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Behind The Headlines – Construction Starts is Not Spending

9-13-18

New Construction Starts is powerful data if used properly. Understand how to use the data and you have an excellent forecasting tool.

New Construction Starts is incorrectly used when the data is referred to as construction spending. It cannot be used to look at the year over year (yr/yr) or month over month (mo/mo) trend in values to predict % change in construction spending. This misrepresents how to use New Starts data.

Care must be taken to use Starts properly. It is sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate spending. Also, Starts do not directly indicate changes in spending per month or per year. Projected starts data cannot be used to directly forecast expected construction volume.

Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.

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

New Starts for the month or the year is the total value of new project revenues that came under contract in that period. Since the values reported for Starts are a sampling survey of about 60% of the industry totals, the total dollar volume is not comparable to actual spending. However, the percent change in values is very useful.

The entire value of a project enters backlog when the contract is signed and work begins. That’s a new start. Projects booked on or before December 31st, that still have work remaining to be completed, are in backlog at the start of a new year.

Backlog Cashflow Forecast 2017-2021 9-21-18

Simply referencing total new starts or backlog in the year does not give an indication of spending within the year or next calendar year. Projects, from start to completion, can have significantly different duration. Whereas a residential project may have a duration of 6 to 12 months, an office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Total Cash  Flow in the Year, or Spending, could include spending from projects that started years ago.

Backlog at the start of the year could include revenues from projects that started in December or several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of the year is the amount remaining to complete the project or the estimate to complete (ETC). And all that ETC may not be spent in the year following when it started, dependent on the duration remaining to completion.

The only way to know how much of total starts or 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. The sum of the amounts from all projects ongoing in each month gives total cash flow in that month, or monthly spending in that year. Spending in any given month could have input from projects that started many months ago.  The sum of the cash flow is what shows the expected change in spending.

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

Starts vs Spending 2009-2017 9-13-18

Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts.

Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.

Starts vs Spending Nonres Bldgs 9-13-18

Power market starts and spending provides a good example.

Power starts peaked in 2015 at an all-time high, up 140% from 2014 and more than the prior two years combined. Yet Power spending was down 6.5% in 2015 and down 1.5% in 2016. This happened because Power starts were also at an all-time high in 2012, just below the 2015 level, and those starts drove 2014 spending to an all-time high, but then tapered off in 2015. Those peak starts from 2015 will still be contributing spending for several years to come, long beyond typical jobs, and that drives typical spending growth because it adds more than typical number of months that contribute spending.

Starts vs Spending Power Market 9-13-18

Power starts gained only 1.5% in 2016, dropped 7% in 2017 and are expected to finish 2018 down 12%. The pattern of cash flows from starts is indicating growth in spending for 2018 and 2019. Starts from 2015 and 2016 with longer than average duration contribute spending out to 2020 & 2021, breaking the average balanced cycle of one month of old jobs ending for every new month of jobs starting. That drives the pattern in spending.

The following example shows what happens to monthly spending growth when a long duration job first influences spending past the typical duration and then when it ends. In the example table presented below, starts grow at 1% per month and have a typical duration of 5 months. But one unique month has an unusually large project start that will last for 10 months.

A typical month of spending has cash flow from 5 months of starts, but the long duration project creates 6 months of cash flows for the period beyond typical duration. Notice what happens and when it occurs.

Starts vs Spending Example 9-13-18

When the large project starts it has no unusual effect on spending. But when it first extends beyond typical duration, it has a massive +20% growth effect on spending, even though starts had only been increasing at 1%/month for the previous 5 months. When it ends it has a similar downward effect, again, even though starts had been increasing at 1%/month.

Spending growth (or declines), both when an extra-large job causes it to increase and then when the extra-large job ends, is almost entirely influenced by the long duration project, not by normal monthly starts growth rate. This same example can be over months or over years.

Spending patterns are far more influenced by projects with unusual duration. Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Cash flow is the best indicator of how much and when spending will occur.

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

 

July Construction Starts Fall but 3moAvg at New High

8-23-18

New Construction Starts for July in the latest report from Dodge Dodge July 2018 Construction Starts  are down 9% from June, but June starts reached an all-time high Seasonally Adjusted Annual Rate (SAAR) of $899 billion. July posted at $817 billion. May was $804 billion. The May-Jun-Jul three month average SAAR construction starts is $840 billion, all-time high.

The Dodge July construction starts report posted $78 billion of new starts and highlights 19 projects valued over $200 million, one of those at $2.4 billion and 17 projects valued between $100-$200 million. The Dodge June construction starts report posted $98 billion of new starts and highlighted 7 projects over $1 billion (totaling $16.5 billion), 17 more projects over $200 billion and 15 projects between $100-$200 billion. The starts report is a sampling of about 2/3rds of all projects.

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

The new high in construction starts is measured in current $. When adjusted for inflation (constant $), total starts are still about 20% below 2003-2004, when all sectors reached their previous highs. A closer look at constant $ starts adjusted for inflation shows nonresidential buildings about 8-10% below the previous high, non-building infrastructure about 6-8% above the previous high, but residential is still 40% below the previous high.

Residential starts average for the 6 months Jan-Jun 2018 is the highest since 2006. The 1st 6 months of 2018 is up 8% from the prior 6 months.

Dodge Outlook Midyear Update is forecasting 2018 single family starts to gain 6% and multifamily to gain 3%. Year-to-date through July, single family starts are up 7% and multifamily up 6%.

Starts 2011-2018 Res bldgs 8-24-18

Non-building infrastructure starts for July are level with June and level with the average of the 1st six months. Starts may finish the year slightly down from 2017. However, 2017 was the best year of starts on record. The growth in Infrastructure starts will drive Non-building spending to record highs in 2018 through 2020.

