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Beyond Estimation

Market Outlook – Q1 2018

Vermeulens market reports are based on actual bid prices in the Institutional‐Commercial‐Industrial construction industry.

Forecasts are based on leading indicators, and historical comparative analysis.

Construction Price escalation nationally has trended to 4% per annum for Q1 2018.

Construction Cost Trendline: Due to consistent increases in construction costs over the past few years, Vermeulens Index long term trendline is up from 3.3% to 3.4%.

Commodity prices have continued the upward trend through Q1. Energy and metals indices rose sharply coming into 2018 before experiencing corrections near the end of Q1.

Consumer Price Index: After a positive trend in the second half of 2017, CPI has slowed and fallen below expected long term averages at 2.6%.

Construction Dollar Volume has increased by 3.6% year over year (Mar 17/Mar 18). Year over year growth can be

attributed to Residential (5.3%) and Infrastructure (5.5%) spending. Non‐Residential spending has continued its upward trend from 2017 Q4 and is up 2.5% year over year.

New York Stock Exchange: The stock market has slowed after reaching all‐time highs in 2017, with Q1 yielding a 2.8% decrease in equities.

Growth in Employment: Six month rolling average job growth at the end of Q1 sits at 216,000 jobs, showing a reversal of

the moderating trend since the second half of 2014. The 324,000 jobs added in February were the main driver of this trend reversal. Labor force participation rates are high by historic measures but do not appear to be causing inflationary pressure, perhaps due to increased productivity.

Construction Job Growth: We are at full employment in the construction sector. Q1 has seen the addition of 85,000 construction jobs (1.2%) nation‐wide. Wage and profit increases in the sector will continue to draw employment from new entrants and other sectors.

Gross Domestic Product remained in line with long term expectations and carried a 2.5% growth rate through Q1.

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Market Watch

Inflation and employment targets propel monetary policy, and subsequently construction prices. Although the target range for federal funds has increased, continuing low interest rates are good for stability in the interest rate sensitive construction sector.

“Information received since the Federal Open Market Committee met in January indicates that the labor market has continued

to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months,

and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed

investment have moderated from their strong fourth‐quarter readings. On a 12‐month basis, both overall inflation and

inflation for items other than food and energy have continued to run below 2 percent. Wage inflation has increased in recent

months but remain low; survey‐based measures of longer‐term inflation expectations are little changed, on balance.

The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12‐month basis is expected to move up in coming months and to stabilize around the Committee's 2 percent objective over the medium term. Near‐term risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1‐1/2 to 1‐3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”

https://www.federalreserve.gov/newsevents/pressreleases/monetary20180321a.htm

The table below looks at several key economic indicators that drive construction volume and costs. On balance, current

indicators support stable construction growth in the short‐term.

Indicator Effect Current Forecast

CPI Inflation ‐ low Stimulative

ICI Demand ‐ stable Moderating

Nom Interest Rates ‐ low Stimulative

Real Interest Rates ‐ low Stimulative

Government Spending ‐ stable Stable

Government Deficits ‐ increasing Stimulative

Financial Assets ‐ increasing Stimulative

Real Estate Assets ‐ stable Stable

Construction Prices ‐ moderating Moderating

Construction Employment ‐ rising Moderating


Vermeulens Construction Cost Index

As inflation in other sectors of the economy—moderate and real interest rates reduce, escalation in the construction sector will continue to have room to increase at a higher rate.

Price increases for Q1 2018 nationally trended towards 4% annually.

For the past 30 years, construction prices trended at a 3.4% annually compounded escalation rate. The rate of escalation seen in construction costs relate to the target of 2 ‐ 3% annual inflation for consumer prices and the monetary policy used to achieve this goal. Following a decline in 2014 due to energy prices, year over year CPI inflation is trending below the Federal Reserve’s long‐term targets.

Following the global recession construction bid prices for institutional projects fell by 14% from their peak in 2008. During 2011, Vermeulens saw an average selling price increase of 3%. This was followed by a 6% increase in 2012, 8% in 2013, 6% in 2014, 8% in 2015, 6% in 2016, and 5% in 2017, and 4% in Q1 2018.

