction spending was a miss are revised away in following months.
Nonresidential Construction Spending Remains Stagnant in May.
I’ve said this before many times, spending predictions are best tracked based on cash flows from all projects that have started. This is not simply tracking total backlog, nor is it tracking new construction starts. New starts (new backlog) represent only 20% to 25% of total spending within the year. Most spending comes from projects that started in previous years.
Big monthly changes in spending come from unusual fluctuations in starts. Very large projects ending (spending ending), compared to new projects starting, would cause a monthly drop in spending. The reverse would cause an increase. If a record volume month of construction projects that started two or three years ago are now reaching completion, and new starts today are experiencing normal growth not at record levels, then spending will most likely decline temporarily. Most monthly construction spending predictions are predetermined months ago.
Also, Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure is quite erratic while buildings spending has been climbing at a steady strong rate for several years. Buildings spending is up 2% from Q2’16 and up 6% YOY. In the 2nd half 2017 YOY spending is expected to reach 8%.
Most infrastructure projects that started in 2015 and 2016 are still ongoing so do not effect much change in current monthly spending. It is projects from late 2014/early 2015 that are finishing that are resulting in the largest share of current spending drops. Worthy of note is that non-building infrastructure spending just experienced two years of record highs, so even though spending is down slightly we will still see 2017 finish near record highs.
Construction Companies Continue to Face Labor Shortage Challenges
Construction Spending for the last 24 months increased +13%, but after inflation actual volume during that period increased only +5.5%. Construction output, (jobs x hours worked) for that same period increased +7.6%.
Why is it that jobs output is growing faster than construction volume? Could it be that shortages are localized, not as widespread as thought? Or perhaps it’s that contractors can’t get skilled workers, so they are hiring more workers with less skill? Maybe contractors anticipate growth, so they are hiring more now to prepare for the future? Whatever the case, jobs are growing faster than construction volume and that is not what should be expected in a labor shortage.
Are contractor’s responses to survey questions about filling job positions based on an anticipated need to staff up to meet revenue growth? If so, that is a major miscalculation to determine staffing needs. This is not as far-fetched as you might think. I’ve talked with numerous contractors in the past who were doing this. As I tried to explain in several previous articles, growth in revenue (or construction spending) doesn’t address how much of the growth is due to inflation. Right now, in fact for the last 24 months, the largest portion of spending growth is inflation, not real volume growth.
If you are hiring to match your revenue growth, you are part of the reason jobs are growing faster than volume. INFLATION!
Is there a Residential Construction Spending slowdown? If so, how significant?
YTD Residential Construction spending for the 1st 5 months 2017 is up 12.2% from 1st 5 months 2016. YTD has been above 12% since January.
Average spending for the last three months is up 4.0% from the average in Q4 2016. That’s a ~10% annual rate of growth. Starts cash flows are indicting flat spending for the next few months but then accelerated spending from late Q3 into the end of the year. Current projected spending for 2017 is $523 billion, +10.5% higher than 2016.
May vs April residential construction spending shows a 0.5% decline. However, April has been revised up once and May has not yet been revised. All months are revised twice after the first release of data. The average revision (to residential data) for the last 16 months is up 4%, the average revision for the last 28 months is up 7%. All revisions for the last 28 months were up. After revisions, there were only two monthly declines in the last 28 months, and both of those were slight.
If new starts collapse to show no gains for the remainder of the year, then based on starts already in backlog and reduced starts for the remainder of the year, spending would be reduced to $513 billion. That’s still 8.5% higher than 2016. Of course, this would be an extremely unlikely scenario. The last time residential construction starts declined for three or more consecutive months was 2010, and the last time there were no gains for six or more months was 2008.
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.
The following table includes my 2017 growth forecast for construction spending in nonresidential buildings compared to the recently published AIA Consensus Forecast which includes individual forecasts from seven economists.
Construction Analytics (edzarenski.com) forecast is based primarily on scheduled cash flow of construction starts in backlog. About 75% to 80% of all nonresidential buildings construction spending in 2017 will be generated by projects that are already underway. Only 20% to 25% of all spending in 2017 will come from new projects that start in 2017.
See my recent blog post on 2017 Starting Backlog here describes in part how I use backlog starts data to generate future spending forecast.
Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current growth cycle. Spending in 2017 from that starting backlog has increased every year and it will be up 35% over 2014.
This comment I made two weeks ago in a post on Dodge Data 2016 Construction Starts helps explain in part the level of new starts in 2016 that established the pattern I see going into 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.”
Nonresidential Buildings spending for 2016 totaled $409 billion, UP 8.1% from 2015.
