October CPIP Data Shows Construction Slowing

At SMU, we analyze the CPIP data with the intent to provide a clear description of activity we believe 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. Note that we present non-seasonally adjusted numbers. Much of what you will see in the press may differ from our presentation because others base their comments on adjusted values. Our rationale is that construction is highly seasonal and our businesses function in a seasonal world. Also, we don’t understand how the adjustments are made, nor do we trust them.

Total Construction

Total construction expanded by 1.5 percent in three months through October year over year following the 0.5 percent growth in three months through September. Growth slowed from 7.5 percent in January to 0.5 percent in August and September, which were the months with the lowest growth since November 2011. On a rolling 12-months basis year over year, growth in October was 3.0 percent. Since the three-month growth rate is lower than the 12-month rate, we conclude that in the long term the rate of growth is slowing. We describe this as negative momentum. October construction expenditures totaled $94.5 billion, which breaks down to $67.5 billion of private work, $25.1 billion of state and locally funded (S&L) work, and $1.9 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. Figures 1 through 4 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. These are nonresidential, residential, infrastructure and other. The latter is a catchall and includes industrial, utilities and power. Of these four sectors, residential buildings and infrastructure had positive momentum in the October data.

The pre-recession peak of total construction on a rolling 12-month basis was $1.028 trillion through October 2006. The low point was $665.1 billion in the 12 months through April 2011. August 2016 through October 2017 on a rolling 12-month basis were the first months to exceed the trillion-dollar level since October 2008. In 12 months through October 2017, construction expenditures totaled $1.039 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 October was 1.7 percent, down from 11.0 percent in the three months through January as shown by the brown bars in Figure 2.

Based on the present growth rate, the best we can hope for is that total private construction will reach the pre-recession level by the end of next year. Excluding property improvements, our report shows that single-family residential grew by 11.1 percent with positive momentum and multifamily residential had zero growth with negative momentum.

The Census Bureau reports on construction starts in its 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 occurs; the value of a project is spread out from the project’s start to its completion. Single-family starts grew at 8.4 percent in the three months through October, which was less than the growth rate of CPIP, suggesting that housing will slow in coming months. Multifamily starts contracted by 13.4 percent in October, which was much worse than the zero growth of CPIP, suggesting that multifamily will continue to see a contraction in the next few months. Within private nonresidential buildings, healthcare and transportation terminals had positive momentum, but all the other sectors are slowing. The fourth-quarter Federal Reserve Senior Loan Officer Survey indicated there is currently a net decrease in demand for construction and land development loans, though terms for such loans are easing. The Fed survey reviews changes in the terms of, and demand for, bank loans to businesses on a quarterly basis based on the responses from 73 domestic banks and 24 U.S. branches and agencies of foreign banks.

State and Local Construction

S&L work contracted by 0.5 percent in the rolling three months through October year over year with negative momentum. However, this was the best result since May last year (Table 3). The improvement was driven by nonresidential buildings, which expanded by 5.5 percent.

The overall figure includes both nonresidential buildings and infrastructure. April 2016 was the last month in which S&L expenditures had positive year-over-year growth. Figure 3 shows growth as the brown bars and the rolling 12-month expenditures as the blue line. Nonresidential buildings expanded by 5.3 percent in three months through October, which was the best result since March last year. Total S&L nonresidential buildings slumped in the period Nov. 16 through April 17, therefore SMU’s year-over-year comparisons will probably look good for the next few months. Educational buildings are by far the largest subsector of S&L nonresidential at $6.46 billion in October and experienced 6.7 percent growth on a rolling three months basis with positive momentum.

Comparing Figures 2 and 3, S&L construction did not have as severe a decline as private work during the recession, and private work bounced back faster. The downturn in S&L (including infrastructure) means that a full recovery to the pre-recession level of expenditures won’t be achieved until well into the next decade, at best.

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 had positive growth in the first eight months of last year and have experienced negative growth since then. In the October data, every subsector of infrastructure except conservation contracted. However, all except highways and streets had positive momentum, meaning that the contraction is slowing. 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 6.2 percent contraction in three months through October. Bridge work contracted by 1.6 percent, which was the best result since November last year (Table 4). In many categories, such as health care, education and multifamily residential, the Commerce Department separates private and publicly funded projects. Unfortunately, they don’t do this with infrastructure, which is all lumped under S&L. If Texas (where this writer resides) is typical, there is a huge amount of private money going into infrastructure, which means that the contraction in the S&L component may be much more severe than the CPIP reports indicate.

Infrastructure expenditures peaked in the rolling 12 months through April 2016 and have since declined to a level lower than the previous peak in January 2009 (Figure 4). There is still no sign that the $305 billion authorized in December 2015 by Congress to fund roads, bridges and rail lines has begun to take effect. It seems now that this money must have gone into replenishment of the highway and transportation funds and not into investment on the ground.  The 2015 five-year infrastructure bill was the largest reauthorization of federal transportation programs approved by Congress in more than a decade, ending an era of stopgap bills and half-measures that left the Highway Trust Fund nearly broke and frustrated local governments and business groups.

Total Building Construction Including Residential

Figure 5 compares year-to-date expenditures for building construction for 2016 and 2017. Single-family residential is dominant and in the 12 months of 2016 totaled $243 billion, up from $233 billion in 2015. On a rolling 12-month basis through October 2017, single-family residential expenditures were $260.6 billion. It seems likely that if the Senate version of the tax bill prevails and mortgage interest and local tax deductions are eliminated, then housing construction will be severely affected.

Figure 6 shows total expenditures and growth of nonresidential building construction. Growth has been slowing this year and went negative in the three months through both August and September year over year for the first time since October 2011. October this year eked out a small 0.1 percent gain.

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. 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, and Industrial Information Resources for industrial construction. In the case of starts data, the whole project is entered to the data base 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 value of the dollar expenditures presented is 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 writeups 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, or 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 through 4 and 6, the blue lines represent the rolling 12-month expenditures and the brown bars represent the rolling three-month year-over-year growth rates.