Transportation, in Census spending reports, includes all airport work, air-side and terminals. It also includes rail work, track and terminals and dock work. In Dodge Data starts data, terminals are included in Other Institutional and rail work is included in Other Public Works. Terminals and rail work are included in this analysis in Transportation Infrastructure so that starts can be compared with Census spending data..

Terminal starts are down YTD, 50% lower than 2017. But 2017, which included the start of six major airport terminals, was so high, up 120% over 2016, that even though 2018 is down it will be the 2nd strongest year of starts on record. Rail work also doubled in 2017 and will remain close to even for 2018. Starting backlog for transportation projects doubled from the start of 2017 to the start of 2018. Backlog is on track to increase another 25% to start 2019. No other market will realize the gains in construction spending that we will see from transportation for 2018 and 2019.

Power generation plant starts cause erratic bumps in Power work. In the last year there have been a dozen or more project starts valued over $500 million each, six of those over $1 billion. Also included in Power, Pipeline starts represent half of all Power work started YTD. Cash flow may be adversely impacted by the delay of large projects that started previously. A multi-billion dollar nuclear power plant stopped work and large pipeline project delays have reduced the previous forecast for cash flow.

Highway starts hit an all-time high in 2017 and are forecast to surpass that by a few percent in 2018. Highway starting backlog increased 30% in the last 3 years and will increase 6% leading into 2019.

Starts 2011-2018 nonbldg 8-24-18

Nonresidential buildings starts in July reached $318 billion, down 22% from June, but June reached $402 billion, nudging up against the all-time high from 2008. 

Manufacturing starts are down 60% from June, but June was the highest month ever recorded, three to four times the average monthly starts. July is the 4th best month in the last 3 years, going back to April 2015, the 2nd highest month ever. The decline of manufacturing starts from the June high to a normal amount in July accounts for more than half of the total Nonres Bldgs decline in July. The news is not the decline in July, a return to normal, but the abnormally high starts in June.

Office and Warehouse starts, both up from a strong 2017, are seeing gains from data centers (in office) and distribution centers (in warehouse which is in commercial spending). Amusement/Recreation starts YTD are triple last year. The only nonresidential markets lower year-to-date are retail stores and healthcare. The decline in retail stores, which is also in commercial spending, is being hidden by the increase in warehouses, which are at an all-time high.

Adjusted for inflation, Jan 2008, by a few percent, is still the best ever for nonresidential buildings starts and spending.

Starts 2011-2018 nonres bldgs 8-24-18

The plots above show the 3mo moving average and trend line of starts for Residential, Non-building Infrastructure and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending.

The plot below is an index. The plot shows greater accuracy in the forecast when the predicted cash flow and actual spending plot lines move in the same direction. If the slope of the lines is the same, then the cash flow accurately predicted the spending.

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

Starts CF 2015-2018 8-23-18

Year-to-date (YTD) 2018 starts are up 2% from 2017, but 2017 starts through July have already been revised up by 12%, up 16% in nonresidential buildings, 22% in non-building  and 4% in residential. 2018 starts will be revised next year and revisions have always been up. Revisions in previous years have averaged more than +7%/yr. for the last 5 years, with most of the upward revision in nonresidential.

Dodge reported this headline on Nov. 2, 2017 “New Construction Starts in 2018 to Increase 3% to $765 Billion According to Dodge Data & Analytics.” At the time, Dodge predicted construction starts for 2017 on track to finish at $745 billion. However, as each new month of starts is reported in 2018, the comparable month in 2017 is revised up to the latest data. Currently through July 2018, total starts in 2017 have already been revised up to $795 billion. 2017 starts, once all revisions are posted, could reach close to $800 billion.

2018 starts, based on initial data this year, could reach $800 billion, at first appearing to show no gain from 2017. Historically, revisions increase the initial total. After revisions posted next year, 2018 starts could reach $830-$840 billion.

Starts in both 2017 and 2018 are stronger than expected just 6 months ago. The current SAAR monthly $ of starts is 10% higher than anticipated just 6 months ago.

Construction spending is up year-to-date through May in every sector. Only Manufacturing and Power markets are down YTD, but not enough to drag the sectors negative. Both markets are expected to finish the year up. (Religious market is down, but represents only 0.2% of spending).

Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,336 billion, a spending increase of 7% over 2017. The forecast for 2019, based on a 3% increase in starts, is $1,398 billion, an increase of 4.6% over 2018. The strongest growth in spending for 2018 and 2019 is forecast in Non-building Infrastructure.

Construction Economic Activity Notes 4-25-18

4-25-18

Brief notes on spending, starts, backlog, jobs and inflation from March and April tweets.

Nonresidential construction spending is not decelerating in 2018. Will see best growth since 14% in 2015.

Residential construction spending is slowing to +7% growth in 2018, after 6 consecutive years of strong growth averaging 13%/year.

Non-building Infrastructure forecast growth of 8% in 2018, potential to hit a new all-time high due to very large projects in Power and Transportation.

Public construction spending in 2018 is forecast to reach $307 billion, an increase of 8% over 2017, the best growth in 10 years. Educational and Transportation will contribute equally and together account for more than half of the Public spending growth in 2018.

In Oct 2016 and again in Feb 2017, I forecast Manufacturing spending would fall 13% in 2017 after hitting peak spending in 2015 from massive growth in new starts in 2014. At that time, the AIA consensus forecast (average of seven analysts) was that spending would increase +0.4%. By July the consensus had been revised to average -6.6%. I updated my forecast to -11.8%. Based on cash flows, from April 2016 through the end of 2017 I expected spending to decline in 17 of 21 months. It declined in 14 of those months. Manufacturing spending finished 2017 down 11.9%.

