With Congress not reaching an agreement to avoid the fiscal cliff until the eleventh hour, optimism for improvement in the construction industry for the first half of 2013 shrank compared to the previous quarter. Other industry indicators from 4th Quarter 2012 forecast growth for commercial construction in 2013.
Construction Data Company has released the 4th Quarter 2012 Review of the Construction Data Index (CDI). The review shows that optimism shrank from the previous quarter due to uncertainty over the fiscal cliff. According to the US Department of Commerce, construction spending during November 2012 dropped 0.3% from the previous month but showed improvement by being 7.7% higher than it was for November 2011.
Based on responses we received, 47% of businesses feel that their business will be doing better six months from now which is a 7% increase from how they feel their business is doing relative to six months ago. This was a slight decrease of 3% from 3rd Quarter 2012 and shows a slight dip in expectations from the previous quarter.
Taking a look at the responses and comparing them to the previous quarter we find that there was a 1% increase from respondents who felt that their business is doing better than it was relative to six months ago. Only 80% of respondents felt their business was doing the same or better which is down 4% from the previous quarter which was at 84%. There was also a 4% increase in respondents who felt their business was doing worse relative to six months ago. Last quarter only 16% felt they were doing worse and for 4th Quarter 20% of respondents felt they were doing worse compared to six months ago. Part of this can be attributed to a seasonal shift as work in the construction industry tends to decline as the winter months approach.
If we take a look at how companies feel their business will be doing six months from now we see a slight decrease in optimism relative to the previous quarter responses. Respondents who felt their business would be doing better dropped 3% from 50% to 47% from 3rd Quarter to 4th Quarter. The percentage of respondents who felt their business would be about the same in six months remained at 41% for the 4th Quarter. Companies that felt business would be worse in six months rose 3% from 9% in 3rd Quarter 2012 to 12% in 4th Quarter 2012. Again this is probably due to uncertainty over the economy and not knowing what, if any, impact would be felt as a result of the looming fiscal cliff deal.
Overall numbers for 4th Quarter 2012 weren’t as good as those from the previous quarter but the were still fairly positive. A large majority of respondents indicated a positive outlook, 80% felt that their business was doing the same or better than it was six months ago and 88% felt that their business will be doing the same or better six months from now.
Now let’s take a look at some of the other industry-leading indicators to get a better feel for what 2013 has in store for commercial construction.
FMI’s Nonresidential Construction Index Report continues to show growth coming in at 55.5 for 4th Quarter 2012. This is a slight improvement from the 54.8 reported for 3rd Quarter. Remember, any score above 50 indicates expansion, while any score below 50 indicates contraction. Just as a comparison, the 4th Quarter 2011 number was at 50.3 so the 55.5 for 4th Quarter 2012 is a marked improvement over last year.
The US Labor Department released their latest employment report on January 4th showing that the construction industry gained 30,000 jobs in December. An analysis from the Associated Builders and Contractors (ABC) states that this is the fastest pace since February 2011 for construction employment growth. Anirban Basu, chief economist for ABC warns that we should probably take this information with a grain of salt. Basu states, “It is conceivable that a significant share of the growth in construction employment in December came in reaction to Hurricane Sandy and the commencement of rebuilding in New York, New Jersey and other affected communities. The ongoing rebuilding effort impacted both nonresidential and residential construction activities.”
When the Portland Cement Association released their latest predictions for concrete consumption for 2013 there was still uncertainty regarding a fiscal cliff deal. They predicted that if a deal was reached during Congress’ lame duck session, which it was, then cement consumption for 2013 is expected to increase 6%. If a deal had not been reached they expected that the economic impact would have resulted in a 2.7% drop in consumption.
One of the more positive indicators coming out of the industry is the AIA’s Architecture Billings Index. For November, the ABI was up again for the fourth straight month at 53.2. This is the strongest growth in almost five years going all the way back to the end of 2007. For the AIA’s index, a score of 50 indicates no change from the previous survey period. All sectors of the industry showed growth for the first time all year with Commercial/Industrial at 52.0, Institutional at 50.5 and Residential at 55.9.
The Turner Building Cost Index, for the ninth quarter in a row, reported a gradual increase in costs. For 4th Quarter 2012 it rose to 839 which is up 0.84% from the previous quarter and reflects a yearly increase of 2.57% from 4th Quarter 2011 when it was at 818. The BCI has not been that high since 2nd Quarter 2009 when it was at 837.
4th Quarter 2011 818
1st Quarter 2012 821
2nd Quarter 2012 826
3rd Quarter 2012 832
4th Quarter 2012 839
The Turner BCI measures costs in the non-residential building construction market in the United States.
After the industry finally stabilized in 2012 we should finally see some positive growth in 2013. There were two major events in 4th Quarter 2012 that could get the construction industry off to a good start in 2013. The first was Hurricane Sandy which rocked the coasts of New York and New Jersey at the end of October and did an estimated $63 billion in damages. Rebuilding efforts are underway and will continue throughout the year. Construction in the areas hit by the storm should see an uptick during the restoration. The second major event was the last minute fiscal cliff deal struck by Congress which prevented the economy from backsliding into another recession. Congress still has to address the across the board spending cuts that were half of the fiscal cliff equation. They have until March 1st to figure that out which is about the same time that they will have to deal with the issue of raising the debt ceiling. Both of these could easily be avoided if anyone happens to have a trillion dollar coin laying around.
While our respondents optimism for the future took a small step back from the previous quarter, a large majority remain cautiously optimistic that good things are on the horizon for the commercial construction industry.
AIA Architecture Billings Index
FMI Nonresidential Construction Index Report
Portland Cement Association
Turner Building Cost Index