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By: Alex Carrick on November 26th, 2018

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Fall 2018 U.S. Put-In-Place Construction Forecasts

Economic News

The following sets out, in text and graphs, ConstructConnect’s projections of U.S. put-in-place (PIP) construction activity. PIP statistics are published by the Census Bureau. They are analogous to work-in-process or progress payments as projects proceed.

Fall 2018 U.S. Put-in-place Construction Forecasts Graphic

(PIP statistics lag up-front ‘starts’ statistics which are lump sum figures estimated when ground is broken. Also, the ‘starts’ set the table for later PIP numbers.)

Prospects for the U.S. economy remain quite solid based on outstanding jobs and income growth that will continue to fuel consumer spending. There are, however, several factors that suggest a gradual easing in the forward momentum.

  • The Federal Reserve would like to restore its policy-setting interest rate to ‘neutrality’, implying a figure closer to 3.00% than its current level barely over 2.00%;
  • Tariffs on lumber, steel and aluminum from a limited number of countries and on a wide range of products from China are adding significantly to costs;
  • Shortages of labor are driving wages upward, which is positive for family finances, but sparks worry about inflation;
  • The federal government’s deficit is headed back up to $1 trillion;
  • Economic performance in much of the rest of the world has turned sluggish.

Table 1: U.S. Construction Spending (put-in-place investment)
(billions of “current” $s)

Actuals Forecasts
Type of Construction: 2017 2018 2019 2020 2021
Grand Total 1246.0 1313.3   1,368.7 1,422.8 1,486.5
(year vs previous year) 4.5% 5.4%   4.2% 4.0% 4.5%
     Total Residential 531.7 563.0   582.7 601.4 629.0
  12.2% 5.9%   3.5% 3.2% 4.6%
     Total Nonresidential 714.3 750.3   786.0 821.5 857.5
  -0.5% 5.0%   4.8% 4.5% 4.4%
          Total Commercial/for Lease 183.3 195.5   202.5 207.2 211.2
  6.1% 6.7%   3.6% 2.3% 1.9%
               Lodging 28.7 31.6   32.4 31.5 29.7
  6.3% 10.2%   2.6% -2.9% -5.8%
               Office 66.9 72.1   75.7 79.1 81.2
  -1.1% 7.9%   5.0% 4.5% 2.6%
               Commercial (retail/warehouse) 87.7 91.8   94.3 96.6 100.4
  12.3% 4.6%   2.8% 2.4% 3.9%
          Total Institutional 169.6 174.5   180.2 186.0 192.8
  2.6% 2.8%   3.3% 3.2% 3.7%
               Health Care 41.9 42.5   44.1 45.8 47.9
  4.4% 1.5%   3.7% 3.9% 4.4%
               Educational 91.2 93.2   95.6 98.3 102.0
  1.0% 2.2%   2.6% 2.8% 3.7%
               Religious 3.4 2.9   2.8 2.8 2.7
  -9.5% -13.7%   -3.2% -2.1% -0.2%
               Public Safety 8.3 9.4   10.1 10.7 11.2
  3.3% 12.9%   7.8% 6.4% 4.8%
               Amusement and Recreation 24.9 26.4   27.5 28.4 29.0
  7.3% 6.4%   4.0% 3.1% 2.4%
          Total Engineering/Civil 295.0 313.5   331.1 350.3 370.4
          (year vs previous year) -2.8% 6.3%   5.6% 5.8% 5.8%
               Transportation 45.2 53.0   57.6 62.1 66.1
  4.4% 17.4%   8.6% 7.9% 6.4%
               Communication 24.8 24.9   25.4 26.0 26.6
  12.0% 0.2%   2.0% 2.3% 2.6%
               Power 96.5 97.7   103.8 111.2 119.4
  -4.8% 1.2%   6.3% 7.1% 7.4%
               Highway and Street 89.1 93.5   97.7 102.1 106.9
  -4.0% 5.0%   4.5% 4.5% 4.7%
               Sewage and Waste Disposal 20.4 22.0   23.0 24.1 25.2
  -11.9% 8.1%   4.4% 4.6% 4.9%
               Water Supply 11.8 13.8   14.4 15.1 15.8
  -9.5% 17.0%   4.3% 4.5% 4.7%
               Conservation and Development 7.2 8.6   9.2 9.7 10.3
  -4.5% 18.6%   6.6% 6.4% 6.2%
          Total Industrial/Manufacturing 66.4 66.8   72.3 78.0 83.0
-13.0% 0.5%   8.2% 7.9% 6.4%

"Current" means not adjusted for inflation.

