The Slide in U.S. PIP Construction Spending is Just Beginning

Article source: ConstructConnect

So Far, PIP Construction Not Too Alarming, But …

The headline numbers on U.S. put-in-place (PIP) construction spending, from the Census Bureau, continue to be somewhat reassuring ‒ or, at least, not too alarming.

In September, the total dollar volume of $1.414 trillion (seasonally adjusted and annualized) was +0.3% month to month, with residential at +2.7% and nonresidential, -1.6%.

On a year-over-year basis, September’s total PIP figure was +1.5%, with residential (+10.1%) pulling ahead and nonresidential (-4.4%) stepping back.

Residential PIP is holding up nicely; nonresidential, not so much. The former is 44% of the total, with the latter at 56%. The relationship is usually nearer to 40% versus 60%.

A closer look at the numbers, especially in the nonresidential sphere, is warranted.

Residential Construction has been Much Peppier of Late

For three broad type-of-structure categories of construction and 16 nonresidential sub-categories, Table 1 sets out how recent dollar spending is comparing with a longer-term pattern.

The key results appear in the final two columns of Table 1 where color-coding and check marks highlight whether the dollar volume of PIP spending is ‘speeding up’ or ‘slowing down’.

A ‘speeding up’ check mark is assigned when the percentage-change for the latest three months versus previous three months (annualized) is greater (or less negative) than for the last 12 months versus preceding 12 months.

When it’s the flip side that prevails, ‒ i.e., latest three-month results are disappointing relative to latest 12-month results ‒ then the category is judged to be ‘slowing down’.

More directly, ‘speeding up’ or ‘slowing down’ is simply based on whether the final column of percentage changes is greater than or less than the second-last column of percentage changes.

The ‘total’ is speeding up entirely due to ‘residential’ being so much peppier in the latest three months (+33.9%) than in its latest 12 months (+7.7%).

Some of the factors contributing to the surge in residential construction, even as the pandemic has once again tightened its grip on the economy, have been as follows.

A movement away from city cores to outlying regions has been underway, with millennials especially interested in setting down roots in the suburbs. Knowing they can work from home has been a bonus.

Potential home buyers, with little else to spend their money on, have been able to more rapidly accumulate residential property down payments. Third quarter National Income figures record that the savings rate (16%) is currently about twice its normal level (8%).

The 30-year fixed mortgage rate has fallen below 3.00%, lowering the cost of financing to a degree never previously experienced. (One consequence from the resale homes market has been a doubling in the number of million-dollar houses that have changed hands.)

Nonresidential PIP Construction, Though, is on a Slippery Slope

The story for nonresidential (NR) PIP construction spending, though, is opposite to residential’s upbeat message.

From Table 1, NR PIP can clearly be characterized as ‘slowing down’. It’s latest three months spending figure versus prior three months (annualized) is -7.1%. And -7.1% is well down from total nonresidential construction’s longer-term pattern (i.e., latest 12 months over previous 12 months) of +3.4%.

From the far-right color-coded columns of Table 1, the script for nonresidential construction wanders into even darker territory. Only 4 of NR’s 16 sub-categories have check marks in the ‘speeding up’ column. Furthermore, those 4 sub-categories account for just 20% of NR dollar-volume construction (and 11% of total construction).

Eleven of the 16 NR sub-categories in Table 1 have check marks in the ‘slowing down’ column.

The NR sub-categories staging the most pronounced reversals are lodging, commercial (retail, restaurants, etc.), educational, power and highways/streets.

Table 1

Nonresidential Starts Dipping with Firm Backpedaling Intent

It seems likely the retreats in the PIP statistics are barely beginning. To the extent they’ve been held aloft so far, it’s been primarily thanks to projects that were initiated last year. Onsite work from 2019 groundbreakings has been carrying over into this year.

The important sidebar is that backlogs are being run diminished.

From ConstructConnect’s starts statistics, 2019 was an exceptionally fertile year for mega project initiations. Mega projects are valued at a billion dollars or more each.

2020 is seeing a greatly reduced volume of ‘megas’. Also, from Graph 1, it’s apparent that construction starts are trending decidedly downwards. ‘Starts’ are an advance indicator for later PIP spending statistics. PIP results are analogous to progress or work-in-process payments.

The 12-month moving average trend line for residential starts (from ConstructConnect) is being dragged slightly downwards, due to a weakening of multi-unit (i.e., condo tower) launches.

What’s most noteworthy, though, is the trend lines for engineering/civil starts and even more so for nonresidential building starts are dipping with firmer backsliding intent.

Graph 1

Category: ConstructConnect

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