SMU Analysis: Construction Spending's High But Slowing

At SMU, we analyze the CPIP data with the intent to provide a clear description of activity that accounts for about 45 percent of total U.S. steel consumption. See the end of this report for more detail on how we perform this analysis and structure the data. In particular, note that we present non-seasonally adjusted numbers and we don’t include expenditures for residential improvements. Our rationale is that construction is highly seasonal and our businesses function in a seasonal world, and home improvements don’t consume much steel. The growth or contraction that we report in this analysis has had seasonality removed by providing only year-over-year comparisons. For these reasons, our results may not align with other sources.

Total Construction

Total construction expanded by 1.5 percent in three months through February and by 4.2 percent in 12 months through February, both year over year. Since the three-month growth rate is lower than the 12-month rate, we conclude that momentum is negative. February construction expenditures totaled $77.64 billion, which breaks down to $57.3 billion of private work, $18.6 billion of state and locally funded (S&L) work, and $1.7 billion of federally funded work (Table 1). Growth trend columns in all four tables in this report show momentum.

Figure 1 shows total construction expenditures on a rolling 12-month basis as the blue line and the rolling three-month year-over-year growth rate as the brown bars. Total construction in the 12 months through February was at an all-time high, but the brown bars show growth is slowing.

Figures 1, 2, 6, 7 and 9 in this analysis have the same format, the result of which is to smooth out variation and eliminate seasonality. We consider four sectors within total construction: nonresidential, residential, infrastructure and other. The latter is a catchall and includes industrial, utilities and power. Of these four sectors, only infrastructure had positive momentum in February.

The pre-recession peak of total construction on a rolling 12-month basis was $1.028 trillion through November 2006. The low point was $665.1 billion in the 12 months through April 2011. In 12 months through February 2019, construction expenditures totaled $1.102 trillion. (This number excludes residential improvements; see explanation below.)

Private Construction

Table 2 shows the breakdown of private expenditures into residential and nonresidential and subsectors of both. The growth rate of private construction in three months through February 2019 was negative 0.1 percent, down from positive 4.9 percent in three months through last July. Growth has declined continuously in every one of those months as shown by the brown bars in Figure 2. Last May was the first month for the rolling 12-month total of private construction expenditures to exceed the pre-recession peak that occurred in September 2006.

Within the nine sectors of private nonresidential buildings, momentum was mixed with three positive sectors and six negative.

Excluding property improvements, our report shows that single-family residential contracted by 5.0 percent in three months through February with negative momentum and multifamily residential grew by 5.1 percent with positive momentum. Housing starts, NAHB optimism and other housing-related data have been mostly disappointing in recent months. Homebuilder sentiment declined continuously from January 2018 through January 2019. There was a slight uptick in February and March 2019. The Census Bureau reports on construction starts in their housing analysis. In the starts data, the whole project is entered into the database when ground is broken. Construction put in place is based on spending work as it proceeds; the value of a project is spread out from the project’s start to its completion. Single-family starts declined by 1.7 percent in the three months through February year over year, which was better than the contraction rate of CPIP. Multifamily starts declined by 4.0 percent, which was much worse than CPIP. Figure 3 shows the growth of both housing sectors since January 2005 and Figure 4 shows the ratio of single-family to multifamily starts. The proportion of single-family has been gradually increasing since January 2015 when the ratio was 1.66 in favor of single units to 2.75 in February 2019. Figure 5 shows total housing starts in four regions with the South being the strongest and the Northeast the weakest.

State and Local Construction

The growth rate of S&L work improved every month from December 2017 through October 2018 and has been in a positive holding pattern in the last four months. In October, the year-over-year growth rate on a rolling three-months basis reached 9.8. In February, the growth rate was 7.1 percent (Table 3). S&L nonresidential buildings and infrastructure, both of which are included in the S&L data, had slightly negative momentum. Table 3 shows that S&L nonresidential buildings expanded by 6.4 percent in three months through February. Educational is by far the largest subsector of S&L nonresidential buildings at $5.0 billion in February and experienced a 4.8 percent positive growth on a rolling three-months basis with positive momentum. The point is that even though S&L as a whole has negative momentum, there are bright spots. Figure 6 shows the history of total S&L expenditures. In previous updates we have stated that a full recovery of S&L construction wouldn’t happen in this decade. The growth of this sector has exceeded our expectations and this conclusion is now in doubt.

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, data for which is not available from the Commerce Department.

Infrastructure

Infrastructure expenditures peaked in early 2016 and declined through 2017 before beginning a robust recovery in 2018. On a rolling 12-months basis, infrastructure expenditures in February were at an all-time high with a growth rate of 9.8 percent. Highways and streets including pavement and bridges account for about two-thirds of total infrastructure expenditures. Highway pavement is the main subcomponent of highways and streets and had a 16.7 percent growth in three months through February. Bridge expenditures had negative growth in August through January, but picked back up to positive 2.6 percent in February (Table 4).

Figure 7 shows the history of infrastructure expenditures and the year-over-year growth rate.

Total Building Construction Including Residential

Figure 8 compares year-to-date expenditures for the construction of the various building sectors for 2018 and 2019. Single-family residential is dominant and in the 12 months of 2018 totaled $281.8 billion, up from $242.5 billion in 2016.

Figure 9 shows total expenditures and growth of nonresidential building construction. On a rolling 12-months basis, expenditures on nonresidential buildings including both private and S&L are at an all-time high, but slowing.

Explanation: Each month, the Commerce Department issues its construction put in place (CPIP) data, usually on the first working day covering activity one month and one day earlier. There are three major categories based on funding source: private, state and local, and federal. Within these three groups are about 120 subcategories of construction projects. At SMU, we slice and dice the expenditures from the three funding categories to provide as concise a summary as possible of steel consuming sectors. For example, we combine all three to reach a total of nonresidential building expenditures. Construction put in place is based on spending work as it occurs, estimated for a given month from a sample of projects. In effect, the value of a project is spread out from the project’s start to its completion. This is different from the starts data published by the Census Bureau for residential construction, by Dodge Data & Analytics and Reed Construction for nonresidential construction, and Industrial Information Resources for industrial construction. In the case of starts data, the whole project is entered into the database when ground is broken. The result is that the starts data can be very spiky, which is not the case with CPIP.

The official CPIP press release 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 background data is provided as both seasonally adjusted and non-adjusted. The detail is hidden in the published tables, which SMU tracks and dissects to provide a long-term perspective. Our intent is to provide a route 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 values of the dollar expenditures presented are of little interest. What we are after is the magnitude of growth or contraction of the various sectors. In the SMU analysis, we consider only the non-seasonally adjusted data. 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 because such expenditures are minor consumers of steel.

In the four tables included in this analysis, we present the non-seasonally adjusted expenditures for the most recent data release. Growth rates presented are all year over year and are the rate for the single month’s result, the rolling three months and the rolling 12 months. We ignore the single month year-over-year result in our write-ups because these numbers are preliminary and can contain too much noise. The growth trend columns indicate momentum. If the rolling three-month growth rate is stronger than the rolling 12 months, we define that as positive momentum, and vice versa. In the text, when we refer to growth rate, we are describing the rolling three-month year-over-year rate. In Figures 1, 2, 6, 7 and 9 the blue lines represent the rolling 12-month expenditures and the brown bars represent the rolling three-month year-over-year growth rates.