June 2023
For more than a year, economists have been warning about the growing risk of recession. This pessimism has been induced by several occurrences, including the outbreak of war in Eastern Europe, the sharp rise in energy prices that ensued, sluggish financial market performance during much of 2022, and the Federal Reserve’s war on inflation, which has lifted America’s benchmark interest rate, the Fed Funds rate, by 500 basis points in a bit more than a year.
But while members of the dismal science fretted, the U.S. economy continued to progress. Consumers continued to spend, including on travel and an array of other service categories. Employers continued to hire, surprising economists with their willingness to take on additional compensation costs. Financial markets recovered, with certain companies, including those tied even loosely to frenzied exuberance regarding artificial intelligence, registering dramatic share price increases.
Construction spending also continued to expand as mega-projects around the nation broke ground (e.g., computer chip manufacturing plants) and as the nation’s single-family home builders experienced a surprising level of demand for new homes even in the context of sharply higher mortgage rates. In response, the nation’s construction firms have collectively continued to staff up, with the industry adding 320,000 jobs between February 2020 and May 2023.
The nation’s economic resilience had been neatly reflected in Confindex survey data. But then, as often happens, fate intervened. On March 10th, 2023, Silicon Valley Bank faltered. Two days later, it was Signature Bank’s turn to fade into ignominy. While financial markets quickly shook off the episodes as idiosyncratic, recent data indicate that credit conditions are tightening. Moreover, data indicate that core inflation remains stubbornly elevated, a partial reflection of a still-hot labor market. The implication is that monetary policy is poised to continue to tighten as the central bank’s war on inflation persists into 2023’s latter half.
Not coincidentally, every sub-index declined during the second quarter Confindex survey, indicating that recent events have sapped a meaningful share of CFO confidence. The declines were sufficient to pull every sub-index below its year-ago level.
The overall CFMA Confindex declined 5.6% for the quarter to a reading of 101. Among sub-indices, the Financial Conditions Index recorded one of the sharpest declines, falling to a reading of 102, a decline exceeding 6%. More expensive and increasingly difficult-to-access credit has become a serious threat to industry momentum. The share of financial professionals who are highly or very concerned about the availability of financing for projects rose to 29% during 2023:Q2, the highest level since 2020:Q2-Q4, right after the pandemic onset.
That said, for now, contractors remain busy. In addition to mega-projects related to reshoring and infrastructure, contractors continue to work on projects financed at a time when the capital was both cheap and plentiful. Accordingly, the Business Conditions Index slipped a more modest 2.9% during the quarter and the Current Confidence Index, which addresses firm performance over the near-term, declined a similar 2.7% on a quarterly basis. Skills shortages remain the primary concern among contractors, with 77% of respondents expressing some level of serious concern.
By contrast, materials prices are not nearly as concerning as they were several quarters ago. Fully, 36% of contractors indicate that materials prices have improved over the last year. That was up from 31% the prior quarter, and the share of respondents indicating improving prices has been growing over the last three survey administrations.
While contractors remain busy, they have become increasingly concerned about the future. No sub-index declined as substantially as the Year-Ahead Outlook Index, which fell to a reading of 92, a decline of 8%. The index hasn’t been this low since the worst of the pandemic (91 in June 2020). To put forward-looking matters into further context, in 2021, between 35-40% of respondents expected their backlog to expand over the year to come. That share began to decline in 2022 and now stands at 28%.
One might presume that stagnant or shrinking backlog would be associated with declining profit margins. But the expected slowdown has yet to impact margins thus far, at least for a significant share of respondents. The share of construction financial professionals indicating worsening margins over the past year stood at 31% during the most recent survey, down from 38% the prior quarter.
Looking Ahead
The tendency to shift from ebullience to pessimism has been among the only constants during the pandemic recovery period. It remains to be seen whether the lack of optimism regarding the next year will prove justified or will come to be viewed as another period of exaggerated concern. What is known is that inflation remains stubbornly high and that monetary policymakers in much of the world continue to push rates higher. That combined with tightening credit conditions may very well justify the latest expressions of growing concern among construction industry financial professionals.
About CFMA’s CONFINDEX
The CONFINDEX is CFMA’s proprietary confidence index survey that measures the confidence level of leading financial professionals in the U.S. commercial construction sector. 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. A reading of less than 100 indicates pessimism among the survey participants, while a reading of more than 100 indicates optimism among survey participants.