Nonresidential construction continues to stumble badly on the road to recovery, registering new losses that may not even reflect the full, gloomy picture, according to a new report.
|Some of the recovery indicators are being propped up by unsustainable low-bid activity, FMI contends.|
Economic indicators for the third quarter of 2012 declined five percentage points over the previous quarter, hitting their lowest level since the second quarter of FY 2010, according to the new Nonresidential Construction Index Report by FMI of Raleigh, NC. The firm provides management consulting and investment banking to the engineering and construction industry.
‘Beware the Upturn’
FMI recorded a third-quarter 2012 reading of 54.8, a five-point decline from the previous quarter.
Although the number is still above 50, a threshold that indicates improving or expansion, the report carries an ominous message: “Beware the upturn.”
Why? The road to recovery is also apparently resulting in the downfall of marginally surviving contractors, FMI’s panelists say.
Too many contractors have been taking on too much low-bid work to pump up their backlogs, the report says. Combined with rising material and labor costs, the result is businesses that are unable to finance ongoing losses.
Project management fees and profit margins have also declined, driving some industry firms into bankruptcy. Nearly a third of the panelists report a decline in trade contractors; more than 10% report fewer general contractors and design firms.
Confidence Plunges, Loans Tighten
The decline is also sapping confidence, FMI reports. The panelists’ confidence in the economy took a huge hit, dropping 24.7 points for the quarter.
Adding to the volatility is the decline in bank loans for construction, which has driven more contractors to pursue self-funded projects as a financing partner with owner/developers.
If there is a bright side, it is that temporary gains in the economy have boosted sales and released some projects that had been on hold for a long time. The result is some improvement in backlogs—the first positive indicator of that kind since the second quarter of 2011.