Contractor confidence reached an all-time high in the third quarter of 2019 with a composite score of 77, but that quickly diminished in the fourth quarter. The Commercial Construction Index (CCI) dropped six points to a score of 71, the lowest score since the index was first released by USG Corp. and the U.S. Chamber of Commerce.
Drivers of Confidence
All three key drivers of confidence fell from their positive third quarter numbers:
- Revenue dropped six points to 66;
- The ratio of current and ideal backlog dropped six points to 76; and
- Contractor confidence in new business fell four points to 72.
The average current backlog is 9.3 months, compared to the average stated ideal backlog of 12.3 months. Only 24% of respondents reported having a backlog of more than 12 months.
While the percentage of contractors reporting having high confidence in sufficient new business opportunities dropped in the fourth quarter, 96% of contractors reported either high or moderate confidence in these opportunities over the next 12 months. The percentage reporting high confidence dropped from 58% to 47% from the third to fourth quarter while the percentage reporting moderate confidence increased from 39% to 49% over the same period.
The percentage of contractors reporting moderate confidence in new business opportunities over the next 24 months remained the same, but the percentage reporting high confidence shifted from 29% to 26% and the percentage reporting low confidence grew from 6% to 9%.
“At 9%, only a small fraction of the contractors seem to be highly concerned, but it may suggest some growing unease about the possibility of an economic slowdown,” reads the report.
The percentage of contractors who expect revenue to increase in the next 12 months dropped from 50% last quarter to 36% in Q4 2019. However, this shift is consistent with the revenue expectations in Q2 2019, which the report suggests shows an adjustment in contractors’ level of optimism rather than a major market shift. While 40% of general contractors expect a revenue increase in the next year, only 32% of trade contractors expect an increase. Over half of all contractors expect a revenue increase of 4% or more.
Profit margin expectations also fell in the fourth quarter of 2019, with the percentage of contractors expecting profit margins to increase in the next 12 months dropping from 39% to 30% in Q4 2019.
When it comes to hiring, fewer contractors expect to employ more workers over the next six months. The percentage reporting that they expect to employ more dropped from 61% to 56% in the fourth quarter, while the percentage reporting that hiring would remain the same increased from 35% to 39% in that period.
The majority of contractors (89%) report a moderate or high level of difficulty finding skilled workers, however that percentage is down from Q3 2019 (93%). Eleven percent of contractors report a low level of difficulty in finding skilled workers, up from 7% last quarter.
“Most contractors (71%) in the Midwest report that it is very difficult to find skilled workers, but only 44% of contractors in the Northeast agree,” reads the report. “In fact, 22% of contractors in the Northeast report a low level of difficulty in finding workers.”
The degree of concern contractors have about the cost of skilled labor has also decreased, with the percentage reporting high concern dropping from 43% in the third quarter to 33% in the fourth quarter. The percentage reporting modern concern jumped from 46% to 54% in the fourth quarter.
Contractors reported the following consequences of skilled labor shortages:
- Asking skilled workers to do more work (80%);
- Challenged to meet scheduled requirements (73%);
- Putting in higher bids for projects (66%); and
- Turning down opportunities for work (42%).
A majority of general contractors (83%) are challenged to meet schedule requirements at the moment due to skilled worker shortages compared to 63% of trade contractors. Small companies (53%) were the most likely to have to turn down opportunities for work due to the labor shortage, compared to 34% of mid-sized companies and 45% of large companies.
Most contractors (92%) report being at least moderately concerned about adequate worker skill levels, but there’s been a slight shift from high to moderate concern in the fourth quarter. Fifty percent of contractors reported being highly concerned in Q4 2019 compared to 58% last quarter and the percentage reporting moderate concern rose from 33% to 42% in the fourth quarter.
“Only 31% of contractors in the Northeast report a high level of concern over skill levels, far fewer than those in the Midwest (59%), South (54%) and West (47%). In addition, one quarter of those in the Northeast rate their concern as low,” reads the report.