A Return to Normalcy: Construction Industry Optimism Remains High

by Phil Neuffer 2018
A record-setting level of optimism was reported in Wells Fargo’s annual construction industry forecast. John Crum, national sales manager of the Construction Group at Wells Fargo Equipment Finance analyzes the data, explains why equipment rental has been on the rise and what challenges and opportunities lie ahead.

When Wells Fargo released its annual construction industry forecast earlier this year, it included a selection of quotes from industry participants that colored the feel and theme of the forecast. Many of the quotes highlighted what’s going right in the construction sector, what’s going wrong and what the future will bring.

John Crum, the national sales manager of the Construction Group at Wells Fargo Equipment Finance, doesn’t just see buzz words in those quotations, but is able to read between the lines and analyze just what it means for both the people and companies that finance, lease and sell construction equipment and the customers who will buy, lease or rent assets to complete jobs.

High Optimism Once More

Since 2010, optimism around the construction industry has been on a more positive trend. Wells Fargo illustrates that in its Optimism Quotient. Before looking at the reading for 2018, its important to understand what the numbers mean. Any reading above 75 indicates an expectation of growth, while a number above 100 implies even higher expectations. That means the 133 mark the OQ reached for 2018 is a great sign of positivity. It also is a record for the past 20 years, beating out the mark of 130 from 2014. The OQ has been above 100 in each of the last seven years after reaching that high only six times in the previous 15 years.

“The bottom line really comes down to contractors have work. They’re expecting more work in 2018 and as a result of that dealers are expecting to sell more new and used equipment,” Crum says. “They see things improving in ‘18 and therefore it’s driving a higher optimism or a higher outlook for that.”

While the OQ is high across the board, there is a bit of a difference between the optimism felt at the contractor level and that experienced by distributors. As Wells Fargo noted in its forecast, distributors are usually more optimistic when compared to contractors, which Crum attributes to the fact that the two groups approach the industry from different angles. Contractors tend to be more conservative and distributors, by nature of buying on speculation, are inherently optimistic.

However, in 2016, the optimism readings for both sides were very close. In fact, the difference between the separate OQs for each faction was only three points, which was the smallest it has been in the last 13 years. Crum explains that this was just an anomaly, owing primarily to uncertainty surrounding the 2016 presidential election.

In 2018, Crum expects a return to normalcy and a continuation of the stability of 2017.

“All things being equal, if we continue the path that we’re on, we do expect growth in the market. We have seen some impediments the last couple years, particularly in public construction,” Crum says. “In 2017, the growth in overall construction was driven by private investment. This growth did lead to an increase in the number of construction equipment units placed in service. If public construction shows some growth and private investment continues to keep pace, 2018 could be a strong year for all participants.”

Rental Rising

Although it has been almost a decade since the Great Recession, there are still effects being felt throughout the financial industry and that includes in construction equipment financing. In what Crum calls a “hangover” from the recession, there has been a steady rise in the amount of equipment that is rented, primarily due to flexibility and a change in what contractors want out of their equipment.

“I still think there’s a bit of reluctance to be totally reliant on having everything that you need owned and on hand,” Crum says.

In Wells Fargo’s forecast, it notes that 65% of distributors and rental companies are expecting more rentals than a year ago while 33% of contractors expect to rent equipment. While the Great Recession is firmly behind us, Crum thinks that the after effects that created a rise in rental equipment are here to stay.

In a similar vein, there also has been an increased willingness by fleets to hold onto equipment for longer periods of time. In some ways, that will be a good thing for 2018.

“People have been holding onto equipment a little bit longer so maybe it’s time in the replacement cycle to move over to new equipment,” Crum says.

The reasons for why contractors are keeping their equipment for long stretches of time can be accredited to improvements made at the manufacturer level. Just as financial products have developed and improved, so has the technology behind the assets those products support. In that way, machines and equipment are built to last for longer than ever before. But Crum doesn’t see that as an absolute negative for the supply chain, but rather another opportunity for distributors to ensure they are providing the best products as well as the best service once a sale or lease is entered.

Economic Factors

As 2018 continues on, there will be a number of trends that are tangential to the construction industry that will have a major effect on equipment sales and financing. Included in Wells Fargo’s forecast are other indices that are relevant to this industry, including architectural billings, industrial production, private construction and public nonresidential construction.

To Crum, expectations for an increase in nonresidential construction activity means there is an opportunity for more volume, improved portfolio quality and performance. This can occur at both the end user level and at at the distributor level.

To help validate the OQ, Crum likes to compare it to other indexes over a period of time.

“If everyone in the industry believe it’s going this way and it actually goes that way and you can validate that trend over a number of years it adds some credibility,” Crum says, while noting the importance of architectural billings. “If you look at architectural billings, which a lot of people see as a leading indicator for projects that are on the board, projects that are being planned or at least someone is paying architects to draw and design the projects. That is a very similar forecast in terms of being a leading indicator.”

Rising materials prices and the level of industrial production also can dictate just how productive the construction industry is in 2018 and beyond. In 2017, there was a “fairly significant price increase in a number of commodities,” Crum says, noting that should that continue it will cause contractors to reevaluate how to proceed with projects.

It is those future projects that are really the backbone of the optimism for the future. While there is certainly a notable concern about having enough skilled and unskilled laborers both from a contractor and distributor perspective, a longer view shows that industry participants are expecting larger scale projects within the next 18 months. A lot of that is built up from the continued discussion about drastic infrastructure improvement spending out of Washington D.C. Should those plans start to come into place, then it will signal continued improvement in the construction industry. Until then, the optimism in the marketplace will continue, but remain stable rather than booming. That’s because when it comes down to it, both contractors and distributors want certainty.

“They want to know if they make an investment in equipment that the jobs will be there to support that investment. When they’re concerned about political and regulatory uncertainty, what they’re really saying is we just want to know if we’ll be able to utilize our investments,” Crum says. “A lot of people say, even in a tough regulatory environment, if things are consistent and understandable, they can manage their business within those parameters. But if things change, if they get harder or more difficult, or there are new hurdles that they have to go through, that’s when they get concerned because they don’t want surprises.”

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