FMI: Nonresidential construction index slowly rises
According to FMI's latest nonresidential construction index report, there is a slight increase on the index from 62.5 in the third quarter to 62.8 in the fourth quarter of 2014.
FMI has announced the release of the 2014 fourth quarter nonresidential construction index (NRCI) report. The NRCI shows a slight increase from 62.5 in the third quarter to 62.8 in the fourth quarter of 2014. This is nearly 5.5 points ahead of fourth quarter 2013. An NRCI greater than 50 indicates improvement or expansion.
There are many good reasons for optimism by NRCI survey respondents this quarter. The top-three are: businesses are starting to build again, backlogs are expanding, and future business looks good with low inflation. A close fourth is a sense of financial security with improved balance sheets.
However, the costs of labor and materials are still on the rise, thus holding down the overall NRCI score. In addition, nearly one-fourth of the panelists expressed concern about the availability of skilled labor.
NRCI fourth quarter 2014 highlights
- Overall economy: After a solid start the first two quarters of 2014, panelists’ opinion of the overall economy has lost some exuberance. The latest reading of this component dropped 2.7 points to a still solid 72.1.
- Overall economy where panelists do business: The softer outlook for the overall economy has trickled down to panelists’ local businesses dropping this component 3.2 points to 71.8 this quarter.
- Panelists’ construction business: Uncertainty in the overall economy makes it difficult to sustain a growth mode as the index component for panelists’ construction business slipped from 76.6 last quarter to 70.6.
- Nonresidential building construction market where panelists do business: Still in much better shape than last year, this index component lost 3.1 points to 71.2 this quarter.
- Expected change in backlog: Backlogs are still growing, but at a slower rate than earlier in the year. The median backlog had reached 10 months in Q2 and Q3, but is back to nine months, the same as for all of 2013.
- Cost of construction materials and labor: Although the index score for both improved slightly this quarter, the costs of labor and materials are still on the rise, thus holding down the overall NRCI Index score.
- Productivity: The component score for productivity slipped this quarter to its lowest point since the third quarter of 2010. Now at 49.0, it appears that rising labor costs are not being offset by improving productivity; thus it is likely that profitability will take a hit if this becomes a trend.
Economic uncertainty, security and market optimism
Uncertainty due to political bipolarization in the country has often been cited as a continuing reason for economic woes in the past few years. It is still a huge issue. However, it ranked second to the problem of finding enough skilled labor to perform growing backlogs. Rounding out the top-three causes of uncertainty is the ongoing question of where the money will come from to finance planned and potential projects. If the number three problem, financing, is miraculously solved in the coming year or so, then the problem of recruiting talented labor could go off the charts.
Unfortunately, according to many Washington observers, the problem of political bipolarization is here to stay for the near future. A company might do well to just accept that situation and plan accordingly or ignore it and move on, as many seem to be doing now. Bottom line, one doesn’t have to look too far to find uncertainty these days, and that is a cause of continuing risk aversion on the part of the more timid, some may say wise, investors. On the other hand, as we will see in the responses below, there is a good deal to be optimistic about too.
– To download a copy of the full report, click here. Edited by Joy Chang, digital project manager, CFE Media, jchang(at)cfemedia.com