Construction Analytics Outlook 2024 « Construction Analytics

Construction Analytics Economic Outlook 2024 includes Construction Data – DEC 2023 Data 2-7-24

2-22-24 At the bottom of this article is a downloadable PDF of the complete 2024 Outlook

Here is a summary of construction spending through December 2023, Inflation through 4th qtr. or Nov where available, and resulting constant dollar volume. 2023 spending will be revised three times in 2024, Mar1, Apr1 and Jul1, and then again on Jul1 2025. Historically, almost all revisions are up.

Construction spending preliminary total for 2023 is up 7.0%. But nearly 80% of that total is inflation. Except for Nonresidential Bldgs, spending increased 23%, so inflation is only 25% of that. Even deducting inflation still leaves 75% of spending as volume growth Most of that growth is in Manufacturing buildings.

Spending is up a total of 42% since 2019; up 8% in 2020, 10% in 2021, 12% in 2022 and now 7% in 2023. But volume after adjusting for inflation is up only 5% total. You can see the Constant$ line, with one lower dip in 2022, has ranged between Constant$1400bil. to $1500bil. since mid-2019.

Construction spending total forecast for 2024 is up 10.7%. Nonresidential Buildings is forecast up 8.8%, Non-building Infrastructure up 15.8% and Residential up 9.7%. Lower inflation in 2024 means more of that spending is counting towards real volume growth. I’m expecting only 4% to 5% inflation for 2024, so real volume growth could reach 6% for the first time since 2015. From 2012-2016, volume growth averaged 6%/yr. For the last four years, 2020-2023, 42% spending growth vs 37% inflation growth netted only 5% total real volume growth. Since 2017, volume growth averaged less than 1%/yr. Non-building Infrastructure volume could increase 10%+ in 2024.

New Construction Starts

Dodge Construction Network (DNC) monthly news article of construction starts by sector provides the data from which the following is summarized.

Total construction starts for 2023 ended down 4%, but Nonresidential Buildings starts finished down 7% and Non-building Infrastructure starts were UP 16%. Residential starts decreased 12% in 2023.

Total construction starts for 2024 are forecast up 7%. Nonresidential Buildings starts are forecast up 5% and Non-building Infrastructure starts up 8%. Residential starts are forecast up 10% in 2024.

In recent years, Nonres Bldgs new starts averaged $300 billion/year. In the 2nd half of 2022, starts averaged near $500 billion/year. For the 1st half 2023 starts dropped to a rate of $390bil./yr., which is still well above the recent average. Then, for 2nd half 2023, starts came back up to average $430 billion/year, the 2nd highest half year average. A 50% increase in new nonresidential building starts in 2022 has a positive impact on the rate of construction spending in 2023 and 2024. It will continue to add lesser impact into 2025.  Projects starting in 2nd half of 2023 could have midpoint of construction, point of peak spending, in 2024 or into 2nd half of 2025, some real long duration starts even later. So, the major spending impact from starts is sometimes one or two years later.

Residential construction (Dodge) starts posted the five highest months ever, all in the 1st 6 months of 2022. In the second half of 2022, residential starts fell 15%. In Q1 2023, residential starts dropped another 12% below 2nd half 2022, the lowest average since Q1-Q2 2020. Finally in July and August, starts regained some strength coming in 33% higher than the lows in Q1. Residential starts finish 2023 down 12% vs 2022. Forecast is up about 10% in 2024.

Nonresidential Buildings, in 2022 posted the largest ever one-year increase in construction starts, up 50%. Some of these starts will be adding to peak spending well into 2025. Nonres Bldgs starts in the 2nd half 2022, averaged 67% higher than any other 6mo period in history. Starts fell 20% in the 1st half 2023 but still posted the 2nd highest 6mo average ever. After two years of outstanding growth, Nonres Bldgs starts close 2023 down 7%. Although 2023 is down 7%, that’s still by far the 2nd best year ever. The forecast for 2024 is +5%.

Manufacturing starts, the market with the largest movement, gained 120% from 2020 to 2023. Manufacturing projects can have a moderately long average duration because some of these are multi-billion$ projects and can have schedules that are 4 to 5 years.

Educational, Healthcare, Lodging and Public Buildings all had starts of 20% or more the last two years.

