Construction industry executives are more optimistic about non-residential construction activity than they have been since the start of the 21st century, according to a nationwide survey of industry contractors and equipment distributors compiled by Wells Fargo Equipment Finance, a subsidiary of Wells Fargo & Company.
Now in its 42nd year, the 2018 Construction Industry Forecast reveals increased construction industry confidence and expectations about net profits, equipment sales and rentals.
The survey’s primary benchmark for measuring industry confidence is the Optimism Quotient (OQ). The OQ for 2018 is very positive at 133, a ten-point increase over 2017. This is the highest OQ in 20 years, Wells Fargo noted, pointing out that a OQ score greater than 100 indicates strong optimism for increased local, non-residential construction activity versus the prior calendar year.
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“It’s exciting to see this level of optimism. It reflects what we have heard from our customers about the strength of the market,” explained John Crum, senior vice president and national sales manager of the construction group at Wells Fargo, in a statement. “Many industry participants feel that this could be one of their best years ever.”
While most distributors and contractors maintain a positive outlook on construction activity and industry expansion, looking out two years, fewer predict the pace of growth will continue at this level. That doesn’t mean the majority feel the industry won’t expand, however, as 73% of contractors said that the most likely scenario in the next two years is expansion, while those who said that the current level of activity will remain static increased to 19%.
Few in the industry predict that a contraction is likely in the same time span, with only 9% of contractors and 9% of distributors saying that activity level will be less, Wells Fargo noted.
Bob Costello, chief economist for the American Trucking Associations (ATA), recently noted that construction activity is one of several factors aligning to help boost freight demand in the U.S.:
- Construction: Permits to build new homes, housing starts and the number of new homes completed all hit high levels in 2017, the highest since 2007. “Throw in an infrastructure bill, and [freight] demand from this sector will be even better,” he said.
- Factory output: After two years of “very soft” activity, output rose 1.5% in 2017 and may reach 3% in 2018 and 2019 – even possibly pushing 3.5%.
- Inventory cycle flip: From 2015 into early 2017, there was too much inventory stock on hand in the economy, Costello said, which dampened freight demand considerably. But now that oversupply has been worked out of the system. “That means the inventory cycle is no longer a drag on freight demand; we’ve actually never seen it this good,” Costello noted.
Yet while net profit expectations remain positive for the construction industry, the Wells Fargo survey also discerned that finding and paying for skilled labor and healthcare costs remain top concerns – ones that that will have a potential impact on net profits. Employee wages and other benefits (31%), and healthcare costs (18%), ranked as contractors’ top cost concerns.
Still, 92% of respondents said net profits in the construction industry will either remain the same or increase from 2017, Wells Fargo noted, with 61% expecting an increase in profitability.
