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Midyear 2022 Construction Data

8-16-22

Construction Spending data updated 8-16-22, actual Year-to-Date through June, Census issued 8-1-22.

Forecast based on starts through July. Residential starts peaked in Feb-May 2022. Residential starts in July are down 15% from the highs reached in the 1st five months of 2022. Nonresidential Bldgs annual rate of starts reached a remarkable new high in July, almost 50% higher than the average of the 1st six months of 2022, and 30% higher than the previous single-month high in 2018. Non-Building starts for July reached 125% higher than the average of the 1st six months of 2022, and 50% higher than the previous high in 2019.

Watch for future revisions in Manufacturing Starts data. Through July, Mnfg starts are up 180% over the same seven months in 2021. It won’t be up 180% at year end. This may not yet be fully reflected here. This will add to spending mostly in 2023 and 2024. Also watch Power/Utilities which posted a 60% gain in the 1st seven months over same period in 2021.

Keep in mind, only time will tell how much of those huge gains in Mnfg and Power starts are a real increase in the amount of new work started or how much of that gain reflects an increase in the share of the market captured in the starts survey. Over the past 10 years, Dodge total starts data captured amounts to only about 40% to 50% of the final spending amount for these two markets.

Construction Starts forecast updated to 8-16-22

Construction Backlog forecast 8-16-22

After a two-year slowdown in backlog growth in 2021 an 2022, growth resumes in 2023 and 2024. Nonresidential Buildings leads in 2023, Nonbuilding leads in 2024.

Watch for this temporary decline in spending over the next few months. Some lower months of residential starts over the past nine months reduces residential spending from May to Sept 2022 before it returns to growth. More moderate declines in Nonres Bldgs and Nonbuilding also contribute to the downturn. Declines generally turn into gains by Q4 2022.

Much of the gains in spending in 2022 and 2023 reflects the very large increases in inflation. Spending after inflation, or volume of work, shown below, declines for all nonresidential in 2022 and declines for Nonbuilding and residential in 2023.

Residential volume peaked in Q1 2022 but will not return to that level until 2025. Both Nonresidential Buildings and Nonbuilding Infrastructure volume peaked in Q1 2020. Neither returns to that level before 2026.

Volume of work (spending minus inflation, or Constant $) has been dropping for several months and will continue to drop for several more months. But jobs have been increasing. Over the long term these two data sets should move in tandem, not in opposition. As greater separation between these two occurs, with jobs over volume, the productivity factor for the amount of work put-in-place per job worsens. That is a hidden factor adding to inflation.

See the PPI post for details on 2022 PPI data.

This month the July update to the Final Demand indices reflects that this index barely moves for two months, then in the third month, when Census performs a contractor survey to update the index, it moves 80% to 90% of the index value for the three months. The same has been true looking back over all recent quarters. Takeaway: the Final Demand indices cannot be used monthly. Essentially, these should be considered a quarterly index. Here I’ve calculated Q2 and Q1xQ2. You can 4x or 2x those results to get an annual rate, but I suspect most of the increase is already in this year, so Q3 and Q4 I’d expect to be lower than Q1 and Q2.

Burning Questions – Recession, Labor, Infrastructure

I gave two conference presentations in the past month. The most pressing questions from the audience were:

Are we headed into a recession? When will recession start?

What can be done about the labor shortage?

How can we support all the infrastructure work that is about to begin?

RECESSION

There is no question the sizable drop in starts in 2020 lead to a downturn in construction spending, mostly felt in 2021, but extending somewhat into 2022. However, this quickly turned around for residential spending and nonres bldgs spending is now past the low point caused by the pandemic initiated slowdown. With new construction starts to date at all-time highs and the forecast for new construction starts in the pipeline, it’s hard to envision how this would lead to a construction recession.

  • In 2021, new starts increased 17%. Residential +21%, Nonres Bldgs +15% and Nonbldg +9%.
  • In 2022, new starts are forecast up 11%. Residential +10%, Nonres Bldgs +18% and Nonbldg +4%.
  • In 2023, new starts are forecast up 10%. Residential +12%, Nonres Bldgs +7% and Nonbldg +11%.

Total of all starts year-to-date in 2022 are up 6% over Jan-May 2021. Nonres bldgs starts are up 17% year-to-date. For the past 6 months, Dec’21 to May’22, residential construction starts posted 5 of the 6 highest months ever. The 6mo total for residential starts is the highest 6mo total ever recorded, up 4% over the previous 6mo record, posted in 2021.

Residential new starts get spent at a ratio of 70:30. Nonresidential Bldgs spending from new starts, on average, gets spent over the next 3 years in the ratio of 20:50:30. That is, 20% of spending from all starts within the year gets spent within the year started, 50% gets spent in the following year and 30% gets spent in the 3rd and sometimes 4th year. So from this we can say, if new starts are up 10% for the year then spending from that source will increase 10% x 20% or 2% the 1st year, 10% x 50%, 5% the 2nd year and 10% x 30%, 3% the 3rd year. If we get 3 consecutive years of growth in new starts there would be no downward pressure on spending for the next 3 to 4 years.

In the 2nd half of 2021, residential starts, although still strong, posted a few lower monthly totals. Although 2022 spending will still finish the year up, these lower monthly starts from late 2021 will work to cause a slight spending dip in the 2nd half of 2022. Nonresidential Bldgs spending is slowly increasing in 2nd half 2022. Nonbldg spending is flat or very slowly decreasing. The net effect is spending will post a decline in 4 of the next 8 months of 2022, but the total declines may not result in 2 consecutive quarters of declines. By the time we head into 2023, all three major construction sectors are in a growth pattern.

So, we will see a few months of spending declines, but the new starts pool of work is growing, not decreasing. The current forecast model is predicting no recession on the horizon.

