Construction industry executives are more optimistic about nonresidential construction activity than they have been since the 20th century, according to a nationwide survey of industry contractors and equipment distributors released from Wells Fargo Equipment Finance, a subsidiary of Wells Fargo & Co.
Now, in its 42nd year, the Construction Industry Forecast reveals increased confidence for the construction industry and expectations about net profits and equipment sales and rentals. New this year, the survey also included an analysis to compare respondents’ optimism levels to other economic indices.
The survey’s primary benchmark for measuring industry confidence is the optimism quotient (OQ). The OQ for 2018 is very positive at 133, a 10-point increase over 2017. This is the highest OQ in 20 years, according to Wells Fargo. An OQ score greater than 100 indicates strong optimism for increased local, nonresidential construction activity versus the prior calendar year.
“It’s exciting to see this level of optimism. It reflects what we have heard from our customers about the strength of the market,” said John Crum, senior vice president and national sales manager of the Construction Group at Wells Fargo Equipment Finance. “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. Seventy-three percent 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 percent. Few in the industry predict that a contraction is likely in the same time span, with only 9 percent of contractors and 9 percent of distributors saying that activity level will be less.
Equipment sales and purchases
Last year was a good year for equipment sales and according to the industry, 2018 could see further improvements. Seventy-six percent of distributors said that their sales of new equipment will increase, while 78 percent say their sales of used equipment will increase. On the contractor side, 37 percent indicate that they will purchase more new equipment, while 27 percent indicate they will purchase more used.
“One key factor to look at in the results is that the percentage of contractors who said they would buy less new and used equipment in 2018 shrunk to the lowest levels in five years,” Crum said.
Distributors and rental companies indicated that their rental fleets will increase in 2018 over 2017, with 55 percent indicating their intention to expand. Notably, only 7 percent say they will decrease the size of their fleets.
The survey asked companies who rent construction equipment about what would happen in the event that the cost of renting should increase. Respondents indicated that an increase in rental costs of 5 percent to 15 percent would make 63 percent of those surveyed consider purchasing equipment rather than renting.
“That such a small increase in rental costs would make companies who rent equipment consider buying instead of renting indicates that the industry is at equilibrium between availability and pricing of rental equipment,” said Crum.
Top concerns and industry awareness
While net profit expectations remain positive, finding and paying for skilled labor and healthcare costs remain top concerns that will have a potential impact on net profits. Employee wages and other benefits (31 percent) and healthcare costs (18 percent), ranked as contractors’ top cost concerns.
Meanwhile, concerns over equipment costs (20 percent) and equipment rental costs (20 percent) remained top of mind for distributors.
One in two respondents said that they are aware of pending changes to the accounting rules for leasing, with about 50 percent anticipating somewhat of an impact or even a great deal of impact on their business; about 20 percent expect no impact at all. Fewer respondents, just over a third, are somewhat or very concerned about the effect new regulations will have on their business while 28 percent express no concern at all.
How does optimism quotient compare to other key economic indices?
This year, the Construction Industry Forecast analyzed and compared the data to four other economic indices for the construction industry outlook, including the Architectural Billings Index, the Private Construction Index, the Industrial Production Index and the Nonresidential Construction Index. Although there are differences in any given year, the overall data shows that the optimism quotient tracks closely with these economic indices.
Net profits on the rise
The industry feels increasingly positive about profits. Ninety-two percent of respondents said net profits will either remain the same or increase from 2017, with 61 percent expecting an increase in profitability.