Nonresidential Buildings spending in 2017 is forecast to increase to $447 billion, 9.1% over 2016.
The most recent 3-month average seasonally adjusted annual rate (SAAR) is already leading into 2017 starting at $420 billion only 5.5% below the peak in 2008. By midyear 2017 the SAAR will reach a new all-time high.
The widest variances between my forecast and the AIA panel forecasts are in Office, Manufacturing, Educational and Commercial. Here are explanations to support my forecast.
Office project starts at the end of the year increased more than 30% for 2016. Office construction 2017 starting backlog (projects under contract as of Jan 1, 2017) is the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office spending began. More importantly, the share of spending from starting backlog is also increasing for 2017. This is setting up a very strong spending growth pattern for the next 2 years.
Manufacturing buildings new starts dropped 33% in 2015 and 38% in 2016. A disproportionately large portion of both 2015 & 2016 spending was generated from starts in 2014. In 2014, starts had jumped 80%+, but now almost all of that work is completed. For 2017, the amount of spending from starting backlog has dropped 25% from the level of 2016. Even an increase of 50% in new 2017 starts would not make up for that loss.
Educational buildings new starts increased 11% in 2016. But more important is that the total value of starting backlog has been increasing for several years. In 2015, the value of starting backlog increased only 5% over 2014. In 2016 it was 9% and in 2017 it is 13%. Even if new educational starts in 2017 decline by 10% to 20%, 2017 spending is being driven higher by the work already in backlog.
Commercial spending increased 11% in 2016. For 2017, spending from starting backlog will increase 10%, and starting backlog is at the highest level since pre-recession. In fact, spending from starting backlog will be 40% higher than 2014. Since starting backlog generates about 75% of spending within the year, most of the growth in 2017 is coming from very strong starting backlog.
Once again,”Simply referencing total backlog does not give a clear indication of spending within the next calendar year. The only way to know how much of total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects that have started in backlog.”
With few exceptions over the last three years, Construction Analytics, Dodge Data & Analytics and ConstructConnect have provided the most accurate forecasts. We’ll see in Feb. 1, 2018 how we all did when the total 2017 spending report gets released.
2-1-17 Upated to include Decmber data
Non-building Infrastructure spending in 2016 will finish at $291 billion, down less than 1% from 2015. Spending based on projected cash flow from Dodge Data Starts predicted this drop. The negative drivers were Transportation, Sewage/Waste Disposal, Communications and Water Supply. Power, the largest infrastructure market at 34% of total sector spending, will finish up 3.3%. Highway/Street, 31% of total sector, will finish up 2%.
In 2017, Non-building Infrastructure, following two down years, will increase by 4.4% to $304 billion, due to growth in the highway and transportation markets. In the most recent quarter spending began to recover from 2016 lows posted in August and September. 2017 will be a record year for Infrastructure spending supported by spending generated from the Fixing America’s Surface Transportation Act and potentially the Water Resources Development Act.
Annual percent growth in new starts (backlog), by itself, is not necessarily a good indicator of spending in the following year. The duration of backlog must be known to forecast spending.
At the beginning of 2016, work in backlog had increased 9% over 2015, but because a large percentage was very long duration work, the amount of cash flow (work put-in-place) in 2016 from that backlog decreased from 2015.
At the beginning of 2017, work in backlog increased only 6% over 2016. What is significant though is that the amount of cash flow in 2017 from that backlog will be up 10%. That is being caused by long duration work-to-complete backlog from 2014 and 2015, which is dominated by spending in the power market. In the 1st five months of 2015, a years worth of Power work started and it’s not yet completed. It’s still contributing to infrastructure spending in 2017.
Although new starts in 2016 will finish down 6% from 2015, starts in 2015 were so strong that 2016 will still be a high volume of new starts. 2015 was up 25% from 2014. So, even though headlines will point to a 6% decline in new infrastructure starts in both 2016 and 2017, due to the distribution of spending from backlog, 2017 spending will post the largest growth in 3 years. 2017 will be a record year for spending on infrastructure, up more than 4% from 2016.
Infrastructure construction starts and spending is dominated by movements in Power and Highway markets. Power/Electric/Gas and Highway/Bridge/Street, about equally, comprise 65% of all infrastructure spending. Transportation/Air/Rail accounts for 15%. Sewage/Waste 8%, Communication 6%, Water 4% and Conservation 3%.
Power is 90% private, 10% public. Highway is 100% public. Transportation is 30% private, 70% public. Sewage, Water and Conservation are 100% public. Communication is 100% private.