Data source: U.S. Census Bureau.

Chart: ConstructConnect.

Grand Total Construction Spending:

ConstructConnect is forecasting that U.S. put-in-place construction dollars will continue to climb nicely over the period ahead, out until at least 2021. The year-over-year annual gains will range from +4.0% to +5.0%. The advances in nonresidential work will be a little faster than for residential in 2019 and 2020, but there will be rough equivalency in 2021. The speed of increase in total dollar spending would be higher if it weren’t for recent pickups in construction material and labor costs that are causing some owners to place expansion plans on hold. In 2018, U.S. grand total construction activity will amount to just over $1.3 trillion dollars. By 2021, it will reach nearly one and a half trillion dollars.

Graph 1: U.S. Grand Total Construction Spending
(put-in-place investment)
U.S. Grand Total Construction Spending
This graph also includes a ‘best fit’ linear trend line.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Residential:

Sales of big ticket items have softened of late. Motor vehicle purchases have flatlined and new housing starts have pulled back somewhat. After years of rapid price increases in residential real estate, and with mortgage rates on the rise, affordability has become less favorable. 2019 and 2020 will see a sideways pattern in home groundbreakings before there is a new upsurge in 2021. In the interim, many householders will satisfy their home improvement longings through renovation projects. Underlying accommodation needs are still healthy. America’s population is growing by 0.7% per year. As Graph 2 illustrates, considerable pent-up demand developed from 2008 through 2015. But only in 2021 will total residential put-in-place construction spending finally ascend to match its prerecession peak.  

Graph 2: U.S. Construction Spending: Total Residential
(put-in-place investment)
U.S. Construction Spending: Total Residential
This graph also includes a ‘best fit’ linear trend line.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Lodging:

As captured in Graph 3, capital spending by the accommodation sector is the most highly cyclical of all the type-of-structure categories. It features a ‘bandwagon effect’. When one owner in the industry adds rooms or makes cosmetic changes to meeting facilities or dining areas, all others will rush to do likewise to retain patrons. Greater prosperity at home has been driving U.S. domestic tourism and business travel. Lower cost gasoline and jet fuel since mid-2014 has also been a help. But the strength in value of the U.S. dollar relative to other international currencies has been putting a damper on visits by foreigners. From 2019 on, lodging put-in-place construction spending will move to the backside of its most recent cyclical peak.

Graph 3: U.S. Construction Spending: Lodging
(put-in-place investment)
U.S. Construction Spending: Lodging
This graph also includes a ‘best fit’ linear trend line.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Office Buildings:

Traditionally, demand for office space has come from firms in finance, insurance, accounting, advertising, architectural and engineering services and legal services. More recently, though, it’s been companies engaged in data management and softwood development that have been urgently seeking more space. According to CBRE, the lowest downtown office vacancy rates across the country are in San Francisco, Oakland, Seattle, Boston, Manhattan, Charlotte and Austin. All those centers benefit from hosting large high-tech communities.

Future demand for office square footage will increasingly be driven by companies on the cutting edge of technology. The implications for rental contracts are already becoming apparent. Many prospective tenants are willing to share work space. Plus, they want greater flexibility in term lengths. They are expressing an aversion to 10-year lease commitments.

In a recent announcement, Amazon confirmed that its 50,000-job HQ2 office-space needs would be split between the outskirts of Manhattan and the edge of Washington D.C. Nashville, with a new center dedicated to providing excellence in customer relations, will also see a piece of the action. What’s not clear, however, is how much of the new space requirements will be satisfied by structures already in place as opposed to building or leasing new quarters.

It should also be noted that the December 2017 Tax Cuts and Jobs Act included tax incentives for individuals and corporations to invest in Opportunity Zones, to be situated in designated municipal lower-income districts. This proposal has been greeted with considerable enthusiasm. 