Non-building starts for the 6 month period Mar-Aug 2023 posted the best 6 months on record, up 30% from the average of 2022. The 2nd half 2022 was up 50% over 1st half 2022. For 2023, Highway/Bridge and Power have the strongest gains. Total Non-building Starts for 2023 are up 16% and they were up 25% in 2022. These starts will help elevate spending through 2025. Non-building starts for 2024 are forecast up 8%.

Power starts are up 25% the last two years. Highway starts and Environmental Public Works are both up 33% the last two years and up 50% the last three years.

Starts data captures a share of the total market or only a portion of all construction spending, on average about 60% of all construction. The easiest way to understand this is to compare total annual construction starts to total annual spending. National starts in recent years about $800 billion/year, while spending in this period ranges from $1,300 billion/year to $1,500 billion/year. From this simple comparison we can see starts captures a share of about 60% of the total market. The actual share for each market varies from as low as 35% to as high as 70%. Before using starts data to forecast spending, starts here were first adjusted for market share.

Starting Backlog

Starting backlog is the estimate to complete (in this analysis taken at Jan 1) for all projects currently under contract. The last time starting backlog decreased was 2011. If new construction starts in the year are greater than construction spending in the year, then for the following year starting backlog increases. It’s when new starts don’t replenish the amount of spending in the year that backlog declines.

80% of all nonresidential spending in any given year is from backlog and could be supported by projects that started last year or 2 to 4 years ago. Residential spending is far more dependent on new starts than backlog. Only about 30% of residential spending comes from backlog and 70% from new starts.

The table below, Forecast Starting Backlog, is model generated by Construction Analytics. Adjusted starts are spread over time to generate cash flow. A sum of spending each month/year, subtracted from start of year plus new starts provides Backlog.

Construction Backlog leading into 2024, in every sector, is at all-time high, in total up 46% from Jan 2020. For the years 2022 and 2023, backlog is up 11% and 12%.  Reaching new highs in Backlog could mean contractors are comfortable adding some backlog, or it could mean not enough labor, subcontractors or suppliers to support advancing growth so quickly, so growth advances slower and more of the work is retained in backlog for longer, essentially dragging out the timeline, or it could be long term workload, 4yr.-6yr. long projects from new starts, such as Manufacturing, where a very large amount enters backlog and gets spent over 4-6yrs., so, although the monthly drawdowns reduce the amount remaining in backlog, it remains in backlog for a long time.

Residential backlog in 2024 is down 0.5%, but from such a previous high, essentially, starts are riding flat along the top. Starts are up 55% since Jan 2020.

Nonresidential Bldgs starting backlog for 2024 received a boost from all the starts in 2022 and 2023. Backlog is up 12% from 2023 and up 50% from Jan 2020.

Nonbuilding Infrastructure starting backlog is up 12% each of the last two years boosted by strong starts in 2022 and 2023. For 2024, backlog is up 40% from Jan 2020.

Manufacturing backlog increased nearly 300% from 2020-2024, from $117bil going into 2020 to $300bil beginning 2024. No other market has ever been close. Manufacturing was responsible for 60% of all the Nonres Bldgs spending growth in 2023. It was also responsible for 60% of the Backlog growth leading into 2024. Nonres Bldgs has a total 3.6 million jobs and has never increased by more than 150,000 jobs in one year. Manufacturing is 30% of all Nonres Bldgs spending, so assume 30% of Nonres Bldgs jobs. That’s 1.2million jobs supporting just Manufacturing projects. So Backlog of $300bil, at 5000 jobs per billion per year, would need 1,500,000 jobs for a year. With a 1,200,000 jobs share of the workforce, that backlog would provide support for 15 months. Of course, new starts add to support throughout the year, but the calculation of how long backlog would support that market segment is valuable.

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.

Current Rate of Spending

The current seasonally adjusted annual rate (SAAR) of spending gives an indication of how spending will perform in the following year. As we begin 2024, the current rate of spending (SAAR) for Nonresidential Buildings in Q4’23 is $709bil., already 4.5% higher than the average for 2023 ($677bil). If spending stays at the current level and no additional growth occurs, Nonresidential Bldgs spending will finish 2024 up 4.5%. Spending would need to have more monthly declines than increases to finish the year up less than 4.5%. The current forecast shows a monthly SAAR rate of growth for Nonresidential Bldgs. averaging about 0.5%/mo in 2024, so we have a minimum, but we can expect 2024 total spending to rise considerably higher than the current rate.

