The construction market is cyclical, but the recent growth cycle is in its tenth year, one of the longest on record. However, all good things come to an end, and industry execs increasingly believe that growth will end in 2020.
The growing sense that a downturn is in the offing can be seen in the latest results of the ENR Construction Industry Confidence Index survey. The CICI fell seven points to 51 in the third quarter of 2019 from the second quarter of 2019. Of the 239 executives from large construction and design firms responding to the survey, many believe the market’s growth is beginning to slow and it may begin declining by the end of this year.
Most execs surveyed believe we are in the last phases of the growth cycle. Only 7% of survey respondents believe the market has started to decline now, while 12% believe the market will begin declining in three to six months. Just 16% say it will still be growing by the beginning of 2020. On the other hand, 37% believe the market will start to shrink in the next 12 to 18 months, compared to only 13% who believe it will still be in a growth mode in that time frame.
The CICI measures executive sentiment about the current market, where it will be in the next three-to-six months and over a 12- to 18-month period. A rating above 50 shows a growing market. The index is based on responses to surveys sent between Aug. 15 and Sept. 23 to 6,000 U.S. companies on ENR’s lists of leading general contractors, subcontractors and design firms.
CFMA: Downturn Is Coming, But Not Yet
The industry’s concerns about next year can be seen in the soon-to-be-released results of the latest Confindex survey from the Construction Financial Management Association (CFMA), Princeton, N.J., which show that CFOs are concerned about the market in 2020.
Each quarter, CFMA polls 200 CFOs from general and civil contractors and subcontractors. The CFMA Confindex is based on four separate financial and market components, each rated on a scale of 1 to 200. A rating of 100 indicates a stable market; higher ratings indicate market growth.
“The Confindex rose from 111 in the previous quarter to 115 in the current quarter,” says Stuart Binstock, CFMA’s CEO. He notes the results show confidence in the current market, but wariness among CFMA members about 2020.
The Confindex components associated with the current market showed a generally positive attitude. The “financial conditions” component rose two points to 120, while the “current conditions” component rose nine points to 126, a sign of a healthy market. The forward looking “general business conditions” component also rose a surprising seven points to 109. Only the “year-ahead outlook” component fell, dropping two points to 101. This would indicate a flat market in 2020.
Despite concerns about next year, the current market continues to grow. Binstock notes that CFMA members are not seeing a drop-off in the current market, but “looking at the horizon, they understand it is a time for caution.”
Across the Board
The ENR CICI index can also be applied to each of the 15 individual markets in the survey. These individual market ratings show the worries about a possible recession and dip in the construction markets are widespread.
Among individual market sectors, the only ones showing a strengthening were hospitals and health care, which rose two points to a 69 rating, the highest among the sectors measured by ENR, and the water, sewer and wastewater sector, which rose two points to 62.
The biggest drops among markets were in the industrial and manufacturing sector, which fell 10 points to a 52 rating, reflecting concerns about the overall economy, and the transportation sector, which also fell 10 points to a 63 rating, showing the frustrations over the failure of Congress to pass a funding bill.
Part of the worry about 2020 comes from uncertainty about the economy. “We are seeing a lot of developments that could affect the economy, such as the trade wars with China,” says Anirban Basu, CEO of economic consultant Sage Policy Group, Baltimore, and a CFMA adviser. But he notes that, “to date, we have seen very little dislocating impact from tariffs.”
The biggest uncertainty will be the impact of the 2020 presidential election. National elections always inject a sense of unease into the markets and the economy. However, this coming election is especially problematic. “This is because the policy making priorities between the Trump administration and his Democratic challengers are so dramatically different,” Basu says.
CFMA survey shows the industry is not panicking. Basu notes that 45% of respondents said their firms’ profit margins are up from last year, compared to 38% from the last quarter. “During a recession, contractors often bid at little or no margin to maintain backlog. We’re not at that point,” Basu says.
There is a lot of concern that the market will begin to decline next year, but most execs believe that it will be a soft landing, unlike the market crash of 2008. But still, firms increasingly are preparing for 2020. “It’s not about what is happening now, but what will happen in the future,” says Binstock. “The industry is preparing for what comes.”