In Fall 2017, I predicted Manufacturing construction spending would increase +9% in 2018. However, through March, total construction starts for Manufacturing over the last 12 months would count as the 2nd highest year on record. Therefore I’ve recently revised my forecast up to +13% spending in 2018. I’m now expecting double digit % spending growth in both 2018 & 2019. The January 2018 AIA consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 spending will decline. My data shows increases in starts and backlog indicate large gains.

Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 24% in two years.

Nonresidential Bldgs 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% with 2018 spending forecast up 9%. Institutional accounts for 52% of 2018 construction spending growth, Commercial 27%, Industrial 21%.

80% of all nonresidential buildings construction spending forecast in 2018 is already in backlog projects at the start of the year.

New Construction Starts are booming (need to look past the mo/mo and ytd)

  • Residential – 2 highest qtrs since 2006 in last 12 months
  • Nonres Bldgs – 3 highest qtrs since Q1 2008 in last 15 months
  • Nonbldg Infra – highet qtr since Q1 2015 peak in last 6 months.

Construction Starts data is regularly misinterpreted in common industry forecasting articles. Starts do not directly indicate changes in spending. A Forecast Cash Flow from Starts gives an indication of the rate of change in spending.

Educational new construction starts total from the last five months of 2017 posted the highest 5mo total starts in at least seven years, 13% higher than the next best 5mo. Jan 2018 monthly spending up 12% from 2017 mid-year low.

Healthcare construction starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. Spending will increase slowly.

Amusement/Rec construction starts avg of +15%/yr for 5yrs, up 30% in 2016, 5% in 2017. In last 6mo, Aug 2017 to Jan 2018, four very large billion$+ projects started, almost a year’s worth of new starts in 6mo. Backlog indicates 15%-20% spending increases for 2018 and 2019.

In 2010, Warehouse new construction starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010.

Lodging starting backlog up 13% for 2018, having already averaged increases of 30%/yr since 2015. Starting backlog jumped from $7 bil/yr in 2014 to $17 bil/yr in 2018, supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.

New construction starts for Manufacturing total for the last 12 months would count as the 2nd highest year on record. I’m now expecting double digit % spending growth in both 2018 & 2019. The consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 manufacturing bldg spending will decline.

Structural steel contract includes structural shapes, steel joists, metal deck, stairs and rails, about 10% of total building final cost.

Other steel in a building can include reinforcing steel, exterior metal wall panels, metal ceiling frames, wall studs, door frames, canopies, steel duct, steel pipe and conduit, about 6% of total building cost.

All steel (in a structural steel building) is at least 16% of total building cost. There are more hidden costs of steel in mechanical, electrical and plumbing equipment.

Raw mill steel is about one fourth the final cost of structural steel installed. A 25% increase in cost of mill steel could raise a structural steel subcontract bid price by 6.25%. At 10% of total building budget, that would raise total building cost by 0.625%.

A 25% increase in cost of mill steel could raise the other nonstructural steel costs by 6.25%. At 6% of total building budget, that would raise total building cost by 0.375%.

A 25% tariff on mill steel raises building cost inflation by at least 1%. That’s about $7.5 billion of unexpected cost inflation just in 2018.

Watch for unexpected impacts from steel tariffs, potentially adding 5% or more to total cost of bridges (plate steel). Also impacted, power industry, pipeline, transmission & communication towers, transportation.

Steel tariff could inflate the cost of the proposed $2.1 billion Gordy Howe International Bridge by $100 million. That would hurt the budget.

2018 Construction Spending Forecast – Nonresidential Bldgs construction spending in 2018 forecast to reach a new high, $459 billion, up 9% over 2017, passing the previous 2008 high. In constant $, 2018 will still be 18% below peak.

An estimator could be far off when indexing construction cost using a general cost index versus an actual selling price index.

Failure to account for the affect of inflation on the cost of construction could result in a failure to be profitable.

For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.

For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%. In 2013 it reached a 12-year high of 8%.

If you are hiring to meet your needs and you see that construction spending (revenue) has increased by 25%, do you hire to match revenue? No! Hiring requires a knowledge of volume growth, and revenue doesn’t show that. Revenue minus inflation shows volume.

Construction activity has a direct influence on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs.

Construction Jobs vs volume growth the last 5 years is nearly even, yet jobs imbalances exist within sectors. Nonresidential Buildings and Non-building Infrastructure show excess jobs while Residential shows a severe jobs deficit. But not all of the apparent deficit in residential jobs is real.

Are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.

In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This is residential space built using labor classified as non-residential commercial.

BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity.”

So, the mis-classified labor reduces the nonresidential excess and offsets a portion of the residential shortfall.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Construction added 177,000 jobs in the 4 months Nov’17-Feb’18. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Construction jobs pulled back 15k in March, but this follows the strongest month (Feb +65k) in 12 years, so not totally unexpected. I think Mar Construction jobs, (-15k), more likely a pause after Feb (+65k), strongest month in 12 years.