Graph 4: U.S. Construction Spending: Office Buildings
(put-in-place investment)
U.S. Construction Spending: Office Buildings
This graph also includes a ‘best fit’ linear trend line.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Commercial (Retail and Warehouse):

The list of big-name retailers (e.g., Sears, Toys‘R’Us) which have not successfully transitioned significant portions of their sales to the Internet keeps growing lengthier. Forays into bankruptcy protection have been sweeping clean the display areas behind many storefronts. Furthermore, some of the newer giants, such as Walmart and Lowe’s, are closing outlets as well. Not only do these downsizings dim the outlook for new retail construction, they also present an ‘overhang’ problem. The empty space must first be filled before there will be much incentive to build new. Fitness gyms, car dealerships and grow-ops don’t provide the full answer.

On the flip side, though, fulfilling orders from e-commerce requires distribution centers. A proliferation of warehouse construction is lifting the ‘commerce’ PIP dollar volume above its long-term trend line. There’s a key component of such new space that warrants mentioning. It should be designed to accommodate extensive use of automation and robotics.

Graph 5: U.S. Construction Spending: Commercial (Retail & Warehouse)
(put-in-place investment)
U.S. Construction Spending: Commercial (Retail & Warehouse)
This graph also includes a ‘best fit’ linear trend line.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Health Care:

From Graphs 6 and 7, it’s clear that the patterns of PIP construction spending on both health care and educational facilities have been more consistent than one might suppose. The swings up and down versus the trend lines have been relatively modest. (For both types of structure, there is no data prior to 2002.) After the introduction of the Patient Protection and Affordable Care Act (PPACA) in 2010, there were half a dozen years of uncertainty over whether it would survive numerous political and court challenges. With future revenue streams up in the air, hospital investment stalled.

A Supreme Court ruling finally verified PPACA’s legitimacy, but in 2016 there was a change at the summit in Washington. Once again, the existence of Obamacare came under extreme stress. With the Democrats retaking control of the House in the 2018 ‘mid-terms’, owners in the health care field may now feel more confident about proceeding with plans.

Beyond chronic care for the oldest among us, – i.e., by 2020, all surviving ‘baby boomers’ will have ridden out 55 birthdays or more – there will also be spikes in demand for hip and knee replacements, cataract surgery and other forms of acute care that can often be provided in medical clinics and other out-patient facilities.

Graph 6: U.S. Construction Spending: Health Care
(put-in-place investment)
U.S. Construction Spending: Health Care
This graph also includes a ‘best fit’ linear trend line.
Numbers for this series prior to 2002 are no longer consistent with more current data.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Educational Facilities:

At the level of higher education, today’s minimal unemployment rate of 3.7% is a disincentive to college and university enrollments. Why stay in school when one can easily find a job and earn a decent living in the high octane workplace? Also, the negative tone towards immigration being adopted by Washington is discouraging the entry into America of foreign students. On a more positive note, though, corporations in the private sector have become eager to enter into partnerships with academia to establish research facilities. And endowment funds for financing projects have ballooned thanks to exceptional returns on stock market investments and generous donations from rich alumni.

With respect to kindergarten to grade 12 (K-12) construction work, a key determinant will be the single-family versus multi-family contest for dominance. If young families opt for single-family housing in the suburbs, a wide range of accompanying infrastructure, including lower- and middle-grade educational facilities, will be needed. If, instead, they choose to stay in city cores, then schooling is more likely to be set up in previously abandoned, and therefore already available, space.

Graph 7: U.S. Construction Spending: Educational
(put-in-place investment)
U.S. Construction Spending: Educational
This graph also includes a ‘best fit’ linear trend line.
Numbers for this series prior to 2002 are no longer consistent with more current data.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Public Safety:

During President Obama’s administration, there was a shift away from privately operated prisons towards mainly government stewardship. Under President Trump, with pressure on prison capacity mounting due to the detention of more undocumented workers, these has been a reverse move to allow increased participation by private prison operators. Among major nations, the U.S. has by far the most alarming incarceration rate, about 650 prisoners per 100,000 population. Russia is next at 400 per 100,000. Canada and Mexico are in a range of 100 to 150 per 100,000. The total U.S. federal, state and local prisoner population is two million. In size, that’s the equivalent of a couple of metropolitan statistics areas (MSAs) of one million people each.

