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Forecasting construction activity in Canada
Rakhra, A. S.
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Construction construction
Forecasting Construction Activity
in Canada
by A.S. Rakhra
ANALYZED
Appeared in
CIB Proceedings of the Fourth International Symposium on Building Economics Copen hagen 1987
Session E
-
Economic and Technological Forecasting in Construction, p. 31-44(IRC Paper No. 1540)
Reprinted with permission
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T h i s p a p e r i s being d i s t r i b u t e d i n r e p r i n t form by t h e I n s t i t u t e f o r Research i n C o n s t r u c t i o n . A l i s t of b u i l d i n g p r a c t i c e and r e s e a r c h p u b l i c a t i o n s a v a i l a b l e from t h e I n s t i t u t e may be o b t a i n e d by w r i t i n g t o t h e P u b l i c a t i o n s S e c t i o n , I n s t i t u t e f o r R e s e a r c h i n C o n s t r u c t i o n , N a t i o n a l Research C o u n c i l of C a n a d a , O t t a w a , O n t a r i o , K1A 0R6.
C e document e s t d i s t r i b u e sous forme d e
t i r 8 - 3 - p a r t p a r l ' l n s t i t u t de r e c h e r c h e en
c o n s t r u c t i o n . On p e u t o b t e n i r une l i s t e d e s p u b l i c a t i o n s de 1 ' 1 n s t i t u t p o r t a n t s u r
les t e c h n i q u e s ou les r e c h e r c h e s e n
matisre
d e bgtiment e n 6 c r i v a n ta
l a
S e c t i o n d e s p u b l i c a t i o n s , I n s t i t u t de r e c h e r c h e en c o n s t r u c t i o n , C o n s e i l n a t i o n a l d e r e c h e r c h e s du Canada, Ottawa ( O n t a r i o ) , K l A OR6.F o r e c a s t i n g C o n s t r u c t i o n A c t i v i t y i n Canada
Amrik S. Rakhra
Codes and Standards Group
I n s t i t u t e f o r Reseach i n C o n s t r u c t i o n N a t i o n a l Research Counci 1 Canada
Ottawa, O n t a r i o K I A OR6
Key words: t h e c o n s t r u c t i o n i n d u s t r y ; c o n s t r u c t i o n f o r e c a s t i n g t e c h n i ques.
Summary
The c o n s t r u c t i o n i n d u s t r y i n Canada i s one o f t h e l a r g e s t i n d u s t r i e s . The need t o f o r e c a s t i t s f u t u r e course can, t h e r e f o r e , be h a r d l y exaggerated.
The paper reviews and e v a l u a t e s v a r i o u s f o r e c a s t i n g t e c h n i q u e s which a r e c u r r e n t l y b e i n g used t o f o r e c a s t c o n s t r u c t i o n a c t i v i t y i n Canada, b o t h a t n a t i o n a l and p r o v i n c i a l l e v e l s. Re1 a t i v e s t r e n g t h s and weaknesses o f t h e s e techniques a r e discussed.
Mots c l 6 : i n d u s t r i e de l a c o n s t r u c t i o n , mgthodes de p r 6 v i s i o n en c o n s t r u c t i o n .
L ' i n d u s t r i e de l a c o n s t r u c t i o n e s t 1 'une des p l u s i m p o r t a n t e s au Canada. On ne peut donc t r o p i n s i s t e r s u r l e b e s o i n d ' e n p r 6 v o i r l e f u t u r .
1.a p r 6 s e n t e documentati on r e v o i t e t 6 v a l ue quel ques m6thodes de pr6v i s i on pr6sentement u t i l i s 6 e s pour p r 6 v o i r 1 1 a c t i v i t 6 de l a c o n s t r u c t i o n au Canada aux niveaux n a t i o n a l e t p r o v i n c i a l . La documentation compare l e s p o i n t s f a i b l e s e t f o r t s de chaque mGthode.
F o r e c a s t i n g C o n s t r u c t i o n A c t i v i t y i n Canada
Amrik S. Rakhra
I n t r o d u c t i o n
The Economic Council o f Canada i n t h e m i d 1 9 7 0 ' s a n a l y z e d i n d e t a i l t h e dimensions and sources o f i n s t a b i l i t y i n t h e Canadian c o n s t r u c t i o n i n - d u s t r y . Concluding on t h e e f f e c t i v e n e s s o f c y c l i c a l s t a b i l i z a t i o n o f con- s t r u c t i on p o l i c y i n Canada, i t remarked, " i n o u r o p i n i on c o u n t e r - c y c l i c a l s t a b i 1 i z a t i on o f c o n s t r u c t i o n component has been u n s u c c e s s f u l . " ( 1 ) P a r t of t h e reason f o r i n e f f e c t i v e c o u n t e r - c y c l i c a l p o l i c y a c c o r d i n g t o t h e
C o u n c i l , has been t h e d i f f i c u l t y o f f o r e c a s t i n g c o n s t r u c t i o n a c t i v i t y . F o r e c a s t i n g c o n s t r u c t i o n a c t i v i t y i s a1 so e s s e n t i a1 f o r r e s o u r c e p l a n - n i n g o r d e t e r m i n i n g r e s o u r c e r e q u i r e m e n t s (e.g. 1 abour, m a t e r i a l s,
s e r v i c e s ) f o r t h e c o n s t r u c t i o n i n d u s t r y .
The purpose o f t h i s paper i s t o r e v i e w c o n s t r u c t i o n f o r e c a s t i n g methods c u r r e n t l y i n use i n Canada, a t t h e n a t i o n a l , p r o v i n c i a l and s u b - p r o v i n c i a l
(metropol i t a n ) 1 eve1 s. The re1 a t i ve s t r e n g t h s and weaknesses o f t h e s e methods w i l l a l s o be discussed. It i s observed t h a t e f f o r t s t o f o r e c a s t c o n s t r u c t i o n a c t i v i t y i n Canada f o r t h e l o n g term, e s p e c i a l l y a t t h e r e g i o n a l l e v e l , a r e few and f a r between. It i s suggested t h a t emphasis should be p l a c e d on f o r e c a s t i n g t h e course o f t h e i n d u s t r y which i s t h e s i n g l e l a r g e s t i n d u s t r y i n Canada. For t h e purpose o f t h i s paper, con- s t r u c t i o n a c t i v i t y i n c l u d e s t h e o u t p u t o f b o t h b u i l d i n g and e n g i n e e r i n g s e c t o r s .
