Princeton, N.J. — The Construction Financial Management Association’s (CFMA) quarterly CONFINDEX fell during the fourth quarter to 114, down 7.3 percent from the third quarter’s reading of 123. The Business Conditions Index, which reflects how well matters are progressing presently, fell during the fourth quarter by nearly 10 percentage points to 113. This reading is down 13 percent from a year ago.
“One might suspect that an unusually large decline in construction CFO confidence would be attributable to a major, identifiable event. But qualitative information acquired through the survey reveals no major single factor – not tariffs, investigations, hurricanes, wildfires, market volatility, trade wars, or inverted yield curves. Rather, the decline in confidence appears to be related to simple economics, with more CFOs concerned that the workings of the economy will continue to grind profit margins lower. There also appears to be intensifying concern that the construction spending cycle is manifesting late-cycle dynamics,” notes CFMA’s Economic Advisor Anirban Basu.
CONFINDEX (www.cfma.org/confindex) 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.
Two years ago, survey respondents indicating that profit margins were improving either significantly or slightly stood at 55 percent. By December 2018, this number had slipped to 43 percent. Conversely, two years ago, the percentage indicating that profit margins were deteriorating stood at just 19 percent. During the most recent survey, this number had risen to 33 percent.
While virtually all stakeholders would agree that construction worker compensation costs are set to rise during the quarters to come, the trajectory of construction materials prices are much less clear. In recent months, construction materials price increases have reversed in many cases, including with respect to fuel and softwood lumber.
Nonetheless, 80 percent of CFOs indicated that construction materials prices were slightly or significantly worse during the most recent survey. Even more telling, 50 percent expect them to be slightly or significantly worse a year from now compared to just four percent who expect some relief from rising materials prices.
“The upshot is that CFOs are becoming increasingly nervous. With the cost of delivering construction services on the rise, more projects are likely to prove too expensive for owners to move ahead. The implication is that not only will profit margins be under pressure, but so, too, might be the absolute volume of work,” notes CFMA President & CEO Stuart Binstock.
With backlog still lofty, there is little concern regarding near-term construction spending, but a number of CFOs indicated concern regarding the latter stages of 2019.
The next CONFINDEX survey and results will be released in March 2019.