Keeping tabs on the construction industry is something the folks over at Wells Fargo Equipment Finance have been doing for quite some time. To be exact, they have been at it for 40 years. With such a long track record in monitoring one of the major verticals in the industry, WFEF has become a trusted source for contractors and distributors as well as equipment lessors and lessees.
In the most recent construction industry forecast released by the equipment finance giant, there were a number of interesting findings to wade through, but in general, the bulk of those findings pointed in a positive direction for the industry.
The forecast’s major metric is the Optimism Quotient (OQ), which gives and indication of industry executive’s confidence for the coming year. A reading over 100 indicates strong optimism and a reading between 75 and 99 is optimistic as well. Anything below 75 is pessimistic. Entering 2016, the OQ stands at 108.
By itself, 108 is a great reading, but there are two ways of looking at that number when compared to historical data. On the positive side, 2016 marks the fifth-straight year of a reading over 100 and the fourth-highest mark of the last 20 years. If you prefer a more negative outlook, it is the second-lowest mark of the last five years and a drop of 22 from 2015’s record high of 130. To John Crum, the national sales manager of the Wells Fargo Equipment Finance Construction Group, the optimism should outweigh the pessimism.
“We’d really look at this as ‘glass half full’,” says Crum. “We were on an upward trajectory for so long, that even if things stay the same it’s pretty good. And most of the distributors that we talked to said that 2015 was a pretty good year; sales were good, margins were okay. So the fact that someone said it’s going to be the same as last year, I don’t see that as overly concerning.”
In essence, Crum feels that because expectations were at a record-high last year, it is likely that many respondents still feel optimistic in 2016, but not more so than they did a year ago.
The survey goes into much further depth than a broad strokes overview of confidence. It breaks down the difference in confidence between contractors and distributors as well. It is rare that these two groups are not somewhat in line. An examination of the last 10 years will show the same trajectory, with confidence dipping sharply from 2005 to 2009 and then rising back to stronger levels over the last six or seven years.
However, this year, the difference between contractor and distributor optimism was razor thin, with distributors registering a 114 and contractors coming just three points lower at 111. That three-point difference is by far the smallest gap in the last 10 years. Crum credits this more aligned view to a growing symbiosis in the relationship between equipment sellers and end users.
“Our distributors are much closer to their contractors. They’re more part of their business thanthen they have been in previous yearsyears back,” says Crum. “The messages that are being sent from the customers to the distributors are more consistent. The amount of data available, the projects that are known are more consistent throughout the industry.”
Even with both groups coming together in their expectations, there was still that slight difference, but Crum also views that as a normal occurrence.
“Contractors, because they do everything on a bid basis, are more pessimistic by nature just because that’s the nature of the business,” explains Crum. “They are competing for every deal. Whereas, distributors, who are selling product, by nature, have to be more of an optimistic group.”
Additionally, while overall optimism is at comparable levels for both distributors and contractors, there is a bit more of a disconnect when it comes to expectations for equipment purchase and rental plans. On one hand, only 50% of distributors believe that sales of new construction equipment will increase in 2016, compared to 70% a year ago. On top of that, 31% expect sales to be the same (up from 20%) and 19% think sales will decrease (up from 9%). The increase in expectations of a decrease is not necessarily a sign of danger, according to Crum.
“Some of that may be related to the fact that either your sales were so high that you don’t think you could surpass those numbers, or maybe your industry is contracting a little bit,” says Crum. “And that may be picking up a little bit of the energy hangover or the anticipated loss of revenue in terms of sales.”
While distributor expectations in regards to sales of new construction equipment have settled, there was more growth in that area for contractors. In the 2016 survey, 42% of contractors expect purchases of new equipment will increase, up from 34% in 2015. There were also slight declines in the percentage of contractors who expect their purchases of new equipment to stay the same (33% from 37%) and decrease (18% from 21%).
Helping fuel the optimism in the industry was the passage of the long-term highway funding bill and the tax incentive piece, which both wrapped up at the end of 2015. With such legislation in place, there is greater clarity on what to expect in the construction industry in the short term and that makes for better projections and increased confidence.
“Those were the No. 1 and the No. 2 things that were on the contractors and the industries minds in 2015 and 2016,” said Crum of the developments. “Whether someone likes it or not, it takes a certain degree of uncertaintyquestion off the table. So we think that’s a positive sign as well.”
Since the survey is directional and not out to project percentage increases, the numbers that appear cannot and should not be taken as gospel, but in general, Crum emphasizes that the findings are indicative of a strong 2016 building off of the overall success of 2015.
“I think the health of the end users, and the consumers of construction equipment is pretty good. I think they’re signaling that to us in terms of what our expectations are,” says Crum. “It should be a good year. We don’t put a percentage on there, but 2016 should be as good or better than 2015.”