The C o n s t r u c t i o n I n d u s t r y
The c o n s t r u c t i o n i n d u s t r y i n Canada i s one o f t h e m a j o r i n d u s t r i a l groups. I n 1985, i t produced g r o s s o u t p u t w o r t h $67 b i 11 i o n , o r about 14% o f gross doinesti c p r o d u c t (GDP) i n t h e Canadian economy. ( 2 ) It employed
a p p r o x i m a t e l y 650,000 workers ( 3 ) (6% o f t o t a l n a t i o n a l employment) and consumed c o n s t r u c t i o n m a t e r i a l s w o r t h $25 b i l l io n , 38% of t h e v a l u e o f
c o n s t r u c t i o n o u t p u t . ( 4 ) The employement f i g u r e exceeded 1.5 m i l l i o n when those employed i n t h e manufacture, s a l e and t r a n s p o r t a t i o n o f c o n s t r u c t i o n m a t e r i a l s and equipment were i n c l u d e d .
The i n d u s t r y i s c l o s e l y l i n k e d t o o t h e r s e c t o r s o f t h e economy t h r o u g h t h e purchase o f i n p u t s ( m a t e r i a l s , l a b o u r and equipment) and t h e s a l e of
i t s p r o d u c t s ( s t r u c t u r e s and f a c i l i t i e s ) . The i n d u s t r y i s an i m p o r t a n t consumer o f metal f a b r i c a t e d p r o d u c t s , lumber and plywood, o t h e r wood products, i ron and s t e e l , cement and c o n c r e t e and who1 e s a l e s e r v i c e s .
It i s , t h e r e f o r e , i m p e r a t i v e t h a t an i n d u s t r y as b i g as c o n s t r u c t i o n , consuming resources w o r t h b i 11 i o n s o f do1 1 a r s be c a r e f u l l y f o l lowed and i t s f u t u r e course o f a c t i o n be a c c u r a t e l y forecasted.
E x i s t i n g Models o f C o n s t r u c t i o n F o r e c a s t i n g i n Canada
For t h e purpose o f t h i s review, c o n s t r u c t i o n f o r e c a s t i n g approaches have been grouped i n t o t h e f o l l o w i n g c a t e g o r i e s : A. Trend P r o j e c t i o n Approach B. A c t i v i t y Approach a ) I n d i c a t o r Method b ) Investment I n t e n t i o n s Method c ) Cumulative P r o j e c t Method C. Behavioural Approach
a ) CANDIUE (Canadian Government I n t e r d e p a r t m e n t a l Economic Model )
b ) The I n f o r m e t r i c a Model (TIM)
B e f o r e r e v i e w i n g t h e e x i s t i n g models, two r e q u i r e m e n t s o f a good con- s t r u c t i on f o r e c a s t i n g model s a r e as f o l l o w s : (1) t h e model should p r o v i d e c o n s t r u c t i o n f o r e c a s t s by p r o v i n c e o r r e g i o n i f needed, ( 2 ) i t should be i n a p o s i t i o n t o d e t e c t c y c l i c a l f l u c t u - a t i o n s . A. Trend P r o j e c t i o n Approach T h i s method o f f o r e c a s t i n g i n v o l v e s f u t u r e p r o j e c t i o n s based on h i s t o r i c a l t r e n d s , o r h i s t o r i c a l re1 a t i o n s h i p s among c e r t a i n v a r i a b l e s . The b a s i c assumption b e h i n d t h i s k i n d o f f o r e c a s t i s t h a t t h e r e l a t i o n s h i p s between t h e v a r i a b l e s i n v o l v e d a r e s t a b l e over t h e f o r e c a s t h o r i z o n . T h i s method o f f o r e c a s t i n g c o n s t r u c t i o n e x p e n d i t u r e c a l l s f o r a h i s t o r i c a l s e r i e s o f a c t u a l d a t a which a r e n o t r e a d i l y a v a i l a b l e on a s u b - p r o v i n c i a l l e v e l and, t h u s , t h e use o f t h e method i s l i m i t e d t o p r o v i n c i a l l e v e l o r n a t i o n a l a g g r e g a t i ons. Furthermore, because o f t h e assumpti on o f s t a b l e r e 1 a t i o n - s h i p between t h e v a r i a b l e s , t r e n d p r o j e c t i o n t e c h n i q u e s a r e n o t e f f e c t i v e when t h e r e a r e c y c l i c a l phenomena. T h i s method, however, i s s a t i s f a c t o r y
when one i s concerned w i t h t h e s e c u l a r growth r a t e s , o r average growth r a t e s , over a p e r i o d o f time, f o r instance, i n a t t e m p t i n g t o a s c e r t a i n long-term changes i n s t r u c t u r a l r e l a t i o n s h i p s i n t h e economy o r i n our case, r e l a t i v e growth r a t e s f o r d i f f e r e n t c a t e g o r i e s o f c o n s t r u c t i o n .
R.
A c t i v i t y Approach1 t ~ i
s
approdchdoes
riot a t t t ? ~ n p t t o determine t h e c~conor~ii c deterininants o fc o n s t r u c t i o n investment. Rather, i t views investment i n c o n s t r u c t i o n as c o n s i s t i n g o f two p a r t s : one r e s u l t i n g from expenditures on p r o j e c t s s t a r t e d ( o r c o n t r a c t s l e t ) i n t h a t y e a r ( p e r i o d ) and t h e o t h e r due t o o u t l a y s on p r o j e c t s s t a r t e d i n e a r l i e r years ( p e r i o d s ) , b u t c a r r i e d over i n t o t h e y e a r ( p e r i o d ) i n question. I n o t h e r words, once a f i r m d e c i s i o n t o b u i l d i s taken, economic f a c t o r s cease t o p l a y any s i g n i f i c a n t r o l e . There a r e t h r e e v a r i a t i ons o f t h i s approach.