LABOR SHORTAGE

This next plot shows labor and volume of work (spending minus inflation) to support that labor growing equally, albeit with short-term peaks and troughs, from 2011 to 2018. In fact, this equal growth extends far back with only few years causing exception to this pattern. This plot, and the extension of this plot to older data, shows that normally, labor increases at the same rate as volume. You can see that 2018 posted a significant drop in volume while jobs continued to increase. This departure had nearly corrected itself by Jan 2020.

The most recent construction spending report, issued July 1, revised unadjusted spending data for 2020 and 2021, both years added $30+bil. That brought volume up those years on this plot. The current spread between jobs and volume of work is still 10%.

In May of 2020, jobs were already on the rebound, but the volume of work was not. Work volume did recover some at the end of 2020 but then fell again, as was predicted, into mid-2021. In May of 2020, jobs and the volume of work were near balance. Since May of 2020, spending increased by 22%, but most of that was inflation. Since May 2020, actual work volume increased by only 1.5%. Jobs increased by 9%.

The last time the normal jobs/volume growth pattern was disrupted like this was 2006, the only other time in the last 25 years this occurred.

Volume, not spending, supports jobs. If volume is down, support for more jobs drops. If jobs increase while volume is declining then productivity is declining and the number of jobs required to put-in-place $1 billion of construction volume increases. At the same time, the inverse, the amount of volume put-in-place per job, decreases. This productivity loss drives up construction labor cost inflation and the need for additional labor to complete the job.

edited/added 8-6-22 Where the construction jobs are:

From Feb 2020 to Jul 2022 Nonres Bldgs and Nonbldg jobs are down 3.5% and 1.5%. Volume of work is down 20%.

Residential jobs are up 6.5%. Rsdn volume is up 14%.

It’s not quite that bad in either sector because some workers classified and counted as nonresidential perform work in the residential sector.

Total jobs up 1%. Total volume down 7%. That’s a slip of 8% in productivity. If labor is only 30% of total construction cost, an 8% slip in productivity is a 2.4% increase in inflation. That’s in addition to changes in wages.

INFRASTRUCTURE

The current administration has approved an infrastructure spending bill that earmarks approximately $500 billion for construction spending. It will take several years to start all this work.

The infrastructure spending bill may fund construction for a variety of buildings and non-building types of construction, for example, highway, water and sewer, educational, healthcare, etc. Rather than strictly classified as infrastructure, or as commonly referred to as nonbuilding construction, this bill will fund some forms of buildings and non-building construction in the public construction sector.

The total of all public construction is only 25% of all construction. This subset of construction totals about $360 billion in annual construction spending. It has never increased by more than $37 billion in spending ($35 billion in volume) in a year. Average growth is closer to $10-$15 billion/year. This public sector of construction does not have the capacity to increase by $100 billion/year.

As you can see in the plot above, it takes about 5000 jobs to support $1 billion of volume for 1 year. So, increasing volume by $35 billion in one year would require 35 x 5000 = 175,000 new jobs for that year. Keep in mind, this is to support a subset of construction that is only 25% of all construction.

Jobs have never increased by more than 400,000 in one year for all construction. Even taking out the 13 years when jobs dropped, the average jobs growth for the past 50 years is only 220,000/year for all construction. That would seem to indicate the average growth for the public sector, at 25% of all construction, averages only 55,000 jobs/year.

Total all construction for the three years 2022-2023-2024 is forecast to increase $140 billion, $117 billion and $116 billion. The remaining 75% of the construction industry still adds a lot of demand for growth and jobs beyond just that of the public sector that gets a boost from the infrastructure bill. But after adjusting for inflation, the growth in volume over this three-year period is only about $120 billion. That would generate a need to create 600,000 new jobs over the next three years. About 25% of those jobs support the infrastructure funded growth.

If the infrastructure spending bill adds $35-$40 billion/year in spending, $30-$35 billion/year in volume, the need would be 150,000 to 175,000 jobs/year to support that 25% of the construction industry. Since it is unlikely the public sector of construction could add that many jobs, it is more likely the amount of construction spending added yearly will be somewhat lower.

Infrastructure has a slower spending curve than the 20:50:30 for nonres bldgs, roughly more like 15:40:30:15. If $100 bil of new contract awards start in 2022 then spending would be $15 bil in 2022, $40 bil in 2023, etc.. At $100 bil of new starts per year, the highest one-year growth would be $40 bil, probably double the pace the sector can grow.

Construction Forecast 2022 Update May22

Construction Spending is up +12% year-to-date for the 1st three months of 2022, again mostly driven by residential which is up 18.6% ytd. Total spending is up 11.7% year over year (Mar’22 vs Mar’21).

See end of post for downloadable pdf.

Total construction spending for the 1st quarter 2022 vs the 4th quarter 2021 is up +6.5%. I expect this rate of spending growth to flatten over the next six months.

Residential is about half of all construction spending. For the past 6 months, residential construction starts ($ by Dodge) posted the highest 6mo total ever recorded. Dec, Jan and Mar are all near Feb, the highest monthly total on record. This implies no slowdown in residential spending at least for the next 6 months although I expect by year end, residential (annual rate of) spending will be down about 2-3%.

Spending up year-to-date: Manufacturing up 34%, Commercial/Retail up 18% and Highway up 9%.

Spending down year-to-date: Public Safety (80% of Other) -31%, Lodging -27%.

Now 2 yrs since the onset of the pandemic, total construction spending in March 2022 is up 15%. Residential spending is 42% higher than March 2020, Nonresidential Bldgs is down 5%, Nonbuilding Infrastructure is down 6%.

Why is spending coming in well above any forecast prepared at the beginning of the year? Since October, new starts have come in much stronger than predicted, 8% higher than the previous high 6mo period which immediately preceded. But some markets increased way above average, residential and manufacturing. This most recent 6 month period for nonresidential buildings includes two months in which starts came in 30% higher than average. You can’t predict that. Residential construction starts posted the highest 6 month total ever recorded and Q1 2022 is the highest quarter ever. Not only are starts stronger than expected, but also the very high rates of inflation are inflating the spending data. Original forecasts for spending did not anticipate all types of work would experience such high inflation.

