Economic Headwinds, Rising Costs a Drag on Nonresidential Construction

Dec. 8, 2015
Reflecting the observations and sentiments of construction-industry executives nationwide, the NRCI dropped 4 points to 59.5, its lowest level in two years.

The nonresidential-construction sector is experiencing a slowdown as the economic recovery continues to taper and the industry heads into the winter season, FMI, provider of management-consulting, investment-banking, and leader-development services to the engineering and construction industry, says in its Nonresidential Construction Index (NRCI) report for the fourth quarter of 2015.

Reflecting the observations and sentiments of a sampling of construction-industry executives nationwide, the NRCI dropped 4 points to 59.5 in the fourth quarter of 2015, its lowest level since the fourth quarter of 2013. The decrease was driven largely by the panelists’ declining outlook for the overall economy, which fell by 12.3 points to 58.3 from the last quarter.

Panelists’ expectations of activity for the economic sectors in which they do business decreased to 64.8 points from 73.3 last quarter, contributing to the conservative reading of the overall index.

Cost of construction materials and labor continue to rise, increasing by 1.2 points to 30.6, indicating an expected bump in costs.

“Economic-recovery momentum is losing steam, and rising costs in labor and materials start to put a load on the industry,” Chris Daum, president and chief executive officer of FMI, said. “Next year will likely be more challenging for industry growth than 2015. Firms that excel at recruiting and training the most skilled workforce will have a strategic edge in the marketplace.”

Highlights from the NRCI reveal challenges as the industry enters the last quarter of the year:

  • Overall economy where panelists do business. Panelists’ business is slowing down, with a grim outlook of the overall economy.
  • Panelists’ construction business. Although the panelists’ expectation of their construction activities slipped by 5.8 points to 69.9, it shows residual recovery momentum.
  • Expected change in backlog. The measure of expected change in backlog dropped to 62.2 from last quarter’s 68.2, a median of the past 12 months.
  • Cost of construction materials and labor. The cost of labor and materials continues to increase. Generally, it is expected that costs will rise as business improves, thus, holding down the overall NRCI number.
  • Productivity flat. The productivity component continues to hang around 50.0. Currently, it is at 47.9.

Skilled Talent Still a Concern

Availability of skilled employees continues to be a key concern of construction-business executives. A majority (77 percent) of the panelists surveyed revealed their worry about not finding enough skilled labor on a national level. Many panelists believe the shortage of craft workers to be an ongoing generational challenge.