Wanted: A Bridge Over Troubled Waters

June 2022

According to the most recent administration of CFMA’s CONFINDEX survey, CFOs and other construction financial professionals are no longer expressing the easy-going confidence that characterized them for much of the last 18 months. Rather, construction financial professionals have become rather dour in the context of persistently elevated materials prices, worsening skills shortages, rising interest rates, and growing concerns regarding project postponements and cancellations.

While much of the apprehension regards the future risk of recession, many construction professionals are indicating that economic circumstances have already deteriorated. The Overall Confidence Index declined 8.6 percent during the second quarter of 2022 to a reading of 106. With the exception of the pandemic period, this is the lowest reading since September 2010 when the construction industry was recovering from the Great Recession.

Tellingly, the Business Conditions Index, which reflects current conditions, declined nearly 21 percent during the second quarter to a reading of 104, down from 131 just three months prior. Construction financial professionals are predictably concerned by sky-high costs of delivering construction services as well as lengthy lead times in terms of procuring materials and equipment, which is neatly reflected in questions regarding profit margins. While 23 percent of respondents indicated that their profit margins have improved recently, 52 percent indicated that they have worsened, strongly suggesting that comprehensively passing along cost increases has become more challenging.

The leading source of concern among financial professionals continues to be skills shortages. During the second quarter, 78 percent of respondents indicated that they were highly or very concerned by the dearth of sufficiently skilled workers, up from 74 percent a quarter prior. A growing number of respondents are indicating that skills shortages now extend well beyond skilled craftspeople to include construction managers and other professional service providers.

Materials prices remain another leading source of concern. Only 4 percent of respondents indicated that materials prices have improved recently. By stark contrast, the share of respondents indicating that prices have worsened rose to 91 percent. Looking ahead, approximately half of respondents (48%) expect prices to be even higher a year from now.

But despair is not ubiquitous. Backlog has been on the rise, with 68 percent of respondents reporting that their company’s total backlog revenue is higher than it was a year ago and up from 64 percent during the prior quarter. However, this could be misleading given delays in delivering services. It may be that backlog is piling up for many contractors because current work has become difficult to complete, resulting in a growing volume of work yet to be initiated. Rising backlog revenue may also simply be a function of rising construction delivery costs as opposed to evidence of expanding construction volumes.

The Current Confidence Index, which pertains to short-term outlooks, declined 4.3 percent during the quarter to a reading of 112. Many contractors indicate that despite challenges, they are operating at capacity. Given the elevated backlog, the expectation is that many contractors will remain busy. This is especially true for public contractors, who stand to be primary beneficiaries of the implementation of the Infrastructure Investment and Jobs Act.

Despite tightening monetary policy and rising interest rates, the Financial Conditions Index rose nearly 3 percent during the second quarter to a reading of 108. While this reading is down 2 percent from a year ago, it has been among the most stable indicators. Generally, respondents indicated that they expect project funding to remain available, though some suggest that the rising cost of capital could induce certain project owners to forego projects. Many survey responses came before the Federal Reserve raised rates in June by the largest amount since 1994. It is conceivable that the Financial Conditions Index will be negatively influenced by that and other events, including financial market volatility, during the months ahead.

Perhaps the most alarming news came from the all-important Year-Ahead Outlook Index. This index declined 13 percent during the second quarter after shrinking during the first. With inflationary pressures remaining stubbornly elevated, the war in Ukraine increasingly turning into a grinding stalemate, skills shortages persisting, and the growing possibility of a recession in the context of rising interest rates, many CFOs and other construction financial professionals are awash with concern. Rather than manifesting itself in sounds of silence, construction financial professionals are sounding the alarm bells. It remains to be seen whether pessimism will become even more acute during the months ahead or whether the geopolitics and the economy can surprise to the upside.

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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