Construction buildings cost inflation over the last 4 years is up 21%. Labor cost is two parts, wages up 15% & productivity down 7%, for a net cost up 22%.

Labor is 35% of total building cost so 35% of cost that is up 22% = labor is 8% of that total 21% building cost inflation. Therefore, 8% out of 21% or fully 1/3 of construction inflation over last 4 years went into workers pockets.

Take out inflation and we get construction volume. In 2 yrs since the onset of the pandemic total construction volume (spending minus inflation) is down 2.5%. Residential construction volume is up 15%. Nonresidential Bldgs volume is down 16% Nonbuilding Infrastructure volume is down 15%.

Volume, not spending, supports jobs. If volume is down, support for jobs drops. If jobs increase while volume declines, then productivity drops and labor cost inflation increases.

Since Feb 2020, the last 2 years

Volume: Residential is up 10%; Nonres Bldgs down 17%; Nonbldg Infra down 15%.

Jobs: Rsdn up 5.75% (+171k), Nonres Bldgs down 4.5%(-159k), Nonbldg down 2.3% (-30k).

In 2021, jobs increased +2.3%. Volume was down -1.1%.

Post-pandemic recovery volume of construction may have temporarily peaked in the 1st quarter 2022 at 3.3% below Feb 2020. Over the next few months, spending mostly holds level, but inflation eats away at growth and volume declines by year end. This should hold jobs down.

In January, I wrote Construction Forecast 2022 – Jan22 a full length post and article on the Outlook for 2022. Below I’ve updated the complete article to include all data up to May 6, 2022

Construction Jobs and Spending Briefs 4-1-22

Construction Jobs report for Mar 2022 shows total jobs up 19,000 from Feb

Rsdn jobs +7,600, Nonres Bldgs +6,300, Civil +5,000

Although construction jobs increased by 19,000 in March, total hours worked dropped by 1.8% from Feb, so total workforce output is down.

It’s real hard to compare construction jobs growth by sector. If you work for a concrete firm or structural steel firm, with firm doing primarily nonresidential work, but you are out there putting in concrete or steel for a high-rise multifamily buildings, your job is still classified as nonresidential.

Jobs are up 82,000 year-to-date, 1.1% from Dec, but that’s also up 3.5% from ytd 2021. With the latest quarter at +1.1%, jobs are increasing at a rate of 4%/year. But inflation adjusted spending, building activity, is expected up only 2.5% in 2022, after dropping -2% in 2021. Jobs increased 2.5% in 2021.

2022 spending started the year at the highpoint. I expect a slow decline in monthly spending in all sectors of 2% over the 2nd half. That provides no support for jobs growth.

Construction jobs have nearly returned to pre-pandemic levels. The problem with construction jobs having returned to pre-pandemic levels is the level of inflation adjusted construction volume of activity that is needed to support those jobs is still 5% below Feb 2020 and 13% below the 2006 peak. So since Feb 2020, jobs are back to that level, but volume is not so productivity has dropped by 5%.

Construction Spending is up +10.4% year-to-date (in 2 months!) mostly driven by +15.5% ytd Residential.

A plot of residential construction spending inflation adjusted. Taking out inflation shows volume of building activity. Perhaps the trend in residential is strong enough to keep going.

Total spending is up +4% in 3mo since Nov 2021 (and 10% ytd-2mo), but I don’t expect this rate of growth to hold. However, this and any other changed data inputs revises my 2022 spending forecast.

Examples of big changes since initial forecast:

Manufacturing spending has increased so much in Jan-Feb, (up 35% ytd) that even if the next 10 months finish flat year/year, Mnfg will still finish up 5% for 2022.

Residential new starts for the latest 3 mo, Dec-Jan-Feb, avg is as high as any quarter last year. Nearly all of this spending occurs in 2022.

Construction buildings cost inflation over the last 4 years is up 25%. Labor cost, wages up 15% & productivity down 7%, is up 22%. But labor is 35% of total building cost so 22% x 35% = labor is 8% of that total 25% building cost inflation. Fully 1/3 of construction inflation over last 4 years went into workers pockets.

Construction Forecast 2022 – Jan22

Spending and Volume updated 1-4-22. Jobs updated 1-7-22

1-28-22 See the bottom of this post for a link to download a PDF of the complete article.

See the link at end for full report updated 2-11-22 to include year-end data.

5-6-22 The complete article has been updated and is here

Construction Forecast 2022 Update 5-6-22

The construction data leading into 2022 is unlike anything we have ever seen. Construction starts were up in 2021, but backlog leading into 2022 is down. That is not normal. Backlog is rarely down and usually when starts have been down the previous year. In this case the starts declined in 2020, but that 2020 decline was so broad and so deep, even with an increase in starts in 2021, backlog to start 2022 has not yet recovered (to the start of 2020). Spending for 2021 was up 8%, but after adjusting for inflation, real volume after inflation was down. Last time that happened was 2006 and 2002, the only two other times that happened in the last 35 years. Let’s have a look at all the data that sets up 2022.

New Construction Starts for 2022, as reported by Dodge Data and Analytics, are forecast up +5% total for the year. Residential starts will be up +2%, but that is on top of a +33% gain over the previous two years. Nonresidential Bldgs starts will be up +8%, just recovering to pre-pandemic levels. Nonbuilding starts are forecast up +8%, still -6% below 2019.

Construction Backlog leading into Jan 2022 vs Jan 2021 is up only +1%, but it’s still down 8% vs Jan 2020. Residential backlog is up +21%, but Nonresidential Bldgs backlog is up only +2%, still down -14% from the start of 2020 and Non-Building backlog is down -8% yoy, now -17% below the start of 2020.

