Associated Builders and Contractors (ABC) reported its Construction Backlog Indicator (CBI) rose 4.3% in the second quarter of 2012 after declining the two previous quarters. Despite the quarterly expansion, CBI is 0.3 months, or 4.2% below the second quarter of 2011. CBI is a forward-looking economic indicator that measures the amount of construction work under contract to be completed in the future.
“The CBI accurately predicted both the broader economic softness experienced during the first half of 2012, as well as a flattening of the nation’s nonresidential construction recovery,” said ABC Chief Economist Anirban Basu. “The latest CBI data is now projecting gradual acceleration in nonresidential construction spending, and perhaps a slight increase in the overall pace of construction activity going forward.
“Unfortunately, any improvement in nonresidential construction activity is likely to remain modest given the ongoing uncertainty regarding America’s fiscal cliff — a number of tax increases and spending cuts that take effect at the end of the year — as well as European sovereign debt issues and increasingly volatile energy prices,” Basu said. “While there is pent-up demand for new construction in the power, manufacturing and infrastructure segments, the level of economic and political uncertainty remains far too elevated to permit more aggressive nonresidential construction spending recovery in the near term.”
Regional Highlights
Analysis
“The South continues to lead the way in construction backlog, due to commodity related production, including food processing, oil and natural gas, as well as substantial investment in manufacturing plants and equipment,” said Basu. “However, average backlog has declined for three consecutive quarters in the South, which may be due to a bit of a slowdown in energy-related investment because of the low price of natural gas.
“In contrast, the West has experienced increasing backlog for two consecutive quarters and arguably enjoys more forward momentum than any of the four regions monitored by ABC,” Basu said. “California’s innovation economy, Washington’s active aerospace and technology industries and Arizona’s overall economic improvement are creating new opportunities for contractors, both directly and indirectly.”
Industry Highlights
Analysis
“Both the infrastructure and the heavy industrial categories experienced meaningful and significant increases in construction backlog during the second quarter,” said Basu. “From a macroeconomic perspective, there is significant demand for more competitive infrastructure and for American alternatives to foreign-manufactured goods. The reshoring of production to the United States appears to be creating new opportunities for construction workers, particularly in the South.
“Progress in the commercial and institutional category may be a bit slower in the near future,” Basu said. “Spending continues to be hamstrung by a combination of weak investment returns and cautious financiers; however the CBI data indicates gradual increases in construction spending in this sector in the coming months.”
Company Size Highlights
Analysis
“For several quarters, much of the improvement in backlog had been among smaller firms,” said Basu. “However, much of the expansion in the second quarter occurred among larger firms as a result of improved construction spending dynamics in the infrastructure and heavy industry categories.
“Smaller firms have tended to benefit disproportionately from improvements in commercial construction and construction related to lodging,” Basu said. “Consumer spending growth has become more erratic of late, implying that the pace of improvement in commercial construction and other forms of construction dependent upon consumer spending may not be as rapid going forward. Correspondingly, backlog among the smallest contractors, those with less than $30 million in annual revenue, has not improved significantly during recent quarters.”