Contractors Center Point

Surety Underwriters’ Outlook for Construction Markets Sours

Surety underwriters have a downbeat outlook for the recovery of construction markets, according to FMI’s second annual Survey of Surety Providers. Sixty-two percent of respondents said the U.S. nonresidential construction market will not experience growth until 2013, and 19 percent do not expect the recovery to occur until 2014.

The results are in marked contrast to FMI’s 2010 survey results, according to which the majority of respondents expected the downturn to end by late 2010 or early 2011. Only 5 percent of 2011 respondents are confident that their client construction firms are “well-positioned,” with good exposure to stable or growing markets. Surety underwriters are concerned that firms are failing to reduce overhead costs and straying from core competencies. Fifty-seven percent of respondents expect their clients to have more difficulty in obtaining bonding one year from now, and 67 percent believe clients will have more difficulty obtaining a bond two years from now.

“Surety providers look at three key factors when considering bonding applications: the expertise of the management team, the strength of the balance sheet and project history,” says Curt Young, vice president of FMI’s Investment Banking Group, which conducted the survey. “If a company is struggling financially, it is likely they have engaged in business practices that will have a detrimental impact on their long-term success.”

To learn more about this report please visit FMI's website at www.fminet.com. To learn more about financial and economic information impacting the construction industry, please contact the construction professionals of McKonly and Asbury, LLP.

Housing Climbing Out of The Basement, Will Support Growth in 2012 and 2013

On December 21, PNC Bank Economic Division issued a report regarding the current and future outlooks of the housing market. PNC reports that the housing market will grow in 2012 and 2013. Highlights of the report are as follows:

  

•  Housing data released for November 2011 show better homebuilding and sales activity than anticipated
• Activity remains at low levels, but is improving; most of the growth in construction is coming from multifamily housing
• There were downward revisions to existing home sales from 2007 forward, but this does not change the outlook.
• A housing turnaround will contribute to modest but sustained economic recovery in 2012

Click Download Housing to read the full report. For further information on the construction industry, please contact the construction professionals of McKonly and Asbury, LLP.

AIA Report Finds Ongoing Credit Crunch Accounts for 20 Percent of Stalled Projects Nationwide

The American Institute of Architects (AIA) today released a comprehensive report which concludes that the major obstacle holding back job creation in the United States is the persistent lack of construction financing, despite record low interest rates.

“This report should lay to rest any doubt about what is a key source for holding back job creation in the United States,’ said Kermit Baker, chief economist of the AIA. “It is the lack of financing especially to the design and construction sector, which accounts for $1 in $9 of U.S. Gross Domestic Product.”

Relying on data compiled by McGraw-Hill Construction and Reed Construction Data, the report found that: 

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  • The share of projects stalled due to financing problems through August 2011 has almost doubled since 2008;
  • One-in-five stalled projects are directly resulting from financing problems;
  • Financing problems account for a higher share of stalled projects in the education and multi-family sector;
  • More than 25 percent of projects reported as stalled due to the credit crunch could qualify for LEED, Green Globes or other green certification status;
  • Financing issues are less of a factor holding back projects in the manufacturing, private healthcare and retail environments.

“Whatever, the reason – be it over-regulation, the threat of a double-dip recession or the reluctance to have too many loans on the books, lenders are just not lending to a major job-producing sector of the American economy,” Baker noted. “Until more credit is extended, the potential of non-residential construction to promote greater levels of economic growth will not be realized.” 

To learn more about this report please visit www.aia.org or contact the construction professionals of McKonly and Asbury, LLP.

2012 Construction Forecasts Provide Mixed Review

Multiple reports from various sources have been published in the last few weeks regarding the 2012 forecast for the construction market. All reports point to a continued slow recovery of the construction sector of the economy with one report showing 0 percent growth in 2012.

Associated Builders and Contractors

Associated Builders and Contractors (ABC) expects 2012 to be a year of gradual advancement in the industry, primarily driven by private construction. ABC is forecasting that nonresidential construction spending will increase approximately 2.4% in 2012. This is following a decrease of 2.4% in 2011. Along with this increase in nonresidential construction spending, employment is also expected to increase, but very little, at a rate of 0.4%. This increase follows a 2011 year which saw employment in this sector increase by 0.6%.

ABC believes that the increase in nonresidential construction will be driven by the energy and health care sectors of the United States economy. Construction related to the nation's power industry is expected to increase 9% in 2012 and is forecast to end 2011 with a 11.4% increase. States that are expected to see the majority of this construction spending are Texas, Oklahoma, North Dakota and Pennsylvania. Health care is also expected to expand with a projected increase in 2012. With continual changes in demographics, health care reform and overall thawing credit markets, construction in this sector is projected to increase 8% in 2012. Other areas of increase are expected in lodging and office construction but minimal.

These increases are expected to be offset by declines in public spending and education. With state and local government budgets continuing to be squeezed and school districts under pressure to hold the line on spending, public improvement projects in these areas are expected to decline in 2011 by 4%. Overall, ABC forecasts public nonresidential construction spending to slip 2% in 2012.