The outlook for ‘public safety’ construction remains strong, although it may be altered by justice reform. President Trump has stated his support for a bipartisan proposal to alter certain legal provisions in the nation’s court system. Some misdemeanors relating to drug offences would be rendered less serious and some rules on sentencing would be relaxed. If the related bill, the First Step Act, can overcome hardline opposition and achieve passage, the heightened need for more prison space may abate. 

Graph 8: U.S. Construction Spending: Public Safety
(put-in-place investment)
U.S. Construction Spending: Public Safety
This graph also includes a ‘best fit’ linear trend line.

Numbers for this series prior to 2002 are no longer consistent with more current data.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Amusement and Recreation:

For a string of years after the 2008-09 recession, Americans were reluctant to open their purses and wallets to spend on ‘frivolous’ pursuits. They were more concerned with paying down debt and restoring a rosier bloom to their financial affairs. Plenty of jobs and rising incomes during the last several years, have allowed stray thoughts of fun to re-emerge and take hold once again. But how we derive entertainment has changed dramatically. For example, where once cinema complexes were sprouting up everywhere, viewing enjoyment is now mostly derived at home from binge watching programs that are downloaded or digitally streamed.

Construction from downstream sources of entertainment may have diminished, but don’t overlook the upstream ‘wellhead’. We’re living in a golden age of video and audio production. The supply of studio space is being challenged. In the U.S., the major entertainment production centers are Hollywood, New York, Atlanta and Nashville.

In another corner of ‘amusement and recreation’, an era of big stadium construction projects (e.g., in Atlanta, San Francisco, Los Angeles and Las Vegas) has mainly receded due to work completions. But there is still some upcoming activity to anticipate – e.g., an NHL arena in New York and a race track or two. 

Graph 9: U.S. Construction Spending: Amusement and Recreation
(put-in-place investment)
U.S. Construction Spending: Amusement and Recreation
This graph also includes a ‘best fit’ linear trend line.

Numbers for this series prior to 2002 are no longer consistent with more current data.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Transportation:

The curve for transportation PIP construction spending in Graph 10 shows a steady upwards progression, with a more pronounced takeoff from 2018 on. There’s a good chance the 2019 to 2021 figures will understate what eventually occurs. Many U.S. cities are planning new commuter lines or expansions to their existing rapid transit systems – e.g., Denver, Minneapolis-St. Paul, Charlotte and Seattle.

In railroad work, a construction manager was recently appointed to oversee the planned bullet train to run between Houston and Dallas. Included in ConstructConnect’s Top 10 construction starts list for September 2018 was the Long Island Railroad expansion for almost $2 billion.

In airport construction, the dollar amounts being discussed are staggering. Every major international airport in the U.S. has a capital spending program in the billions of dollars. The estimate of the work to be undertaken at JFK Airport in New York has climbed to $15 billion. Airport construction spending goes towards passenger gates, runways, de-icing facilities, on-site LRT systems and access roads and expressways. 

Graph 10: U.S. Construction Spending: Transportation
(put-in-place investment)
U.S. Construction Spending: Transportation
This graph also includes a ‘best fit’ linear trend line.

Numbers for this series prior to 2002 are no longer consistent with more current data.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Power:

The ‘power’ category in the Census Bureau’s PIP statistics encompasses more than just electricity. Also included are oil and natural gas pipeline and storage projects. At the beginning of 2018, there were start-ups on two major natural gas pipeline projects, one in Virginia (Mountain Valley Pipeline) and the other in West Virginia (Atlantic Coast Pipeline). There’s also the famous Keystone XL Pipeline expansion on the drawing boards. Once again, however, its go-ahead has been waylaid, at least temporarily, by a court challenge warning of its environmental impact.

As for electric power projects, it’s interesting and surprising that the nation-wide demand for electricity has demonstrated almost no growth over the past eight years. Conservation efforts by all consumers, citizens and businesses alike, have proven effective. Reducing power usage, as well, have been next-generation appliances and computer devices employing greater energy efficiency. But there’s still strong potential for the construction of replacement generating stations to utilize cleaner-burning natural gas as a feedstock rather than coal. Eighteen states in the middle of the country are behind the times in relying mainly on coal for their electricity generation.

