RALEIGH, N.C. — FMI’s Nonresidential Construction Index (NRCI) for the third quarter is 44.8 and essentially unchanged from the second quarter reading of 45.0. According to the management consulting and investment banking firm, this result indicates the bottom of the long recession for nonresidential contractors; however, there isn’t much evidence indicating recessionary conditions, for nonresidential contractors at least, are going to end soon.
Most panelists see the short-term outlook as slightly less bad than last quarter — a good sign, even if a small one. A more important and telling sign is seen in this quarter’s results for the one- to three-year outlooks for major construction markets. Panelists have reigned in their longer-term optimism, which seems to signal they are expecting a protracted recovery.
The American Recovery and Reinvestment Act (ARRA) hasn’t yet been that stimulating for nonresidential construction and has led to a certain amount of frustration in the responses this quarter. The hope for a quick recovery has faded, and contractors are now slugging it out in the trenches trying to keep their backlogs full and facing increasing competition.
Nonetheless, there is a growing sense that, when the recession ends, there will be a lot of changes in the industry. For instance, panelists expect much more work will come from the public sector than from private owners as the recession recedes, and the move to green construction continues to represent a growing trend.
NRCI Third Quarter 2009 Highlights
Overall economy — Panelists sense the overall economy is improving significantly from last quarter with this NRCI component moving from 34.9 to 43.5. Note, this is still in recession territory, but moving in the right direction.
Overall economy where panelists do business — Looking closer at home markets, panelists are slightly less glum about the outlook than last quarter, with a component index score of 37.1 compared with 34.5.
Panelists’ construction business — In the early stages of the recession, when panelists were still working on long backlogs, their markets and businesses were markedly better than the overall economy. That has now changed as panelists’ backlogs have slowly declined from a median of nine months last quarter to eight months this quarter. Even though they expect those backlogs to continue to decline next quarter, they see their business as slightly improving to 35.7 compared with 32.2 last quarter.
Cost of materials — Although panelists still see material prices going lower, there are signs that, in general, material prices are beginning to stabilize, with 60 percent of panelists reporting no change from last quarter, giving a component index of 63.8 compared with 77.1 last quarter.
Cost of labor — Like materials costs, labor costs appear to be stabilizing and may even show some signs of rising as the index changed slightly from 54.7 last quarter to 52.2 this quarter.
Productivity — Productivity increases remain in the positive range as contractors struggle to be more efficient in the face of greater competition and lower profit margins. The component index for productivity is down slightly to 62.4 compared with 63.3 last quarter.
Delays and cancellations — Delays and cancellations continue to plague nonresidential construction, and are currently unchanged from last quarter with delays running at 20 percent, or four times a normal rate, and cancellations occurring at five times normal. As reported by one panelist, one reason this figure isn’t worse is because projects are being cancelled or delayed while still on the drawing board.
Effects of the ARRA — Only 21.9 percent of panelists are seeing some work trickle into their backlogs from the ARRA funds. Few panelists in the nonresidential construction markets expect the ARRA to stimulate their business. At best, it is helping to replace some work that would have been lost due to the recession. At worst, it may be causing delays in some publicly funded projects, creating a bureaucratic morass and leading to fierce competition in already tight markets.