( a ) I n d i c a t o r Method
This approach estimates t h e t i m e p a t t e r n between c o n s t r u c t i o n s t a r t and investment p u t - i n - p l a c e , and a p p l i e s t h a t t i m e p a t t e r n f o r s h o r t r u n f o r e - c a s t s o f n o n - r e s i d e n t i a l c o n s t r u c t i o n b u i l d i n g expenditure. U t i l i z i n g b u i l d i n g p e r m i t s o r c o n t r a c t awards, f o r e c a s t s r e s u l t i n g from t h i s approach a r e r e l i a b l e o n l y f o r t h e s h o r t - t e r m (6-9 months). Some e f f o r t s have been made t o increase t h e f o r e c a s t h o r i z o n by making use o f surveys o f planned c o n s t r u c t i o n p r o j e c t s . These a r e d e s c r i b e d under t h e c u m u l a t i v e p r o j e c t s e c t i o n .
I n Canada, t h i s approach was f i r s t used by C.O. Hodgins and J.D. Tanner(5) and l a t e r on by Hamdani . ( 6 )
Hodgins and Tanner's Model
-
T h i s Model uses two t y p e s o f d i s t r i b u t e d l a g s t o r e l a t e c o n t r a c t awards and b u i l d i n g p e r m i t s i s s u e d t o investment p u t - i n - p l ace, namely, f i x e d d i s t r i b u t e d l a g and v a r i a b l e d i s t r i b u t e d lag. By u s i n g monthly data on investment o u t l a y s and a sequence o f f i x e d lagged values o f c o n t r a c t awards and b u i l d i n g p e r m i t s c o v e r i n g t h e p e r i o d 1948- 1970, a s i g n i f i c a n t re1 a t i o n s h i p was found between t h e v a r i a b l e s which went as f a r as two years. L a t e r on, a v a r i a b l e d i s t r i b u t e d l a g r e l a t i o n - s h i p between c o n t r a c t awards and investment p u t - i n - p l a c e was used. The l a g v a r i e d i n response t o changes i n t h e s t a t e o f o v e r - a l l economic a c t i - v i t y , season o f t h e y e a r when t h e c o n t r a c t was awarded, t r e n d and market c o n d i t i o n s i n t h e c o n s t r u c t i o n sector. When t h e d i s t r i b u t e d l a g r e l a t i o n - s h i p between c o n t r a c t awards and investment was m o d i f i e d t o account f o r these i n f l u e n c e s , h i g h l y accurate s h o r t t e r m f o r e c a s t s o f non-resi d e n t i a l b u i l d i n g c o n s t r u c t i o n r e s u l t e d . Using monthly data c o v e r i n g t h e p e r i o d1953-1972, t h e study found a s u b s t a n t i a l change i n t h e l a g s t r u c t u r e over time. The s t a t i s t i c a l l y s i g n i f i c a n t v a r i a b l e l a g s were r e l a t e d t o market t i g h t n e s s and q u a r t e r o f t h e year.
T h i s model can p r o v i d e o n l y s h o r t t e r m f o r e c a s t s up t o 6-9 months. It i s developed o n l y a t t h e n a t i o n a l l e v e l and n o t d i s a g g r e g a t e d by sectors. I t
covers o n l y t h e n o n - r e s i d e n t i a l c o n s t r u c t i o n s e c t o r and excludes t h e e n g i n e e r i n g s e c t o r . The model, however, i s q u i t e capable o f t a k i n g i n t o account c y c l i c a l and seasonal s h i f t s .
Hamdani's I n d i c a t o r Approach
The main o b j e c t i v e o f Hamdani's approach i s t o assess t h e use o f l e a d i n g i n d i c a t o r s ( c o n t r a c t awards) f o r m o n i t o r i n g and p r o j e c t i n g investment a t t h e p r o v i n c i a l l e v e l . To accomplish t h i s , he e s t i m a t e s t h e t i m e o r
p r o g r e s s p a t t e r n o f c o n s t r u c t i o n between c o n t r a c t awards and t h e
c o m p l e t i o n o f p r o j e c t s and t h e n uses t h i s p a t t e r n i n p r o j e c t i n g investment i n f u t u r e . He p r e f e r s t h e use o f c o n t r a c t awards o v e r b u i l d i n g p e r m i t s .
Using t h e annual d a t a on c o n s t r u c t i o n awards and c o n s t r u c t i o n p u t - i n - place, c o v e r i n g t h e 1955-73 p e r i o d , t h e s t u d y found a c o n s i d e r a b l e d i f - f e r e n c e i n l a g d i s t r i b u t i o n between Quebec and t h e P r a i r i e Region. There were d i f f e r e n c e s n o t o n l y i n t h e l e n g t h o f l a g b u t a l s o i n i t s w e i g h t d i s t r i b u t i o n . The l a g p e r i o d i n Quebec was found t o be t h r e e y e a r s and i n t h e P r a i r i e Region f o u r years.
