ABC’s nonresidential building backlog hits record levels

Sources: Associated Builders and Contractors, Washington, D.C.

The ABC Construction Backlog Indicator (CBI) of nonresidential and infrastructure segments expanded to 9.67 months during the fourth quarter of 2017, its highest level ever, and finished the year up 1.36 months—16.3 percent higher than 2016.

“The CBI established an all-time high, breaking records set during both the first and third quarters of last year,” says ABC Chief Economist Anirban Basu. “The implication is that the average nonresidential construction firm entered 2018 with significant momentum. Construction spending is set to be elevated this year under virtually any conceivable scenario.

“A confluence of factors has produced this result, including still-expansionary monetary policy and accelerating global growth in much of the world, brisk foreign investment in U.S. commercial real estate, surging business/developer confidence, deregulation of certain key industries, higher energy prices, strong consumer spending, a recovering U.S. manufacturing sector, and rising spending in a handful of publicly financed construction categories.”

“Recently enacted tax reform is likely to serve as an additional tailwind to an already strong construction story,” Basu adds. “While 2018 is likely to be a solid year for construction spending, there are gray clouds emerging. A trade dispute with Canada has helped push softwood lumber prices higher. Recently announced tariffs on steel and aluminum may have similar effects. Indeed, inflationary pressures are building in various elements of the economy, including wages, health care, homes, apartments and tuition. The result is an increasingly inflationary economy likely to produce higher interest rates over time. Should interest rates rise too quickly, backlog is likely to eventually decline as fewer developments are green-lighted due to higher borrowing costs.”

Commercial/industrial has the deepest project pipeline among CBI segments. At 10.1 months, the segment’s average backlog is at its highest level in the history of the CBI series. Heavy/industrial finished 2017 with backlog down 5.8 percent year over year. Infrastructure backlog reached 12.55 months during the fourth quarter, the segment’s highest reading on record. Improving state and local government finances are helping spur additional public construction, ABC finds, including in the education, public safety, highway/street and transportation categories.