Nonresidential Bldgs starting backlog for 2022 is still down -14% from the start of 2020 and Non-Building backlog is now -17% lower than the start of 2020. That could weigh on spending for several years.

(Construction Analytics measures Backlog at the start of the year vs backlog at the start of the previous year. This is different than the ABC Backlog indicator, which measures current month’s backlog compared to previous year’s total revenue).

Backlog at the beginning of the year or new starts within the year does not give an indication of what direction spending will take within the year. Backlog is increasing if new starts during the year is greater than spending during the year. An increase in backlog could immediately increase the level of monthly spending activity, or it could maintain a level rate of market activity, but spread over a longer duration. In this case, there is some of both in the forecast. It takes several years for all the starts in a year to be completed. Cash flow shows the spending over time.

Spending for 2021, with 11 months actual in year-to-date, is forecast up +7.9%. However, that can be misleading. Residential spending for 2021 is up 22% while Nonresidential Bldgs is down -5% and Non-Bldg is down -1%.

In almost every data release this year, Census has revised the previous month upwards. That has been adding to my forecast throughout the year.

Spending includes inflation which does not add to the volume of work.

My current and predicted Inflation rates:

  • 2020 Residential 5%, Nonres Bldgs 4.8%, Nonbldg Infra Avg 4.5%
  • 2021 Residential 14.2%, Nonres Bldgs 6.8%, Nonbldg Infra Avg 7.8%
  • 2022 Residential 7%, Nonres Bldgs 4.5%, Nonbldg Infra Avg 3.7%
  • There is greater chance for rates to move up than down.

After adjusting for inflation, total volume in 2021 is down -2.5%. Residential volume for 2021 is up +7.4% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8.1%.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that will add to labor cost inflation. Since 2010, Construction Spending is up over 100%, but after adjusting for inflation, Volume is up only 28%. Jobs are up 41%.

Jobs average over the year 2021 increased +2.3%. Volume was down -2.5%

Spending Forecast for 2022 is expected to increase +3.0%. Residential spending for 2022 is forecast up +5.7%. Nonresidential Bldgs forecast is up +3.5%. Non-Bldg forecast is down -3.6%.

Some of the biggest impacts to nonresidential buildings spending are: Warehouses, 60% of Comm/Retail, new starts are up 50% since Jan 2020. Comm/Retail could post the largest gains in 2022 nonres bldgs spending. Lodging starts even with 24% growth in 2022, are still down 50% from Jan 2020. Manufacturing starts dropped over 50% in 2020 but gained nearly all of that back in 2021. Manufacturing spending in 2022 should return to the level of 2019.

Many construction firms judge their backlog growth by the remaining estimate to complete of all jobs under contract. The problem with that, for example, is that Nonresidential Buildings spending (revenues) are expected to grow +3.5% in 2022, but after adjusting for inflation the actual volume of work is down about -1%. By this method, in part, these firms are accounting for an increase in inflation dollars passing through their hands. Spending includes inflation, which does not add to the volume of work.

Total volume for 2022 is forecast down -2.5%. After adjusting for inflation, Residential volume for 2022 is forecast down -1%. Nonresidential Bldgs volume is also forecast down -1% and Non-Bldg volume is forecast down -7%.

The Non-Building Infrastructure spending forecast for 2022 is more affected by a drop of -17% in starts in 2020 (2020 starts would have generated 30% of 2022 spending) than by any increase in starts in 2022 (which would generate only 15% of 2022 spending).

Non-building construction starts recorded 18 months (from April 2020 through September 2021) averaging 16% below the Q3’19-Q4’19 average of starts. Non-building Infrastructure Backlog beginning 2022 is down -17% from Jan 2020, the largest two-year drop on record. Non-building Infrastructure Spending has declined in 15 of the last 21 months.

Why is spending still down in Non-building? Here’s a few notes on construction starts that drive spending.

Power starts for the 3yr period 2020-2022, even with 11% growth in 2022, are expected to average 33% lower compared to 2017-2019. Transportation starts for the 3yr period 2020-2022 are expected to average 40% lower compared to 2017-2019. These two make up 50% of the Non-bldg sector and we could see spending remain depressed in both for the next two years.

Highway starts through 2020 are up 15% in 3 years. But spending in 2019 through 2021 has remained constant. This might be an example of adding new starts but it doesn’t show in spending because work is spread out over many years, or this could be indicating no real change in volume but a change in share of total market being captured in the starts.

On average about 20% of new nonresidential buildings construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in future years. (For residential the spending curve is more like 70%-30%).

Nonresidential Buildings construction starts recorded 12 consecutive months (from April 2020 through March 2021) at 20% or more below the Q4’19-Q1’20 average of starts. Nonres Bldgs spending has posted 17 of the last 21 months down and is still down 13% from Feb 2020.

Construction Analytics has been forecasting these drops in Nonresidential spending since August of 2020.

In constant (inflation adjusted) dollars, as of Nov. 2021, Nonres Bldgs spending is 20% below the Feb 2020 peak. The bottom is expected in mid-2022.

Below is the Non-building plot, inflation adjusted. Both these plots show there has been no increase since Feb 2020 in volume of nonresidential or non-building work to support jobs growth, and there is little to no help in 2022.

If new construction starts in 2022 post an add of $100 billion in new starts for infrastructure, only about $20 billion of that would get put-in-place in 2022. The cash flow schedule for that $100 bil of new starts would extend out over 3 or 4 years. Most of that $100 bil would get spent in 2023 and 2024.

Current Final Demand pricing for Nonres Bldgs and Trades is highest on record. Prices support high inflation this year and next. Do not expect inflation to turn to deflation in 2022 or any time in the near future. The only time in 50 years that construction experienced deflation was in the period 2008 to 2011. At that time conditions were 10x worse than now.

