As the national economy continues to slowly improve, industry outlooks and attitudes indicate recovery of the construction industry steadily continues. A quick comparison from CDI numbers from 3rd Quarter 2011 with the 3rd Quarter 2012 numbers indicate that overall optimism has increased as we look toward the next six months.
Construction Data Company has released the 3rd Quarter 2012 Review of the Construction Data Index (CDI). The review shows that optimisim is high as the construction industry continues its steady recovery. According to the US Department of Commerce, construction spending during September 2012 grew 0.6% from the previous month and is 7.8% higher than it was for September 2011.
Half of all respondents feel that their business will be doing better six months from now which is an 11% increase from how they feel their business is doing relative to six months ago. This is also a marked improvement from how respondents felt about the future six months at the same time last year. The 3rd Quarter 2011 numbers indicate that only 43% felt that their business would be doing better over the next six months.
To better gauge how things are improving we can compare the responses from the 3rd Quarter 2011 CDI with those of the 3rd Quarter 2012. On how businesses felt they were doing relative to six months ago, the numbers drop slightly as to whether they felt things were better 41% of respondents felt things were better for 3rd Quarter 2011 as opposed to only 39% for 3rd Quarter 2012. In contrast, if we compare the numbers for all those that said they were doing better or about the same, the numbers are identical. For both quarters 84% felt they were doing better or about the same and only 16% felt they were doing worse.
Taking a look at the responses to how contractors see their business doing six months from now, optimism is much higher. In 3rd Quarter 2011 90% of respondents felt they would be doing the same or better with 43% stating they felt they would be doing better and 47% stating they felt things would be about the same. The numbers from 3rd Quarter 2012 indicated that 92% felt their business would be doing better or the same six months from now. Breaking that down further, 50% felt they would be doing better and 41% felt they would be about the same as they currently are. While this indicates only a 1% drop among those that feel that feel they would be doing worse, it’s a 7% increase in respondents who feel their business will be doing better within the next six months as we head into the last quarter of the year and into the first quarter of 2013.
The data provided in the CDI indicates that the construction industry will continue to improve. Other industry indicators are also pointing to better days ahead as the economy treks ahead to recovery.
FMI’s Nonresidential Construction Index Report continues to show growth coming in at 54.8 for 3rd Quarter 2012. This is slightly down from what we saw in the 1st and 2nd Quarters of 2012, 59.8 and 58.1 respectively. The 54.8 for 3rd Quarter is still indicative of growth as any score above 50 indicates expansion, while any score below 50 indicates contraction. Just as a comparison, the 3rd Quarter 2011 number was at 52.4.
The Associated Builders & Contractors’ Construction Backlog Indicator was just released and it also points to improvement as it rose 3.5% from the previous quarter to 8 months. According to Anirban Basu, Chief Economist for the ABC, “the CBI is signaling that nonresidential construction spending will accelerate by mid-2013.” But he also gives this warning, “this presumes the nation does not tumble over the fiscal cliff—a series of spending cuts and tax increases that kick in at the end of the year.”
On the civil engineering side of the industry there is more indication that the industry is moving in the right direction. According to the Portland Cement Association, “[The] PCA revised its spring forecast upward, anticipating a 6.9 percent increase in 2012 from 2011 levels, followed by a 5.8 percent jump in 2013 and a double-digit increase of 10.9 percent increase in 2014.” According to Ed Sullivan, PCA chief economist, “In addition to great construction weather during the first half of the year, real put-in-place construction activity is up 4.2 percent compared to 2011 levels. We expect to see a 5.5 percent gain on real construction activity this year – after seven consecutive years of decline.”
As with CDCNews’ Construction Data Index, FMI’s Nonresidential Construction Index Report, ABC’s Construction Backlog Indicator and the PCA spring forecast, the architects are supplying good news as well. The AIA’s Architecture Billings Index moved up to 51.8 to close out September 2012 which is the strongest growth they’ve experienced in almost two years. For the AIA’s index, a score of 50 indicates no change from the previous survey period. This number has continued to grow each month to get above the 50 mark as the index finished the 2nd Quarter at 45.9 for June. Taking a look back at 3rd Quarter 2011, the AIA’s index hovered around the no change mark with a quarterly average of 49.63.
The Turner Building Cost Index reported a gradual increase in costs. The index has hovered in the low 800s for the past few years, and from 3rd Quarter 2011 through 3rd Quarter 2012 the index has experienced an increase of only 2.21%. This is also a slight increase of 0.73% from 2nd Quarter 2012 to 3rd Quarter 2012.
3rd Quarter 2011 814
4rd Quarter 2011 818
1st Quarter 2012 821
2nd Quarter 2012 826
3rd Quarter 2012 832
According to Karl F. Almstead, Turner’s vice president responsible for the Turner Building Cost Index, “A modest increase in construction costs over the last few months is driven by labor and material cost increases. Market optimism also contributes to the moderate increase in costs. However, any significant change in the market will require a change in the overall economy.”
While there is every indication that the industry will continue to improve as we move through 2013, the one thing that could cause the economy and the construction industry to plummet back into a recession is the dreaded fiscal cliff. The term fiscal cliff conjours images of lemmings leaping to their doom from fjords in Norway, it is simply put an impending economic crises. The fiscal cliff is basically the effects of large spending cuts and tax increases that would take place on January 1, 2013. One of the main factors leading to this would be the expiration of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 which was a two-year extension of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003. The second main factor that would lead to this fiscal cliff is the Budget Control Act of 2011 which will result in across the board spending cuts scheduled to begin on January 2, 2013 if Congress fails to produce a bill to reduce deficit by $1.2 trillion.
The worst case scenario is that nothing will be done and the tax cuts will expire and spending cuts will be implemented resulting in another recession. Assuming that Congress and the President can agree on some compromises and provide some type of resolution for the impending economic crises, the construction industry is primed to continue making strides in 2013.
ABC Construction Backlog Indicator
AIA Architecture Billings Index
FMI Nonresidential Construction Index Report
Portland Cement Association
Turner Building Cost Index