Construction Financial Professionals Remain Surprisingly Upbeat

September 2021

Despite Challenges, Industry Attitude Remains Upbeat

Third-quarter 2021 results emerging from CFMA’s Confindex reveal surprisingly upbeat assessments of current construction industry dynamics as well as prospects for the year to come.  In recent months, there has been considerable discussion regarding materials shortages, elevated input costs, and an ever-worsening shortage of skilled construction craftspeople.  Indeed, when asked about their greatest concern, 80 percent of respondents indicated that they were very or highly concerned about skills shortages.

One might think that higher construction delivery costs would result in more project postponements.  Perhaps, but respondents collectively indicated an expectation that profit margins and backlog will continue to march higher during the year to come.  Approximately 2 in 5 respondents indicated an expectation that profit margins will increase to some degree over the next year.  That was up from 33 percent the prior quarter.  Another 38 percent anticipate that margins will be roughly unchanged.

Results are similar for backlog, with nearly 9 in 10 respondents indicating that backlog will either remain stable or be higher a year from now.  Optimism reflected in these readings may have something to do with how questions are asked.  CFMA’s survey asks financial professionals how their current backlogs compare to those from a year ago and to those a year from now.  Certain other industry surveys have indicated that very recently, backlog has been in decline.  It may be that backlog has fallen among some contractors recently, but that a year from now they will be higher than they are now.

The upshot is that demand for construction services remains sufficient to more than offset supply-side challenges and that that will continue to be the case.  A relatively low proportion of respondents indicated that demand for construction services ranked among their principal challenges (15% versus 23% percent a quarter earlier).  Many contractors expressed a desire to see some resolution regarding Washington, D.C.’s intentions for infrastructure spending.

In addition to what has generally been a strong recovery, there are several other factors supporting demand for construction services.  Among these are the e-commerce revolution, which is helping to support the building of fulfillment and data centers, and the sheer volume of liquidity coursing through the veins of the nation’s financial system.  Ongoing injections of the money supply by the Federal Reserve have created large pools of investible cash throughout the economy.  With interest rates low and stock prices elevated, real estate investment has become an increasingly obvious mechanism by which to deploy available capital.  That rush of investment is helping to push real estate valuations higher, helping to stimulate construction volume in the process.

Accordingly, the Overall Confindex stood at a reading of 119 during the third quarter, up 3.5 percent from the analogous second-quarter reading of 115 and up 37 percent from a year ago.  The Business Conditions stands at 130, up more than 7 percent from the prior quarter and an astonishing 83 percent from a year ago.

The Financial Conditions Index was unchanged at 110 in the third quarter.  This was the sub-component least impacted by the pandemic-induced recession.  Early during the crisis, the Federal Reserve raced to restore confidence by yanking down interest rates and expanding liquidity.  Initiatives such as the Paycheck Protection Program also helped to keep sufficient cash flowing through the economy.

The Current Confidence Index rose nearly 3 percent on a quarterly basis and stands at a reading of 117.  This component is up 48 percent on a year-ago basis.  Despite ongoing supply chain challenges, prognostications that such challenges could linger into 2023, the Delta and other variants of Covid-19, construction financial professionals generally believe that ongoing momentum will persist over the months to come.

The Year-Ahead Outlook Index, arguably the most important of the sub-indices and certainly the most forward-looking, rose 4.3 percent during the third quarter to a reading of 121.  The reading is up nearly 24 percent from a year earlier, suggesting that many construction financial professionals have been surprised by the degree to which the construction economy has recovered to date.

Looking Ahead

It remains to be seen whether the optimism reflected in Q3:2021 will prove justified.  Much can still go wrong.  A major infrastructure bill may not be passed.  There may be a near-term debt ceiling crisis.  Additional projects could be canceled in the context of rising construction delivery costs.  The stock market may give back a chunk of its gains.  Longer-term interest rates could spike.  But for now, financial professionals are indicating that the U.S. construction industry has much to look forward over the year to come.

About the Author

Anirban Basu

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, MD. He is one of the Mid-Atlantic region’s most recognizable economists in part because of his consulting work on behalf of such clients as prominent developers, bankers, brokerage houses, energy suppliers, and law firms.

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