Construction Backlog Indicator Shows Stagnant Third Quarter Activity

On Tuesday November 15, 2011, Associated Builders and Contractors (ABC) today released its Construction Backlog Indicator (CBI) for the third quarter of 2011. At 8.1 months, the third quarter CBI remained unchanged from the previous quarter, but was up 16.3 percent from a year ago. CBI is a forward-looking economic indicator that measures the amount of construction work under contract to be completed in the future.

“The lack of increase in the CBI last quarter appears to be a symptom of the soft patch in economic momentum experienced in the middle of this year, as well as the ongoing and elevated level of uncertainty regarding Europe, financial markets and other aspects of economic life,” said ABC Chief Economist Anirban Basu.

“A backlog of less than 8 months is associated with construction spending declines, while a backlog exceeding 8 months is statistically associated with future construction spending increases,” said Basu. “Today’s level of backlog is consistent with flat construction spending.

“The implication of the most recent CBI data is that momentum in the U.S. nonresidential construction industry is in the process of stalling,” said Basu. “The question remains: Will the nation’s commercial and industrial construction industries face a long-term slump or become reinvigorated in the new year?”

Regional Highlights

• Regional construction backlog grew in the Northeast and the South from the second quarter to the third quarter, but shrank in the Middle States and the West. On a year-over-year basis, backlog is higher in every region of the nation with the exception of the Northeast.
• The South continues to report the lengthiest construction backlog of any major region at 9.41 months, and is 35 percent higher than one year ago.
• Construction backlog in the Middle States continues to be the shortest at 6.5 months.

Industry Highlights

• Average construction backlog in the nation’s infrastructure industry surged during the third quarter, with backlog expanding from 7.9 months a quarter ago to 9.2 months.
• In the commercial and institutional category, construction backlog took a step back, falling from 8.6 months during the second quarter to 8.4 months in the third quarter.
• Construction backlog rose in the heavy industrial category to 5.9 months during the third quarter, but is still down from year-ago levels and is lowest among all categories monitored by ABC.

Highlights by Company Size

• During the past quarter, firms in the $100 million or more category experienced the largest construction backlog at 9.8 months – the highest level for this category in the history of the CBI.
• For firms with annual revenues of less than $30 million, construction backlog declined from 7.5 months to 7.1 months.
• Construction backlog for firms in the $30 million to $50 million category saw a slight decrease from 9.8 months in the second quarter of this year to 9.7 months in the third quarter.

For more information on the CBI please contact Associated Builders and Contractors at www.abc.org or contact the construction professionals of McKonly and Asbury, LLP.

 

Construction Will Remain Flat in 2012, McGraw-Hill Construction Forecasts

When U.S. construction starts leveled off in 2010, after plunging 24 percent in 2009, forecasters had hopes for renewed expansion in 2011. The recovery for the construction industry, however, has struggled to take hold (-4 percent in 2011), and McGraw-Hill Construction now forecasts that new construction starts will remain flat (0 percent) in 2012. “The backdrop for the construction industry is the fragile U.S. economy, which continues to see slow employment growth, diminished funding from federal and state governments, and pervasive uncertainty,” said Robert Murray, vice president of economic affairs, McGraw-Hill Construction. Murray discussed the forecast on Oct. 19 at the Outlook 2012 Executive Conference in Washington, D.C., where McGraw-Hill released its 2012 Dodge Outlook Report. “In 2012, the top-line numbers are not expected to show much change, but there will be variation within the major construction sectors, with some gains predicted for housing and commercial building assuming the U.S. economy avoids recession.”

McGraw-Hill forecasts commercial building starts to grow 6 percent in 2011 and 8 percent in 2012. Warehouses (18 percent in 2011, 17 percent in 2012) and hotels (34 percent in 2011, 17 percent in 2012) will see the largest percentage increases, but improvement for offices (-2 percent in 2011, 4 percent in 2012) and stores (0 percent in 2011, 2 percent in 2012) will be modest. Institutional building, McGraw-Hill reports, will slip 2 percent in 2012 after falling 15 percent in 2011. Tough fiscal environments for states and localities will continue to dampen school construction (-14 percent in 2011, -9 percent in 2012), and healthcare facilities building will decline 1 percent in 2012 after remaining flat (0 percent) in 2011.

September Architecture Billings Index Declines

Following the first positive score in four months, the Architecture Billings Index (ABI) reversed direction again in September. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the September ABI score was 46.9, following a score of 51.4 in August. This score reflects a sharp decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 54.3, down from a reading of 56.9 the previous month.

“It appears that the positive conditions seen last month were more of an aberration,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “The economy is weak enough at present that design activity is bouncing around more than usual; one strong month can be followed by a weak one. The economy needs to be stronger to generate sustained growth in design activity.”

Key September ABI highlights:

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  • Regional averages: Midwest (51.0), Northeast (50.8), South (47.3), West (46.7)
  • Sector index breakdown: commercial / industrial (52.4), mixed practice (50.0), institutional (48.0), multi-family residential (46.4)
  • Project inquiries index: 54.3

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Architecture Billings Index Turns Positive after Four Straight Monthly Declines

On the heels of a period of weakness in design activity, the Architecture Billings Index (ABI) took a sudden upturn in August. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the August ABI score was 51.4, following a very weak score of 45.1 in July. This score reflects an increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 56.9, up sharply from a reading of 53.7 the previous month.