The chart below illustrates bid prices for Institutional Commercial Industrial (ICI) construction projects relative to the Construction Trendline (1986 = 100) of 3.4% and the 2.6% Consumer Price Index Trendline.


AIA Billings

Architectural billings are a leading indicator for future construction volume. A score greater than 50 indicates growth. Design fee billings typically indicate construction volume 9 ‐12 months in advance.

Architectural Billings started off strong in 2018 and have slowed down since, while inquiries experienced a sharp decline in March.

https://www.aia.org/pages/190336‐abi‐march‐2018‐firm‐billings‐increase‐at‐mo


Put In Place Construction

Construction dollar volume has increased 3.6% year over year (Mar 17/Mar 18). Construction dollar volume is the main driver of construction prices. As volumes increase and contractor bidding opportunities and backlogs grow, the margins included in a bid prices will grow.

Residential dollar volume continues to grow, increasing 5.3% year over year.

Non‐Residential construction spending has seen a 2.5% increase year over year, continuing the positive trend from the previous quarter’s 1.8% increase. Moderating growth and strong margins in Non‐Residential construction volume has caused reduced escalation in this sector.

Infrastructure spending has seen a 5.5% year over year increase.

http://www.census.gov/construction/c30/c30index.html


Equities and Commodity Prices

Equity Prices represented by the new York Stock Exchange (blue line) are an indicator of construction prices (Vermeulens Index, green line). Improving equity markets provide capital and investment spending for construction.

Commodity Prices (red line) are an input but not an indicator of construction prices. Economic growth since 2011 has been bolstered by lower commodity prices. The energy sector is particularly important as it underlies all economic activity. A correction from the previous quarter resulted in a surge in industrial metals and a drop off in energy indices, keeping the Dow Jones Commodity Index relatively flat.


Construction Labor Market.

Unemployment fluctuating between 4 ‐ 6% will tend to put upward pressure on labor costs similar to 2004 ‐ 2007. Construction Job Growth was 85,000 or 1.2%, this quarter. Wage and profit increases in the sector will draw new

entrants as well as restructuring from other sectors of the economy (energy or exports, for example).

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Total Jobs & Market Performance

Total Jobs in the US economy during Q1 2018 saw an average monthly increase of 212,000 jobs. 6‐month average job growth saw an increase after a strong February. The long term downward trend in non‐farm payroll employment since Q2 of 2014 has stabilized or reversed.

The chart below removes short‐term fluctuations in job growth by looking at a 6‐month moving average Dips in job growth temper wage demands. Negative job growth accompanies financial sector recessions. Sustained periods of recession, where job creation remains below 100,000 jobs per month, has accompanied dips in construction prices as illustrated by the red bars below.

https://data.bls.gov/timeseries/CES0000000001


Employment Percentage of Total Workforce

Total Employment as a percentage of total workface is approaching a long term high.

The chart below shows total employment as a percentage of the US workforce. The Federal Reserve will accommodate growth until full employment puts inflationary pressure on consumer prices above the 2 to 3% target. The workforce in the US continues to expand so the economy must produce at least 100,000 jobs/month to remain neutral. The Federal Reserve will continue to support strong employment growth over the medium term with low interest rates.


Construction Labor Growth Rate

Construction Labor Growth Rate is calculated by the current 12 month average in construction employment relative to previous 12 month average in construction employment.


Forecast ‐ National Trend

Construction prices for North America are firm and stabilizing above the long term Trendline. The medium term forecast is 4% per year. Local market variations from the average depend on market conditions in that market. Contact Vermeulens for specific market information for your project.

With the current labor market at capacity, and continued stable growth in construction volume, construction costs will remain above the Construction Cost Trendline for the medium term.

Vermeulens strives to give our clients the greatest possible value and results for their projects. If you: Need any help with your projects, Want to set up a presentation to your group, Would like to meet to see how we can help your team, and expand our business together, Are looking for company information,

Please contact: Marisol Serrao, Director of Marketing at 617 273 8430 or [email protected].

beyond estimation market outlook q1 2018 - vermeulens inc · beyond estimation market outlook –...

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