see also Construction Economics Brief Notes 3-10-18

and also Notes on March 2018 Construction Spending 5-2-18

2018 Construction Outlook Articles Index

Articles Detailing 2018 Construction Outlook

Links will open in a new tab

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

Spend current vs constant 2018 3-4-18

Most Recently Published

July Construction Starts Fall but 3moAvg at New High

Construction Spending June 2018 8-1-18

June Construction Starts Reach New Highs 7-25-18

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

What Jobs Shortage? 7-6-18

Construction Spending 2016-2017 Revisions 7-1-18

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

Construction Spending April 2018 – 6-1-18

Notes on March 2018 Construction Spending 5-2-18

Construction Activity Notes 4-25-18

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

2018 Construction Spending Forecast – Mar 2018

Construction Economics Brief Notes 3-10-18

Construction Spending is Back 3-9-18

Construction Jobs 3-8-18

Publicly Funded Construction 2-28-18

PPI Materials Input Index 2-20-18

Down the Infrastructure Rabbit Hole 2-16-18

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

Residential Construction Jobs Shortages 2-3-18

2018 Construction Spending – Briefs 1-26-18

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

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

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

Backlog 2018 Construction Forecast Fall 2017 11-10-17

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

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

Construction Jobs / Workload Balance 11-7-17

Constant Dollar Construction Growth 11-2-17

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

Summary

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-26-18

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

Construction Spending is Back 3-9-18

2017 Results

2018 Construction Spending Forecast – Mar 2018

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

2018 Starting Backlog & New Starts

2018 Construction Spending – Briefs 1-24-18

Backlog 2018 Construction Forecast Fall 2017 11-10-17

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

Construction Starts and Spending Patterns 9-26-17

2018 Spending Forecast

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-26-18

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

Construction Spending Almost Always Revised UP  5-1-17

Nonresidential Buildings

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

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-24-18

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

Residential

2018 Construction Spending Forecast – Mar 2018

Residential Construction Jobs Shortages 2-3-18

Infrastructure Outlook

2018 Construction Spending Forecast – Mar 2018

Down the Infrastructure Rabbit Hole 2-16-18

2018 Construction Spending – Briefs 1-24-18

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

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

Calls for Infrastructure Problematic 1-12-17

Public Construction

2018 Construction Spending Forecast – Mar 2018

Publicly Funded Construction 2-28-18

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

Infrastructure & Public Construction Spending 3-5-17

Materials

PPI Materials Input Index  2-20-18

Jobs

Construction Jobs 3-8-18

Residential Construction Jobs Shortages 2-3-18

Construction Jobs / Workload Balance 11-2-17

Construction Jobs Growing Faster Than Volume 5-5-17

Inflation

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

Constant Dollar Construction Growth 11-2-17

Construction Inflation Index Tables UPDATED 2-12-18

Construction Cost Inflation – Commentary  updated 2-13-18

US Historical Construction Cost Indices 1800s to 1957

 

 

Indicators To Watch For 2018 Construction Spending?

I’ve read several articles recently describing, Why 2018 could be a boom year for construction spending. Several reasons being given to support a potential boom, when we look a little deeper, actually may not be good indicators at all to predict the trend for a strong year in 2018. In my Fall Forecast  I do predict 8% growth in 2018 construction spending, but let’s take a look at what gets us there.

Data that doesn’t tell us much about the future trend in construction spending.

Jobs increased in 2017 up 35% over 2016. In 2017 construction added 210,000 jobs, growth of 35% over 2016, but in 2016 jobs growth decreased by 55% from 2015. 2016 growth was the lowest in 5yrs. In 2013 jobs growth increased by 85% and in 2014 by 71%, but in 2015 and 2016 jobs growth slowed. Yet 2015 was one of the best construction spending years on record. And in 2017, jobs growth increased over 2016 but spending growth slowed. The direction of jobs growth is not an indicator of the future trend in spending.

Nov 2017 spending was higher than expected, and YTD is up 4.2%. This is a slippery slope. Actually we won’t know any particular monthly spending until several months after the initial release. All monthly spending values are subject to revision three times after initial release.  However, residential spending is higher than expected for the YTD and nonresidential buildings spending is below expectations for YTD. But more importantly, construction spending normally fluctuates. For instance, in the 2nd half of 2015, spending was down 4 out of 6 months, lower than forecast three times, posting a total decline of 2.5%. Yet 2015 finished the year up 10%. Then, in the 1st half of 2016, spending was up 5 out of 6 months, far exceeding forecast 3 times, posting a total increase of 6% in 6 months. 2016 finished up 6.5% for the year. Neither half performance predicted final results within the year or the forecast for the future. Furthermore, after inflation, 2017 spending is currently flat with 2016$, so all we are seeing in the 4.5% spending growth in 2017 is inflation. Current and past spending is not an indicator of the future trend in spending.

What data does give an indication of the future trend in construction spending?

Construction Starts (Dodge Data & Analytics DDA), Backlog, Cash flow from Starts, the Architectural Billings Index (ABI), The Dodge Momentum Index (DMI) and New Residential Permits and # of Units Construction Starts all give an indication of the future trend in spending.

Residential Permits and # of new units started gives a fairly immediate indication of residential activity. The ABI gives an indication of nonresidential building to start construction about 9 months out and the DMI about 12 months out. The ABI and DMI give some indication as to whether future starts will increase or decrease. DDA Starts give an indication of the percent growth in future work, but not when the spending will occur, so cannot be used directly to predict spending. A good example is the new start for airport terminal work recorded as a new start in 2017 at $4 billion. But it may take 5 or 6 years to complete that $4 billion project and only cash flow will show the impact on spending.

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

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

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

Of course, data highlighting demand, occupancy rates, labor and material trends and other economic factors affecting construction trends all weigh into determining future spending expectations. However, for nonresidential buildings and infrastructure approximately 75% to 80% of all spending within the year comes from starting backlog. Most economic factors that will have an affect on spending within the year are already captured in projects that have started and are in current backlog. On the other hand, new residential starts are more important. 70% of all residential spending in the year comes from new starts.

The following trend predictions are developed based on using this outline.

Starts Trends Construction Forecast Fall 2017

Backlog Construction Forecast Fall 2017

Spending Summary Construction Forecast Fall 2017

In What Category is That Construction Cost?

Seldom do two sources present information the same way!

In the construction industry, a disconnect exists in the reporting of construction starts data and actual spending data.  Problems may arise when data is used to perform comparisons or forecasts between starts and spending. New starts and backlog may be listed in one category and spending for the same markets may be listed in another.

