There is now a general consensus that the market has turned around and is growing. Now comes the tough part for construction firms: coping with an expanding market.
The CICI measures executive sentiment about the current market and reflects the respondents' views on where it will be in the next three to six months and over a 12- to 18-month period. The index is based on responses to surveys sent out to more than 6,000 U.S. firms on ENR's lists of the leading contractors, subcontractors and design firms. The latest results are based on a survey conducted from June 5 to June 23.
For the fifth-straight quarter, the surveyed industry executives believe all the market sectors measured by the CICI are now in growth mode. The Confidence Index has risen steadily as the percentage of firms believing the market continues to decline has shrunk to single digits. But for the first time since ENR launched the CICI survey in 2009, more than 50% of firms surveyed believe the current market is growing.
For the CICI survey, execs were asked to assess current and future market prospects in general and in any of 15 market sectors in which they currently work. While more executives saw growth in their particular market sector than those in the same sector saw decline, optimism is waning in several markets, particularly in the infrastructure sectors.
Among the individual market sectors, the petroleum market ranked as the highest-rated, with a CICI rating of 78, which was down three points from the first quarter. The second-highest rated market, multi-unit residential, was steady at 75. Industrial and manufacturing saw a three-point uptick to 72 this quarter.
Confidence in the infrastructure markets took a hit in this quarter. Regulatory uncertainty caused the power sector to suffer the biggest CICI rating decline, down six points to 61. Worries about a new highway bill and the Highway Trust Fund caused a six-point decline, to a 60 rating, in the transportation sector. Also suffering a six-point drop was hazardous waste, down to 58. The water-and-sewer market fell two points, to a 60 rating.
CFOs Worry About Financing
The soon-to-be-released results of the latest Confindex survey from the Construction Financial Management Association, Princeton, N.J., shows growing confidence in the overall market but some underlying concerns about contractors' business fundamentals. CFMA polls 200 CFOs from general contractors, subcontractors and civil contractors.
While a Confindex rating of 100 indicates a stable market, higher ratings show growth is expected. "Our Confindex fell by one point, to 129 [on a scale of 200] for the second quarter," says Brigitte Meinders, director of marketing communications of CFMA.
Meinders notes that the "overall business conditions" component of the CFMA survey is strong at 149, up two points, as is the current confidence component, which rose two points to 124. However, CFOs continue to worry about the financial conditions faced by contractors. The "financial conditions" component of the CFMA survey fell three points, to 113, on a scale of 200 and is down 2.6% from where it was a year ago.
"Overall, our members believe the market is growing," says Anirban Basu, CEO of economic consultant Sage Policy Group Inc., Baltimore, and CFMA economic adviser. However, he says the CFOs surveyed in the CFMA poll are worried about the recovery's impact on contractor finances.
"Contractors were able to survive the recession by relying on their backlog and cash reserves," says Basu. However, much of their cash reserves are now gone. To succeed in a growing market, firms need additional working capital for new equipment and increased staff. "The problem is that the banks are reluctant to lend the needed working capital to contractors, and, when they do, the terms of the loans are not as friendly as anticipated."
Basu says that, from a business standpoint, the beginning of a market recovery is one of the most dangerous times for contractors. "Competition usually remains strong, and margins are slow to recover. Further, contractors generally do not have the cash reserves to cover for a bad project," Basu says. This leads to cash-flow problems and contractor failures. "The banks know this, and that is why they are very careful about issuing business loans."
While financial institutions may be reluctant to provide contractors with working capital, they continue to make capital available for project financing. In this quarter, 33.9% of CICI respondents said credit for project financing was easier to obtain than six months ago, up from 33.8% last quarter. Only 9.0% surveyed said they saw any tightening of credit in the past six months.
ENR also asked about the level of competition in this quarter's survey. When asked whether competition has changed in the past year, 28% said that competition had increased, while 60% said it was about the same.