The s t u d y a l s o c o n s i d e r e d t h e v a r i o u s d e t e r m i n a n t s o f t h e p r o g r e s s
p a t t e r n , v i z . , s i z e of t h e p r o j e c t , t y p e o f c o n s t r u c t i o n and t e c h n o l o g y i n c o n s t r u c t i o n . For example, i t was found t h a t t e c h n o l o g i c a l l a g (i.e., a phase spanning over t h e p e r i o d from b u i l d i n g p e r m i t t o t h e r e a l i z a t i o n of t h e p r o j e c t i n t o c o n s t r u c t i o n p u t - i n - p l a c e ) i n case o f e n g i n e e r i n g con- s t r u c t i o n i s about t w i c e as l o n g as f o r b u i l d i n g c o n s t r u c t i o n . F u r t h e r , t h e study suggests t h a t t h e d u r a t i o n o f t h e c o n s t r u c t i o n p e r i o d f o r a l a r g e p r o j e c t i s t w i c e as much as f o r a s m a l l e r p r o j e c t . However, t h e study c o u l d n o t examine t h e e f f e c t o f p r o j e c t s i z e on i n t e r r e g i o n a l d i f - ferences i n t h e l e n g t h o f t h e l a g because i t was n o t p o s s i b l e t o determine t h e p r o j e c t d i s t r i b u t i o n o f c o n t r a c t awards on a r e g i o n a l b a s i s . Hamdani's study i s a s t e p f o r w a r d i n c o n s t r u c t i o n i n v e s t m e n t f o r e c a s t i n g a t t h e r e g i o n a l l e v e l , b u t l i k e t h e o t h e r a c t i v i t y s t u d i e s , i t can p r o v i d e o n l y s h o r t t e r m f o r e c a s t s . T h i s s t u d y i s a d e p a r t u r e f r o m t h e p a s t i n t h a t i t can p r o v i d e f o r e c a s t s f o r t h e e n g i n e e r i n g s e c t o r as w e l l . F i n a l l y , h i s s t u d y can r e f l e c t c y c l i c a l f l u c t u a t i o n s t h r o u g h t h e use o f d i s t r i b u t e d l a g between c o n t r a c t awards i s s u e d and t h e c o n s t r u c t i o n p u t - i n - p l a c e .
C u r r e n t l y , s e v e r a l c o n s u l t a n t f i rms t h a t s p e c i a l i z e i n s h o r t r u n and con- s t r u c t i o n a c t i v i t y f o r e c a s t i n g use t h i s technique.
( b ) Investment I n t e n t i o n s Method
I n f o r m a t i o n on c a p i t a l spending i n t e n t i o n s p r o v i d e s a u s e f u l i n d i c a t i o n o f market c o n d i t i o n s o v e r a s h o r t p e r i o d o f time. I n Canada, t h i s i n f o r - m a t i o n i s p r o v i d e d by an annual i n v e s t m e n t i n t e n t i o n s survey conducted by S t a t i s t i c s Canada. ( 7 ) T h i s survey c o n t a i n s e s t i m a t e s o f t o t a l o u t l a y s f o r c o n s t r u c t i o n and f o r t h e acqui s i t i on o f p r o d u c e r ' s machinery and equipment by Canadian business, i n s t i t u t i o n s and governments t o g e t h e r w i t h expendi- t u r e f o r housing. The survey p r o v i d e s data by s e c t o r s , r e g i o n s and by met r o p o l i t a n (summary o n l y ) areas.
An A p p r a i s a l of Canadian Investment I n t e n t i o n s Survey
A study by t h e Conference Board i n Canada has analyzed t h e i n f o r m a t i o n c o n t e n t i n Investment I n t e n t i o n s Survey, p u b l i s h e d by S t a t i s t i c s
Canada.(8) T h i s s t u d y seeks t o improve t h e f o r e c a s t i n g accuracy of
i n t e n t i o n s w i t h o u t u s i n g i n f o r m a t i o n o t h e r t h a n t h e i n t e n t i o n s themselves. T h i s i s done by c o r r e c t i n g t h e d a t a on investment i n t e n t i o n s t h r o u g h t h e a p p l i c a t i o n o f t h e " o p t i m a l l i n e a r c o r r e c t i o n " , r u l e developed by P r o f . Thei 1 . ( 9 ) The c o r r e c t e d f o r e c a s t s a r e compared t o t h e raw i n t e n t i o n s , and
i t i s found t h a t l a r g e accuracy g a i n s can be o b t a i n e d by a p p l y i n g t h e r u l e . I t i s expected t h a t t h i s accuracy would be g r e a t e r i n t h o s e s e c t o r s where investment o u t l a y s r e q u i r e a l o n g e r p l a n n i n g horizon. With r e s p e c t t o t u r n i n g p o i n t s , a l l t h e i n t e n t i o n models (raw, aggregated and
d i s a g g r e g a t e d ) p r o v i d e r e l i a b l e i n d i c a t o r s o f t u r n i n g p o i n t s i n t h e c a p i t a l spending c y c l e .
The Study concludes t h a t t h e Investment I n t e n t i o n s Survey pub1 i shed by S t a t i s t i c s Canada p r o v i d e s v e r y u s e f u l i n f o r m a t i o n on f u t u r e investment o u t l a y s over a one-year horizon. I t i s suggested, however, t h a t t h i s s u r - vey be conducted on a q u a r t e r l y b a s i s f o r t h e purpose o f s h o r t - t e r m f o r e - c a s t i n g . F u r t h e m o r e , i t i s suggested t h a t t h e t i m e h o r i z o n o f t h e survey be extended t o two years. F i n a l l y , t h e s t u d y n o t e s t h a t s i n c e i n t e n t i o n s a r e i n c u r r e n t d o l l a r s , i t i s d i f f i c u l t t o know whether t h e r e m a i n i n g b i a s i s due t o a m a j o r e r r o r i n t h e p r e d i c t i o n o f p r i c e o r volume o r both.
(C) Cumulative P r o j e c t S p e c i f i c Method
T h i s approach m i g h t b e s t be d e s c r i b e d as a p r o j e c t s p e c i f i c approach t o c o n s t r u c t i o n f o r e c a s t i n g on a m i c r o l e v e l . It f o r e c a s t s c o n s t r u c t i o n ex- p e n d i t u r e based on t h e c o l l e c t i o n o f d i s a g g r e g a t e d d a t a , i .e. s p e c i f i c p r o j e c t s a t t h e l o c a l l e v e l . Two v a r i a t i o n s o f t h i s approach a r e c u r r e n t l y
i n use a t P u b l i c Works Canada (PWC) and i t s P r o v i n c i a l c o u n t e r p a r t i n B r i t i s h Columbia (R.C.)
