March 2017

One can observe the explosion of confidence among investors and business managers since November in many ways. Perhaps the most prominent display of renewed hopefulness regarding faster economic growth is the performance of U.S. equity markets since November.
The Dow Jones Industrial Average recently hit all-time highs on 12consecutive days. There are also indications of stepped-up hiring, accelerated business investment, busier architects, and now, moreconfident construction firm chief financial officers.

CFOs Express Confidence in Pro-Business Agenda

The Overall CONFINDEX reading rose from 127 to 130 during 2017’s first quarter. Interestingly, the reading remains below a recent cyclical peak achieved in March 2015. CFOs were confident that 2015 would be a good year for the nation’s construction sector and the broader economy. They were right. The economy that year expanded 2.6 percent, the best performance since the financial crisis ended and construction spending expanded. Though falling short of a cyclical high, the overall reading is up by nearly 6 percent from a year ago and by 65 percent since the December 2008 reading of 79.

All CONFINDEX sub-indices were either stable or up during thenyear’s first quarter. Furthermore, in addition to the overall reading,
all sub-indices are up on a year-over-year basis. For instance, the Business Conditions Index, which reflects how well construction firms are doing right now, rose by 5.4 percent on a quarterly basis and is up by roughly 8 percent year-over-year.

Perhaps surprisingly, the Financial Conditions Index did not improve. Despite the new presidential administration’s emphasis on financial deregulation and upending Dodd-Frank, the Financial Conditions Index remained at 125. This sub-index is up by four percent from a year ago, however, and by 30 percent from its December 2008 reading of 96.

Also a bit surprising, at first blush, is the lack of quarterly movement in the Current Confidence Index. The current reading is 129. That index is up by less than 2 percent on a year-over-year basis, representing the smallest increase from a year ago of all sub-indices.

If one contemplates the interpretation of the Current ConfidencenIndex more deeply, the lack of movement makes perfect sense. Donald Trump’s pro-business agenda has yet to be implemented. Therefore,the short-term impact on the volume of construction work is relatively insignificant. Stock markets may surge today, but projects need to be planned, designed, financed, and permitted before construction can transpire. The president’s pro-business agenda will accordingly require the passage of time before it translates into actual construction spending.

If this analysis is correct, one would expect the Current Confidence Index to remain largely unchanged, but the Year-Ahead Outlook Index to surge. That’s precisely what happened. No sub-index rose as rapidly as the Year-Ahead Outlook Index on a quarterly basis. This index rose by nearly 6 percent during the quarter and is up by 12 percent on a year-over-year basis, which represents the largest year-over-year increase among any of the indices. The implication is that typical construction CFOs expects their firms will be busier in a year. It is not clear, however, how closely this belief is tied to the proposed $1 trillion infrastructure-led stimulus package proposed by the president.

While CFOs expect their firms to be become busier, they do not necessarily expect them to become more profitable. Construction materials and labor costs have been rising more rapidly in recent months. Further acceleration in economic activity will presumably tilt these costs even higher. During the most recent survey administration, 40 percent of respondents expressed an expectation that their profit margins will improve over the next year, down from 46 percentnduring the fourth quarter of 2016.

A vast majority of CFOs appear to believe that the constructionnmaterials price declines that characterized late-2014 and virtually all of 2015 are over. Forty-one percent of respondents expect materials prices to be the same a year from now, while 52 percent expect the materials price situation to become more problematic.

As has been the case for years, concern regarding construction skills shortages remains intense. During the final quarter of 2016,
80 percent of respondents were either very or highly concerned by skills shortages. One quarter later, the proportion of those expressing a significant level of concern expanded to 83 percent.

Rise in Construction Spending Coming Soon?

The average CFO has become more confident regarding the level
of anticipated construction spending. Anecdotal information indicates that many remain somewhat skeptical regarding the future of the proposed infrastructure stimulus package. In particular, there remain significant questions regarding how effective and ubiquitous public-private partnerships can be.

Still, the view is that overall construction spending will soon be on the rise due to a combination of diminished financial regulation, planned tax reform, and faster economic growth. Recent decisions impacting the energy sector, including pipeline construction, also have likely played a part in shaping more ebullient CFO expectations.

Copyright © 2017 by the Construction Financial Management Association (CFMA). All rights reserved. This report first appeared in March 2017 on CFMA.org.