Non-building Infrastructure current rate of spending is now 3.7% higher than the average for 2023, however the forecast is indicating steady growth of 1%/mo for all of 2024.

Residential current rate of spending is 2.4% above the 2023 average and is forecast to average an increase of just under 1%/mo for 2024.

2024 Construction Spending Forecast

Starts lead to spending, but that spending is spread out over time. Starts represent a contract award. Spending takes the amount of that contract award and spreads it out by a cash flow curve over the duration of the job. An average spending curve for the sum of nonresidential buildings is 20:50:30 over three years. Only about 20% of new starts gets spent in the year started. 50% gets spent in the next year and 30% in YR3/4. An average spending curve for Non-building Infrastructure is more like 15:30:30:20:5. The effect of new starts does not show up in spending immediately. For example: If 2024 posts an additional $100 billion in new starts for Infrastructure, only about $15 billion of that would get put-in-place in 2024. The cash flow schedule for that $100 bil of new starts would extend out over 3 to 5 years. Most of that $100 bil would get spent in 2025 and 2026.

This forecast does not include a recession.

The largest increases to construction spending in 2023 are Manufacturing +$80bil, Highway +$20bil, Public Utilities (Sewage and Waste, Water Supply and Conservation-Rivers-Dams) +$15bil and Educational +$14bil.

Residential regains the top growth spot in 2024 with a forecast spending increase of +$68bil. Manufacturing is forecast to add +$32bil. Highway gains +$26bil, Power +$24bil and Educational gains +$15bil.

One big question is how did the forecast for Manufacturing increase so much since the beginning of 2023. Since January 2023, the starts forecast for 2023 increased by 35%. How much of that 35% is real growth in starts vs an increase in the capture rate of data gathering is yet to be determined, but has an impact of 2023-2024 spending. Also, starts for future years were increased by 50%. Starts (contract awards) drives up the spending forecast, since spending is a function of the future monthly cash flow (spending) of starts.

As we begin the year, Manufacturing SAAR current rate of spending is already 8% higher than the average for 2023. The current rate of spending is increasing at an average of near 2%/month for the next 6 months, then slows or dips slightly for the remainder of the year, indicating total spending for 2024 will finish well above the current rate of 8%. I’m forecasting 16% growth for the year.

Highway SAAR rate of spending begins the year 6.5% higher than the average for 2023, with the current rate increasing at an average of 1%/month for all of 2024, indicating total spending for 2024 will finish well above the current rate of 6.5%. Starts have increased +15%/yr the last three years. My forecast is for 19% growth in 2024 spending.  

Power SAAR rate of spending begins the year 4% higher than the average for 2023, with the current rate increasing at an average over 1%/month for 2024, indicating total spending for 2024 will finish much higher. My forecast is for 20% growth in 2024.

Public Utilities SAAR rate of spending begins the year 6% higher than the average for 2023, with the current rate increasing at an average over 1%/month for 2024. Public Works averaged +15%/yr new starts the last three years. My forecast is for 13% spending growth in 2024.

Residential regains the top spot in 2024 with a forecast spending increase of $68bil. Residential SAAR rate of spending in Q4’23 was up 2.5% over 2023, but December was up 5%. So we begin the year 2.5% to 5% higher than the average for 2023. The rate of spending is forecast to increase 1%/month for 6 months, then fall 0.5%/mo for H2 2024. My forecast is for 10% growth in 2024.

Educational SAAR rate of spending begins 2024 7% higher than the average for 2023, and the current rate is increasing at an average of 0.7%/month for 2024. My forecast is for 13% growth.

Inflation

Construction Inflation differs from other common types of inflation, i.e., Consumer Price Index. It must be accounted for in order to make reasonable calculations for business volume and past or future costs.

30-year average inflation rate for residential and nonresidential buildings is 3.7%. Excluding deflation in recession years 2008-2010, for nonresidential buildings is 4.2% and for residential is 4.6%.

