The Dodge Momentum Index increased 2.9% in December to 136.7 (2000=100) from its revised November reading of 132.8. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. After trending upward over the course of 2016, the Momentum Index is now at an eight-year high, although still more than 25% below its previous peak reached at the end of 2007. December’s gain was due to a 5.7% increase in the commercial component, which more than offset a 1.7% drop in the institutional component. After ending 2015 in a lull, commercial planning intentions posted remarkable strength in 2016, climbing 38% over the year. Meanwhile, institutional planning settled back in 2016, losing 6% after a strong 2015. This suggests that commercial construction activity has more room to grow in 2017 despite being at a more mature phase of its cycle, while planning in the institutional sector has yet to see the benefit of the numerous education-related bond measures passed in recent years. In December, eight projects entered planning each with a value that exceeded $100 million. For the commercial building sector, the leading projects were a $400 million mixed-use building in Atlanta GA, that will include 640,000 square feet of office space and a hotel, and a $351 million office tower in San Francisco CA. The leading institutional projects were a $140 million renovation to the Quicken Loans Arena in Cleveland OH and a $130 million high school in Sherman TX.
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Wells Fargo Analysis:
DMI Points to Growth in the New Year
- The Dodge Momentum Index rose 2.9 percent to 136.7 in December, from November’s downwardly revised reading, and is up almost 17 percent year over year. However, the index still remains 25 percent below its 2007 peak. Despite a strong year- end reading, we look for moderate gains in private nonresidential spending in 2017 as momentum in the institutional sector, especially health care, slows further and other forward-looking indicators (e.g. Architecture Billings Index) point to moderation in construction activity.
Institutional Planning Loses Momentum
- In December, commercial planning grew 5.7 percent, which more than offset the 1.7 percent decline in institutional. Year over year, commercial jumped almost 40 percent, and the three-month moving average remained positive during the month, signaling the sector still has room to grow.
- On the other hand, institutional planning is down 6 percent year over year, with the three-month moving average also registering a weak reading. We suspect that open questions around the Affordable Care Act will weigh on the sector in 2017.