Power project starts dropped 25% in 2016 but from the highest annual total of starts on record in 2015. In addition, power had very strong starts in late 2014. All of those very strong starts in late 2014 and all of 2015 are still ongoing in backlog and will contribute to strong spending in 2017. Almost half of all the spending in 2017 is generated from projects that started in 2014 and 2015. Power spending in 2017 will increase 2% over 2016 for a 6th consecutive year of near $100 billion in spending.
Highway/Street, the second largest public market, reached all-time highs in spending from the 3rd quarter 2015 through the 1st quarter 2016. After a 6 month slow down, spending in November again reached a new all-time high. Highway spending in 2017 will grow 5% over 2016.
Transportation hit all-time highs in spending all during the 2nd half of 2015. Spending declined by 6% in 2016 but is still the second highest year on record. It will again equal those 2015 highs throughout all of 2017. Transportation spending in 2017 will grow 6% over 2016.
Projected impact of proposed infrastructure stimulus:
- None of the starts or spending detailed above includes any projections of potential work from future stimulus.
- Infrastructure spending, about 25% of total construction spending, increased 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. Although infrastructure growth is always erratic with no growth some years, the average growth for the last six years (post-recession) has averaged $10 billion/year. Some of those years included prior stimulus growth.
- The annual growth in PUBLIC Infrastructure has never exceeding $20 billion in a single year and averages only $7 billion.
- The average growth in infrastructure jobs (excluding all recessionary years because those years would make the result approach zero) is about 25,000 jobs per year.
- Based on infrastructure proportion of all construction, and on both all construction and infrastructure historical maximum rates of spending and jobs growth, it may be unrealistic to anticipate more than $10 billion/year growth in the infrastructure sector. ie., (from current total add $10bil yr1, $20bil yr2, $30bil yr3, etc.) See Infrastructure – Ramping Up to Add $1 trillion for more detailed explanation.
Total construction spending peaked in Q1 2006 at an annual rate of $1,222 billion. For the most recent three months it has averaged $1,172 billion. It is currently at a 10 1/2 year high at just 4% below peak spending. But that ignores inflation.
In constant inflation adjusted dollars spending is still 18% below the Q1 2006 peak.
Current headlines express exuberance that we are now at a 10 1/2 year high in construction spending but fail to address the fact that is comparing dollars that are not adjusted for inflation.
In the 1st quarter of 2006 total spending peaked at a annual rate of $1.2 billion and for the year 2006 spending totaled $1,167 billion. We are within a stone’s throw of reaching that monthly level and 2016 will reach a new all-time high total spending by a slim fraction. But all of that is measured in current dollars, dollars at the value of worth within that year, ignoring inflation.
Adjusting for inflation gives us a much different value. Inflation adjusted dollars are referred to as constant dollars or dollars all compared or measured in value in terms of the year to which we choose to compare. To be fair, we must now compare all backdated years of construction to constant dollars in 2016. What would those previous years be worth if they were valued in 2016 dollars?
By mid-2017 total construction spending will reach a new all-time high, but in constant inflation adjusted dollars will still be 17% below 2006 peak. We will not reach a new inflation adjusted high before 2020.
Residential construction spending is still 32% below the 2006 peak of $690 billion. In constant inflation adjusted dollars it is 39% below 2006 peak.
Nonresidential Buildings construction spending is only 3.5% below 2008 peak of $443 billion. However, in constant inflation adjusted dollars it is 18% below 2008 peak.
Non-building Infrastructure construction spending pre-recession peaked in 2008 at at an annual rate of $290 billion. However, post recession it peaked in Q1 2014 at $314 billion. It is now 8% below the 2014 peak. In constant inflation adjusted dollars it is 12% below the 2014 peak.
For more on inflation SEE Construction Cost Inflation – Midyear Report 2016
October construction spending put-in-place was released today by U.S. Census. This report includes the first revision to September data and the 2nd revision to August.
October spending 1st release came in at $1.172 billion, 0.5% higher than September which was revised up 1.4% to $1.166 billion from the 1st release of $1.150. August was revised up 2.1% to $1.166 billion from the 1st release of $1.142.
I predicted October spending would come in at $1.190 billion. Once revisions to October data are posted in Nov and Dec, we may reach that $1.190 billion forecast. Revisions have averaged over 1.4%/mo this year and 1.5%/mo for the last 4 months.
Average spending for the last 3 months is $1.169 billion, the highest three-month average since May-Jun-Jul 2006.