Deflation is not likely. Only twice in 50 years have we experienced construction cost deflation, the recession years of 2009 and 2010. That was at a time when business volume dropped 33% and jobs fell 30%. During two years of the pandemic recession, volume reached a low down 8% and jobs dropped a total 14%.But we gained back far more jobs than volume. That means it now takes more jobs to put-in-pace volume of work. That increases inflation.

The following Construction Inflation plot (for Nonresidential Buildings only) shows three elements: 1) a solid grey bar reflecting the max and min of the 10 indices I track in my weighted average inflation index, 2) a solid black line indicating the weighted average of those 10 indices, and 3) a dotted red line showing the Engineering News Record Building Cost Index (ENR BCI). Notice the ENR BCI is almost always the lowest, or one of the lowest, indices. ENR BCI, along with R S Means Index, unlike final cost indices, do not include margins or productivity changes and in the case of ENR BCI has very limited materials and labor inputs.

Final cost indices represent total actual cost to the owner and are generally higher than general indices. Producer Price Index (PPI) INPUTS to construction reflect costs at various stages of material production, generally do not represent final cost of materials to the jobsite and do not include labor, productivity or margins. Even with that, a PPI Inputs index +20% for a material could be only a +5% final cost. PPI Final Demand indices include all costs and do represent actual final cost. The solid black line (above) represents the Construction Analytics Building Cost Index for Nonresidential Bldgs and is a final cost index.

This short table shows the inflation rate for each year. Useful to compare to last year, but you would need to mathematically do the compounding to move over several years. The plot below shows the cumulative inflation index, or the cumulative compounded effect of inflation for any two points in time.

Typically, when work volume decreases, the bidding environment gets more competitive. We can always expect some margin decline when there are fewer nonresidential projects to bid on, which typically results in sharper pencils. However, when labor or materials shortages develop or productivity declines, that causes inflation to increase. We can also expect cost increases due to project time extensions or potential overtime to meet a fixed end-date.

Current$ Spending, Inflation, Constant$ Volume

Volume = spending minus inflation. Spending includes inflation. Inflation adds nothing to the volume.

Inflation adjusted volume is spending minus inflation, or to be more accurate, spending divided by (1+inflation). Inflation adds nothing to volume growth. The following table shows spending, inflation and volume (spending without inflation) for each year. Spending is current to the year stated. The values in the constant table are indexed to a constant value year, 2019. This shows business volume year to year, can be a lot different than spending would indicate. When inflation is positive, volume is always less than spending by the amount attributed to inflation.

Lower inflation in 2024 means more of that spending is counting towards real volume growth. Expecting only 4% to 5% inflation for 2024, real volume growth could reach 6% for the first time since 2015. From 2012-2016, volume growth averaged 6%/yr. For the last four years, 2020-2023, 42% spending growth vs 37% inflation growth netted only 5% total real volume growth. Since 2017, volume growth averaged less than 1%/yr. Non-building Infrastructure volume could increase 10%+ in 2024.

Spending during the year is the value of business volume plus the inflation on that volume. When inflation is 12%, volume plus 12% = total spending. Revenue is generally measured by spending put-in-place during the year. Revenue does not measure volume growth. In 2022, Nonresidential buildings inflation was 12%, so business volume was 12% less than spending, or 12% less than revenue. Residential volume was 15% less then spending.

When referencing Constant $ growth, remember the dollars for all years are reported here as 2019$. If the baseline year is changed to this year (divide all indices by this year’s index), the resulting comparison would be all years reported as 2024$. The dollars would all be greater, but the percent change would be the same. In this table, nominal spending is divided by the inflation INDEX for the year. You can also deduct the percent inflation from any individual year of spending to find inflation adjusted $ for that year alone, however that method would not allow comparing the adjusted dollars to any other year. A baseline year is necessary to compare dollars from any year to any other year.

Reference Inflation Data Construction Inflation 2024

Through December 2023, Total Construction Spending is up 40% for the four years 2020-2023, but, during that same period inflation increased 35%. After adjusting for 35% inflation, constant $ volume is up only 5%. So, while the current $ spending plot shows a four-year total increase of 40% in spending, the actual change in business volume is up only 5% and has just in the last few months returned to the pre-pandemic peak in Feb-Mar 2020.

