Construction starts rose four percent in June according to the Dodge Index of New Construction.

For the second quarter, construction starts are down substantially. The overall trend is also down, indicative of a mature market.

New construction starts in June grew 4% from the previous month to a seasonally adjusted annual rate of $679.9 billion, according to Dodge Data & Analytics. Nonresidential building increased 13% in June, strengthening after two months of lackluster activity, and the nonbuilding construction sector rose 8% with the help of elevated activity for electric utilities. However, residential building slipped 4% in June, as both sides of the housing market (single family and multifamily) retreated. Through the first six months of 2017, total construction starts on an unadjusted basis were $342.7 billion, down 4% from the same period a year ago. If the manufacturing plant and electric/utility gas plant categories are excluded, total construction starts during the first half of 2017 would be up 1% from last year.

June’s data lifted the Dodge Index to 144 (2000=100), compared to 138 for May. Even with June’s improved activity, the Dodge Index averaged 139 for the second quarter, down 10% from the first quarter’s 154 average.

Maturing Expansion

“A maturing construction expansion is characterized by deceleration in the overall rate of growth, that’s often accompanied by up-and-down behavior on a quarterly or monthly basis,” stated Robert A. Murray, chief economist for Dodge Data & Analytics. “The 11% to 12% yearly increases for total construction starts during the 2012-2015 period were followed by a 4% gain in 2016, and several factors suggest that 2017 should still see modest growth for the year as a whole. These factors include commercial vacancy rates that remain low as well as greater construction funding coming from the state and local bond measures passed in recent years. At the same time, it’s become apparent that any impact from a new federal infrastructure program, should one get passed during the latter half of 2017, would benefit construction more in 2018 and 2019.”

“Residential building so far in 2017 has been mixed, with some growth for single family housing earlier this year, while multifamily housing appears now to be trending downward after peaking in 2016.”

Nonresidential building in June was $249.6 billion (annual rate), up 13% from May. The commercial categories as a group climbed 23%, led by an 83% surge for new office building starts. There were 8 office projects valued at $100 million or more that reached groundbreaking in June, led by a $585 million Facebook data center in the Omaha NE area, the $400 million office portion of the $500 million renovation of the Willis Tower in Chicago IL (involving remodeling of the structure’s base and observation deck), and the $334 million office portion of the $600 million Diridon Station mixed-use complex in San Jose CA.

Nonbuilding construction, at $155.4 billion (annual rate), increased 8% in June. The electric utility/gas plant category ran counter to its generally declining trend this year, with June soaring 78%. Large electric utility projects included as June starts were a $1.3 billion natural gas-fired power plant in Florida, a $1.1 billion wind farm and transmission line in Colorado, and a $296 million wind farm in Texas. The public works categories as a group dropped 6% in June, making a partial retreat after a 26% jump in May. The miscellaneous public works category, which includes such diverse project types as site work, pipelines, and mass transit, fell 16% in June.

Residential building was $274.9 billion (annual rate) in June, down 4%. Single family housing slipped 4%, continuing to settle back in June from the strengthening that took place during the first two months of 2017.

Construction Summary

An 83% surge in new office building starts helped the index achieve positive territory in June. Don’t expect the office trend to continue.

Mike “Mish” Shedlock