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Monthly Discussion

Construction in America

For some time now news headlines have been heralding a real estate boom. In this issue of the Newsletter we are looking closer to this question by examining construction in America.

Expenditures in construction have long been dominated by the private sector, roughly 3.5 to 1. Public construction has been at a low level and has grown gently and almost linearly for at least a dozen years (see purple line in Exhibit 3). The growth pattern of private construction, however, has followed S-curves. Behaving the dominant “species”, private construction obeys the law of natural growth in competition. Exhibit 3 shows an S-curve covering the better part of a decade (green line), but one can discern smaller S-curves as constituents of the large curve. (As discussed in Conquering Uncertainty S-curves can be decomposed to smaller S-curves.) Naturally, we expect more S-shaped growth segments in the far future. For the near future, two scenarios are shown in Exhibit 3 and they are practically equally probable on this particular set of data.

Exhibit 3. Two scenarios for the immediate future of total private construction in America.

Scenario 2 (red dotted line) is optimistic and rather aggressive. Scenario 1 argues that we are practically at a standstill, for a while anyway, because another S-curve will certainly follow sometime in the future. Contradictory as they may be the two scenarios yield useful results nevertheless. Their usefulness becomes clear when we zoom into the components of total private construction.

The data I used break down private construction into: “residential”, “office”, “commercial”, “business”, and “other”.* By far the most important segment is “residential”. Moreover, the residential sector has been consistently increasing (except for short periods of rebound) since 1992. In contrast, all other private construction that also increased in during the 1990s has been systematically declining since September 2000. In fact, within the envelope of Total Private Construction, the residential segment has been overtaking all other private construction in a natural way, i.e., as if residential construction were a “species’ more gifted for survival than any other private construction. Evidence for this statement comes from the fact that the % share trajectories in Exhibit 4 are amenable to straight-line description (S-curve paths).

Exhibit 4. We see how the total expenditures in private construction split. “Other” includes office, commercial, business, and other. The vertical scale is logistic meaning that straight lines in the graph are S-curves in real life.

The natural-growth pattern is easy to forecast. With the dotted-line extrapolations from Exhibits 3 and 4 we can deduce future growth rates for residential and other private construction, see Table I.

Table I – Rate of Growth of Private Construction

Actuals
	Total	Residential	Other
Mar-02	0.08%	0.52%	-0.65%
Apr-02	0.42%	0.91%	-0.40%
May-02	-1.18%	0.46%	-4.00%
Jun-02	-0.49%	0.66%	-2.56%
Jul-02	0.20%	0.91%	-1.10%
Aug-02	-1.55%	-0.08%	-4.34%
Sep-02	0.53%	0.50%	0.60%
Oct-02	1.49%	0.98%	2.48%
Nov-02	0.82%	1.06%	0.35%
Dec-02	0.28%	1.62%	-2.34%
Jan-03	1.43%	1.94%	0.38%
Feb-03	-0.38%	-0.33%	-0.49%
Mar-03	0.55%	-0.31%	2.34%
Apr-03	-0.90%	-0.73%	-1.23%
May-03	-0.28%	0.22%	-1.28%
Jun-03	0.09%	-0.09%	0.46%
Jul-03	1.93%	2.84%	0.07%
Aug-03	1.03%	2.12%	-1.28%
Sep-03	1.65%	1.91%	1.07%
Oct-03	1.84%	2.49%	0.43%
Nov-03	1.05%	1.94%	-0.93%
Dec-03	0.84%	0.88%	0.75%
Jan-04	-0.66%	-0.17%	-1.79%
Feb-04	0.15%	-0.27%	1.11%

Forecasts

Total

Residential

Other

(scenario 1)

(scenario 2)

(scenario 1)

(scenario 2)

(scenario 1)

(scenario 2)

Apr-04

0.20%

1.15%

0.64%

1.60%

-0.90%

0.04%

May-04

0.13%

1.12%

0.55%

1.55%

-0.93%

0.05%

Jun-04

0.09%

1.15%

0.52%

1.60%

-1.01%

0.04%

Jul-04

0.05%

1.10%

0.47%

1.53%

-1.02%

0.02%

Aug-04

0.04%

1.12%

0.46%

1.55%

-1.07%

0.00%

Sep-04

0.02%

1.08%

0.45%

1.51%

-1.09%

-0.04%

Oct-04

0.01%

1.01%

0.42%

1.42%

-1.07%

-0.09%

Nov-04

0.01%

0.99%

0.42%

1.41%

-1.11%

-0.14%

Dec-04

0.01%

0.90%

0.40%

1.30%

-1.09%

-0.20%

Jan-05

0.00%

0.87%

0.41%

1.28%

-1.13%

-0.27%

Feb-05

0.00%

0.81%

0.40%

1.21%

-1.13%

-0.34%

Mar-05

0.00%

0.68%

0.36%

1.04%

-1.03%

-0.36%

Apr-05

0.00%

0.69%

0.39%

1.08%

-1.14%

-0.46%

May-05

0.00%

0.61%

0.38%

0.98%

-1.11%

-0.51%

Jun-05

0.00%

0.57%

0.38%

0.95%

-1.15%

-0.59%

Jul-05

0.00%

0.50%

0.37%

0.86%

-1.12%

-0.63%

We see that residential construction will increase even with the pessimistic scenario for total private construction. Summarizing, at worse, Scenario 1, the annual value of residential construction put in place will grow at around 0.5% for the next 12 months; at best, Scenario 2, at around 2 to 3 times as much. So much cannot be said for the other kinds of construction. Office, commercial, business, and other types of private construction, small as they are, will together decline.