The Construction Industry's Financial Future
Insight The word “fascinating” could best describe a comparison of Canadian put-in-place investments versus trends statistics when it comes to construction’s investment forecast.
What I have found to be equally riveting is the relationship between the ‘actuals’ (i.e. the historical numbers) and the trend lines. There are surprisingly strong correlations in most type-of-structure categories.
In turn, those closely aligning patterns are extremely helpful in making projections.
Looking to the past
Obtaining historical numbers for residential (back to 1998) and non-residential building (back to 1997) put-in-place investment was relatively easy, thanks to Statistics Canada’s Cansim Tables 026-0013 and 026-0016.
The engineering/civil figures were harder to obtain. They are mainly residuals from the total and date back to only 2007. This is unfortunate, since engineering work is the category of construction being most affected at present by the precipitous drop in energy prices worldwide.
As a result, the ‘grand total’ numbers, at least in constant dollars (2007 = 100.0), also have a limited back-story.
There are interesting observations to be made nonetheless. Between 2007 and 2014, actual constant dollar ‘grand total’ put-in-place investment in Canada varied by only as much as 8.9 percent on the high side versus ‘trend’ (in 2012) to -10.1 percent on the low side (in 2009).
In other words, for ‘grand total’ put-in-plus construction in Canada, there’s been – at most − a modest swing of approximately plus or minus 10 percent on either side of the trend line.
Analyzing industry sub categories
Now we will delve into major sub-categories. Remember that while the lifespan for constant dollar engineering statistics is short (beginning with 2007), the figures for the residential and non-residential building categories date back to 1998 and 1997 respectively.
The sub-category displaying the greatest volatility compared to its trend line may come as a shocker to most readers. One would think that because it is tied to a fairly secure source of funding, the public purse, institutional work would be relatively stable.
That may be true for employment in the government sector, but it doesn’t hold for construction.
Institutional on-site work has swung from a high of +25.1 percent versus its trend line in 2002 to a low of -9.7 percent last year, 2014. There was also an outsized increase of +23.3 percent in 2010 as infrastructure projects were deliberately sped up by Ottawa, the provinces and municipalities to combat the Great Recession.
Since then, the pendulum has reversed direction. Austerity has been the watchword among most governments in Canada, yielding a shortfall in institutional work. Pressures from ongoing population growth and cyclical economic improvement will, however, necessitate a return to trend by 2018.
Second most volatile has been industrial construction. This is to be somewhat expected, based on the fact it has the lowest dollar volumes among all the sub-categories. Therefore, the low denominator in the percentage change calculation can lead to a bigger gain or loss.
Constant dollar industrial construction in 2004 was -19.9 percent below its trend line. In 2013, it was +19.3 percent. The steep decline in the value of Canada’s dollar, orchestrated by the Bank of Canada, will almost certainly cause more investment funds to flow into manufacturing this year and out several periods.
The commercial category of construction has rarely deviated by much from its trend path. Over the history of its numbers, the back-to-back years of 1999 and 2000 were its ‘wildest’, with a 9.8 percent expansion in the former immediately offset by a 7.2 percent contraction in the latter.
“Pressures from ongoing population growth and cyclical economic improvement will, however, necessitate a return to trend by 2018.”
My biggest concern with respect to commercial work at this time is what’s happening in the retail sector. Store closings (Target, Future Shop), brought on to a significant degree by burgeoning Internet sales, is a phenomenon that has not fully run its course yet. At the same time, though, low-priced gasoline should provide a boost to all consumer spending.
Residential put-in-place investment also moves nicely along a trend path. Its largest deviations have been +13.6 percent in 2004 and -8.3 percent in 2009. Such a minor drop in 2009, compared with many other countries, when the credit crunch and Great Recession were devastating economies nearly everywhere, is something to ‘crow’ about.
What’s often overlooked is that about half of the residential dollar figure in any given year is comprised of renovation work.
This brings us to engineering construction, the ‘home’ of truly enormous or mega-sized projects in fossil fuels, hydroelectric power and other resource areas. Despite their presence, this category as a whole has strayed from its trend line by only +12.5 percent on the upside in 2007 and -14.8 percent on the downside in 2009.