Optimism for 2018 Construction Activity

By Tasha Anderson for Arizona Builder’s Exchange

The level of optimism for nonresidential construction activity for 2018 is at the highest it has been in more than twenty years, according to the Wells Fargo 2018 Construction Industry Forecast report.

The report is the result of an annual survey conducted amongst distributers and contractors across the United States, getting their outlook on future nonresidential construction activity.

The numerical measurement for the industry’s expectation for construction activity, called the “Optimism Quotient” is at 133 for 2018, a 10-point increase over 2017. According to the report, “An OQ score of 100 or more represents strong optimism for increased local construction activity relative to the perceived level of activity for the prior calendar year.” A score of 75 or less represents a more pessimistic view.

The Optimism Quotient hasn’t been under 100 points since 2011 when it measured 96.

When asked about projections for activity for 2018, 71 percent of distributers expect an increase, whereas only 60 percent expected an increase in 2017. 26 percent expect activity levels to remain the same in 2018. Contractors’ projections for 2018 increased from 49 percent to 57 percent.

Nonresidential vs Residential Activity

63 percent of executives project an increase in local nonresidential construction activity for 2018, compared to 55 percent in 2017. Only 4 percent of respondents project a decrease in activity, just one-third of the respondents from 2016. 33 percent of executives predict that activity will remain the same.

For residential activity, 54 percent of executives foresee an increase compared to 45 percent in 2017. The number of respondents who expect residential activity to decrease in 2018 has significantly declined to 4 percent compared to 9 percent in 2017. 42 percent of respondents expect residential activity to remain the same.

Net Profits

Nearly two-thirds of those surveyed (61 percent) expect an increase in their net profits for 2018 as compared to 58 percent in 2017. Of those projecting an increase, 12 percent foresee a significant increase in profitability of at least 15 percent or more. Only 8 percent of respondents expect to see a decrease in net profits for 2018, compared to 14 percent in 2017.

Future Construction Activity

Contractors in 2018 have tempered their optimism about industry expansion in the next two years, despite being highly positive about increased construction activity. 73 percent of contractors predict that there will be industry expansion in the next two years, compared to 84 percent in 2017. 19 percent of contractors believe the industry will remain steady in the next two years.

80 percent of distributers in 2018 foresee an increase in industry expansion in the next two years, compared to 81 percent in 2017. While 2017 showed a 20 percent projection for significant expansion in the next two years, that figure has been more than cut in half and has plummeted to 8 percent in 2018.

An area of concern threatening construction activity is still rising material costs. According to the report, in 2017 the Producer Price Index “indicated that material costs have indeed been on the rise. In November, the PPI for input prices for construction industries rose 5.6 (percent) year over year, marking the fastest rate of growth since 2010.”

Still, distributers and contractors in 2018 believe that construction activity as well as new and used equipment sales/purchases are on the rise compared to 2017.