The Construction Financial Management Association (CFMA) announced the results of its quarterly CONFINDEX survey. The Overall CONFINDEX rose during the third quarter to 123, up 3.4% from the second quarter’s reading of 119. The Business Conditions Index, which reflects how well matters are progressing presently, rose during the third quarter by nearly a percentage point to 125. This reading is down 2% from a year ago.
“One might be tempted to conclude that, based on these survey results, matters are virtually unchanged over the past year. In some sense, that’s true. CFOs expressed comfort with conditions that prevailed in mid-2017 and feel similarly now,” notes CFMA’s Economic Advisor Anirban Basu.
CFMACONFINDEX is CFMA's proprietary confidence index survey of CFOs in the commercial construction sector. It is the only confidence index survey asking the level of confidence from important decision makers in a critical industry of the US economy. CONFINDEX is compiled from four sub-indices measuring critical components of the financial health of a commercial construction company: Business Conditions, Financial Conditions, Current Conditions, and Year-Ahead Outlook. Less than a 100 reading indicates pessimism among the survey participants, while a reading more than 100 indicates optimism among the survey participants.
One of the reasons for CFOs’ sense of comfort is the ongoing availability of financing. The Financial Conditions Index rose 3.4% during the third quarter. Leading indicators, including the Conference Board’s Index of Leading Economic Indicators, suggest that broader economic momentum will persist in the near-term. With the nation continuing to add jobs rapidly, the implication is that the demand for new commercial space, whether in the form of office buildings or fulfillment centers, will remain elevated in much of the nation.
Therefore, it may come as a surprise that the Year-Ahead Outlook Index slipped during the third quarter to a reading of 113. The decline was hardly steep on a quarterly basis — a bit less than a percentage point. But the Year-Ahead Outlook Index is down nearly 6% from last year’s reading of 120. This represents the most significant year-over-year decline in any of the indices.
However, this may not be a function of concerns regarding demand for construction services. Likely, it is about growing concerns regarding the ability of firms to profitably supply construction services given exacerbated skills shortfalls and rising materials prices. “Eighty-five percent of construction CFOs are very or highly concerned about skills shortages. Perhaps these shortages, working in conjunction with higher steel, softwood lumber, and petroleum prices, help explain why the share of respondents indicating that profit margins are worse than last year’s rose from 26% to 31% during the third quarter,” notes CFMA President & CEO Stuart Binstock.
With borrowing costs on the rise, purchasers of construction services will be even more interested in squeezing construction costs lower, implying that already apparent pressure on profit margins among many contractors is set to intensify.
The next CONFINDEX survey and results will be released in December 2018.