Construction executives are less optimistic about business conditions going into 2016 than they have been in three years, with a growing number concerned about the uncertain economy, according to a recent survey.
Still, the almost 500 executives nationwide who participated in the survey remained optimistic on the whole, with 52 percent saying they expected to achieve higher profits this year, and another 32 percent expecting profits to remain about the same.[contextly_sidebar id=”PrGE6OQp6OGn9oQpuFc7HY9d9m35hp94″]Wells Fargo Equipment Finance surveyed U.S. construction contractors, aggregates producers, construction equipment distributors and rental companies, among other industry participants from Oct. 19 through Nov. 6 for its Construction Industry Forecast for 2016. Fifteen percent of survey participants were from the Western states of California, Washington, Oregon, Hawaii or Alaska.
“The economy combined with an election, combined with interest rates, combined with oil and gas prices: All of those factors figure into what the local contractor is really starting to feel,” said Tom White, a Northern California-based vice president and territory manager for Wells Fargo Equipment Finance. “There’s optimism but there’s also skepticism about the election.”
The survey’s main metric is an “optimism quotient” that measures participants’ expectations for construction activity in their own regions. Participants this year registered an overall optimism quotient of 108, with any number over 100 indicating that participants were generally optimistic. However, the indicator dropped from 2015, when the quotient measured 130, and was lower than in 2014, when it registered at 124.
“Industry leaders expect their businesses will continue to grow in profitability in the year, although they are slightly less optimistic than in 2015,” Wells Fargo’s report stated.
Forty-four percent of survey participants said they expected their profits to expand by at least 5 percent but less than 15 percent. Another 8 percent of participants said they expected profits to grow by more than 15 percent.
Thirty-two percent of respondents were less optimistic, saying they expected their profits to remain the same. The remainder were pessimistic, with 14 percent of participants saying they expected profits to decrease by 5 percent to 15 percent, and 1 percent saying they expected their profits to fall by 15 percent or more.
For the longer term, more of the executives were optimistic.
Over the next two years, 62 percent of survey respondents said they expect the U.S. construction industry to expand. That includes 56 percent who said they expect a “modest” expansion and 6 percent who called for a “significant” expansion.
“I’m optimistic about this year and even next year but I’m not going to sugar coat it and say it looks amazing going forward for a long period of time,” said C.J. Markey, a Wells Fargo Equipment Finance territory manager for the Pacific Northwest. “I think that we’re getting toward the top of the cycle. I think my customers are a little more hesitant on what [equipment] they want to buy.”
Of those survey respondents who were less optimistic, 23 percent said they expected neither an expansion nor a contraction over the next two years, 14 percent said they expect a “moderate” contraction and 1 percent forecast a “significant” contraction.
Asked to assess the greatest risk to the U.S. construction industry, “national economic uncertainty” was the answer chosen by 33 percent of survey respondents, making it the most common fear. That compared to only 25 percent of respondents who named economic uncertainty as the greatest threat in the 2015 survey. The rising concern about the economy caused it to surpass political and regulatory uncertainty as the greatest risk.
Meanwhile, participants were less concerned than they had previously been by falling oil prices, which had been cited as the greatest risk by 14 percent or respondents in 2015 but only 8 percent this year. The survey included construction industry leaders from oil-producing regions, but falling oil prices can pose a threat to the building industry in other parts of the country.
In California, low oil prices have been biting into revenue from the state’s gas tax, which is used to fund highway construction.
“As we’re seeing prices at the pump plummet, you’re seeing the state’s coffers plummet with it,” said White. “That doesn’t bode well for a contractor that does a lot of highway work. You can see the massive amount of dollars being spent fixing our roads. Those are big projects the majority of my customers are working on.”
Tier IV emission standards, introduced by the Environmental Protection Agency in recent years, also declined as a concern. It was cited as a top risk by 5 percent of survey participants in 2015, but by only 1 percent in this year’s survey.
The new standards for diesel emissions remain a concern, however, according to White. In California, they may require builders to acquire new equipment.
“The cost for contractors to be compliant with the [California] Air Resources Board is very expensive,” White said. “A lot of larger contractors that have the wherewithal buy new equipment, but you have a lot of middle-size contractors that don’t have the wherewithal to take on that type of debt.”
Many of those will be renting new equipment this year, White said.
Despite new risks in the economy, construction leaders nationwide also see growing opportunity in increased infrastructure spending. Asked to rank the construction industry’s greatest opportunity this year, 14 percent pointed to increased government spending, up from 8 percent in the 2015 survey.
And despite greater pessimism about the economy, the largest proportion of survey respondents, at 23 percent, still said that an “improving national economic situation” ranked as the industry’s greatest opportunity.
Industry leaders are, meanwhile, growing more concerned about their ability to find qualified workers to fill open positions. Sixty-one percent of this year’s respondents rated it as “difficult” to find qualified workers, up from 49 percent last year. Another 35 percent rated it as “somewhat difficult,” while only 4 percent answered “not difficult,” down from 7 percent in 2015.