Wells Fargo: Nonresidential construction industry growth continues
A healthy level of optimism on the part of construction executives, or among leaders in any industry for that matter, is very telling. They are "on the ground" running their businesses and are in a position to see early signs of a downturn.
But, for now, the nonresidential construction industry is enjoying good news for the eighth year in a row, according to the 2019 Wells Fargo Construction Industry Forecast.
Every year, Wells Fargo Securities surveys a select group of contractors and equipment rental companies as well as distributors, dealers and manufacturers of construction equipment about the construction landscape. More than 95% of respondents have been in the industry for at least five years. Site preparation, excavation and heavy highway contractors typically make up the majority of the survey’s participants.
This year, Wells Fargo secured responses from 441 executives in 48 states, and here are the big takeaways.
- 96% of contractors participating in the survey plan to purchase new or used equipment this year. For 76% of this group, their new equipment purchases will increase from last year. For 75% of these respondents, purchases of used equipment will either increase or remain steady.
- 92% of contractor respondents plan on increasing or at least maintaining their current level of equipment rental activity, with 46% citing the flexibility of renting as the major advantage.
- 47% of contractors said that their utmost cost concern is the ability to hire qualified workers, and 35% of all respondents said this was their most significant risk factor.
The survey also revealed that only 4% of respondents believed that industry activity would shrink in the coming year, while 52% predicted an increase. However, when asked to forecast industry growth during the next two years, only 51% of survey participants said they expected a continued expansion, while 27% said they believe the construction industry is due for a contraction.
This caution is also evident in a primary feature of the annual Wells Fargo survey, the Optimism Quotient (OQ) score. Report authors take participant responses and analyze them to determine this key indicator of whether local, nonresidential construction is more likely to expand or contract in the coming year.
A score of 100 or more indicates strong optimism about the coming year’s construction activity, while a score of 75-99 represents “cautious optimism.” A score of 74 or lower means that executives have expressed more pessimistic attitudes about the year ahead than they have optimistic ones.
This year’s OQ is 122, which puts executive sentiment squarely in the realm of strong optimism, although it does represent an 11-point downward departure from last year’s record-breaking score of 133.
This uncertainty about how the industry will perform in 2020 and beyond is something other organizations have expressed as well.
For example, Anirban Basu, chief economist for the Associated Builders and Contractors, has predicted that the construction industry will see strong momentum through 2019 but that factors like inflation, labor supply, tariffs and immigration policy could start impacting the industry as early as 2020.
The good news is that despite the long-term uncertainty, Mark Vintner, Wells Fargo Securities’ managing director and senior economist, predicted that several industry segments will see increased spending this year, namely offices (6.8%); hotels (6.5%); airports (6%); highways, streets and roads (5%); heavy construction and civil engineering (4.5%); and seaports (4%);
The Wells Fargo predictions are part of the American Institute of Architects’ Consensus Construction Forecast, as are projections from the ABC, ConstructConnect, Dodge Data & Analytics, Markstein Advisors, FMI, Moody’s Analytics and IHS Economics. The combined forecast is an affirmation that most experts agree growth will likely slow starting in 2020.
However, for now, contractors are enjoying heathy backlogs, and those businesses that can adopt cost-cutting, time-saving practices and technology should be poised to take on whatever the economy has to throw at them.
- Wells Fargo Securities Construction Industry Forecast 2019
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