Met hod01 ogy o f PWC F o r e c a s t ( l o )
PWC f o r e c a s t s n o n - r e s i d e n t i a l b u i l d i n g c o n s t r u c t i o n a t t h e m e t r o p o l i t a n l e v e l . Under t h i s method i n d i v i d u a l p r o j e c t s a r e i d e n t i f i e d a c c o r d i n g t o t y p e , v a l u e and proposed t i m i n g t h r o u g h S t a t i s t i c s Canada B u i l d i n g P e r m i t s r e c o r d s and t h r o u g h surveys conducted by PWC r e g i o n a l o f f i c e s . T h i s
i n f o r m a t i o n i s t h e n f e d i n t o a computer where ( u s i n g e x p e n d i t u r e p a t t e r n s e i t h e r h i s t o r i c a l l y determined o r p r o v i e d by e s t i m a t o r s f o r v a r i o u s t y p e s of s t r u c t u r e s ) t h e e x p e n d i t u r e c h a r a c t e r i s t i c s f o r t h e p r o j e c t a r e p r o - j e c t e d o v e r time. A f t e r e n t e r i n g t h e i d e n t i f i e d p r o j e c t s i n a s p e c i f i c l o c a l i t y , t h e program accumulates t h e t o t a l v a l u e o f e x p e n d i t u r e i n each q u a r t e r o f t h e y e a r . The PWC f o r e c a s t i s focused on i n d u s t r i a l , commercial and i n s t i t u t i o n a l s e c t o r s w i t h i n a few s e l e c t e d g e o g r a p h i c a l areas.
The PWC method01 ogy o f f o r e c a s t i n g n o n - r e s i d e n t i a1 c o n s t r u c t i o n can p r o v i d e f o r e c a s t s up t o 2-3 years. It p r o v i d e s f o r e c a s t f o r each o f t h e components o f n o n - r e s i d e n t i a l b u i l d i n g c o n s t r u c t i o n , v i z. i n d u s t r i a l commercial, i n s t i t u t i o n a l , However, i t excludes t h e e n g i n e e r i n g s e c t o r and s u f f e r s f r o m t h e i n a c c u r a c i e s i n h e r e n t i n b u i l d i n g p e r m i t d a t a which a r e p r o b d b l y q u i t e pronounced f o r t h e heavy i n d u s t r i a l s e c t o r .
B.C. Department o f Pub1 i c Works
'
S t u d y ( l 1 )Another v a r i a t i o n o f t h e p r o j e c t s p e c i f i c approach i s developed by B.C. Department o f P u b l i c Works. T h i s v a r i a n t p r e d i c t s t h e v a l u e o f work i n p r o g r e s s i n t h e c o n s t r u c t i o n i n d u s t r y a t a p a r t i c u l a r t i m e by p r o j e c t i n g t h e a n t i c i p a t e d p r o g r e s s payments o f t h e t o t a l o f c o n t r a c t s awarded and work i n t h e d e s i g n o f f i c e . It d e f i n e s p r o g r e s s payments as " t h e d i s t r i - b u t i o n o f a sum o f money over a p e r i o d o f time". I t i s f o u n d t h a t p r o g r e s s payments r 0 1 ~ g h l y f o l l o w a normal d i s t r i b u t i o n . The s t u d y uses a computer program which r e q u i r e s : ( 1 ) t h e v a l u e o f t h e p r o j e c t ; ( 2 ) t h e s t a r t i n g date, and ( 3 ) t h e c o n t r a c t p e r i o d . A seasonal f a c t o r i s added t o t h e s e f o r g i v i n g a l l o w a n c e t o d i f f e r e n t s t a r t i n g dates. The C o n t r a c t p e r i o d t i m e i s a u t o m a t i c a l l y g i v e n by t h e computing system a c c o r d i n g t o t h e v a l u e o f t h e p r o j e c t . The d a t a used f o r t h e v a l u e o f c o n t r a c t s awards and t h e work i n a r c h i t e c t s ' o f f i c e a r e p r o v i d e d by Canadata, a d a t a d e v e l o p i n g and
c o n s t r u c t i o n f o r e c a s t i n g arm o f Southam P u b l i s h i n g Company o f Canada. The r e s u l t s o f t h e s t u d y (i.e. p r o j e c t e d amount o f money s p e n t ) a r e computed monthly, q u a r t e r l y o r a n n u a l l y and by r e g i o n and s e c t o r o f t h e i n d u s t r y .
Uses o f P r o j e c t S p e c i f i c Methods
The i n d i c a t o r method of p r o j e c t i n g c o n s t r u c t i o n investment can p r o v i d e f o r e c a s t s f o r 6-9 months. The p r o j e c t s p e c i f i c method i s aimed a t f o r e - c a s t i n g c o n s t r u c t i o n investment up t o 2-3 years. Through t h e use of h i s t o - r i c a l data, t h e method can p r o v i d e seasonal and c y c l i c a l v a r i a t i o n s i n c o n s t r u c t i o n a c t i v i t y . I t i s d i s a g g r e g a t e d and t h u s i t i s capable o f p r o d u c i n g f o r e c a s t s by t y p e o f c o n s t r u c t i o n e x p e n d i t u r e as w e l l as on d i f f e r e n t geographic l e v e l s . F i n a l l y , t h i s approach i s f l e x i b l e ,
judgemental and i t a l l o w s f o r easy updating. P o t e n t i a l l y , t h e approach can be used t o p r e d i c t manpower and m a t e r i a l requirements.
I t must be noted, however, t h a t c u r r e n t p r o j e c t s p e c i f i c approaches t o f o r e c a s t i n g a r e n o t v e r y r i g o r o u s . They s u f f e r f r o m t h e l i m i t a t i o n s o f u s i n g b u i l d i n g p e r m i t s o r c o n t r a c t awards; i n s u f f i c i e n t survey coverage and s u b j e c t i v e b i a s (much depends upon i n d i v i d u a l judgements about t h e 1 i k e l i hood o f p r o j e c t s g o i n g ahead).
C. Behavi o u r a l Approach
The a c t i v i t y approach t o c o n s t r u c t i o n f o r e c a s t i n g does n o t c o n s i d e r t h e economic d e t e r m i n a n t s o f c o n s t r u c t i o n investment, n o r does i t i n v e s t i g a t e t h e s t r u c t u r e o f t h e investment d e c i s i o n ( a l t h o u g h some v a r i a n t s o f t h e approach i n c l ude t h e appl i c a t i o n o f judgements c o n c e r n i n g investments). Rather, t h e r e l a t i o n s h i p s which i t seeks t o i d e n t i f y a r e more mechanical t h d n b e h a v i o u r a l . I t s a p p l i c a t i o n i s l i m i t e d t o s h o r t - t e r m f o r e c a s t s .
