March 2024
As 2023 wound toward a close, construction CFOs, controllers, and similarly situated financial professionals expressed a growing sense of unease. High interest rates, high profile bank failures, postponed projects, and stubborn workforce challenges produced low and declining CONFINDEX readings quarter after quarter.
But a new year has changed that. One might call this a relief rally. CFOs and others appear to be suggesting that whatever challenges they will face going forward, many will not be apparent in 2024. At the end of last year, the stock market rallied while credit conditions eased, rendering it more likely that projects that had been postponed in 2023 will come to fruition in 2024. CFOs are also likely looking forward to lower interest rates. Coming into the year, the Federal Reserve was expected to reduce interest rates several times. While those expectations have been trimmed in light of recent inflation data, the notion remains that the Federal Reserve’s next move will be to cut rates, rendering project financing a bit easier or at least less expensive.
Stable materials prices have also liked helped to ease concerns. While certain supply chain challenges are emerging in the context of the Red Sea, Panama Canal, etc., supply chains remain far more reliable than they were in late-2021. During the initial stages of recovery from the pandemic, construction input prices were rising 20 to 25% on a year-over-year basis. Over a recent 12-month period, construction input prices rose 1.5%, though much of that increase occurred during a single month – February 2024.
Nonetheless, construction financial professionals have become far more upbeat. During the year’s first quarter, the Overall Confidence Index surged 13.5% to a reading of 109 and is now 1.9% higher than a year ago. The Business Conditions Index was up an astonishing 25.3% in the first quarter, also to a reading of 109. This is consistent with an expectation that many contractors will continue to hire in 2024 in the context of rising sales.
At the heart of the matter are financial conditions. The failures of Silicon Valley Bank and Signature Bank rocked the financial world roughly a year ago. While many pundits declared that these failures were idiosyncratic and therefore not representative of systemic risk, many economic stakeholders could be forgiven for being skeptical. As it turned out, much of the banking system functioned like normal in 2023. That, working in conjunction with the promise of lower interest rates, helped spur a rally in the Financial Conditions Index, which was up nearly 6% for the quarter and also stands at a reading of 109.
Another factor at work is evidence that infrastructure work is picking up. President Biden signed the Infrastructure and Investment and Jobs Act on November 15, 2021. It required approximately two years to position many projects to break ground, but recent construction spending data indicate that more public work has begun, another reason for expanding CFO confidence. Accordingly, the Current Confidence Index expanded 7.3% during 2024’s initial quarter to a reading of 103.
In short, contractors expect to remain busy in 2024. That helps explain why skills shortages remain the primary concern among contractors, with 71% indicating an elevated level of concern. That easily remains the most frequently identified contractor challenge.
Backlog expectations are consistent with renewed optimism. Fully 37% of contractors indicate that backlog is higher than it was a year ago, though it is conceivable that that figure also reflects what has been a rising tide of postponed projects. Tellingly, 38% of contractors expect backlog to be higher a year from now, up from 23% during the fourth quarter of 2023.
Perhaps the most interesting piece of data relates to the Year-Ahead Outlook Index. That index is up 21% on a quarterly basis and 16% on an annual basis. In other words, contractors expect to be even busier a year from now; an expectation that perhaps reflects collective anticipation regarding lower interest rates and project financing costs.
Looking Ahead
In recent years, there has been a pattern of elevated optimism as calendar years begin and then a steady deterioration in sentiment as the year progresses. Time will tell whether this year will repeat that pattern. With inflation remaining stubbornly elevated according to recent data releases, it is conceivable that interest rates may not move materially lower as the year progresses, helping the pessimism that characterized much of last year to reappear.
About CFMA’s 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.