Year-to-date (YTD) spending is up 4.5% over last year, but this may go even higher once the revisions are in. There is now no doubt that we’ve clearly passed a previously forecast dip in spending that bottomed in Apr-May at $1.142 billion. The last 5 months of spending are all up from the low point and the trend is pointing higher.
My forecast for total spending in 2016 is $1,168 billion, up 5% from 2015. I expect 7.6% growth in 2017.
Residential spending is up 5.5% ytd and is on track to reach a 2016 total of $468 billion, +6.4% over 2015. Last year, peak spending was in September, then residential spending dropped slightly in Q4 2015. This year I expect 2016 spending to peak in Q4, so we should see ytd performance get better as we approach year end. Cash flow from new starts indicates growth of 9% in 2017 spending.
Total Nonresidential spending is up 3.8% ytd, on track to finish 2016 with total spending at $700 bil, up 4.2% over 2015. Almost all the 2016 growth is in nonresidential buildings, not infrastructure. For the 4mo period Jul-Oct 2016, compared to the same 4mo in 2015, all nonresidential spending is up only 1.7%, but the spending trends are not apparent unless we separate nonresidential buildings from non-building infrastructure. For Jul-Oct 2016, compared to the same period a year ago, nonresidential buildings spending is up 7.6% and non-building infrastructure is down 5.4%.
Nonresidential Buildings spending is up 8.2% ytd through October, led by Office, Lodging and Commercial Retail markets. We should finish 2016 up 8.1% with a total at $409 billion vs. $379 billion in 2015. Total sector growth for the last three years is 35%. I’m predicting 2017 spending for Nonresidential Buildings will increase 7.5%, led by Educational and Office spending.
We are currently at what may be 2016 peak nonresidential buildings spending. I’m expecting nonresidential buildings spending to stall or drop 1.5% to 2% over the next few months before resuming growth. This drop may be in large part due to uneven starts from the end of 2014 and beginning of 2015, a period when starts were abnormally high, that are now finishing and dropping out of the monthly spending values. Usual normal growth patterns in starts do not fill the void left when abnormally high volume of projects finish.
Non-building Infrastructure spending is down 1.2% ytd. Infrastructure spending in 2016 will total $291 billion, down less than 1% from 2015. Spending predicted from Dodge Data Starts predicted this drop. Negative drivers are Transportation, contributing -0.9% to overall decline, Sewage/Waste Disposal -1.0% and Water Supply -0.4%. Power, the largest infrastructure market at 33% of total, is up 1.4% ytd so adds about +0.5% to offset some of the declines. Highway/Street, 31% of infrastructure, is up only slightly. Growth resumes in Q1 2017. Although new starts in 2016 will finish down 10%, starts in 2015 were so high that 2016 will still be a good volume of new starts. Predicted spending from starts is indicating 2017 will be a record year for spending on infrastructure, up 7% from 2016.
Public spending is down 1.5% ytd, on track to finish 2016 with total spending at $285 billion, down 1.4% from 2015. Public spending will rebound in 2017, up 6.5%.
Educational spending is 80% public and 20% private. Education accounts for 25% of public work. Educational is by far the largest building type in public work. All the remaining building types contribute only 2% to 4% each.
60% of all public work is infrastructure. Highway/Street accounts for 31% of all public work. Transportation facilities is 11% of public work, Sewage and Waste Water 9% and Water 4.5%.
The biggest drivers of performance in public markets by far are Highway/Street and Educational spending. Highway/Street spending reached all-time highs from Dec 2015 to March 2016 but is currently 10% below that level and will end 2016 down 1% from 2015. In public markets educational is only up 5% ytd, but in October experienced the largest monthly increase in the public sector.
REVISIONS AND YEAR/YEAR COMPARISONS
Census construction data is always revised in the following two months after initial release. Census revises data and incorporates more data from additional sources to update spending values. Census updates all the values for the previous year, usually with the May data release (on July 1) the following year.
For the 1st nine months of 2016, seven of nine times the first release of spending showed a decline vs the previous month. After revisions, the values show no declines vs the previous month. The last 36 months of data shows there were 16 Census releases that originally showed a decline vs the previous month. After revisions there were no mo/mo declines in the last 36 months. Revisions in 2016 have averaged 1.4%/mo and 1.5%/mo for the last 4 months.
In 2015, spending peaked in the months of July, August and September, then dropped slightly and remained flat for the last quarter of the year. This 2015 pattern, along with the issue of revisions noted above, is one of the reasons comparisons of 2016 to same month last year was low for August and September. A growth trend is now in place. Expect this month vs same month last year for the remainder of 2016 to come in near or above +5%.
10-20-16 Starts Point to Robust 2017 Spending