Current Situation Remains Stable, Outlook Deteriorates

December 2022

Waiting for the Thunder

We appear to be between the lightning and the thunder. The lightning takes the form of inflation and the attendant increase in interest rates. The sensitivity of construction activity to both higher costs of capital and a slowing economy are well known. While the lightning has flashed, to date, there has been scant evidence of thunder.

Many contractors continue to operate at or near capacity, reporting elevated backlog in the process. Various surveys indicate that the average nonresidential construction firm remains in growth mode, expecting to experience expanded sales and staffing over the next six months. CFMA’s CONFINDEX is similarly situated, with the Overall Index remaining unchanged at 103 during the final quarter of 2022 despite ongoing increases in borrowing costs. While the CONFINDEX is down 11.2% from a year ago, any indications of impending catastrophe remain elusive.

Indeed, the greatest concern does not relate to demand for construction services, but rather the ability of firms to supply services on a timely basis. Two-thirds (67%) of CFMA respondents indicate that they are highly or very concerned by skills shortages. But there appears to be some transition in sentiment. A quarter ago, almost 75% of respondents were very or highly concerned by skills shortages. Meanwhile, between the third and fourth quarters, the proportion of those concerned about the availability of financing for projects expanded from 18% to 25%. Project financing is now the second most pressing challenge among those listed in the survey, surpassing public policy and demand for construction over the past three months.

Despite growing concerns regarding project financing in the context of rising interest rates and anecdotal evidence suggesting that certain large banks have begun to withdraw from commercial real estate deals, the Financial Conditions Index rose 2% during the fourth quarter to a reading of 103. However, the reading is still down from 108 recorded during the first half of 2022. The reading’s stability given the Federal Reserve’s race to push interest rates higher may have something to do with the availability of public financing, as state and local governments, often flush with cash, prepare to move forward with an abundance of public works.

The presence of contractors that specialize in infrastructure helps explain the increase in the Current Confidence Index, which expanded approximately 3% during the fourth quarter to a reading of 109. This reading remains lower than it was earlier in 2022, but like many indicators fails to signal any sense of impending doom.

In short, contractors generally remain busy. This assessment is consistent with contractor backlog, with roughly half of CFMA respondents indicating that their company’s backlog is higher than it was a year ago. Only 14% indicate that backlog has declined.

Despite that, the Business Conditions Index slipped during the fourth quarter by nearly 3% to a reading of 103. In addition to skilled worker shortages, contractors have continued to wrestle with elevated physical input costs, equipment and component shortages, and growing concern that certain projects will be pealed off backlog as some project owners become more defensive and seek to preserve cash.

Even with demand elevated, profit margins have been under pressure in recent quarters. While 32% of respondents indicate that their margins have been improving recently, 39% indicate that they have deteriorated. Given higher costs of capital, project owners may see fit to squeeze contractor margins even more aggressively during the months ahead. Some contractors have reported that some of their clients are becoming frustrated and heated by elevated costs of delivering construction services. Those higher costs often induce developers and other project owners to borrow additional funds, which stings even more when interest rates are high.

Looking Ahead

Despite the relative stability that characterizes a considerable fraction of the U.S. nonresidential construction industry, contractors remain on alert. Many contractors continue to await the thunder, with the Year-Ahead Outlook Index dipping 3% during the fourth quarter to 96. This represented the largest quarterly decline of any sub-index. The Year-Ahead Outlook Index is down 17.2% from a year ago, which is also the largest decline among any of the indicators.

While many contractors enter the new year with plentiful backlog and continue to report significant numbers of bidding opportunities, some may find demand for their services deteriorating either later in 2023 or at some point thereafter. For now, contractors continue to wrestle primarily with the age-old challenge of skilled worker shortages. But other aspects of the economic environment are likely to become more challenging as the year progresses, and the expectation is that those challenges will be reflected in future iterations of the 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.


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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