Almost universally, reporting of construction economic actual spending data follows the U.S. Census Put-in-Place Spending format. I adjust all other construction starts input/forecasting data that I use to conform to these Census Put-in-Place definitions. Here are some pitfalls to be aware of:

The U.S. Census Construction Put-in-Place (Construction Spending) Release follows these definitions.

Residential spending data is about 35% renovations and improvements that has no units associated with the dollars, so cannot be included in a comparison to housing starts.

Demolition is not included in renovations/improvements. Partial repair of flood damaged homes is NOT included in residential improvements. Full replacement of flood damaged homes is included as improvements, not new single family. Here is Census definition of flood repairs

Offices includes pubic buildings such as city halls and courthouses. Includes data centers and bank buildings. Excludes medical office buildings, offices at manufacturing sites and offices at educational or healthcare facilities. Excludes Public Safety.

Commercial includes all retail buildings, warehouses, parking lots and garages. Excludes parking at educational/healthcare facilities.

Census DOES separate the costs for buildings that are mixed use retail/office/residential.

Educational, along with K-12, includes administrative offices, health centers, parking, residence halls, classrooms, educational research labs, food service and sports/recreation facilities at schools or colleges and universities and all associated infrastructure and maintenance facilities at the educational site. Also includes public libraries, science centers and museums.

Healthcare includes similar support and infrastructure to educational. Also includes medical office buildings, non-manufacturing and non-educational research labs.

Amusement and Recreation includes performing arts centers, civic centers, convention centers, sports and recreation facilities not located at schools or colleges.

Transportation includes air freight and passenger air terminals, runways, bus and railroad passenger terminals, light rail and subway facilities, railroad track, railway structures and bridges, docks and marine terminals and maintenance facilities and infrastructure associated with each.

 

Some sources of design or new construction starts data carry terminal buildings as commercial buildings, institutional buildings or other public nonresidential buildings. Census caries the building cost of all terminals grouped in with the non-building infrastructure costs of Transportation. Some sources carry public buildings such as city halls and courthouses as Public Safety but Census carries cost data for public buildings such as city halls and courthouses in Offices. Some sources classify laboratories as commercial and warehouses as industrial/manufacturing but Census includes warehouses in Commercial and Labs, depending on use, can be either Educational, Healthcare or Manufacturing.

 

Dodge Data New Construction Starts

Dodge includes monthly New Construction Starts for Terminals and Courthouses in Other Institutional Buildings, a Nonresidential Buildings category. The Census actual spending report includes Terminals in Transportation and Courthouses in Offices.

Although all of these still remain in Non-building Infrastructure, Dodge includes Rail, Mass Transit, Airport Runway and Pipelines in Other Public Works. Although not often mentioned by Dodge, it is assumed Communications is also included in Other Public Works.  Census includes all mass transit in Transportation, Communications is listed separately and pipelines are included in Power.

 

Constructconnect (CC) Construction Starts Forecast

New starts for Transportation Terminals is in a line by the same name but subtotaled in Commercial (Nonresidential Buildings) starts. Census includes Terminals in Transportation.

CC lists Courthouse starts subtotaled in Institutional. Census carries Courthouses in Office (Commercial).

CC lists Military as a line item subtotaled in Institutional. This might include Office, Housing, Warehouse, etc., which would be carried by Census in Office, Residential, Commercial, etc., respectively.

CC lists Laboratories (Schools & Industrial) together and subtotals all labs in Commercial. Census separates labs by commercial, research and educational and carries spending in Manufacturing, Healthcare or Educational respectively which would subtotal spending in Manufacturing (industrial), or Institutional (Healthcare and Educational).

CC does not list rail or transportation separately, but does list Airport and Misc Civil (Power,etc.). This leads me to think rail is included in the line item with Misc Civil (Power, etc.). Also, CC does not list Communication, which I suspect is included in Misc Civil (Power, etc.) Already noted above is that Terminals is subtotaled in Commercial. Census carries rail, runway and terminals in Transportation and keeps Communication and Power separate from others.

CC provides an alternate table of new starts data that corresponds to a proprietary software, INSIGHT. This table of starts data reshuffles categories very far from anything that would resemble Census spending output.

 

The AIA publishes a twice annual Consensus Construction Forecast, comparing forecast of Nonresidential Buildings spending using inputs from seven or eight firms. Every firm but one follows a similar organization. The difference is FMI includes both Transportation and Communications in Commercial Nonresidential Buildings. I’m not aware of another other firm that reports these two categories of spending as Nonresidential Buildings. Both are typically carried as Non-building Infrastructure. That these categories include costs for projects such as rail beds, rail right-of-way civil structures, loading platforms, airfield runways and support structures, communication transmission lines and cell towers supports the more standardized inclusion of these items in Infrastructure.

Similar discrepancies may exist when comparing starts or spending to indexes, such as the AIA Architectural Billings Index, which broadly classifies projects as commercial, institutional or residential with no further definition. Some resources classify Amusement/Recreation as institutional and some as commercial. In particular, the shifting of costs between Nonresidential Buildings and Non-building Infrastructure creates a particularly meaningful disparity between spending forecasts.

 

As you can see, there are numerous instances where the data are often mixed up. From the point of view of the forecaster, initial input data cannot always be used directly to forecast or match spending output. Some manipulation of the data is required to make input and output match.

As an example, I move the Dodge data starts for Terminals from nonresidential buildings to non-building infrastructure Transportation, so that really changes my totals from theirs for Nonresidential Buildings to Non-building Infrastructure. My output conforms with most all others, most of whom also follow the Census PIP definitions.

What does your source for data take into consideration? Know your data!

 

 

Backlog Construction Forecast Fall 2017

11-9-17

Total Construction Starting Backlog is at a record high, up 30% from the previous high in 2008.

