FMI's Q3 Nonresidential Construction Index Shows Nonresidential Construction Sector Remains Optimistic Despite Drop in Overall Economy

The nonresidential construction sector continues at a steady pace, a slight decline notwithstanding, according to the FMI Nonresidential Construction Index Report (NRCI) for Q3 2015.  The Index reflects the observations and sentiments of a sampling of construction industry executives nationwide.

FMI’s NRCI for Q3 2015 dropped 1.3 points to 63.6 from the previous reading of 64.9 in Q2. The index paints a mixed picture of the current state of the nonresidential construction sector. On one hand, the NRCI component for the overall economy dropped 6.3 points to 70.6 points this quarter. While down from its peak, this component still indicates that panelists contributing to the index remain bullish about the economy.  Similarly, indicators for the economies where panelists do the most business stood at 73.3, indicating a strong outlook despite a slight 3.4 points slip from last quarter.

“The construction industry continues to proceed on the recovery track, although it is showing signs of a minor deceleration,” said Chris Daum, president and senior managing director of investment banking at FMI. “Despite the decrease in projected backlog and the squeeze from rising material costs, executives in our industry are still bullish and hold positive outlooks overall.”

Highlights from the NRCI point to diverse forces driving the industry as we enter the last quarter of the year:

• Panelists’ Construction Business.  Panelists’ views on their businesses are solidly positive with little changed from the last quarter.
• Nonresidential Building Construction Market. Although the nonresidential building construction market where panelists do business slipped 1.4 points to 75.0, this NRCI component remains in the optimistic range.
• Expected Change in Backlog.  The measure of expected change in backlog dropped 3.1 points this quarter to reach 68.8, while current backlog remains at a solid 10 months.
• Cost of Construction Materials and Labor.  The cost of labor continues to rise, though not greatly changed from the last quarter, at 12.5. Materials costs continue to be high, but slightly lower than last quarter. Both labor and material costs act to hold down the overall NRCI as costs increase.
• Productivity Low.  The productivity component stands at 47.6, the lowest since 2008. Executives surveyed report difficulties in maintaining productivity while squeezed by rising material and labor costs.
• International Debt Impacts
• The NRCI Q3report tallies executives’ opinions on the potential impact of the Greek debt crisis on their businesses. A third of respondents indicated no immediate or long-term impact was likely for their businesses, 25% were unsure and only 2% surveyed expected they would have to adjust their strategic plans to deal with the uncertain economy. 

Business Changes Since Recession

All sectors within the construction industry continue their recovery since the financial crisis, with companies making numerous adjustments to their businesses in the intervening recession. The NRCI Q3 report summarizes how business adapted during the recession. Among the strategies employed, greater selectivity regarding projects and clients tops the list, followed closely by greater use of technology for their businesses to drive productivity, stronger risk management, heightened productivity, and incorporating global geopolitical and economic conditions in decision making.

Source: FMI