Construction Expenditures through December 2015

At SMU we analyze the CPIP provided by the Department of Commerce with the intent of providing a clear description of activity in this steel consuming sector. Please see the end of this report for more detail on how we perform this analysis and structure the data.

Total Construction

We have reported previously that the June through November CPIP reports were excellent and on a year/year basis we find that December growth was good though slowing. On a rolling three months basis year over year, June was up by 12.4 percent, July by 13.1 percent, August by 13.4 percent, September 13.1 percent, October by 12.0 percent, November by 10.9 percent and December by 8.0 percent. Clearly a slowing trend which is not a seasonal effect.

December expenditures were $73.7 billion which breaks down to $54.6 B of private work, $19.1B of state and locally (S&L) funded work and $1.9 B of federally funded (Table 1).

Previously we have projected that total construction will reach the pre-recession level in mid-2016 but if the present slowdown persists this may slip (Figure 1).

On a rolling three month basis y/y total construction was up by 8.0 percent led by private work up by 11.5 percent. Total construction growth was accelerating through October but in November flattened out and in December momentum was negative since the short term growth (3 months) was lower than the long term (12 months). Note there is no seasonality in our analysis because we only report year over year results. Momentum was negative for all financing sectors, Private, S&L and Federal and for all building sectors and for infrastructure. Only “Other” construction which is Industrial, Utilities and Power had positive momentum. We consider four sectors within total construction. These are non-residential, residential, infrastructure and other. The growth rate of non-residential buildings and residential buildings is good but infrastructure eked out only a 1.9 percent growth rate. The growth rate of “Other” became very negative at the time of the oil price collapse a year ago but has recovered to positive growth in the last four months on a 3MMA basis. Infrastructure grew only 1.9 percent in three months through December year over year with negative momentum and Other grew by 2.5 percent with a very positive momentum. The growth rate of total construction is shown by the brown bars in Figure 1. The pre-recession peak of total construction on a rolling 12 month basis was $1,145 B in 12 months through February 2007. The low point was $665.1 B in 12 months through October 2011. The 12 month total through the latest data of December 2015 was $950.2 B. July through December were the first months to exceed $900 B since April 2009 when the recession was gaining traction.

Private Construction

Table 2 shows the breakdown of private expenditures into residential and non-residential and subsectors of both.

The growth rate of private construction was 11.5 percent in the last three months as shown by the brown bars in Figure 2.

The blue lines in all four graphs in this report are 12 month totals which smooths out seasonal variation. Excluding property improvements our report shows that both single and multi-family residential continue to have strong y/y growth but both have negative momentum. The single family expenditures reported here have a rate of growth higher than that of the Census Bureau housing starts data which have a growth rate of 8.5 percent. The growth of starts being lower than current expenditures we are discussing here suggests some further slowing growth going forward. The growth of multifamily expenditures in this CPIP report is very much higher than construction starts of this sector reported by the Census Bureau. In this CPIP report multi family is growing at 14.0 percent as the multifamily housing starts data from the Census Bureau is growing at 5.2 percent. Private non-residential building expenditures grew at a solid 14.7 percent in three months through December y/y with negative momentum. Within private non-residential, all sectors except commercial had positive growth led by hotels/motels and manufacturing however all but educational buildings had negative momentum. Nonresidential starts data published by Dodge Analytics had a double digit negative growth rate year over year in the four months September through December.

State and Local Construction

S&L work expanded by 2.8 percent in the rolling three months through December y/y with negative momentum (Table 3).

June through December had the highest growth rates for S&L construction since before the recession but growth slowed in each month of the fourth quarter. Figure 3 shows year over year growth as the brown bars.

Educational buildings are by far the largest sub sector of S&L non-residential at $4.732 billion in December. Recreational buildings have accelerated markedly in 2015 and grew by 6.5 percent in the latest data. This includes convention centers, sports arenas, theatres and miscellaneous amusements. Table 2 shows that S&L health care expenditures contracted by 9.2 percent but $445 million is much less than the $2.527 billion of private healthcare expenditures which grew at 5.1 percent. August was the first months for public safety buildings which includes jails, police, courthouses and fire stations to have positive growth after 32 straight months of contraction. September through December reverted to contraction for this sector. Comparing Figures two and three it can be seen that S&L construction did not have as severe a decline as private work during the recession and that private work bounced back faster. Private expenditures have now recovered to the point that they should exceed the pre-recession peak by the middle of 2017 but the recent slowdown in S&L makes that projection questionable.

Drilling down into the private and S&L sectors as presented in Tables 2 and 3 shows which project types should be targeted for steel sales and which should be avoided. There are also regional differences to be considered for which data is not available from the Commerce Department. In December 2015 the Bureau of Labor Statistics initiated the reporting of GDP data by state and by sector, including construction and when the next update is released in March we will initiate a routine analysis for our subscribers.

Infrastructure

Expenditures have had positive growth every month since July 2013 but growth slowed to +1.9 percent in the latest data with negative momentum. Highway and streets including pavement and bridges accounts for about 2/3 of total infrastructure expenditures and had positive growth for 15 months through February, contracted in March and April then had positive growth ever since culminating in a 4.2 percent rate in three months through December. Highway pavement is the main subcomponent of highways and streets and had a 5.0 percent positive growth in three months through December. Bridge work contracted every month in the period August through December 2014 but has since expanded every month though the growth rate slowed in November and December. Bridge work totaled $2.1 billion in the single month of December with a 2.8 percent growth rate (Table 4).

Infrastructure expenditures were slow to respond to the recession due to the magnitude of many of these projects. Growth stopped in 2009 and 2010 but it wasn’t until 2011 that an actual contraction occurred. For most of 2015 infrastructure expenditures exceeded the pre-recession high (Figure 4).

Total Building Construction Including Residential

Figure 5 compares YTD expenditures for building construction for 2014 and 2015.

Single family residential is dominant and through December 2015 totaled over $218 billion. On this year over year basis the only sector to be trailing 2014 is public safety which is down by 5.8 percent, at the other extreme manufacturing is up by 44.7 percent.

Explanation: The official CPIP press report gives no appreciation of trends on a historical basis and merely compares the current month with the previous one on a seasonally adjusted basis. The detail is hidden in the published tables which we at SMU track and dissect to provide a long term perspective. Our intent is to provide a rout map for those subscribers who are dependent on this industry to “Follow the money.” This is a very broad and complex subject therefore to make this monthly write up more comprehensible we are keeping the information format as consistent as possible. In our opinion the absolute value of the dollar expenditures presented are of little interest. What we are after is the magnitude of growth or contraction of the various sectors. Data is reported by the Commerce Department on both a seasonally adjusted and non-adjusted basis. Their official commentary is based on adjusted numbers. In the SMU analysis we consider only the non-seasonally adjusted data because we don’t trust seasonal adjustments and in any case our businesses operate in a seasonal world. We eliminate seasonal effects by comparing rolling three month expenditures year over year. CPIP data also includes the category of residential improvements which we have removed from our analysis in the rational that such expenditures are minor consumers of steel.

In the four tables above we present the non-seasonally adjusted expenditures for the most recent month of data. Growth rates presented are all year over year and are the rate for the single months result, the rolling 3 months and the rolling 12 months. We ignore the single month year/year result in our write ups because these numbers can contain too much noise. The arrows indicate momentum. If the rolling 3 month growth rate is stronger than the rolling 12 months we define this as positive momentum and vice versa. In the text, when we refer to growth rate we are describing the rolling 3 months year over year rate. In Figures 1 through 4, the blue lines represent the rolling 12 month expenditures and the brown bars represent the rolling 3 month year over year growth rates.