Tariffs and Construction Labor Shortage: Commercial Construction Index 2018 Q3 | Construction Podcast

The Commercial Construction Index tracks trends in the construction market to help industry professionals understand the current state of the industry. Listen to “A Podcast That Builds” host Ben Johnson and Dodge’s Donna Laquidara-Carr discuss the findings from the 2018 Q3 CCI Report, including insights into tariffs and construction labor shortages. Below is a transcript of this construction podcast.

 

Ben Johnson:    

Welcome to "A Podcast That Builds", construction industry experts keeping you in the know with news, trends and analysis that will shape the future of building. On today's show, we'll be discussing the third quarter 2018 CCI report, that's Commercial Construction Index. And to help us do that, we have the report's author, Donna Laquidara-Carr, with us here today. Welcome, Donna.

 

Donna Laquidara-Carr:  

 Thank you very much. It's a pleasure to be here.

 

Ben Johnson:   

  So, let's jump right into today's topic. First, can you remind our listeners what exactly the CCI is?

 

    Donna Laquidara-Carr:  

Every quarter we've surveyed general contractors and trade contractors and we do this in partnership with the US Chamber of Commerce and USG who are the groups that actually published the commercial construction index. We teamed up with them because we thought it'd be valuable to find out what contractors feel about their business to really understand what's going on in the construction industry. We create the index part of it in particular by asking about three things, revenue, their backlog, and their confidence and being able to secure new business. We also always survey them on different issues every quarter like profit margins, access to financing, their concerns about the construction labor shortage, all those things that might impact or change the fundamental CCI figure. And then finally in every quarter we do ask them about a unique topic or trend.       

We just want to see how the industry is evolving and we're trying to keep an eye on the key things that are changing in the industry. And you know we get a little short insight into those as well. So, the CCI of course is an index. The figure this quarter is 75 I'm now that is only two points different from last quarter and it's pretty much within the range of what we've seen with the other CCI reports. But it's actually pretty interesting. Up till now we've seen each of the components of the CCI stay pretty consistent. But this time we saw a bit of a shift in one of the components backlogs shot up. It's set 81 which is the ratio of their actual backlog to their current ideal average backlog. So, 81 is a pretty high ratio. The ratios have been in the 70s up til this point.               

It was 73 in Q2. So that's a huge change. And we also saw the average backlog increased this month. It was over 10 months for the first time. Now the other two components were a little bit less positive with that big positive leap and backlog. We did see optimism about new business stay about the same. It just dropped about one point. It's still a very positive number at 74, but it did, you know, drift down to tiny bit. And we saw an actual decline in revenue, not as big of a jump up as we saw in backlog, but we saw revenue decline from 72 to 69 this quarter. Although, you know, I think the key thing you want to take away from that is that the majority of contractors are still expecting their revenue to grow. So, all in all we see the most of the, the, the contributing factors showing a pretty strong market.

 

Ben Johnson:    

Yeah. The average backlog over 10 months. That's quite high. Well do you have any thoughts on why that number is up?

 

Donna Laquidara-Carr:  

Not yet. Cause you know, we just have to one quarter of data so it's a little bit too early to say things for certain, you know, data has this weird tendency to sometimes spike and sometimes dip. And one of the great things about doing this quarterly is that we can really track which changes are significant and which aren't. So, we're really going to be looking for what happens next quarter to see if this is an actual leap up or just a little momentary blip in the data. It really is a point that bears watching though. And if it turns out to be a more permanent thing, it's won't be terribly surprising because it, it corresponds to the strong economic figures that you hear reported on in the country in general and a lot of other measures that are put out there in public.

 

Ben Johnson:    

Yeah, everything seems to be pretty strong right now. So, what about revenue? Any thoughts on why that's down?

 

Donna Laquidara-Carr:  

Well, you know, that one is surprising, I have to admit precisely because backlogs up, you would assume revenue would be up if backlogs up. Now one thing that could be true is they could just be doing smaller projects that would account for backlog being up in revenue being down. But it doesn't seem to fit in with the overall optimism of the economy. So, I'm, I think it's worth noting that we're not really seeing a decline per se in revenue. In fact, you know, the percentage who said that they think revenue is going to decline was actually smaller as tiny already, but it was already actually smaller this quarter than it was last quarter. What we're seeing is a lot more people saying that revenue is going to stay the same. So, to me, what this likely indicates, it's just that you know, we're, you know, close to the top of a very strong market. So, you know, you're seeing very good revenue and you're seeing it maintaining itself.

 

Ben Johnson:    

So, the picture overall was very positive. But last quarter you mentioned that there were two areas of concern that contractors were reporting a skilled labor worker availability and also material prices. Is there any significant change in either of those this quarter?