“Based on the poor economic conditions over the last several months, this turnaround in demand for design services is a surprise,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Many firms are still struggling, and continue to report that clients are having difficulty getting financing for viable projects, but it’s possible we’ve reached the bottom of the down cycle.”

Key August ABI highlights:  

• Regional averages: Midwest (49.0), South (47.4), West (47.4), Northeast (46.5),
• Sector index breakdown: mixed practice (50.9), institutional (48.5), commercial / industrial (46.0), multi-family residential (44.8)
• Project inquiries index: 56.9

The regional and sector breakdowns are calculated as a 3-month moving average, whereas the index and inquiries are raw numbers.

To learn more about the ABI, visit www.aia.org or contact the construction professionals of McKonly and Asbury, LLP.

Construction August Jobless Rate Dips, But Job Losses Continue

The construction industry's unemployment rate edged downward in August, to 13.5% from July’s 13.6%, the Labor Dept.'s Bureau of Labor Statistics reported. Last month's rate also was an improvement over the August 2010 level of 17.0%.

But the latest monthly BLS unemployment report, released on Sept. 2, also said construction lost 5,000 jobs in August and construction’s jobless rate was still the highest among U.S. industry categories.

Ken Simonson, the Associated General Contractors' chief economist, said the August figures continue "a long-running zig-zag pattern of minimal up-and-down changes in constrution employment."

He added, "The free-fall has ended, but the seasonally adjusted employment total in August--5.5 million--has been virtually unchanged for a year and a half."

Most segments of the construction industry recorded job losses last month, with nonresidential specialty trade contractors showing the steepest decline, shedding 8,400 positions. Two sectors showed gains--residential specialty trade contractor employment rose by 6,800 and nonresidential buildings sector jobs increased by 1,000. The numbers are adjusted for seasonal variations.

Anirban Basu, the Associated Builders and Contractors' chief economist, said, "The risk of recession is expanding rapidly. He added that the BLS unemployment figures and Commerce Dept. report showing a decline in construction put in place for July "both reflect the ongoing slowdown in construction activities."

The BLS numbers do show some signs of life in the industry. Architectural and engineering services employment, a possible indicator of future construction market trends, was up in August, posting an increase of 3,500 jobs, seasonally adjusted.

Basu also says contractors who work on buildings' foundations and exteriors and site preparation work added a total of 19,100 jobs in August, using figures that aren't adjusted for seasonal variations.  "This suggests that some semblance of construction momentum remains."

August also was the 11th-consecutive month in which construction's unemployment rate was better than year-earlier levels.

The BLS jobless rates for construction and other industries are not seasonally adjusted. The volume of construction projects tends to rise in the summer and early fall, and the industry’s unemployment rate in those months tends to drop.

The overall U.S. unemployment rate in August was  9.1%, BLS reported, the same level as July’s.

For more information on this report or to learn more about construction industry economic data, please contact the construction professionals of McKonly and Asbury, LLP.

Construction Backlog Up 10 Percent In Second Quarter

Associated Builders and Contractors (ABC) reported August 16th that its Construction Backlog Indicator (CBI) increased 10 percent in the second quarter of 2011 to an average of 8.1 months, up from 7.3 months the previous quarter. The CBI is 12 percent higher than one year ago. CBI is a forward-looking indicator that measures the amount of construction work under contract to be completed in the future.

Regional Highlights

• The South continued to report the lengthiest construction backlog of any major region, with project orders rising 1.87 months during the second quarter compared to one year ago.
• Construction backlog in the Middle States continued to expand, growing by .25 months, or an 11.8 percent increase from the second quarter of 2010.
• The Northeast reported the smallest construction backlog increase of .04 months from the same period last year.
• The West experienced a modest construction backlog increase of .61 months from one year ago.


CBI Map of Regions Second Quarter 2010 versus Second Quarter 2011

 

 

 

 

 

 

 

 

 

 

 

Industry Highlights

• The quarterly increase in construction backlog was fueled by only one of three major industry segments monitored by ABC – the commercial/institutional building sector – in which backlog rose from 7.3 months in the first quarter of 2011 to 8.6 months in the second quarter.
• Backlog in the infrastructure category has declined for four consecutive quarters, likely the result of the steady decrease in the impact of the stimulus package enacted in February 2009.
• Construction backlog in the heavy industrial category declined 18 percent during the second quarter following three quarters of stable activity.

Highlights by Company Size

• During the second quarter of 2011, construction backlog rose for all categories of firm size with the exception of those with revenue exceeding $100 million.
• Average construction backlog was highest at 9.8 months among firms with revenues between $50 million and $100 million.
• Smaller firms are now experiencing meaningful increases in construction backlog, with average backlog rising from 6.4 months to 7.5 months during the second quarter among firms with revenue of less than $30 million.

For more information on the construction industry, please contact the construction professionals of McKonly and Asbury, LLP.