Infrastructure and Residential sectors dropped to a decade low backlog in 2010. In 2013, nonresidential buildings hit the lowest starting backlog since 2004. Combined, total backlog hit a low-point in 2011, the lowest since 2003. Total Starting Backlog has been increasing since 2011, up 65% in 2018.

Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. Residential backlog is at a post-recession high, although as will be explained later, it is new residential starts that are more important and starts have tripled since the 2009 low. 70% of all residential spending in the year comes from new starts. Residential starts are still 20% below the 2004 peak.

Starts Generate Backlog

New Starts increased at an average rate of 11%/year from 2012 to 2016. 2017 starts slowed to less than half that pace.

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

Non-building Infrastructure starts were the highest in the 1st 6 months of 2015 than any 6-month period in history. Total 2015 starts increased 26%. 2016 is down just 2% from the peak 2015 starts and 2016 is the 2nd highest starts on record. Those early 2015 starts will still generate 10% of all spending in 2018. 2017 starts are level with 2016. After revisions, 2017 starts may set a new peak high.

Residential starts in 2016 posted the best year since 2005-2006. New starts in 2016 were revised up to show an increase of 10% over 2015. That follows five years of growth averaging 20%/year. New starts in Q1’17 reached an 11 year high.

Entering Backlog

New Backlog is added every month from New Construction Starts. When projects first enter backlog, the amount counted to backlog is the total value of project revenues under contract that are about to start construction, or the same as the new start values. For purposes of predicting future construction spending, as each month of project construction passes, work that has been put-in-place is subtracted from the total value to get the amount remaining in backlog.

Starting Backlog

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or three years ago. The amount counted in backlog is the value of the project that remains or that has not yet been put-in-place. Backlog is the total amount of future spending that will be generated by the project, commonly referred to as the ETC. The sum of all ETCs represents current backlog.

  • Nonresidential buildings 2018 starting backlog is up 10%
  • Non-building Infrastructure 2018 starting backlog is up 12%
  • Residential buildings 2018 starting backlog is down 3%
  • Starting Backlog is at an all-time high for nonresidential buildings and non-building infrastructure.

Typically, starting backlog is a reference to the amount of work in backlog on January 1st. It is referred to as the Starting Backlog for the coming year. The sum of all ETCs as of December 31st represents Starting Backlog.

For any project that has a remaining duration going out past year end, backlog at the start of year does not represent the amount that will be spent within the year. Some of that project backlog will be spent in future years. For this reason, backlog is not representative of spending within the year and the change in Starting Backlog from year to year is not an indication of a change in spending from year to year.

Values and duration of projects that make up backlog help to better predict spending activity over time, particularly in the coming year.

A cash flow schedule of all ETC backlog and predicted new starts provides a tool to predict future spending. It is not enough to look at just the change in backlog to get an indication of the strength of the market. While continued growth in backlog is important, the predicted cash flow from backlog and cash flow from new starts is necessary for predicting spending.

Construction spending is strongly influenced by long duration projects in backlog, more-so than normal monthly starts growth rate. The pattern of continuing or ending cash flows from the long duration backlog projects causes fluctuations in spending that supersede the balance cycle of one month of old jobs ending for every new month of jobs starting. This often can be responsible for some of the monthly fluctuations of construction spending.

The following table shows predicted cash flow from backlog on record as of October 1, 2017 and predicted starts that will generate future backlog in 2018.

Backlog Cashflow 2018 and 2017 11-10-17

Look Ahead to 2018

Buildings and Infrastructure will both hit new all-time highs for starting backlog in 2018.  For four years, from 2010 to 2013, all nonresidential backlog remained nearly constant. Since then, growth has been similar to the pre-recession construction boom of the early 2000s.

Nonresidential buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle. Starting backlog has increased for 5 years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for 5 years at an average 9%/year. Buildings will reach a new high for spending in 2018.

Non-building Infrastructure 2018 starting backlog is up 35% since 2014 but spending from backlog is up only 10%. Infrastructure starting backlog has been increasing for more than 10 years, sometimes only a fraction of a percent per year. Since 2010, backlog increased only 3%/year for the first 5 years then it jumped 35% in the last 3 years. Spending within the year from starting backlog is up 8% in 2018. Infrastructure spending will hit a new high in 2018.

Backlog incld Res Starts 2005-2018 11-8-17

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

  • Cash flow models of construction projects in backlog are indicating substantial acceleration in nonresidential spending over next year, perhaps most notable in infrastructure.
  • 75% to 80% of nonresidential spending within the year comes from Starting Backlog.
  • 70% of residential spending within the years comes from New Starts. Residential starts are at a post-recession high.
  • Share of spending within the current year from backlog is at an all-time high for nonresidential buildings and non-building infrastructure.

Nonresidential Buildings

Nonresidential buildings experienced a decline in starting backlog as recently as 2013. Since 2013, nonresidential buildings starting backlog is up 60%. Backlog will hit a new all-time high for 2018, 5% over the previous high in 2009 . Not only is starting backlog higher coming into 2018, but also spending from backlog is predicted up by 10%. This will produce a new high in current dollar spending.

Revenues from starting backlog account for 75% of all nonresidential buildings construction spending within the year.

Backlog for Nonres Bldgs 2014-2019 11-12-17

Educational starts, backlog and spending has been increasing for 5 years or longer. 2018 starting backlog is up 16% from 2017. Starts for 2018 are predicted to go up 13% and this will push 2019 starting backlog even higher. This should produce good spending growth for the next few years.

Office construction starting backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018 it’s up 27% over 2017. Office starting backlog increased an average of 28%/year for the last 5 years. Actual spending increased an average of 17%/year. Backlog growth looks like it will support very strong spending increases into 2019.