 

Donna Laquidara-Carr:  

Well, there is let's talk about workforce first. We still see workforce as a consistent top challenge reported in this study. This quarter hasn't changed. The biggest change we saw in that area was actually we saw an uptick in the percentage who are highly concerned about whether workers possess adequate skills that went up to 55% and that's the highest we've seen so far in 2018 but just to, to kind of put a little context around that, that kind of returns 2018 to the same levels of concern we were seeing about that factor in 2017 so, but still, you know, people are paying attention to whether or not there are enough. The, the level of that, these skilled workers that they do find, have, and that's a growing area of concern right now. About two thirds of contractors have also reported they're having trouble meeting schedules.            

And putting in higher bids because of these issues. So, you know, these impacts are going to continue to ripple through the industry. It's also worth noting that nearly half, 44% of contractors say that they're turning down work because they're experiencing the construction labor shortage. And again, we expect that to have impact eventually on construction costs on owners being able to move forward in a timely fashion on their projects. And what's one thing that's interesting about that is the trade contractors are still the ones who are reporting the highest levels of concerns about the availability of skilled workers. You know, we, we see that gap over and over again. Sometimes it's big enough to be statistically significant. Sometimes it's just directional. But it's, it's been a consistent thing now for seven quarters. So, I think I can state that really, it's trade contractors that really have their thumb on this as the major problem.

 

Ben Johnson:    

Very interesting. So, so things are pretty consistent with previous findings about the construction labor shortage. But what about materials?

 

Donna Laquidara-Carr:  

Well in material costs, you know, at first everything was very consistent, and it was not a big issue. Then came Q2 of 2018 and we saw a huge spike in the level of concern about cost fluctuations and materials and the impacts that they'd have on the contractor’s businesses. Suddenly that really jumped right up at, at that time because we thought something like that might happen. We also asked, so some questions about tariffs and construction to see if, if concerns about tariffs were contributing to that and when they, when the survey field it, it's actually right when tariffs are really being talked about. But none had really been implemented yet back in Q2 and there was a really high level of concern or they, they were definitely correlated together. Okay. So, let's move now to this quarter. This quarter we are continuing to see material cost fluctuations having an impact on businesses in the construction market.

In fact, we've seen that figure increase. It was 38% when it first leaped up in Q2. Now it's 44%, almost half who are saying, yeah, we're really concerned now that these material fluctuations are going to hurt us. And we see over half of the contractors say they are expecting a high degree of business impact from steel and aluminum tariffs. And that's all the contractors. That's GC's and trades. If you really just look at GC's, it's over 70%. So, but then when we look at the tariff questions, we do see some, some moderation in the percentage that say they're really concerned about the tariff impact on construction. There's still concern, but they're a bit lower at like for instance, 44% said they're worried about new material and equipment tariffs. And like I said, over half said they're worried about the steel and aluminum tariffs, but both of those figures are a little bit lower than what they were in Q2. So, I think now that they're living with the reality of the tariffs, they are feeling impacts, but perhaps the high, high degree of concern has moderated a bit.

 

Ben Johnson:    

Wow. Very interesting topic. So, I always end up asking this question, Donna, but is there anything else that you found surprising or particularly interesting this quarter?

 

Donna Laquidara-Carr:  

Well, I don't have an explanation for this, but one thing that is very interesting is that the, the West seems to be very, very concerned about tariffs and then Midwest seems to be the least concerned. So, 67% over two thirds of those in the West are expecting a high impact from the new steel and aluminum tariffs. And that compares with just 42% in the Midwest. And we see that same disparity when it comes to potential new construction material and equipment tariffs with the west at 56% for that and the Midwest at 35%. So, there's definitely some regional impact, you know, and these are broad regions, so they all include red states and blue states. So, I don't think it's a political thing. I don't know if it's a material sourcing thing or what, but, but it'll be interesting to see if concern remains high about tariffs and construction. If we see that trend continue.

 

Ben Johnson:    

Wow. Yeah, that is quite the disparity. Very interesting. Donna, thank you so much for taking the time to come in and talk to us about this quarter's construction market results.

 

Donna Laquidara-Carr:  

  Sure. I look forward to these every quarter.

 

Ben Johnson:    

  Yeah, and we'll definitely see you here next quarter. Thanks for listening. A free copy of the report referenced in today's show is available in the show notes or at      construction.com; you can reach Dodge at construction.com or at (877) 784-9556. We'll see you on the next episode, where our topic will be safety.

 

Episode Links:

Q3 2018 Commercial Construction Index Report