June 2021
Construction Industry has Demonstrated Awe-Inspiring Resilience
For more than a year, significant parts of the economy have been in hibernation. Millions of jobs have been lost. The labor force is smaller than it used to be. Many construction projects were put on hold or canceled altogether. Commercial real estate dynamics have been compromised by more pervasive remote work, online shopping, and streaming of Netflix and other mediums bringing more entertainment into homes.
As if that were not enough, there have been spikes in construction materials prices, a worsening shortage of skilled craftspeople, and Washington’s inability to negotiate a federal infrastructure package. One would think that given all of this, financial professionals working in the nation’s construction industry would not only be exhausted but highly pessimistic.
Instead, confidence among construction chief financial officers continues to surge. According to CFMA’s most recent CONFINDEX survey, during the second quarter of 2021, the Overall Confidence Index rose to a reading of 115, up more than more 9% from the prior quarter and more than 32% from the year-ago level. While contractors complain of rising costs, demand for construction services is presently sufficient to countervail those considerations. Nearly 40% of respondents indicate that their backlog is higher than it was a year ago. By contrast, 34% indicate that their backlog has shrunk over the past year.
The expectation among many is that backlog will continue to rise during the year ahead. More than 39% anticipate a higher backlog a year from now compared to less than 22% who expect the backlog to shrink.
Just because contractors are busy and getting busier doesn’t indicate that they are profitable. But apparently, many contractors are becoming more profitable. To date, rising materials and labor costs have not been enough to erode expectations of rising profit margins, at least among a plurality of respondents. Almost precisely one-third of respondents expect profit margins to be better a year from now. Only a quarter expect margins to shrink. Since the survey was conducted, the prices of softwood lumber, copper, and certain other inputs have been on the decline, which should help reinforce already ascendant industry confidence.
The Business Conditions Index rose 16% during the second quarter to a reading of 121. This index is up 70% from a year ago, the largest year-over-year increase among any of the sub-indices. In short, business is good, with more bidding opportunities emerging. Some contractors, however, noted sharp weakness in a number of construction segments, including the demand for new office space in a number of very large markets.
The Financial Conditions Index, now at a reading of 110, rose 3.8% during the second quarter on a quarterly basis and is up 11% from a year ago. This was a reasonably stable indicator over the course of the pandemic. The Federal Reserve has striven to keep the economy highly liquid through a variety of monetary policies. The Paycheck Protection Program injected large sums of federal funds into the economy, which helped keep the wheels of finance turning even as certain segments of the economy faced the equivalent of a stop sign. For now, the Federal Reserve continues to pursue its low-interest rate, heavy quantitative easing policies.
The Current Confidence Index rose 16% during the second quarter and is up 37% from a year ago. It now stands at a reading of 114. Construction financial professionals do not expect any significant hiccups regarding the level of industry activity anytime soon. This seems to be a reasonable position to hold since the ongoing reopening of the global and national economies should create more opportunities for development and more confidence among those who purchase construction services. It also helps that many state and local governments are in rather excellent financial shape in light of monies being sent in their direction by the American Rescue Plan Act of 2021, which was signed into law on March 11th.
While the Year-Ahead Outlook Index expanded during the second quarter, the increase was a relatively modest 1.8%. Still, the index is up nearly 28% from a year ago. Construction financial executive confidence regarding the year ahead is likely constrained by a number of factors, including volatile materials prices and rising labor costs. During the year’s initial quarter, 54% of respondents were very or highly concerned by skills shortages. Just one quarter later, that figure has surged to 72%. Among other things, contractors report that some of their best (older) workers retired during the pandemic. They also report that not enough younger people are entering the construction trades. Some things never change.
Looking Ahead
Though construction financial executives can collectively be characterized as confident, circumstances may turn out to be even better than expected. Economic growth over the balance of 2021 should be very strong as global supply chains become more orderly and as demand for goods and services remains elevated. Rising transactional volume translates into superior economic growth.
As the economy continues to improve, that should translate into growing demand for construction services. As global supply chains begin to function more effectively, shortages of materials should abate and prices should moderate. Labor market functioning should also improve over the months to come as stepped unemployment insurance benefits lapse and as children return exclusively to in-person instruction in large numbers.
If a meaningful federal stimulus package is legislated, however, the industry will face even larger skills shortages. One hopes that if such a package is implemented, it will be complemented by a sufficiently-sized initiative to train the future American construction workforce.