While construction industry leaders remained confident in the third quarter of 2018, optimism slipped relative to the second quarter, according to the latest Construction Confidence Index released by ABC. Approximately three in four construction firms expect that sales will continue to rise over the next six months and closer to one in 10 expect sales to decline over the next two quarters.
Though many firms expect to become even busier, fewer than six in 10 contractors expect profit margins to increase, a reflection of rising human capital, materials prices and other input costs. Despite rising labor costs, seven in 10 contractors expect to bolster staffing levels through the end of the first quarter of 2019.
“Growing concerns among construction executives are not attributable to a sense that construction spending will decline anytime soon. A variety of indicators, including ABC’s Construction Backlog Indicator, suggest that the average U.S. contractor stands to become a bit busier during the months ahead,” said ABC Chief Economist Anirban Basu. “This is consistent with the CCI indicating that the average survey respondent anticipates both sales growth and more employees in early-2019.
All three key components measured by the CCI survey—sales, profit margins, and staffing levels—remain well above the diffusion index threshold of 50, signaling ongoing expansion in construction activity along multiple dimensions.
· The CCI for sales expectations declined from 72.6 to 68.6 during the third quarter of 2018.
· The CCI for profit margin expectations fell from 64.5 to 63.6.
· The CCI for staffing levels decreased from 69.5 to 68.6.
“There are reasons for optimism,” said Basu. “The U.S. economy continues to expand, public construction spending has become meaningfully stronger over the past year, and ongoing employment growth generates more demand for a variety of commercial space. There are also some potential events that could improve economic performance, including a federal infrastructure package, slower interest rate increases, a trade deal with China, and the elimination of tariffs on steel, aluminum and other items.
“But with confidence slipping during the third quarter, construction industry leaders must be paying more attention to emerging risks,” said Basu. “There are many of these, but perhaps the most serious concern revolves around the rising costs associated with delivering construction services. A growing number of construction firm CEOs and other leaders remain fixated in the dearth of trained, willing and reliable construction workers. Compensation costs are rising rapidly in the context of a nation with more than 7 million total job openings and an official national unemployment rate that is effectively at its lowest level since December 1969. With other costs rising as well, including interest rates, bids to supply construction services are edging higher. Not only does this suppress profit margin growth and render negotiations more challenging, it may cause a growing share of construction project owners to forego investment. This dynamic would ultimately result in softer construction spending growth at some point in the future.”
CCI is a diffusion index. Readings above 50 indicate growth, while readings below 50 are unfavorable.