The current year will go down as yet another during which CFO confidence steadily slipped over the course of the spring and summer after beginning the year at a high level. According to the Q3:2013 CONFINDEX Survey, there was no significant improvement along any dimension of performance in the U.S. construction industry. Margins failed to thicken, business conditions modestly deteriorated, financial conditions flattened, and the outlook dimmed just a bit.
The last six months represent a period of deflating CFO confidence. After witnessing an increase in only one CONFINDEX sub-index during the second quarter, all five survey sub-indices declined during the third. The Overall Confidence Index declined 0.8 percent from last quarter, falling to 127 after an equivalent decline of 0.8 percent from Q1 to Q2. Despite the six-month slump, on a year-over-year basis the Overall Confidence Index is up 8.5 percent (from 117 in September 2012).
The Business Conditions Index declined 1.4 percent last quarter from 144 to 142. Perhaps somewhat surprisingly, the Financial Conditions Index fell 1.7 percent in the third quarter (116 to 114) after representing the only sub-index to rise during the previous quarter. For many months, the conventional wisdom has been that lenders are flush with cash and are now ready to begin to deploy additional capital in support of loan-making. But that logic did not play out during the third quarter. Despite the recent setback, the Financial Conditions Index is up 7.5 percent from a year ago.
The Current Confidence Index fell 0.8 percent during the third quarter, dipping from a reading of 121 to 120. This same index stood at only 108 a year ago, however. Significantly, the Year-Ahead Outlook Index also dipped. This index fell 1.4 percent during the second quarter and declined another 1.5 percent during the third quarter (137 to 135). The Outlook Index is still 6.3 percent higher than it was a year ago.
Despite the fact that the nation is in its fifth year of recovery, 17 percent of respondents are still very concerned about the level of demand for construction, 6% are highly concerned, and 66 percent are watching with some concern. Only 10 percent are not concerned at all. Some contractors are predictably observing a decrease in government work given still constrained state and local government budgets and the realities of federal sequestration. Contractors also have been unnerved by an increase in interest rates, which would impact the level of demand for private work.
One implication of this is that competition for available work is expected to remain intense. Stiff competition translates into slender profit margins. Accordingly, the proportion of respondents indicating better profit margins fell from 47 percent during the second quarter survey to 38 percent during the third. About 36 percent report that their profit margins are roughly the same as last year. Moreover, the number of respondents reporting that profit margins had substantially deteriorated rose to 23 percent during the third quarter from 19 percent in the second.
That said, 50 percent of respondents expect that their profit margins will be slightly better next year. Only 3 percent believe that they will be significantly better, but virtually no one believes that they will be significantly worse. One supposes that margins remain so low that even somewhat slimmer margins are hard to imagine.
With respect to the availability of financing for projects, only 13 percent are not concerned. Six percent are highly concerned, and 13 percent are very concerned. Fully two-thirds of respondents continue to watch with some concern, which means that many CFOs remain unconvinced that financing conditions have returned to normalcy.
The level of concern regarding the impact of public policy impact on construction remains elevated. Eight percent of respondents are highly concerned, 15 percent are very concerned and 54 percent are watching with some concern. Primary concerns included the impact of Detroit’s bankruptcy and the likely ripple effects of the bankruptcy on capital budgeting in other communities, the potential impacts of the Patient Protection and Affordable Care Act, and policy regarding the construction labor market.
Remarkably, despite the apparent lack of strong construction demand growth, CFOs continue to worry about looming skills/labor shortages. Forty-five percent of respondents are very concerned with another 15 percent being highly concerned. Another 30 percent are watching with some concern, which means that 9 out of 10 CFOs are concerned by potential skills shortages and their potential impact on business performance. Some CFOs indicate that the nation needs an immigration bill and that “we are already seeing a shortage of applicants.”
One category of stable concern is materials prices. Fifty-three percent think that prices will either rise moderately or significantly over the next year, but that figure stood at 58 percent a quarter ago. Another 38 percent of third quarter respondents believe they will be approximately the same a year from now and only 4 percent expect them to be slightly lower. Materials prices have been notoriously volatile over the past decade and it remains to be seen whether this relatively benign outlook proves justified.
