December Reading:

By Anirban Basu CFMA Economic Adviser
The U.S. economy has regained some of the momentum that was lost earlier this year due to higher input prices, the earthquake in Japan, and the debt-ceiling crisis. Job growth has accelerated in recent months (with 100,000 jobs added in October and 120,000 in November), and unemployment fell to 8.6% in November – the lowest level since March 2009. Economists are generally predicting about 2.5% growth in GDP in the fourth quar¬ter. Leading indicators of construction spending have begun to stabilize, including the Architecture Billings Index, which was up 2.5 points to 49.4 in October.

This quarter’s CONFINDEX survey data provides evidence of growing confidence among CFOs regarding present and future conditions of the construction industry. The Overall Confidence Index is up 4.5% from last quarter and now stands at 116. The Current Confidence Index increased to 108, a 2.9% improvement from last quarter’s reading of 106. The 2012 Outlook Index rose 5.1% from last quarter’s reading of 117, a sign that survey respondents have become somewhat more comfortable with next year’s prospects.


Survey respondents also remain fairly confident with respect to the stability of financial conditions. At 107, the Financial Conditions Index was unchanged from last quarter, but is up nearly 2% from one year ago. In the new open-ended portion of the survey, many respondents noted that while banks are more willing to lend than before, their standards remain strin¬gent by longer-term historic stan-dards. Other respondents noted that they have seen no change in financ¬ing availability and that banks still don’t view construction favorably.

New data regarding profit margins in this quarter’s survey provide stakeholders with an improved understanding of industry per¬formance. This data reveals that economic improvement has yet to neatly translate into thicker mar¬gins. According to the survey, more than half of respondents indicate that their profit margins are slightly better (25% of respondents) or the same (28% of respondents) relative to one year ago. However, 32% say that their profit margins are slightly worse than a year ago, and 13% report that they are signifi¬cantly worse. Improvement along this dimension is anticipated, as most respondents expect their profit margins to be slightly better (38% of respondents) or the same (48% of respondents) one year from now.
Several principal concerns among CFOs remain, including high ma¬terials prices and an ongoing lack of demand for construction services. Thirty-nine percent of respondents indicated that materials prices are the same as one year ago, while 49% indicated that they are slightly higher. With respect to a year from now, 39% expect prices to be roughly the same, while 50% believe they will be slightly higher.

Regarding demand for construction services, 44% of respondents indicated that they are “watching with some concern,” while 38% are very concerned and 17% are highly con¬cerned. In other words, virtually everyone is concerned about the adequacy of demand for construction in 2012.
Many respondents also reported that they are worried about the availability of financ¬ing for projects, public policies relevant to construction, and shortages of skilled labor. Government regulations, health care costs, and subcontractor failures were also principal sources of concern among CONFINDEX survey participants.

Another Significant Downturn Not Anticipated
While the national economy struggles to stave off yet another recession, the construction industry has arguably yet to exit recession and has scarcely begun to recover. Both residential and nonresidential construction volumes are flat to declining and the near-term outlook is not sanguine. One prominent leading economic indicator, the Architecture Billings Index, has declined for 5 consecutive months, suggesting that commercial and institutional construction spending is likely to decline over the next several months.

Given this economic context, it would be simple for the nation’s top construction CFOs to express a sense of despair. But that’s not what happened in the latest CONFINDEX survey, which suggests that while the level of construction activity is unlikely to materially improve anytime soon, the sector is not poised for another substantial downturn. The overall Confidence Index now stands at 111, unchanged from the previous quarter and 4.7 percent higher than last year’s reading of 106. The Current Confidence Index now stands at 105, a 9.4 percent improvement from last quarter’s reading of 96.

It is worth noting that construction spending often lags the business cycle. Therefore, the construction volumes being observed today are largely a reflection of the performance of the economy several months ago when gross domestic product was expanding more than 2 percent and job creation was far more rapid. The economy has weakened significantly over the course of 2011, with GDP expanding less than one percent on an annualized basis during the year’s first half and with no jobs added nationally in August.

The implication is that construction spending may stagnate further during the year ahead. Correspondingly, the Outlook Index fell 6.3 percent from last quarter’s reading of 126. That said, half of survey respondents expect that construction industry business conditions will be slightly better a year from now while 33 percent believe conditions to be about the same. This represents a particularly important reading since CONFINDEX survey participants are heavily influenced by actual data regarding financial performance rather than media speculation.

Respondents are also reasonably confident with respect to the stability of financial conditions. The Financial Conditions Index rose 11.5 percent this quarter to 107 and is up 5.9 percent relative to a year ago. Sixty-eight percent of respondents believe that bank credit availability is roughly the same as it was one year ago while 14 percent believe it is slightly better and 13 percent believe it is slightly worse. Looking forward, 72 percent of respondents expect credit availability to be roughly the same a year from now while 18 percent believe it will be slightly or significantly better. Only 5 percent believe that credit availability will deteriorate substantially.

With respect to backlog, the bulk of respondents expect backlog revenue to be either higher (37%) or the same (45%) one year from now. This is hardly consistent with recession and reflects a level of confidence that may surprise some. It may be that certain firms are gaining market share as competitors fade due to a lack of bank credit, bonding, and associated capacity to compete for large construction projects. The implication is that backlog among responding firms can rise even in the absence of general construction spending growth.

By Anirban Basu
CFMA's Economic Advisor

What Is CONFINDEX™

CONFINDEX is CFMA's proprietary confidence index survey of CFOs in the commercial construction sector. It is the only confidence index survey asking the level of confidence from important decision makers in a critical industry of the US economy.

For some industry analysts and financial analysts, CONFINDEX is a leading economic indicator of the health of commercial construction in the US.

CONFINDEX is released quarterly from CFMA HQ in Princeton, NJ. The next CFMA CONFINDEX reading is scheduled for release in December 2011.

CONFINDEX Inputs

CONFINDEX is compiled from 4 sub-indices measuring critical components of the financial health of a commercial construction company:

1. Business Conditions
2. Financial Conditions
3. Current Conditions
4. 2012 Outlook - look ahead to September 2012

CONFINDEX Survey Panel Composition

200 randomly selected CFMA General Members with the title of CFO in commercial construction companies

What the CONFINDEX Number Indicates

• Built using a “net confidence scoring” approach
• Measures degree to which there is a more positive or negative outlook among survey panel members
  • Neutral point is set at 100
  • Less than a 100 reading indicates pessimism among the survey participants, while a reading more than 100 indicates optimism among the survey participants

Download a PDF of the CONFINDEX fact sheet.

Contact Mike Verbanic for more information.