Construction recovery accelerating, not yet robust, US

The construction recovery is accelerating and will continue to do so with meaningful gains, but is still not robust, says a new survey published in Engineering News-Record, a McGraw Hill Construction publication.

Janice L. Tuchman, editor-in-chief of Engineering News-Record, said:

“The ENR Construction Industry Confidence Index (CICI) for the first quarter of 2014 shows a dramatic leap in expectations about the current and near term by construction and design firm executives.”

“Survey respondents believe the private-sector markets are the healthiest, led by petroleum, power, hotels & hospitality, and multi-unit residential. All sectors measured by the survey were on the upswing.”

The CICI is based on the response of 414 executives from leading contractors and engineering companies.

Construction recovery making broad gains

The CICI for the first quarter of 2014 stands at 72, anything over 50 indicates a healthy market. The index measures industry sentiment for trends and market sectors.

The authors of the survey say the Q1 2014 figures suggest that the construction market is making broad gains after a lengthy period of recession. They add, however, that some sectors remain sluggish.

This quarter’s 72 rating is higher than 69 registered in Q4 2013, and significantly higher than the 50 reported in Q4 2012, when the number of industry executives believing the market was expanding equaled those who thought the opposite.

In the latest survey, only 9% of respondents believe that construction is still in decline, compared to 42% who see growth. Fifty-seven percent predict sustained growth over the next six months, versus 6% who forecast a decline.

Sixty-four percent of executives who responded think the construction recovery will continue for the next twelve to 18 months, compared to 5% who believe it will fall.

Project financing up, less pressure on margins

Project financing is rising, especially in the private sector. The authors believe that the current optimism stems from this. While 56.5% of respondents said project financing has remained the same over the last six months, 33.8% say that credit for project financing has actually eased from its level six months ago.

Construction companies are also starting to feel relief from the pressure on margins caused by the Great Recession. Among the respondents, 32.6% reported higher profit margins compared to twelve months ago, 46.9% said they were pretty much the same, and 20% said they were lower.

The latest Confindex survey carried out by the Construction Financial Management Association (CFMA), which will soon be published, parallels the CICI findings. A Confindex rating of 100 suggests a stable market.

Stuart Binstock, CEO of CFMA said “Our Confindex rose three points, to 130, [on a scale of 200] for the first quarter.” It is the first time the overall Confindex has increased in four successive quarters.”

Only 14% of CFOs in Q1 2014 expect margins to be worse in 2014, compared to 23% in Q4 2013. Anirban Basu, CEO of economic consultant Sage Policy Group Inc., Baltimore, and CFMA economic adviser, said “This is pretty encouraging. It is a sign people expect a more aggressive recovery in 2014.”

Harder for smaller firms

Smaller companies are still finding it very difficult to get credit from banks. One small subcontractor said that smaller subcontractors cannot secure lines of credit, operating capital, or capital investment loans for tools and equipment from banks, like the giant general contractors can.

Basu also mentioned that smaller companies are facing more daunting challenges. CFOs say their main concern today is how the regulatory environment is becoming increasingly anti-business.

Basu said “The large construction firms can afford to hire lawyers to ensure regulatory compliance. The smaller firms without those resources are at a real disadvantage.”