The b e h a v i o u r a l approach, on t h e otherW'hand, i s concerned w i t h t h e f u n c t i o n a l re1 a t i onshi ps between t h e v a r i o u s d e t e r m i n a n t s o f c o n s t r u c t i o n investment. I t i s a l s o concerned w i t h t h e s t r u c t u r e o f t h e investment d e c i s i ons. Two model s u s i n g t h i s approach a r e d e s c r i bed below.
The CANDIDE Model
CANDIDE i s an econometric model f o r f o r e c a s t i n g a n n u a l l y t h e general econorr~ic a c t i v i t y o f t h e economy f o r t h e medium term. Revised v e r s i o n o f t h e CANDIDE c o n t a i n s 2049 e q u a t i o n s ; 616 o f which a r e b e h a v i o u r a l and t h e r e m a i n i n g 1433 a r e i d e n t i t i e s . The i d e n t i t i e s can be s u b d i v i d e d i n t o 427 i n p u t - o u t p u t r e l a t i o n s h i p s
-
which a r e used f o r i n d u s t r y o u t p u t d e t e r m i n - a t i o n-
and 1006 a r e o r d i n a r y i d e n t i t i e s .C o n s t r u c t i o n as S p e c i f i e d i n t h e CANDIDE Model
The e q u a t i o n s o f t h e CANDIDE model a r e grouped i n t o 38 b l o c k s which can be c o n v e n i e n t l y aggregated i n t o e i g h t m a c r o ~ b l o c k s : f i n a l demand, i n p u t - o u t p u t c o n v e r s i o n o f f i n a l demand, 1 abour market, p r i c e d e t e r m i n a t i o n ,
revenue and income, money market, demographic c h a r a c t e r i s t i c s and aggregates. The macro b l o c k s which a r e r e l a t e d t o c o n s t r u c t i o n f o r t h e purpose of f o r e c a s t a r e d e s c r i b e d below.
F i n a l Demand
The f i n a l demand b l o c k c o n s i s t s o f consumption, i n v e s t m e n t , i n v e n t o r i e s , f o r e i g n t r a d e and government expenditures. I n a l l , i t c o n t a i n s 170 f i n a l demand c a t e g o r i e s , f o r t y o f them deal w i t h c o n s t r u c t i o n investment
( s t r u c t u r e s ) . The breakdown investment i n s t r u c t u r e s i s as f 01 lows: 1 ) A g r i c u l t u r e ; 2 ) F i s h i n g and Trapping; 3) F o r e s t r y ; 4 ) M i n i n g and O i l Wells; 5 ) M a n u f a c t u r i n g
-
1 9 i n d u s t r i e s i n t h i s c a t e g o r y ; 6 ) C o n s t r u c t i o nI n d u s t r y ; 7 ) U t i l i t i e s
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2 c a t e g o r i e s ; c a t e g o r i e s 8 ) T r a n s p o r t a t i o n-
8 c a t e g o r i e s ; 9 ) R e t a i l and Wholesale Trade; 10) Finance, Insurance and Real E s t a t e ; 1 1 ) Commercial S e r v i c e s ; 1 2 ) U n i v e r s i t i e s and Re1 i g i o u s I n s t i t u - t i o n s ; 13) R e s i d e n t i a l Housing and 1 4 ) Government Departments. Resid- e n t i a l c o n s t r u c t i o n investment i s d i v i d e d i n t o s i n g l e and m u l t i p l e housing s t a r t s . Goverment c o n s t r u c t i o n e x p e n d i t u r e s a r e d i v i d e d i n t o school con- s t r u c t i o n , o t h e r b u i l d i n g c o n s t r u c t i o n , highway c o n s t r u c t i o n and o t h e r e n g i n e e r i n g c o n s t r u c t i o n .The s p e c i f i c a t i o n s o f investment f u n c t i o n s o f i m p o r t a n t s e c t o r s of con- s t r u c t i o n demand d i f f e r s s i g n i f i c a n t l y from t h e o t h e r s though b a s i c a l l y they f o l l o w f r o m t h e n e o - c l a s s i c a l investment r e l a t i o n s h i p as developed by Dale W. J u r g e n s o n ( l 2 ) ( t h e c h a r a c t e r i s t i c f e a t u r e o f t h e neo-cl a s s i c a l models i s t h a t e n t r e p r e n e u r s i n v e s t w i t h t h e o b j e c t i v e o f m a x i m i z i n g p r e - sent w e a l t h o f t h e e n t e r p r i s e by m a x i m i z i n g d i s c o u n t e d p r o f i t a t each p o i n t i n t i m e ) . For example, s i n g l e housing s h o r t s a r e a f u n c t i o n of housing c o s t s , s t o c k o f houses, home h o l d f o r m a t i o n , mortgage r a t e s and l o n g t e r m bond y i e l d s .
E x p e n d i t u r e on school c o n s t r u c t i o n i s s p e c i f i e d as a f u n c t i o n o f v o c a t i o n a l e d u ~ a t i o n g r a n t s and t h e lagged d i s t r i b u t i o n o f school enrolments e x c l u d i n g u n i v e r s i t i e s .
Input-Output Conversion o f F i n a l Demand
The o b j e c t i v e o f t h e i n p u t - o u t p u t c o n v e r s i o n i s t o t r a n s l a t e t h e f i n a l demand i n t o i n d u s t r y o u t p u t s which balance t h e d e m a n d - F i r s t , each o f t h e 40 c a t e g o r i e s o f c o n s t r u c t i o n investment demand i s c o n v e r t e d i n t o e i g h t commodity r e q u i rernents, i .e. t y p e s o f c o n s t r u c t i o n : 1) R e s i d e n t i a l , 2) N o n - r e s i d e n t i a l
,
3) Roads, highway, a i r s t r i p s , 4 ) Gas and o i lt e l e g r a p h i n s t a l l a t i o n s , 7 ) Other e n g i n e e r i n g s t r u c t u r e s , 8) Repair con- s t r u c t i o n .