1-7-22 Construction Jobs growth

2021 Dec21 vs Dec20 Rsdn+75k, Nonres Bldgs +61k, Nonbldg +24k

but annual averages tell a much different story

AVG21 vs AVG20 Rsdn+153k(+5.3%), Nonres Bldgs +28k(+0.8%), Nonbldg +9k(+0.9%)

Dec vs Dec simply compares jobs at 2 points in time, without the benefit of what occurred in the other 11 months of the year, so does not tell us what took place over the year. The annual average gives a much clearer indication of jobs growth over the year because it accounts for the peaks and dips of all 12 months during the year.

Jobs average over the year 2021 increased +2.3%. After adjusting for inflation, total volume in 2021 is down -2.5%. Residential volume for 2021 is up +7.4% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8.1%.

If jobs are increasing faster than volume of work, productivity is declining. For example, nonres bdgs volume declined 11%, but nonres bldgs jobs increase 0.8%. That’s a 12% swing in productivity. Since labor is about 35% of the cost of a project, if productivity declines by 12% Then inflation rises by 12% x 35% = 4%. The most recent year drop in volume, while jobs increased, added 4% to nonres bldgs inflation for the year.

If jobs are increasing faster than volume of work (a negative impact) can we tell if it’s production employees or supervisory employees? BLS reports ALL construction jobs (~7.5million) and Production jobs (~5.5million). The difference between these two data sets is supervisory employees.

Looking at the average number of construction jobs in the last 4 years, the average of 2021 jobs vs the average of 2017 jobs, production jobs increased +5%, but supervisory jobs increased +12%.

Looking at 2021 vs 2019, in the past 2 years, production jobs decreased by -1.5%, but supervisory jobs increased +1.7%. During this period spending increased +3.5%, but after adjusting for inflation, volume declined -9%.

In 2011, supervisory jobs was 24% of all construction jobs. Now it is 35%. Growth in supervisory jobs has had a greater negative impact than production jobs on the spread between jobs and volume.

Jobs and Volume of work growth should move in tandem.

If jobs grow faster than volume, productivity is declining. When these plot lines grow wider apart with jobs on top, that is a sign of productivity decline. That’s part of inflation.

And finally, here’s one of the markers I use to check my forecast modeling, my forecasting performance tracking index. The light plot line is forecast predicted from my modeling. The dark plot line is actual construction spending. Even after any separation in the indices, the plots should move at the same slope. Almost without fail, the forecast model, estimated spending from cashflow, predicts the changes in direction of actual spending.

See the full report updated 2-11-22 to include year-end data.

Year End 2021 – Construction Forecast 2022 – Briefs

New Construction Starts, as reported by Dodge Data and Analytics, are up +13% for the total three years 2020+2021(actuals) + 2022(estm). Residential starts will be up +35%. Nonresidential Bldgs starts are at 0%. Nonbuilding starts are down -7%. This includes the forecast that has Nonresidential Bldgs and Non-Bldg starts both up +8% in 2022.

Construction Backlog leading into Jan 2022 vs Jan 2020 will be down -8%. Residential backlog will be up +34%, but Nonresidential Bldgs backlog will be down -14% and Non-Bldg backlog will be down -17%.

(Construction Analytics measures Backlog at the start of the year vs backlog at the start of the previous year. This is compared to ABC Backlog indicator, which measures current backlog compared to previous year’s revenue.)

Backlog at the beginning of the year or new starts within the year does not give an indication of what direction spending will take within the year. Backlog increases if new starts during the year is greater than spending during the year. An increase in backlog could immediately increase the level of monthly spending activity, or it could maintain a level rate of market activity, but spread over a longer duration. In this case, there is some of both in the forecast. It takes several years for all the starts in a year to be completed. Cash flow shows the spending over time.

Spending for 2021, with 10 months actual in year-to-date, is forecast up +7.4%. However, that can be misleading. Residential spending for 2021 is up 22% while Nonresidential Bldgs is down -5% and Non-Bldg is down -1.7%.

Spending includes inflation which does not add to the volume of work.

“This is the beginning of trying to work through supply chain problems…inflation will still get worse before it gets better ” Diane Swonk, Chief Economist Grant Thornton 11-12-21

My current and predicted Inflation rates:

  • 2020 Residential 5%, Nonres Bldgs 4.8%, Nonbldg Infra Avg 4.5%
  • 2021 Residential 14.2%, Nonres Bldgs 6.8%, Nonbldg Infra Avg 7.8%
  • 2022 Residential 7%, Nonres Bldgs 4.5%, Nonbldg Infra Avg 3.7%
  • There is greater chance for rates to move up than down.

After adjusting for inflation, total volume in 2021 is down -3%. Residential volume for 2021 is up +7% while Nonresidential Bldgs volume is down -11% and Non-Bldg volume is down -8%.

Volume declines should lead to lower inflation as firms compete for fewer new projects. However, if jobs growth continues while volume declines, then productivity continues to decline and that will add to labor cost inflation.

Jobs average over the year 2021 increased +2.3%.

Spending Forecast for 2022 is expected to increase +2.5%. Residential spending for 2022 is forecast up +5%. Nonresidential Bldgs forecast is up +4%. Non-Bldg forecast is down -5%.

One important thing that happens when we find out inflation rose much faster than we would have thought, production hasn’t been as great as we thought.

When volume decreases and jobs increase, productivity is declining.

Many construction firms judge their backlog growth by the remaining estimate to complete of all jobs under contract. The problem with that, for example, is that Nonresidential Buildings spending (revenues) are expected to grow +4% in 2022, but after adjusting for inflation the actual volume of work is down about -1%. By this method, in part these firms are accounting for an increase in inflation dollars passing through their hands. Spending includes inflation, which does not add to the volume of work.

The Non-Building Infrastructure spending forecast for 2022 is more affected by a drop of -17% in starts in 2020 (2020 starts would have generated 30% of 2022 spending) than by any increase in starts in 2022 (which would generate only 15% of 2022 spending).

