FMI has released the 2014 Second Quarter Nonresidential Construction Index report. The NRCI shows slight improvement of a 0.9 point increase from Q1 and a 5.7 point increase from Q2 2013.
Although growth continues, it is beginning to slow indicating that the economy still holds a lingering recession mentality. The largest repercussion of this mindset is that it keeps companies from investing, banks from lending and consumers from spending. Thus, the pressure to keep prices low continues along with the need for greater profitability, leading to two key challenges:
- How to improve productivity?
- Where to find qualified personnel?
A 1.7 point decline in the productivity component of the NRCI is indicative of these challenges. To answer these issues, deliberate time must be spent on new ideas, innovation, and R&D. However, 47% of industry panelists indicate that their company does not have an ongoing research and development effort. This suggests an opportunity exists to improve market position for those companies that can be the most innovative.
When panelists were asked where the industry most needs to focus future innovation, one industry leader responded, “On anything that makes construction more productive. More productivity means less labor is needed on-site during a time of real labor shortages.”
Select Market Predictions Include:
- Overall Economy: Panelists’ view of the overall economy was up just 1.2 points this quarter to 81.1, reflecting what we have been seeing for some time now, continued slow growth.
- Overall Economy Where Panelists Do Business: Panelists are somewhat brighter about the growth in the economy where they work as the index moved up a solid 4.9 points to 81.9.
- Panelists’ Construction Business: The local and national economy is doing better according to our panelists, but they do not yet feel they are getting all that goodness. Nonetheless, the index for panelists’ construction business increased 3.6 points to 79.0.
- Nonresidential Building Construction Market Where Panelists Do Business: Our primary focus for the NRCI, the nonresidential building construction market, is continuing to improve, with the index up 6.7 points this quarter.
- Expected Change in Backlog: For the first time since the early part of the recession when backlogs were falling from 12 months down to eight months and fewer for many contractors, we now have a reading of 10 months and climbing.
- Cost of Construction Materials and Labor: The index for the cost of construction materials was essentially unchanged this quarter. This is not necessarily good; rather, it is less bad than sharp rises in materials costs. The same cannot be said for labor costs. As the industry rebounds from a long recession, the outlook for talented labor gets tighter and demand for higher wages increases.
- Productivity: The index for productivity improvement continues to linger around the midmark, indicating little or no change as the index dropped from 52.7 last quarter to just 51.0 this quarter. Productivity continues to be a challenge to the industry, and our current issues questions on industry R&D and innovation show the importance panelists place on finding ways to improve productivity.