Confidence in the economy for 2004 by members of the construction industry jumped 16% from last year, the biggest increase in 28 years in an annual survey taken by construction equipment lend-er CIT Equipment Finance.
CIT Equipment Finance, a unit of CIT Group, said the 2004 outlook indicates that U.S. construction industry leaders are significantly more positive about the industry’s prospects than at any time since 1999. Of nine U.S. regions surveyed, eight show double-digit improvements in optimism.
“This year’s forecast tells a much different story than last year’s,” said Roy Keller, president of CIT Equipment Finance. “The overall year-over-year growth in optimism was the most impressive in the 28-year history of the CIT Construction Industry Forecast and this bodes very well for the industry’s prospects.”
More than 900 contractors and equipment distributors across the country were surveyed via telephone interviews. The Optimism Quotient is the forecast’s primary indicator for assessing and comparing the respondents’ level of confidence in the health of the construction industry. Generally, a number of 100 or higher indicates strong optimism in the industry’s one-year outlook; a number below 100 indicates a more cautious projection.
The 2004 forecast’s overall optimism quotient jumped 14 points — from last year’s 89 to 103 — the highest level since 2000, when the forecast accurately predicted a softening in the U.S. construction industry. The OQ for contractors and distributors rose 13 and 16 points, respectively. The OQ had been 104 in 1999.
The OQ in six of nine U.S. regions rose 14 points or more. The West South Central region (Arkansas, Louisiana, Oklahoma and Texas) is the most positive region, posting the highest OQ (118) of any region in the past five years. This was the second consecutive year this region had the highest OQ.
The Mountain, South Atlantic, West South Central and Pacific regions experienced the highest year-over-year OQ increases, 18-20 points. The East North Central region (Illinois, Indiana, Michigan, Ohio and Wisconsin) is the only region to experience a decline in OQ, down one point to 90.
The East North Central, West North Central, New England and Middle Atlantic regions had the lowest OQ ratings in 2004, ranging from 90-92. No region had an OQ below 90 for the first time since 2000.
Industry-wide, executives are slightly more positive about their financial prospects than they were in 2003. Of contractors and distributors surveyed, 89% expect to generate at least as much net income in 2004, compared with 85% who said that in 2003.
At the same time, 68% of contractors and 66% of distributors anticipate higher financing costs for 2004, up significantly from 2003 when 51% and 56%, respectively, thought they would rise. Cost of capital is cited as one of the industry’s most significant issues by 42% of contractors and 44% of distributors.
For the second consecutive year, the rising cost of insurance is the top issue on the minds of construction industry executives; 89% of contractors and 87% of distributors mention insurance costs as one of the most pressing issues facing the industry in 2004. Also, 49% of contractors and 64% of distributors cite profit margins as a major concern for 2004. Cash flow is cited as a major problem by 42% of contractors and 56% of distributors.
Contractors continue to take a conservative approach to investing in new or used equipment. Roughly 44% of contractors surveyed say they would purchase equipment in 2004 vs. 49% in 2003. Half of these contractors indicate that they would purchase new equipment; 23% plan to purchase only used equipment (21% in 2003).
As equipment fleets grow older, more contractors continue to find it necessary to use rental equipment to back up the equipment they own.
The Internet continues to grow in importance as a business tool for the U.S. construction industry; 52% of contractors consider the Internet to be a valuable source of industry information. In addition, 54% of contractors say they plan to use the Web more in the coming year. On average, distributors expect to make 11.4% of their equipment sales and 9.5% of their equipment rentals online in 2004, up significantly from 2003.