After adjusting for inflation, Residential volume for 2022 is forecast down -1.5% while Nonresidential Bldgs volume is forecast down -1% and Non-Bldg volume is forecast down -9%. Total volume for 2022 is forecast down -3%.

On average about 20% of new nonresidential buildings construction starts gets spent within the year started, 50% is spent in the next year and 30% is spent in future years. (For residential the spending curve is more like 70%-30%).

Nonresidential Buildings construction starts recorded 12 consecutive months (from April 2020 through March 2021) at 20% or more below the Q4’19-Q1’20 average of starts. Now 20 months after the onset of the pandemic, Nonres Bldgs starts have posted 16 down months and are still down 13% from Mar 2020.

In constant (inflation adjusted) dollars, as of Oct. 2021, Nonres Bldgs spending is 20% below the Feb 2020 peak. The bottom is expected in mid-2022.

If new construction starts in 2022 post an add of $100 billion in new starts for infrastructure, only about $20 billion of that would get put-in-place in 2022. The cash flow schedule for that $100 bil of new starts would extend out over 3 or 4 years. Most of that $100 bil would get spent in 2023 and 2024.

Current Final Demand pricing for Nonres Bldgs and Trades is highest on record. Prices support high inflation this year and next. Do not expect inflation to turn to deflation in 2022. The only time in 50 years that construction experienced deflation was in the period 2008 to 2011. At that time conditions were 10x worse than now.

An interesting question came up recently, related to the plot below, that prompted me to look at jobs data a little deeper. The question was, If jobs are increasing faster than volume of work (negative impact) can we tell if it’s production employees or supervisory employees? BLS reports ALL construction jobs (~7.5million) and Production jobs (~5.5million). The difference between these two data sets is supervisory employees.

Looking at the average number of construction jobs in the last 4 years, the average of 2021 jobs vs the average of 2017 jobs, production jobs increased +5%, but supervisory jobs increased +12%.

Looking at 2021 vs 2019, in the past 2 years, production jobs decreased by -1.5%, but supervisory jobs increased +1.7%. During this period spending increased +3.5%, but after adjusting for inflation, volume declined -9%.

In 2011, supervisory jobs was 24% of all construction jobs. Now it is 35%. Growth in supervisory jobs has had a greater negative impact than production jobs on the spread between jobs and volume.

And finally, here’s one of the markers I use to check my forecast modeling, my forecasting performance tracking index. The light plot line is forecast predicted from my modeling. The dark plot line is actual construction spending. Even after any separation in the indices, the plots should move at the same slope. Almost without fail, the forecast model, estimated spending from cashflow, predicts the changes in direction of actual spending.

Nonresidential Bldgs Forecast 2022 Improves

11-8-21

Lots of construction data came out last week. Sept spending, Oct jobs and Dodge Outlook 2022 for new starts. There have been major revisions to new starts since the June and July starts reports. Since June data, starts increased over what had been forecast for 2021 in Residential +12%, Comm/Rtl +20%, Mnfg +41%, Educ +4%, Rec +38%, Enviro+6%. These increases to 2021 starts improve the spending forecast for 2022. Mnfg, Rec and Enviro starts for 2022 were all reduced slightly.

See Construction Economics in Pictures 11-5-21 for current forecast.

Nonresidential buildings starts increased in 2021 by more than the marked up equivalent of $40 billion in spending (over the life of the projects). About half of that increase in spending would occur in 2022. So this increase in the starts forecast really pushed up the forecast for 2022 spending. All sectors now are forecast higher spending in 2022, but the biggest change is in nonres bldgs. These two plots show nonres bldgs as it was forecast based on June data on Aug. 1, and again as of Sept spending/Outlook22 starts data released Nov. 3. The expectation now is for an upward turn in spending beginning in the 4th quarter 2021. Previous models all had poor 2020/2021 starts reflecting a bottom in nonres bldgs spending just about mid-2022. The spending increase leading into 2022 moves the spending bottom to a point much sooner in 4th quarter 2021.

Nonres bldgs spending prior to release of Dodge Outlook 2022

Nonres bldgs spending forecast as of 11-3-21 includes release of Dodge Outlook 2022

Forecast spending bottom was mid-2022, now is Q4 2021. Although total spending is now forecast to increase 2.5% in 2022, that is still less than inflation, so real construction volume in nonres bldgs is still down slightly for 2022. The forecast bottom for nonres bldgs inflation adjusted constant $ is still mid-2022.

Construction Economics in Pictures 11-5-21

These data reflect Sept’21 construction spending Put-in-Place, Jobs and hours worked thru Oct’21, Dodge Nov’21 New Starts Outlook 2022, Inflation factors thru Q3’21

Construction Spending Update 10-1-21

Construction Spending Actual through August 2021

Total Construction Spending compared to same period 2020 is now up 7.0% year-to-date (ytd). Residential spending continues to perform better than forecast and is now up 25.8% ytd. Nonresidential Buildings is now down -8.7% and Nonbuilding Infrastructure is down -3.8%, both improved in the last two months.

The single largest impact to the change in this forecast from last month is Residential. Spending continues to perform better than cash flow predicted from starts would indicate. For August, I expected residential spending to drop 1% compared to July, but it increased 0.4%. Also, it increased from an upwardly revised July. In this August spending report, residential spending was revised upwards in both June and July by 1% each month. That pushes the total up for my forecast for the year.

Highway also posted large upward revisions, +3% to June and +2% to July, but these revisions combined represent only $515 million. The Residential revisions alone total $2.2 billion, more than double the revisions to all other markets combined, including Highway.

Year-to-date through August, while residential is up 25.8%, all but one single nonresidential market is down. 15 of 16 nonresidential markets are down -8.7% for nonresidential buildings and -3.8% for nonbuilding infrastructure. Only Sewage/Waste Water is up 3.6% ytd., but that’s only 2% of all nonresidential construction. It’s half of the $ in the table item Sewer / Water / Conservation.