Commercial Retail backlog will hold steady from 2017 into 2018. This should level off spending after 7 years of strong growth. 2018 backlog still produces a spending increase but current projections show a slight drop in 2019.

Lodging backlog increases slightly for 2018. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.

Manufacturing posted a 100% increase in new starts in 2014 that drove starting backlog to new highs for the next two years. With new starts slowing back to normal by 2016, starting backlog dropped 20% in 2017 and spending dropped 12%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts and that pushed 2018 starting backlog again to a new high. This will support a spending rebound in 2018-2019 after a drop of 18% in the last two years.

Non-building Infrastructure

Non-building infrastructure backlog stood at $180 billion in 2008, the last pre-recession year. At the beginning of 2017, non- building infrastructure backlog hit an all-time high, $260 billion, up 45% from 2008. For the last three years, starting backlog is up 40%. In 2018, it’s up 13%, another new high.

Revenues from starting backlog account for 80% of all non-building infrastructure construction spending within the year.

Backlog for Nonbldg Infra 2014-2019 11-12-17

Power backlog has doubled since 2014. It’s up 11% for 2018. Starts are down 14% from the 2015 peak, but spending from backlog is increasing. Most relevant is that backlog increased much stronger than spending. Backlog is being driven higher by very long duration projects that started in 2015, 2016 and 2017.

Highway starts declined the last two years from the peak in 2015, but starting backlog increased the last 3 years and is now 25% higher than 2015.  The last three years of highway starts are still feeding spending in 2018. There is very little change in the amount of spending from backlog, so 2018 spending won’t change very much from 2017.

Transportation new starts shot up by 70% in 2017, pushing 2018 starting backlog to a new high, up 75% from 2017. That will help increase 2018 spending by more than 15%, but a larger spending increase could come in 2019.

Environmental Public Works, Sewer/water/Conservation is experiencing declining starts, declining backlog and declining spending from backlog. All are at the lowest since 2014. We may not see any increase in construction spending until 2019.

Public Work

Public vs Private starts are not tracked separately, but the public share of markets is known. Therefore a projection of public backlog is possible. Highway and Environmental Public Works are 100% public.  Educational is 80% public, Transportation is 70%, Amusement/Rec is 50%, Healthcare is 20% and Power is 10% public, along with few other smaller shares. Starting backlog for 2018 is up 40% from 2014 due to the predominantly long duration projects that make up public work. This is a post-recession high and is nearing the all-time high of 2008. Increased backlog is indicating the best construction spending increases since 2008 for the next two years.

Residential Buildings

Residential new starts hit bottom in 2009 and starting backlog hit bottom in 2010. Residential on average has the shortest duration and new starts has a dramatic impact on the amount of available work. Both new starts and backlog are now 3x higher than the lows. New residential starts have increased every year since the 2009 bottom, but are still 25% lower than 2004-2005. Residential spending reached its peak of $630 billion in 2005. Current spending is still 15% below that peak. In constant $, spending is 30% below that peak.

Due to the shorter duration of projects, nearly 70% of residential spending within the year is generated from new starts. Unlike longer duration nonresidential projects, backlog does not contribute nearly as much. 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 residential construction industry.

New starts slowed in 2017 to only 4% growth and similar growth of 6% is expected for 2018. This is not unexpected after 5 years (2012-2016) of new starts growth at an average 20%/year. This leads to a prediction of 2018 spending up only 6%.

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

See this companion post for  Starts Trends Construction Forecast Fall 2017

Also see 2018 spending forecast Spending Summary Construction Forecast Fall 2017

Starts Trends Construction Forecast Fall 2017

11-8-17

It all starts here! Construction Starts Generate Construction Spending.

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

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

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

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

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

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

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

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

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

Nonresidential Buildings

Retail/Commercial starts may finish flat or up just slightly for 2017, but that is compared to peak starts in 2016. Starts for the 12 months Aug 2016 – June 2017 posted 10% growth over the previous 12 months. Retail/Commercial starts have been increasing every year since 2010. In 2010, Warehouse starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010.

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

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

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

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

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

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

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

Non-building Infrastructure

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

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

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

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

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

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

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

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

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

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

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

 

ABI – DMI – Starts – Construction Spending

2-22-17

The attached plot shows actual and predicted construction spending compared to several industry leading indicators. The ABI, produced by the American Institute of Architects (AIA) shows work on the boards at architectural firms. Values above 50 indicate work increasing, values below 50 = work decreasing. The DMI is a survey from Dodge that gives an indication of new construction momentum. Starts is the total cash flow growth from all nonresidential starts currently in backlog.

Both the ABI and the DMI have long lead times. For example, the ABI value posted by AIA today is an indication of what to expect 9 months from now. I’ve plotted the values for ABI and DMI out at the lead time dates (# of months) in the future so they would correspond to future cash flows from all starts and predicted spending. The Starts, DMI and Spending values on this plot are indexed so they could be plotted with the ABI while keeping growth trends in each index true.

  • ABI – Architectural Billings Index
  • DMI – Dodge Momentum Index
  • Starts – Aggregate Cashflows of Dodge Starts
  • Spending – Actual and Predicted Construction Spending

abi-dmi-starts-spend-thru-2017-2-22-17

Overall Spending mostly correlates with Starts except that Starts showed a steeper growth rate in 2016 before a drop. Starts and Spending match well for all of 2014 and 2015. Both DMI and ABI are more erratic, however, the advances and declines in the ABI do correspond well with pickups and slowdowns in Spending. From mid-2015 through the end of 2016, the DMI was in a narrow range and that could possibly be said to be in synch with a slowed period of Spending.

Although they don’t match exactly by month, the ABI, DMI and Starts all show a drop sometime between 4th qtr 2016 and 2nd qtr 2017. That appears in Spending as a slight dip in 1st qtr 2017. The ABI gives an indication of a nice increase midyear. Both DMI and Starts are indicating substantial growth in spending by year end 2017.