Second, t h e e i g h t commodity r e q u i r e m e n t s a r e passed t h r o u g h t h e market share m a t r i x and a l l o c a t e d on a one-to-one b a s i s t o t h e e i g h t correspond- i n g c o n s t r u c t i o n sub-sectors. T h i r d , t h e d i r e c t and i n d i r e c t i n p u t
r e q u i r e ~ r ~ e n t s ( l a b o u r , m a t e r i a l and s e r v i c e s ) o f each o f t h e e i g h t con- s t r u c t i o n s e c t o r s a r e met i n accordance w i t h i n p u t - o u t p u t i n v e r s e ( a m a t r i x which g i v e s d i r e c t and i n d i r e c t i n p u t r e q u i r e m e n t s o f one d o l l a r w o r t h of f i n a l demand, sometimes c a l l e d impact m a t r i x ) . As a r e s u l t o f t h i s , i n p u t - o u t p u t (110) e s t i m a t e s o f gross o u t p u t o f c o n s t r u c t i o n s e c t o r s a r e obtained. Next, t h e s e 110 Gross Outputs a r e c o n v e r t e d i n t o 1/0 e s t i - mates o f Real Domestic Product (RDP) and a t t h i s p o i n t t h e e i g h t con- s t r u c t i o n s e c t o r s a r e c o l l a p s e d i n t o one.
Labour Market
The f o r e g o i n g d e s c r i p t i o n o f c o n s t r u c t i o n i n t h e CANDIDE p r o v i d e d proce- d u r e o f d e r i v i n g t h e m a t e r i a l and l a b o u r requirements and o u t p u t tends t o meet a g i v e n l e v e l o f c o n s t r u c t i o n demand. T h i s s u b - s e c t i o n e x p l a i n s how 1 abour r e q u i rements (demand) b a l ances 1 abour supply.
The CANDIDE model i n c o r p o r a t e s b o t h l a b o u r s u p p l y and demand f u n c t i o n s . The l a b o u r s u p p l y f u n c t i o n s do n o t a l l o w f o r any i n d u s t r y - s p e c i f i c o r o c c u p a t i o n breakdown, I n t h e case o f c o n s t r u c t i o n i n d u s t r y , i t i s n o t p o s s i b l e t o o b t a i n d a t a on t h e s u p p l y o f Yabour by t r a d e o r occupation.
I n s t e a d , l a b o u r s u p p l y r e l a t e s t o v a r i o u s age-groups. The p r i m a r y source o f l a b o u r s u p p l y as s p e c i f i e d i n t h e CANDIDE model i s male l a b o u r force, 25-34 y e a r s o f age, and t h e secondary f o r c e i s p r o v i d e d by women b o t h below and above 25 y e a r s o f age and young and o l d males 14-20 and 55+
y e a r s of age.
Labour demand f u n c t i o n s i n CANDIDE a r e d e r i v e d f r o m i n d u s t r y - s p e c i f i c p r o d u c t i on f u n c t i o n s , m o s t l y o f t h e Cobb-Doug1 as t y p e . They p r o v i d e e s t i m a t e s o f l o n g - t e r m r a t e o f employment growth, o f gradual changes i n t h e r a t e o f growth and t h e r a t e o f adjustment o f a c t u a l and d e s i r e d l a b o u r i n p u t s .
The CANDIDE model, as d e s c r i b e d above, i s a medium t e r m h i g h l y d i s - aggregated econometric model o f t h e Canadian economy. T h i s has an
advantage over an i n s t i t u t i o n a l approach t o c o n s t r u c t i o n f o r e c a s t i n t h a t
i t can p r o v i d e f o r e c a s t even beyond 5 years. However, i t s appl i c a t i o n a t t h e r e g i o n a l l e v e l i s v e r y much r e s t r i c t e d because t h e r e q u i r e d d a t a on t h e r e g i o n a l v a r i a b l e s a r e n o t a v a i l a b l e . I n t h e m i d s e v e n t i e s , a r e g i o n a -
l i z e d v e r s i o n of CANDIDE ( c a l l e d CANDIDE-R) was developed by t h e Depart- ment o f Regional and Economic Expansion (now I n d u s t r i a l Regional
Expansion). T h i s model was n o t a f o r e c a s t i n g model, i t was used m a i n l y f o r s i m u l a t i o n purposes. I t i s , t h e r e f o r e , n o t d i s c u s s e d here.
I n f o r m e t r i c a Model ( 1 3 ) (Regional and I n d u s t r y F o r e c a s t Model )
B a s i c a l l y , t h e r e a r e two econometric approaches which can be used f o r f o r e c a s t i n g c o n s t r u c t i o n a c t i v i t y a t t h e r e g i o n a l l e v e l . The f i r s t one i s bottom-up f o r e c a s t i n g i nvestment requirements. I n Canada, t h e r e i s no c u r r e n t source f o r s u f f i c i e n t d e t a i 1 i n r e g i o n a l o u t p u t , p r i c e s , i n v e s t - ment and c a p i t a l s t o c k t o a l l o w t h e use o f t r a d i t i o n a l econometric model-
l i n g techniques. The second approach ( f o l l o w e d h e r e ) u t i l i z e s a n a t i o n a l model t o d e r i v e d e t a i l e d investment f o r e c a s t s . A sate1 1 i t e model p r o v i d e s
a r e g i o n a l d i s t r i b u t i o n o f investment (see F i g . 1 ) . F o r e c a s t s o f b o t h model s a r e a d j u s t e d judgemental l y u s i n g i n f o r m a t i o n d e r i v e d from m a j o r p r o j e c t s f i l e which m a i n t a i n s an i n v e n t o r y o f m a j o r c o n s t r u c t i o n p r o j e c t s v a l u e d a t more t h a n $100 mi 11 i o n .