Graph 11: U.S. Construction Spending: Power
(put-in-place investment)
U.S. Construction Spending: Power
This graph also includes a ‘best fit’ linear trend line.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Highways and Streets:

With the signing of the Surface Transportation Act in 2015, federal financing of roadway projects became more stable and assured. The tumultuous years of three-month spending extensions were finally put to rest. But as Graph 12 shows, in whatever manner it was achieved, the long-term history of dollars committed to highway and street projects has stayed remarkably close to a slightly upwards sloping trend line. In regression analysis, the measure that says how good a fit there is between a data series and its trend line is the R2 value. R2 varies between 0.00 and 1.00. Above 0.80 indicates good correlation. The R2 value in Graph 12 is an outstanding 0.91.

Besides the roadwork that is underway and planned, there has also been an upsurge in tunnel (e.g., Hudson Gateway, N.Y.) and bridge (Gordie Howe, Detroit-Sarnia) projects in the works. Furthermore, expressions of concern about the structural integrity and safety of many long-in-the-tooth crossings have spurred state and local legislatures to initiate upgrades. Headline news stories about collapses elsewhere, such as the Morandi Bridge in Genoa, Italy, have served as cautionary warnings. Worth noting is that the Census Bureau’s ‘highways and streets’ category presents some of the best alternative financing opportunities (e.g., P3 initiatives).

Graph 12: U.S. Construction Spending: Highways and Streets
(put-in-place investment)
U.S. Construction Spending: Highways and Streets
This graph also includes a ‘best fit’ linear trend line.
Numbers for this series prior to 2002 are no longer consistent with more current data.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Water Supply, Sewage & Waste Disposal, and Conservation & Development:

Graph 13 combines three Census Bureau categories: ‘water supply’, ‘sewage and waste disposal’ and ‘conservation and development’. The summed dollar volume for the three is about half the total for roads, highways, and bridges. The need for spending on water delivery and takeaway systems will be tied to how much of a resurgence occurs in the suburbs and the extent of repairs that are required to maintain existing infrastructure in good working order.

There are also naturally occurring and man-made events, − e.g., drought and wildfires in California – that are calling for workaround solutions and remedial action. But it’s in the arena of ‘conservation and development’ where the biggest year-over-year advances in capital spending may occur. ‘Conservation’ includes the installation of the dams and levees along coastlines that will limit to some degree the immense damage that is now being done by tropical storms and rising ocean levels.

Graph 13: U.S. Construction Spending: Water Supply, Sewage & Waste Disposal, and Conservation & Development
(put-in-place investment)
U.S. Construction Spending: Water Supply, Sewage & Waste Disposal, and Conservation  & Development
This graph also includes a ‘best fit’ linear trend line.
Numbers for this series prior to 2002 are no longer consistent with more current data.
Data source: U.S. Census Bureau.
Chart: ConstructConnect

Manufacturing:

The intent behind the large corporate tax cuts (36% down to 21%) and the imposition of tariffs has been to stimulate ‘capex’, especially by American manufacturers. Given faster depreciation write-offs as well, those measures may be effective with respect to machinery and equipment purchases. But there’s an obstacle standing in the way of favorable decisions to enlarge plant footprints. Capacity utilization rates in industrial sub-sectors, with only a few exceptions, are still too low. A usage rate of at least 80% is the usual benchmark for considerations of plant expansions. Only the metal fabrication, paper and motor vehicle production sectors have surpassed that 80% threshold.

‘Manufacturing’ investment is being lifted higher, however, by a segment of industry with its roots in energy. Spurred on by deregulation and an abundant supply of inexpensive oil and gas, there has been a groundswell in the building of petrochemical plants, with an even more abundant array of LNG projects waiting in the wings. It will be interesting to observe the impact of the mid-term elections on the regulatory control environment that has been placed on pause and retracted over the past two years. 

Graph 14: U.S. Construction Spending: Manufacturing
(put-in-place investment)
U.S. Construction Spending: Manufacturing
This graph also includes a ‘best fit’ linear trend line.
Data source: U.S. Census Bureau.
Chart: ConstructConnect