Election Leads to Cautiously Optimistic Construction Outlook – COVID-19 Impact Unknown
MAR 11, 2020 - 6:50 am
Following eight straight years of strong optimism, construction industry executives say they are slightly cautious about 2020 for their business sector, according to the 44th annual Wells Fargo Construction Industry Forecast. Despite the shift, the 2020 U.S. National Optimism Quotient comes in at 99, just one point shy of the 100 points considered strongly optimistic.
The survey tallied opinions of industry contractors, manufacturers and equipment distributors to determine the 2020 optimism quotient (OQ) — a key indicator of whether local, nonresidential construction is likely to increase or decrease in 2020.
Wells Fargo conducted the survey in late 2019, before current the coronavirus and oil crash had a major impact on the markets. James Heron, Construction Group national sales manager for Wells Fargo Equipment Finance said he did not want to guess about COVID-19’s impact on the construction industry. “The good news is, what I can tell you is from the people that I’ve been talking to, it hasn’t affected the construction industry yet, but it may,” he said. “But so far so good. Construction spending remains really strong and people are optimistic, or as our survey says, cautiously optimistic about the year.”
Heron attributes that cautious optimism to the uncertainty that comes with an election year: “In the past election year, we saw the optimism quotient deteriorate as well. It did this year also. It’s just the unknown surrounding the election in my opinion…construction spending remains strong. The economy — for what’s going on right now is very strong and I still think and expect the construction market will remain strong through 2020.”
When it comes to equipment acquisition, Heron said a few major OEMs are forecasting slight declines in overall production in top line revenues. “A lot of equipment has been sold over the last several years,” Heron said. “I think that people are believing that because we had come off such a long economic expansion, that things in the market have to contract. Part of the decline in top-line revenues is self-fulfilling, that people think this economic expansion has to come to an end. Now all of this, so for some I’m saying before what we’re talking about with COVID-19.”
This year, hundreds of construction industry executives remain fairly optimistic when looking ahead. However, following a 20-year high of 133 in 2018, the past two years have seen a decline. The 2019 OQ reached 122.
“Contractors now are more optimistic than distributors,” Heron said. “This year marks the first reversal of about a 15-year trend — 91% of the contractors expect that their market will remain the same or grow in 2020 versus 83% of distributors who are in the same category.”
Heron said contractors have a backlog of work, which contributes to their optimism this point in the year. “Part of that is due to the wet weather conditions of late 2018, and the first half of 2019, that didn’t allow them to complete some of their projects.”
Attracting and retaining a skilled labor force was also difficult for contractors, according to Heron.
“Distributors are feeling good as well, but a little less optimistic than contractors,” Heron said. “When you separate the optimism quotient between the two buckets, contractors would fall in the optimistic bucket and distributors would be cautiously optimistic. If you separate the way they would, but we would tell either optimism quotient.”
In addition to determining the OQ, the survey posed questions about equipment sales and purchase expectations, trends in the rental market, and major cost and risk concerns that industry participants are considering keeping top of mind.
Heron encourages business leaders to look at the full report when weighing business decisions this year. Key insights from the Construction Industry Forecast include:
Contractors are more optimistic than distributors.
Historically, distributors have expressed higher optimism than contractors. For 2020, distributors’ optimism decreases from 121 to 97, and contractors’ optimism remain slightly more optimistic with a 101 score. Although still a decline from 2019 overall, 2020 contractor and distributor results are on par with tempered sentiments expressed in previous election years.
Equipment acquisition is expected to be conservative.
In 2020, distributors and contractors say they expect used equipment sales and purchases to remain the same, shifting away from increases they anticipated in 2019. Consistent with 2019, a stronger backlog of jobs and long-term confidence in the local economy are the top two key factors that would encourage the purchase of construction equipment.
Retaining skilled labor leads concerns.
The primary concern among contractors for 2020 continues to be the ability to hire qualified workers, ranking above the impact of employee wages and benefits, material costs, healthcare costs, interest rates, and the cost of equipment. Distributors mainly worry about equipment costs and equipment rental costs, followed closely by employee wages and other benefits and healthcare costs.
Election and regulations top industry risks.
Unsurprising in an election year, the uncertainty of the outcome of the election and its potential impact on the industry is a common concern among executives, with 90% indicating the 2020 election will have somewhat or a great deal of impact on the industry. Consistent with past election years, this also hinders executives’ willingness to be optimistic about the construction industry.
Although there are outlier years, data over time shows that the OQ tracks closely with four economic indices that are significant to the construction industry outlook: Architectural Billings Index, Private Construction Index, Industrial Production Index, and Public Nonresidential Construction Index.
The 2020 Construction Industry Forecast results represent the 44th year in which Wells Fargo Equipment Finance has surveyed construction industry executives to gather insight into current business conditions and trends and to measure sentiment. Responses came from 305 construction industry executives in 47 U.S. states. Nearly all of the respondents report that they have been in the industry five years or more. To learn more, download the complete survey.
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