Construction Market Facing Tipping Point?
The construction market continues to grow, but so do the uncertainties about the future. Since the financial meltdown of 2008, when the economy plunged and took construction with it, construction firms have witnessed a slow but steady recovery. However, industry executives are seeing signs of slowing growth.
1st Quarterly Cost Report
The ENR Construction Industry Confidence Index for the first quarter shows that, of the 239 executives of large construction and design firms responding to the survey, most believe market growth will begin to level off by the end of this year and be flat in 2017. The CICI index was 61 on a scale of 100 in the first-quarter survey, down seven points from the fourth quarter.
The CICI measures executive sentiment about the current market and reflects the respondents’ views on where it will be in the next three to six months and over a 12- to 18-month period. The index is based on responses to surveys sent out to more than 6,000 U.S. firms on ENR’s lists of leading general contractors, subcontractors and design firms. The latest results are from a survey conducted from Feb. 24 through March 16.
While only a majority of petroleum executives think their sector currently is declining, respondents from every other sector believe their market is in a growth mode. But when asked about prospects through mid-2017, executives said five of the 15 surveyed markets will be in decline and several others will be essentially flat.
For example, 40% of those surveyed believe the overall market currently is growing, and only 15% believe it is declining. However, only 31% of respondents think the market will still be growing in mid-2017, while 23% predict it will be declining at that point.
The soon-to-be-released results of the latest Confindex survey from Construction Financial Management Association, Princeton, N.J., also is showing an increased sense of caution. CFMA polls 200 CFOs each quarter from general and civil contractors and subcontractors.
CFMA Sees Uncertainty Ahead
While a Confindex rating of 100 indicates a stable market, higher ratings show growth is expected. “Our Confindex fell from 128 in the fourth quarter, down to 123 [on a scale of 200] in this quarter,” says Stuart Binstock, CEO of CFMA. “All four components of the Confindex declined.”
Binstock goes on to note that the “current business conditions” component of the Confindex dropped 10 points, to 126, this quarter, and the year-ahead outlook component fell to 117 from 122. “Economic circumstances are pretty good right now. But with all the uncertainties surrounding the global economy, the stock market and the upcoming presidential election, our members are waiting for the hammer to drop,” he says.
There are real fears among CFOs that 2017 will see the market flatten out, says Anirban Basu, CEO of economic consultant Sage Policy Group Inc., Baltimore, and CFMA economic adviser. He notes that there are three stages to a construction cycle: the downturn, when firms are forced to live off backlog and scramble for margins; the recovery, when the market and margins begin to rise and firms build backlog; and stability, when it begins to get tougher to maintain backlog and margins soften.
“Backlogs are not growing as fast as they did over the past couple of years, and that has some of our members concerned. We may be approaching an inflection point between recovery and stability,” Basu says.
CFMA members are not seeing a tightening of credit, nor do they foresee pressure on margins. Binstock notes that the “financial conditions” component dropped only one point this quarter, indicating money is available, despite the recent increase in interest rates by the U.S. Federal Reserve Bank and global financial uncertainties.
CICI survey respondents also failed to note any tightening of credit for project financing. When asked if clients’ access to capital has changed over the past six months, 60.6% said there had been no change. Further, 22.0% said client access to capital had gotten easier, while only 17.3% said there had been a tightening of credit.
Market Sectors Softening
In the CICI survey, execs also were asked to assess current and future market prospects in any of the 15 survey market sectors in which they now work. Respondents reported an across-the-board softening in market growth. Indeed, the CICI ratings fell in 13 of the 15 markets surveyed.
The biggest decline was in the petroleum sector, where weak oil prices have begun to take their toll. Petroleum came in at a 28 CICI rating, down 17 points from the fourth quarter. Also down sharply was the commercial building sector, which dropped to a 54 CICI rating in the first quarter from a fourth-quarter 62 rating. The industrial-and-manufacturing and power sectors were both off by six points, as was the distribution-and-warehouse sector.
Transportation and K-12 education were the two market sectors that gained. The surge in the transportation CICI rating—to 68 points from 62—was expected. The previous CICI survey closed before the passage of the Fixing America’s Surface Transportation (FAST) Act, which will provide long-term funding certainty for surface transportation, say transportation firms.
Although firms are worried about the future of the construction market and the overall economy, many remain confident in their own firm’s abilities to carry on. “In the Confindex survey, despite all the uncertainty, 41% believed that their profits would be up next year,” says Binstock.