Index affirms strong underpinnings for nonresidential market

Sources: FMI Corp., Raleigh, N.C.; CP staff

Except for the hint of a slight decline indicated at mid-year, commercial, industrial and institutional building activity continues at a steady pace, according to the Nonresidential Construction Index Report (NRCI) for Q3 2015. Prepared by management consultant FMI, the index reflects sentiments of construction executives nationwide.

“The industry continues to proceed on the recovery track, although it is showing signs of a minor deceleration,” says FMI President and Senior Managing Director of Investment Banking Chris Daum. “Despite the decrease in projected backlog and the squeeze from rising material costs, executives in our industry are still bullish and hold positive outlooks overall.”

FMI’s NRCI for Q3 2015 dropped 1.3 points to 63.6 from the previous reading of 64.9 in Q2. The index paints a mixed picture of the nonresidential construction sector’s current state. On one hand, the NRCI component for the overall economy dropped 6.3 points to 70.6 points this quarter; while down from its peak, this component still indicates that panelists contributing to the index remain bullish about the economy. Similarly, indicators for the economies where panelists do the most business stood at 73.3, indicating a strong outlook despite a slight 3.4-point slip from Q2.

NRCI Q3 highlights point to diverse forces driving the industry as construction interests approach the 2015 sunset:

  • Construction business. Panelists’ views on their businesses are solidly positive with little changed from the last quarter.
  • Nonresidential building construction. Although the market sector where panelists do business slipped 1.4 points to 75.0, this NRCI component remains in the optimistic range.
  • Backlog change. While the measure of expected change in booked contracts dropped 3.1 points this quarter to 68.8, the current backlog remains at a solid 10 months.
  • Construction materials and labor. The cost of labor continues to rise, though not greatly changed from the last quarter. Materials costs continue to be high, but slightly lower than last quarter. Both labor and material costs act to hold down the overall NRCI as costs increase.
  • Waning output. The productivity component stands at 47.6, the lowest since 2008. Executives surveyed report difficulties in maintaining productivity while squeezed by rising material and labor costs.

The index confirms that all sectors within the construction industry continue their recovery since the financial crisis, with companies making numerous adjustments to their businesses in the intervening recession. The NRCI Q3 report, posted here summarizes how business adapted during the recession, employing such strategies as greater selectivity regarding projects and clients; greater use of technology for their businesses to drive productivity; and, stronger risk management coupled with decisions factoring global geopolitical and economic conditions.