The Model
The I n f o r m e t r i c a Model (TIM) i s a l a r g e , dynamic macroeconomic model, w i t h over 900 s t o c h a s t i c e q u a t i o n s and 3 400 endogeneous v a r i a b l e s .
I t
p r o v i d e s f o r e c a s t s o f 44 n o n - r e s i d e n t i a l investment c a t e g o r i e s p l u s r e s i d e n t i a l c o n s t r u c t i o n e x p e n d i t u r e s .Non-Residential Investment
Two steps a r e used t o r e g i o n a l i z e t h e investment. F i r s t , r e g i o n a l
aggregate investment i s e s t i m a t e d , by u s i n g s i m p l e a c c e l e r a t o r s p e c i f i - c a t i o n , as f u n c t i o n o f p r o v i n c i a l income and c a p i t a l stock. P r o v i n c i a l income i s d e r i v e d f r o m t h e n a t i o n a l domestic p r o d u c t by u s i n g exogenous weights. The e s t i m a t e s a r e c o n s t r a i n e d t o sum t o n a t i o n a l t o t a l . Judge- mental i n f o r m a t i o n based on t h e M a j o r P r o j e c t s F i l e i s used t o ensure t h a t t h e p r o v i n c i a l a l l o c a t i o n r e f l e c t s t h e r e g i o n a l aspects o f t h e assumptions u n d e r l y i n g t h e n a t i o n a l f o r e c a s t . T h i s e s t i m a t i o n o f an "independent" r e g i o n a l investment t o t a l can c a p t u r e any "greenhouse e f f e c t , i .e. any investment t h a t may t a k e p l a c e i n excess o f what m i g h t be expected f r o m a n a t i o n a l l e v e l f u n c t i o n a p p l i e d f o r a g i v e n r e g i o n .
The second s t e p i s t h e a1 1 ocat i o n o f r e g i o n a l n o n - r e s i dent i a l investment t o t h e n i n e i n d u s t r i a l s e c t i o n s p l u s government. T h i s process can be
viewed i n a m a t r i x form
-
t h e columns r e p r e s e n t i n g i n d u s t r i e s and rows r e p r e s e n t i n g provinces. The t o t a l s o f each column r e p r e s e n t t o t a l s f o r each i n d u s t r y a t t h e n a t i o n a l l e v e l and t h e row t o t a l s r e p r e s e n t t o t a li n d u s t r i a l investment. I n d i v i d u a l c e l l values o f t h e m a t r i x a r e a1 l o c a t e d by u s i n g t h e i r p r e v i o u s values and by u s i n g i n f o r m a t i o n from t h e Major P r o j e c t s F i l e . A M a t r i x b a l a n c i n g technique i s used t o develop c e l l estimates which a r e c o n s i s t e n t w i t h t h e known row and column t o t a l s . R e s i d e n t i a l Investment
R e s i d e n t i a l investment expenditures a r e based on t h e f o r e c a s t o f housing s t a r t s , which are s p e c i f i e d as a f u n c t i o n o f t h e l e v e l o f households i n t h e r e g i o n and t h e stock o f d w e l l i n g s i n t h e p r e v i o u s period. The l e v e l o f households i n a given r e g i o n i s s p e c i f i e d as a f u n c t i o n o f l e v e l o f
r e g i o n a l income and t h e l e v e l o f households i n t h e p r e v i o u s period. The s p e c i f i c a t i o n f o r housing s t a r t s i s d e r i v e d from a model based on adjustment between d e s i r e d and a c t u a l vacancy r a t e s . The d e s i r e d vacancy r a t e i s assumed t o be p r o p o r t i o n a t e t o t h e e x i s t i n g house stock. Housing completions a r e a 1 agged f u n c t i o n o f housing s t a r t s .
The d i f f i c u l t y w i t h t h i s aproach
i s t h e l a c k o f d i s a g g r e g a t i o n between
housing types, s i n c e t h e p r o p o r t i o n o f d w e l l i n g types by r e g i o n has been changing over time. One planned e x t e n s i o n t o t h e model i s t o e x p l a i n s i n g l e and mu1 t i p l e s t a r t s separately.One o f t h e lessons t o be l e a r n e d from r e s i d e n t i a l investment i s t h a t i t represents a nod el segment w i t h s i g n i f i c a n t p o t e n t i a l f o r "feedback" t o t h e n a t i o n a l model. Even i f t h e n a t i o n a l housing market m i g h t i m p l y an a p p r o p r i a t e vacancy r a t e , a r e g i o n a l housing market may r e q u i r e a d d i t i o n a l housing s t a r t s .
Concluding Remarks
The f o r e g o i n g review i n d i c a t e s t h a t none o f t h e c u r r e n t l y used methods can p r o v i d e c o n s t r u c t i o n demand f o r e c a s t s which meet a1 1 t h e requirements s p e c i f i e d e a r l i e r . The t r e n d p r o j e c t i o n approach can p r o v i d e medium or 1 ong-term f o r e c a s t b u t cannot p r e d i c t c y c l i c a l f l u c t u a t ions. The
i n d i c a t o r method s u f f e r s from a s h o r t horizon, i.e. i t o n l y can p r o v i d e f o r e c a s t s up t o 6-9 months. Another v a r i a n t o f t h i s approach, v i z . t h e Cumulative P r o j e c t Method, can extend t h e f o r e c a s t h o r i z o n t o 2-3 years, b u t i t d e f i e s e m p i r i c a l t e s t i n g because o f t h e l a c k o f h i s t o r i c a l s e r i e s which c o u l d be used f o r t e s t i n g t h e methodology. F i n a l l y , t h e behavioural approach t o c o n s t r u c t i o n demand f o r e c a s t i n g i s n o t f u l l y developed a t t h e r e g i o n a l l e v e l . It i s q u i t e capable o f p r o v i d i n g l o n g term c o n s t r u c t i o n f o r e c a s t s , b u t n o t down t o t h e l e v e l o f d i s a g g r e g a t i o n r e q u i r e d by users.
F i g u r e 1 P r o v i n c i a l C o n s t r u c t i o n F o r e c a s t s General Approach
1
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