By year end I expect residential spending to finish up 20%, nonresidential buildings to finish down 7% and nonbuilding to finish down 3%.

Construction starts are slowly leading the way to recovery, with remarkable strength in residential, but construction spending, which is dependent mostly on starts from previous years (nonres bldgs starts in 2020 down -20%), will remain depressed for nonresidential construction well into 2022. New nonresidential starts could double from the current rate of growth and it still wouldn’t be enough to turn 2021 nonresidential spending positive.

Residential starts gained only +3% in 2019, increased +6% in 2020 and are forecast up +9% in 2021 and +7% in 2022. Residential spending surprisingly increased +15% in 2020 to $638 billion and is forecast up +20% to $767 billion in 2021, but only +4% in 2022. Both residential starts and spending are at all-time highs. That is driving total spending to new highs.

Nonresidential Bldgs starts fell -4% in 2019, -21% in 2020 and are now forecast up +8% in both 2021 and 2022. New starts for 2021 are still -20% below the peak in 2018. Most of the fall off in starts in 2020 would have produced peak spending in 2021. Nonresidential Bldgs spending fell only -2% in 2020 but is expected to fall -7% in 2021 and -2% in 2022.

Comparing combined 2020 and 2021 starts, the only markets to show positive growth over 2019 are Commercial/Retail, +5% (due to warehouses) and Healthcare, +7% (due to hospitals). The average growth in starts of all other nonresidential buildings markets for 2020 x 2021 combined is still 35% lower than 2019. Public Bldgs increased in 2020 but fell back in 2021.

My forecast, ever since August 2020, has been showing a decline in nonresidential buildings spending on a long downward trend through 2021 and into 2022. That forecast was then and still is now correct. The nonresidential building spending plot below shows that spending has declined in 16 of the last 18 months. Spending hits a bottom in 2022.

Nonbuilding starts were up 3% in 2019, fell -15% in 2020 and forecast indicates +6% growth in both 2021 and 2022. Nonbuilding starts are 10% lower than 2019. Nonbuilding spending gained only +1% in 2020, but the forecast is down -3% for 2021 and is expected to drop -5% in 2022. Like nonresidential buildings, the large drop in 2020 starts would have had peak spending well out at the midpoints of those projects, many of which would have been in 2021 or 2022.

For more on construction starts SEE New Construction Starts as of Aug’21

Behind the Headlines

An anomaly in the data is the Manufacturing spending data versus expectations. In 2020, Dodge posted a 57% drop in new starts for Manufacturing. Since many of these type projects have long time spans to completion and peak spending is near the midpoint of a project schedule, most of the drop in spending from that huge loss of new starts would normally occur in years following the starts. I predicted the drop would occur in 2021 and 2022, expecting it would produce a 20% decline in spending in 2021. But year-to-date Manufacturing spending is down only 1%. It did produce an 11% decline in 2020 spending, but that is not the extent of the total loss. This puts into question either my forecast of when the drop would occur or percent decline in starts reported. You can’t have a drop of 57% in starts activity and get only a 1% decline in spending the following year. Based on spending in 2020 and 2021 ytd, my forecast model is indicating there may be a variance in 2020 starts data % of market captured.

Part of the difficulty with the manufacturing data arises from the fact that history shows only approximately $20bil/yr to $30bil/yr is captured in the new starts data reported and yet spending has been in the range of $70bil/yr to $80bil/yr. That means only about 25% to 35% of the total market activity is being captured in the starts data. But from this we need to predict 100% of the future spending. This % of total market captured in the starts data fluctuates up and down. So the difficulty is predicting actually how much of the market is captured, and that varies. The question is this: How much of the change in the starts data reflects an expected change in future market activity versus how much of the change in starts reported represents an unidentified variance in % of market captured. A variance in % of market captured in the data may not indicate a change in future market activity (spending). Since project schedules can be anywhere from less than 20 months to more than 4 years, any given year of actual spending could have some portion of that spending generated by project starts from the previous 4 or more years. It takes several years of actual spending to identify the differences in these two parts of the question. Only future data will help resolve this question.

Another set of data to question is residential starts. Currently, for 8 months through August, starts are up 18% over 2020. Starts began to climb in July 2020 and posted a very strong final 5 months of 2020. This year average starts to date is at all-time highs. But Dodge, in the 3Q21 Outlook, forecast 2021 residential starts up about 9%. In order for that to happen, for the remaining 4 months residential starts would need to drop 20% from the current average rate, 10% below the most recent month. That seems a bit unrealistic. That would set the monthly rate back to a point lower than anything experienced since the pandemic lows in Apr-May-Jun last year. It seems to me residential starts will finish quite a bit higher than that. I’m carrying 15% growth for the year in my forecast.

Recovery

Recovery in both nonresidential buildings and nonbuilding backlog begins to build in a few markets in 2021. Even though starts growth in % is greater than spending growth in %, overall spending in nonresidential buildings and non-buildings in dollars, not %, is exceeding new starts. Therefore both will begin 2022 with lower backlog than 2021. Total all nonresidential 2021 starting backlog dropped -9% from 2020. Starting backlog to begin 2022 will be down another -5%. Based on forecast growth in new starts, backlog increases 4% for 2023.

Aside from residential, recovery to the levels of revenue (spending) recorded in Q1 2020 or earlier won’t show up before 2024.

The following table shows ytd through August $ and forecast for 2021/2022. Almost every nonresidential market is down ytd and down compared to the average in Q1 2020 before Pandemic Recession.

Impact of Pandemic Slowdown

The impact of reduced starts in 2020 is showing up in the 2021 year-to-date results. Total Nonresidential Buildings starts were down -20% from April 2020 through March 2021 compared to pre-pandemic high in Q1 2020. Nonres Bldgs starts improved from Apr-Jul 2021 and for those 4 months managed to equal the pre-pandemic high. However, the 2021 average year-to-date through August is still 14% lower than the pre-pandemic high. Nonbuilding Infrastructure starts returned to pre-pandemic high several months ago, but have since slowed.

