Client Alerts
December 23, 2015

Are we there yet?

Stites & Harbison, PLLC, December 2, 2015

Many of us have heard that voice from the rear seat of the car, “Are we there yet?” There is a decent chance that we might hear those very words spoken in the coming days as we travel to the home of a relative or friend for the holidays.

Several construction executives might be asking that same question, “Are we there yet?” Namely, “When will we be back to where we were before the recession of 2008?” Some economists are forecasting continued growth in the construction industry in 2016; however, a number of construction-oriented indices reflect cautious optimism for 2016.

After years of patiently waiting, many construction companies and design firms are now enjoying a measure of prosperity and seizing growth opportunities. Construction industry professionals are questioning, however, whether that projected growth will be sustained in 2016 and beyond. Economic forecasts indicate modest growth for the construction industry in 2016.

Dodge Data & Analytics (“Dodge”) forecasts a 6% increase in total construction starts in 2016. Dodge predicts that the dollar value of total construction starts for commercial buildings will increase 11% in 2016, and Dodge further predicts that the dollar value for the institutional building market will increase 9% in 2016. Dodge also forecasts that construction spending will grow in four of the five regions of the United States: West (+9%); Midwest (+8%); South Central (-3%); South Atlantic (+12%) and Northeast (+4%). Although Dodge predicts that the dollar value of total construction starts in the South Central region of the U.S. will decrease by 3% in 2016, one should note that, according to Dodge, the South Central region experienced an increase of 22% in construction spending in 2015.

Ken Simonsen, chief economist for The Associated General Contractors of America, projects that construction spending for private non-residential construction will increase 1-10% in 2016-17. Mr. Simonsen forecasts that construction spending for public construction will essentially remain flat during that same period. Mr. Simonsen has reported that, in nearly every state, contractors are busier in 2015 than they were in 2014. He has further opined that construction employment has increased around the country, but the construction industry would be expanding even more rapidly if contractors could find enough qualified workers. Mr. Simonsen foresees that availability of skilled workers will continue to be a challenge in 2016.

FMI Corp. (“FMI”) projects a 6.6% increase in construction put-in-place in 2016. Portland Cement Association forecasts an increase of 7.3% in construction put-in-place for 2016.

Anirban Basu, economic advisor to the Construction Financial Management Association (“CFMA”) and to the Associated Builders and Contractors, appears to be expressing reservations about the economic forecasts for the construction industry in 2016. Mr. Basu has stated that projected increases in health care costs, projected material price increases, uncertainties regarding the upcoming presidential election and an unsteady stock market are impacting his economic projections.

Quarterly surveys of construction executives, undertaken by Engineering News Record (“ENR”), CFMA and FMI have demonstrated that construction and design professionals are less optimistic about continued growth in the construction industry at the end of 2015 than they were at the beginning of the year. Indices, computed by these three organizations, reflect cautious optimism for 2016.

Each quarter, ENR computes a Construction Industry Confidence Index (“CICI”) which measures construction executives’ sentiments about the current market and reflects the respondents’ views on where their construction company will be in the next 3 to 6 months and over a 12 to 18 month period. ENR’s CICI is based on a scale of 100, and ENR recently reported that its CICI for the fourth quarter of 2015 is 68. Such index reflects that most of ENR’s respondents believe that the construction market is nearing its peak and may soon level off or decline. ENR’s CICI has steadily decreased in 2015. In the first quarter, ENR reported a CICI of 78; in the second quarter, ENR reported a CICI of 74; in the third quarter, ENR reported a CICI of 68; and as stated above, for the fourth quarter, ENR has reported a CICI of 68. The last time ENR reported a CICI below 68 was in the third quarter of 2013. Therefore, the construction executives whom ENR is polling for its survey are expressing some reservations about continued growth into 2016.

Each quarter, the CFMA calculates a “Confindex” after surveying 200 CFOs from general and civil contractors and subcontractors around the country. The Confindex reflects those CFOs’ confidence in the construction industry on a scale of 200, with 100 indicating a stable market. Like ENR’s CICI, CFMA’s Confindex steadily declined throughout 2015. In the first quarter, CFMA reported a Confindex of 137; in the second quarter, CFMA reported a Confindex of 131; in the third quarter, CFMA reported a Confindex of 131; and in the fourth quarter CFMA has reported a Confindex of 128. Therefore, the CFOs responding to the CFMA’s survey are expressing a similar cautious optimism about 2016, as articulated by ENR’s respondents.

On November 30, 2015, FMI issued its fourth quarter “Non-Residential Construction Index Report.” FMI computes a Non-Residential Construction Index (“NRCI”) by also surveying a number of construction executives throughout the U.S. For FMI’s calculations, NRCI scores above 50 indicate expansion; and NRCI scores below 50 indicate contraction. Like ENR and CFMA, FMI’s respondents have voiced less optimism at the end of 2015 than they did at the beginning of the year. Similar to the ENR and CFMA indices, FMI’s NRCI gradually decreased in 2015: 64.8 in Q1; 64.9 in Q2; 63.6 in Q3; and the recently reported 59.5 in Q4. Therefore, FMI’s respondents are verbalizing the same cautious optimism as the construction executives polled by ENR and CFMA.

ENR, CFMA and FMI each expressed a moderate level of uncertainty regarding the economy in 2016. The various reports attribute such lukewarm forecasts due to a number of factors, including projected material price increases, uncertainty regarding the presidential election, terroristic threats not only in the United States but in the world, an unsteady stock market and troubling events in Europe.

ENR recently labeled future economic growth for the construction industry as “slow and steady” versus “fast and furious.” Construction executives appear to be reserving judgment on economic growth in 2016 in light of some of the previously stated factors. In its recently published Non-Residential Construction Index Report, FMI quotes one construction executive as responding, “The environment is too chaotic to predict. Remain calm; all is well.”

So, are we there yet? Will the construction industry growth be sustained in 2016 and beyond? Just like we have told our children, “Be patient. We will be there shortly; it just depends upon the ‘road conditions’ ahead.”

On behalf of the Construction Service Group and the entire firm, I wish you and your company continued success and the very best this Holiday Season.

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