Construction Expenditures (CPIP) through February 2016

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 total construction had a double digit growth rate from May through November last year. December and January slowed to 8.9 percent and 9.6 percent respectively and February advanced to 10.4 percent. In the last twelve months construction growth has been as strong as at any time since our data stream began over twenty years ago. All growth measures are on a three month moving average (3MMA) basis year over year which eliminates seasonality.

February expenditures were $68.9 billion which breaks down to $50.3 B of private work, $16.8B of state and locally (S&L) funded work and $1.8 B of federally funded (Table 1).

The red and green arrows in Table 1 show momentum. Even though February on a 3MMA basis had an increase in year over year growth to 10.4 percent this was still less than the rolling 12 month growth rate of 11.3 percent therefore we classify this as negative momentum. Total construction will reach the pre-recession level before the end of this year if the present growth rate is maintained (Figure 1).

The 10.4 percent growth of total construction y/y was led by private work up by 11.9 percent. State and locally financed work was up by 7.1 percent and Federal by 1.0 percent. Momentum was negative for private and federal work but positive for state and local. Building construction had negative momentum but infrastructure, industrial, utilities and power accelerated. 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 and infrastructure had the best growth rate in five months. The growth rate of “Other” became very negative at the time of the oil price collapse but has recovered to positive growth in the last six months on a 3MMA basis. 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 February 2016 was $964.9 B. July through February 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 sub-sectors of both.

The growth rate of private construction was 11.9 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 single family residential has slowed to 9.0 percent, down from 17.3 percent in February last year. Multi-family residential is still surging with a 26.2 percent growth rate in this latest data. The growth of single and multifamily construction expenditures reported here are quite different from the starts data as reported by the Census Bureau. Starts of single family homes are growing faster than on going expenditures suggesting positive momentum and the situation for multifamily is the reverse. Private non-residential building expenditures grew at a solid 12.2 percent in three months through February y/y with negative momentum. Within private non-residential, all sectors except religious had positive growth led by hotels/motels and offices however all except educational buildings had negative momentum.

State and Local Construction

S&L work expanded by 7.1 percent in the rolling three months through February y/y with positive momentum (Table 3).

June through October 2015 had the highest growth rates for S&L construction since before the recession but growth slowed in each month of the 4th quarter of 2015 then recovered to 4.9 percent in January and 7.1 percent in February. 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 $4.342 billion in February and on a 3MMA basis y/y grew at 9.5 percent with positive momentum. Transportation terminals grew at a 6.2 percent rate. Recreational buildings which includes convention centers, sports arenas, theaters and miscellaneous amusements grew at 5.4 percent in the latest data with negative momentum. Public safety, which includes jails, police, courthouses and fire stations is in a slump and has contracted for 38 of the last 39 months. Table 2 shows that S&L commercial buildings grew at 72.6 percent but this is a very small volume. 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. Both the private and S&L expenditures have now recovered to the point that they should exceed the pre-recession peak by the middle of 2017.

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.

Infrastructure

Expenditures have had positive growth every month since July 2013 but growth slowed each month from August through December. In January there was a recovery to 3.3 percent which continued into February when y/y growth was 9.2 percent. Highway and streets including pavement and bridges accounts for about 2/3 of total infrastructure expenditures and had positive growth every month since April 2015 culminating in an 18.2 percent rate in three months through February. This was the highest growth rate since July 2006. Highway pavement is the main sub-component of highways and streets and had a 20.6 percent positive growth in three months through February. Bridge work has had positive growth for each of the last 15 months. Bridge work totaled $1.8 billion in the single month of February with a 14.5 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 through February 2016 infrastructure expenditures exceeded the pre-recession high (Figure 4).

Total Building Construction Including Residential

Figure 5 compares YTD expenditures for building construction for 2015 and 2016.

Single family residential is dominant and in February 2016 totaled $15.5 billion. Encouraging for steel people is that so far this year, the manufacturing sector has had the highest construction expenditures of all the non-residential sectors. On this year over year basis the only sector to be trailing 2015 was public safety which was down by 3.4 percent, at the other extreme lodging (hotels and motels) were up by 33.6 percent followed by multi-family residential buildings up 25.5 percent and offices up by 24.2 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 data is provided as both seasonally adjusted and non-adjusted. 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.