Jobs are supported by growth in construction volume, spending minus inflation. If volume is declining, there is no support to increase jobs. Although total volume for 2023 is up 2.3%, Residential volume is down 9%, Nonresidential Bldgs volume is up 16% and Non-building volume is up 8%. Inflation was so high in 2021 and 2022 that it ate away most of the spending gains in those years. 

Jobs vs Volume

Construction Jobs increased 2.75% in 2023. We added 214,000 jobs (avg’23-avg’22). There are currently 8,056,000 construction jobs. The largest annual increase post 2010 is 321,000 jobs (+4.6%) in 2018. The average jobs growth post 2010 is 200,000 jobs per year.

Since 2010, average jobs growth is 3%/yr. Average volume of work growth since 2010 is 2.3%/yr. This plot shows Jobs and Volume growth closely match from 2011 to 2018. With few exceptions for recession periods, this pattern can be seen throughout the historical data.

What’s remarkable about the growth is this, since 2016, spending has increased 63%, volume after inflation increased 6% and jobs increased 19%. In the last 7 years, 2017-2023, jobs increased 2.5%/yr. Volume of work increased only 0.8%/yr. Volume and jobs should be moving together.

It takes about 5000 jobs to put-in-place $1 billion of volume in one year. It could easily vary from 4000 to 6000. So, an add of $100 billion+ in one year would need 500,000 new jobs. Jobs should track volume, not spending growth. Volume = spending minus inflation.

Normal construction jobs growth is about 250,000 jobs per year and maximum prior growth is about 400,000. From the table above, Nonresidential Bldgs and Non-building Infrastructure added $100bil of volume in 2023 and will add $60bil in 2024.  The workload discussed above would theoretically require 500,000 new jobs in 2023 and 300,000 more in 2024. That’s an expansion of the industry workforce by 10% in two years, for just half the industry, in an industry that normally grows in total 3%/yr. This industry can’t grow that fast. This may have some impact if over-capacity growth results in a potential reduction or extension in future forecast. You can’t increase spending that fast if you can’t also expand the labor force and the suppliers to the industry that fast.

In the last 12 months, Dec’22 to Dec’23, Nonres Bldgs jobs are up 4%. Nonres Bldgs spending is up 23%, by far driven by Manufacturing, but after ~5.4% inflation, volume of nonres bldgs workload is up 16%. So, we have a 4% increase in jobs versus a 16% increase in volume.

The last year has shown a huge increase in the volume of nonres bldgs work, without an equal increase in jobs. Is this excess nonres bldgs jobs for the past three years now absorbing added workload, (a 4% increase in jobs but a 16% increase in volume), without collapsing the labor force or canceling the volume?

Non-building, over the next two years, could experience the same kind of growth spurt as Nonres Bldgs., a forecast increase in volume the next two years without an equal increase in jobs. Volume which was lower than jobs since 2021, is now increasing faster than jobs. Non-bldg volume is forecast up 6% to
8%/year the next 3 years. Jobs increase at an avg. 3.5%/year.

Residential volume has exceeded residential jobs all the way back to 2011. The recent decline in volume brings the two even, if the jobs hold the pace.

For as long as I can remember, the construction industry has been complaining of jobs shortages. And yet, as shown in the data mentioned above, jobs have increased multiples times greater than volume of work. With an exception for recession years, (2007-2010 and 2020), jobs increase at a rate of 2.5% to 3% per year. The greatest disparity between jobs and volume occurred in late 2022, when jobs growth had already resumed normal pace, but volume of work was still reeling from the effects of new construction starts that were canceled dating back to late 2020-early 2021. Recent volume growth at a much faster rate than jobs growth is now closing the gap.

When jobs increase without an equal increase in the volume of work, productivity declines. This recent increase in volume and the projected increase in volume in 2024, several points stronger than jobs, will offset some of the disparity which has been negative for a long time.

 

Reference Inflation Data Construction Inflation 2024

Reference Article The Next Forecast Challenge

Reference Article Midyear ’23 Jobs Outlook

Reference Article   Reliability of Predicted Forecast  

Reference Link to Web Dodge Construction News

 

Below is a downloadable 24 page PDF of the complete 2024 Outlook