Housing Starts vs Residential Construction Spending

2-18-17

Housing Starts (# of units started as reported by U.S. Census) can be erratic from month to month and short term changes in growth can sometimes be misleading. Trends should be looked at over longer term periods. New monthly starts on a seasonally adjusted annual rate (SAAR) basis for the last eight months through January 2017 have now averaged over 1,200,000. For the last four months starts have averaged 1,250,000. Permits have been following a similar pattern. Although starts versus permits varies considerably in some months, statistically they follow the same growth pattern. Growth in the number of new starts has been 5% to 25% per year due to erratic movement but in the longer term has averaged 18%/yr over six years since January 2011. We experienced an un-sustained start to recovery in 2010, but essentially we went through a protracted bottom between 500,000 and 600,000 new starts that lasted all throughout 2009-2010.

housing-starts-vs-permits-jan-2017-2-18-17

Dodge Data reports SAAR new residential construction starts by contract value in current dollars (not inflation adjusted). Unadjusted growth for the same six-year period increased from $120 billion SAAR to over $300 billion SAAR, or at an annual rate of over 25%/year. However, there was 25% residential cost inflation during that period. In constant 2016$, Dodge new residential starts growth averages 20%/year for six years since January 2011.

housing-dda-starts-2011-2016-2-18-17

Now let’s look at construction spending, actual dollar value of work put-in-place. Here’s where the data has a disconnect.

At the start of 2011, total residential spending  had a monthly SAAR of $240 billion and at the end of 2016 was $470 billion, an increase of 16%/year for 6 years. To find real volume growth those values must be adjusted for inflation. After adjusting for inflation, the actual spending volume growth in 2016$ from 2011 through the end of 2016 increased from $305 billion to $465 billion, an increase of 52%, or an average increase of 9%/year for 6 years.

spend-res-2011-016-2-18-17

Furthermore, the number of residential construction jobs reported by BLS increased only 33% over that time, an average growth rate of less than 6%/year.

jobs-res-2011-2016-2-18-17

What could explain these differences?

The low rate of jobs growth compared to spending growth is partially explained by the fact that in the preceding few years, even though about 1.5 million jobs were lost, 40% of the workforce, staff was not reduced nearly at the same rate that residential construction volume declined (55%). There remained significantly more staff on payrolls than was needed to complete the amount of volume that was being built during the residential recession. When growth resumed, spending increased at a much faster rate than new jobs were added and the excess labor slack was reduced. I suspect also that a portion of the labor vs spending difference is explained by the fact that not all jobs are captured by BLS. It has been suggested that a large percentage of residential workforce in some southwestern states is undocumented.

The variance between starts and spending is a bit more complicated. We need to look at completions vs starts, the mix and size of housing units being built and the amount of spending related to renovations.

The most commonly reported housing statistic is housing starts. Also in that data series is housing completions. Housing completions are always lower than starts. For the last five years completions have averaged almost 15% less than starts. While the growth in starts averaged 18%/year, growth in completions from 2011 through 2016 averages less than 15%/year. 

From 2011 to 2016 the average number of new single family (SF) units started increased from about 450,000 to 800,000. During that same period multi-family (MF) starts increased from 100,000 to 440,000. The percentage of MF units in total construction grew from 18% to 36% of total.

On average MF units are about half the size of SF units. Although the average size of SF homes increased about 10% during this period, the growth in the number of smaller MF units exceeded that of larger MF units by a factor of 2x. The ratio of smaller MF units doubled.

The share of MF units as a percent of all units doubled and the ratio of smaller vs larger MF units doubled. The total square feet of housing being built increased but did not grow at the same rate as the number of units. The average size of all units is getting smaller and therefore the constant cost per unit went down.

I suspect the increased ratio of smaller MF units and the percent increase of MF within the total number of all housing units has a big influence on the overall average cost per unit of total housing. That with the lower growth rate in completions helps explain why spending is not increasing at the same rate as overall number of housing unit starts. We are building more units per dollar spending because average unit size is smaller.

There is one more hidden factor to look at. That is, residential construction spending includes renovations. From 2009 through 2012 renovations totaled 45% of all residential spending. It began to decrease in 2013. For the last three years, renovation spending accounts for only 33% of all residential construction spending.  Renovation spending has no comparable # of units or total square feet associated with it.

spend-res-minus-reno-2011-2016-2-18-17

The impact this has, since the share of renovations spending is declining, is to increase the percent growth in residential spending attributable to housing units to greater than the 9% calculated above. Removing renovations work from total spending shows growth in real inflation adjusted spending specific to housing units averaged about 13%/year for 6 years.

Summarizing everything from above, since 2011:

On the surface it looks like this:

  • Housing Starts # of units increased at 18%/year
  • Residential new starts in unadjusted dollars increased 20%/year
  • Residential construction spending increased 16%/year

After adjusting both units and spending we get:

  • Inflation adjusted total residential spending increased 9%/year
  • Inflation adjusted spending on units (excluding renovations) increased 13%/year
  • Growth in the # of housing units completed increased 15%/year
  • Share of Multifamily units has increased
  • Average size of multifamily units has decreased
  • Average size of all housing units being completed has grown smaller
  • The growth in the number of units completed can exceed the growth in spending because the average constant value cost per unit has decreased

The growth in the number of housing unit starts is NOT an indicator to use for forecasting growth in residential construction spending or constant volume. Increases in the number of units alone will not give a realistic indication of growth in residential jobs or spending. The rate of growth in completions, combined with the ratio of the sizes of units, not just size of SF homes but average size of all SF and MF units, has a significant influence on the spending volume and can only be compared to inflation adjusted spending specific to units, that is, total spending minus renovations.

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