Using SpaceKnow data to track US construction activity (SNN#18)

Summary

SpaceKnow indices can be used to track US Building Permits, Housing Starts, and non-residential construction spending. Our indices recovered slightly in Q4 2022, suggesting that the outlook for the US construction industry is improving from weak conditions last year. 

In more detail

The construction sector in the US has been subdued since the beginning of the pandemic and its contribution to the real GDP has been declining steadily. Based on the United States of America Construction Industry Report 2022, the US construction sector has recently been shaped by a divergence between real and nominal values. The sector contracted in real terms in 2021 but grew 8.3% in nominal terms. In 2022, the construction industry was expected to expand, both in real and nominal terms due to the government’s investment plan. However, US Census data shows otherwise. Real GDP from construction and the contribution of construction to real GDP have been in free fall since 21Q2 (Figure1).

During the pandemic, US building permits soared as house prices rose, driven by increased demand and the drop in interest rates. However, both US building permits and the house price index have been declining since the end of the first quarter of 2022. 

Demand for residential housing has been clearly impacted by the increase in mortgage rates. Affordability of home ownership declined as buyers lost purchasing power, driven by high inflation and mortgage rates. At the same time, construction costs increased because of supply chain disruptions and increasing energy costs worldwide. Rising costs became the biggest obstacle to completing projects for construction companies.

The non-residential construction industry looks more promising than the residential industry. The US infrastructure bill raised prospects for the future of non-residential construction. Infrastructure investments are designed to support several high-profile projects which have already been planned or are under construction. Despite the decline in residential construction spending, total non-residential construction spending continued to grow in 2022.

Spaceknow has a family of indices monitoring the production and storage of materials used in the US construction industry. These data sets cover major building components such as cement, concrete, and asphalt but also intermediate inputs such as aggregates or sand. The data set also includes aggregate indices providing a comprehensive look at the industry and a regional breakdown of four US regions (MidWest, NorthEast, South, and West).

The indices presented below are based on satellite imagery, specifically Synthetic Aperture Radar (SAR) measurements. The result shows the area that has changed between consecutive satellite revisits and indicates a rate of change in total activity for a given location (Figure 3).

Our indices match the general trend of the construction industry in the US as visible in Figure 3 depicting the Cement Storage Index and US housing starts data (released monthly by US Census Bureau). The relationship between the SpaceKnow Cement Storage Index and US housing starts can also be used to illustrate key properties of Spaceknow indices. Figure 2 shows a non-seasonally adjusted version of the index. The index tracks the most significant peaks in construction activity. On the other hand, the index cannot match the specific seasonality of the US housing starts with its lowest point shortly after a new year begins. The reason for this is likely an inventory buildup in the construction industry in preparation for the building season causing higher activity in cement storage locations when building activity is subdued. Adjusting for seasonality will allow the user to appropriately use SpaceKnow indices to predict US Housing Starts data. 

Another important property of the Spaceknow indices is that they predict activity in US construction a few months ahead. We can see in Figure 3 that most of the significant peaks in housing starts are matched by a similar increase in our cement storage index four months earlier – this suggests our index leads the changes in and can help to predict US building season.

We also compared our indices to other key indicators such as US building permits (released monthly by US Census Bureau). In contrast to the housing starts, our index seems to be the best predictor of building permits in real-time (Figure 4). This suggests the cement industry reacts to the orders for materials done shortly after a building permit is issued. The actual construction starts later, which explains the lag between our index and the housing starts. While our indices are updated daily, US building permits data is made available with a lag.

Last but not least, we tested our indices on financial variables. In this case, we work best with non-residential construction spending. Construction spending was driven by inflation in recent months, causing a split between nominal and real value. When we adjust the construction spending for inflation, we can see a solid match between our indices and the benchmark. We prefer our composite materials index which also contains materials such as concrete or asphalt. These materials justify the correlation with non-residual construction, as these are used primarily in large infrastructure projects. 

A common feature shared among our indices is a significant decline in the value of the index in the first half of 2022, reaching its lowest point in the summer and then starting to recover. The year-on-year drop in the Spaceknow Cement Storage index was over 30 percent in July 2022 and remained in negative territory compared to the previous year. This is also confirmed for the seasonally adjusted indices and corresponds to widespread recession fears witnessed last year. Our indices, however, show a growing trajectory as soon as August 2022, and with certain seasonal ups and downs, they continue to increase. We believe this is a good sign for the US construction market. 

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