Many Challenges in the Rearview
September 2024
Based on the latest CONFINDEX survey results, there is no evidence that construction in America is facing a meaningful downturn anytime soon. Instead, construction financial professionals anticipate a brighter future as interest rates begin to slide lower and as last year’s mini-banking crisis fades deeper into history.
The Overall Confidence Index expanded to a reading of 108 during 2024’s third quarter, up nearly 2% for the quarter and more than 9% on a year-ago basis. Skill shortages remain the primary concern among contractors, with 64% of respondents indicating a significant level of angst. That concern speaks to an industry that expects to remain busy for the foreseeable future.
Nonetheless, the extent of concern regarding skills shortages has faded a bit. During 2023’s initial quarter, 78% of survey respondents expressed substantial concern about this issue. Indeed, government data indicate that the number of unfilled construction job openings has declined dramatically in recent months. The implication is that construction wages are poised to expand at least a bit more slowly going forward.
All things being equal, slower construction wage growth translates into thicker profit margins. That might help the strong performance of the Business Conditions Index, which expanded nearly 5% in the third quarter and is up nearly 8% on a year-over-year basis with a reading of 110. Many of the core pressures that the industry has been experiencing in recent years are easing. In addition to easing wage pressures, construction materials prices have been well behaved in recent months. That helps explain why the proportion of respondents reporting declining profit margins fell from 36% during the second quarter to 30% during the third.
But life is seldom perfect. The Financial Conditions Index fell nearly 1% during the quarter to a reading of 107, though the reading is up more than 9% from a year ago. Almost 20% of contractors are concerned about financing for projects in a macroeconomic environment characterized by still elevated interest rates and tight lending conditions. Several construction segments have been soft of late, with reports of many multifamily projects postponed and diminished activity with respect to the construction of fulfillment/distribution centers. The office market also remains fragile in many communities, with vacancy rates ramping higher and many buildings hemorrhaging value.
The Current Confidence Index also slipped during the third quarter. At 104, the Index is down 2% for the quarter and is flat for the year. What this suggests is that some contractors view the near-term as being a potential spot of challenge as backlog slips and many prospective purchasers of construction services wait until interest rates decline further to move forward with projects. Accordingly, it comes as little surprise that the proportion of respondents indicating that their project backlog has increased recently declined from 42% to 39% on a quarterly basis.
The newsmaker in this quarter’s survey was the Year-Ahead Outlook Index, which surged 6.5% on a quarterly basis and is up 21.3% over the past year. With interest rates set to fall, many construction financial professionals seem to be breathing a sigh of relief. For two and a half years, the Federal Reserve has been pursuing tighter monetary policy to restore America to 2% inflation. Progress along that dimension has been swift since the summer of 2022 when annual inflation peaked at above 9% as measured by the Consumer Price Index. While there may be some weakness in overall construction spending during the months ahead as lag effects from the higher interest rates that have prevailed since 2022 continue to be felt, the outlook beyond the near-term is decidedly brighter.
America remains immersed in the era of the mega-project, with both large-scale private and public industrial projects underway. Supply chains will continue to expand in the U.S. as corporations seek to achieve many objectives, including simplifying logistics and taking advantage of available federal subsidies. The growing pervasiveness of artificial intelligence stands to support development of both data centers and chip manufacturing facilities.
Looking Ahead
Further interest rate cuts are in the offing later this year and through much if not all of 2025. It is conceivable that some contractors will experience a surprising degree of softness with respect to demand for their services next year, particularly in certain construction segments. But eventually, the lower borrowing costs to come should translate into a surge of available bidding opportunities, if not in 2025 then perhaps in 2026 and/or 2027. Based on this quarter’s CONFINDEX survey, many construction financial professionals are already anticipating that moment.
About CFMA’s CONFINDEX
The CONFINDEX is CFMA’s proprietary confidence index survey that measures the confidence level of leading financial professionals in the U.S. commercial construction sector. CONFINDEX is compiled from four sub-indices measuring critical components of the financial health of a commercial construction company: Business Conditions, Financial Conditions, Current Conditions, and Year-Ahead Outlook. A reading of less than 100 indicates pessimism among the survey participants, while a reading of more than 100 indicates optimism among survey participants.