Due to the large drop in new nonresidential buildings starts from Apr 2020, that continued at a level down -20% until March 2021, some markets will be affected by a downward trend in spending for two to three years.

The greatest downward impact from a -20%, year-long loss of starts in nonresidential spending will be felt throughout 2021 and into 2022.

Construction Analytics has been describing this situation and provided plots showing what would occur in nonresidential buildings spending since August 2020. A review of the historical forecasts will show those forecasts mostly correct. The plot below, Construction Spending by Sector, shows the current forecast and actual data through August 2021. The explanation and the plotted data have been similar since last year.

Over the next 9 months, every sector will post more down months (in spending) than up months, although the declines will be most noticeable in nonresidential buildings. The plot line for Nonresidential Buildings may not look like much is going on, but in a minute you will see the magnitude of that downward sloping line.

Overall performance forecast by sector has changed very little since May of this year.

While most markets recover to positive new starts growth in 2021, spending growth lags, showing the downward trend in 2021 as a result of lost starts in 2020.

This next plot changes the scale so the nonresidential buildings spending data can be visualized much easier. This is the exact same data as in the Construction Spending by Sector plot above. The scale change helps to visualize the dramatic decline in nonresidential buildings spending. From Apr through Dec 2020, nonresidential buildings spending fell at a rate of 1.75%/month. Jan 2021 and Mar 2021 are the only up months since Feb 2020. From Apr 2021 through Aug 2021, the rate of spending fell at 1.25%/month. Currently, the annual rate of spending is 17% below the pre-pandemic peak. By midyear 2022, the annual rate of spending will be -20% lower than the pre-pandemic peak. It could take two to three years after that to recover to the pre-pandemic level of spending.

A typical batch of new nonresidential construction starts within a year gets spent over a cash flow schedule similar to 20/50/30, that is, 20% of all starts in the calendar year gets spent in the year started, 50% in the next year and 30% in years following. Total nonresidential buildings starts in 2020 were down -20% ($90 bil in spending) and nonbuilding starts were down -10% ($35bil). Under normal conditions, we know how much of that $125 bil would have occurred in 2020, 2021 and 2022. That’s a loss of spending this year, and that loss remains a steeply downward slope as long as starts remain depressed. Nonresidential buildings starts, depressed for 13 months, posted starts indicating recovery beginning in April this year.

Infrastructure

Let’s assume INFRASTRUCTURE BILL new starts begin in Jan 2022, and let’s also assume $100 billion worth of work gets awarded in 2022. That’s $100 billion of starts in 2022. Only a maximum of 20% (the 1st year portion of the cash flow 20/50/30) gets spent in the 1st year. Therefore, even if $100 billion in new infrastructure starts begin in 2022, only 20% of that or only $20 billion would get spent in 2022. So, there will be very little impact on total 2022 construction spending as a result.

That changes dramatically for the second year. For 2023 we get 50% of the spending from 2021 starts and 20% from 2022 starts, so $70 billion in spending, growth of $50 billion.. That’s already more than the industry can handle.

Total Public Infrastructure and Public Institutional, the total public work pool for which infrastructure investment is a potential, represents a total LESS THAN $350 BILLION annually, less than 25% of all annual construction. Average growth is $12 billion/year. Looking back to 1993, this subset has never exceeded $35 billion in growth in a single year. If we award (start) $100 billion in new work each year for the next 5 years, we would cap out the growth rate for spending in this subset of work, with no room for any additional new starts from any other sources. The work would be completed after 8 years.

This image has an empty alt attribute; its file name is spend-public-infra-institu-8-2-21.jpg

Forecasting Reliability

All the forecast spending in the data above is developed from monthly cash flow of new starts. This plot shows the history of the cash flow forecast (the light colored line) to the actual spending growth (the darker line). The cash flow forecast has been predicting the drop in nonres bldgs spending since last year. Although actual spending is somewhat more uneven, the forecast accurately predicts the direction spending is headed.

2021 Midyear Forecasts

Here’s how my (Construction Analytics) midyear spending forecast compared to various firms’ data published in the AIA Midyear Forecasts and how we all compare to the current August year-to-date spending. The year-to-date (ytd) performance provides insight into expected final 2021 performance. For example, the year-to-date Educational spending is -10.6% with 8 months of spending recorded. You can see in the table, one firm had forecast that educational will finish up 3.5% for the year. (Not shown here, but the AIA Consensus for Educ. is -2.1%). With 8 months of actual ytd data and only 4 months remaining (estimate to complete or etc), we can tell what would be needed in the remaining 4 months to get to any particular estimate.

To finish the year up +3.5%, for the next 4 months Educational spending would need to average +32% year-over-year (yoy) growth per month over last year to swing from currently down -10.6% to up +3.5% . Well, Educational spending is down 16% from the 2020 high, has been averaging down 11% yoy for the last 7 months, has fallen 7 of the last 8 months and is down mo/mo an average of 1.5%/mo for the last 6 months. With this performance over the past year, the probability is not likely at all that Educational construction spending is going to flip from a negative yoy -10.6% to an avg of +32%/mo for the remaining 4 months to finish the year up +3.5%. (To meet the AIA Consensus for Educ., the final 4 months would need to swing to +15%/mo). While there are some good estimates, there are many more examples like this in the AIA forecasts.

In 2020, more of Construction Analytics midyear forecasts by market were closer to the final actual than any other firm reporting in the AIA Midyear Outlook. Here’s the 2021 midyear forecasts compared to the current August year-to-date. Every forecast in the AIA Midyear 2021 report predicts 2022 nonresidential buildings spending will increase. See my spending forecast table above in this report where I’ve projected many nonresidential market down in 2022.

JOBS DATA has been updated with the jobs data release on 10-8-21

SEE Construction Jobs Outlook 10-11-21

Midyear 2021 Economic Forecast Presentation

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