Tariff Impact on Construction Industry: Commercial Construction Index 2018 Q4 | Construction Podcast

The Commercial Construction Index uses construction market data to analyze the construction industry. This quarter, the CCI report focuses on the impacts that tariffs are having on the construction industry. Listen to “A Podcast That Builds” host Ben Johnson and Dodge’s Donna Laquidara-Carr discuss the findings from the 2018 Q4 CCI Report, including insights into the tariff impact on construction industry and what it could mean for the industry as a whole. Below is a transcript of this construction podcast.

Ben Johnson:                    

Hello and welcome to "A Podcast That Builds", a podcast covering the news, trends and analysis that will shape the future of building. So today we have our resident Industry Insights Research expert Donna Laquidara-Carr here to discuss the Q4 2018 CCI, Commercial Construction Index. Welcome, Donna.

 

Donna Laquidara-Carr:  

 Hello. Thank you very much for having me.

 

Ben Johnson:                    

 So, to start out, let's just remind our listeners what the CCI is.

 

Donna Laquidara-Carr:  

Well, every quarter we surveyed GC's and trade contractors for the U.S. Chamber of Commerce and for USG for report that they produce that shows how the contractors feel about their business. That report is based around an index number and we create that index for them by asking the contractors about three things, revenue, backlog and their confidence in being able to secure new business. We also survey them about other issues, things like profit margin, their ability to access financing and their concerns about labor shortages. And then finally, every quarter we do ask about a unique topic for that quarter that captures how the construction market is evolving and all these findings are combined together in a real short report. The one for Q4 was just published on December 11.

 

Ben Johnson:                    

So, this is of course an index. Let's go straight to it. What is the current index number and a what, what does that number mean?

 

Donna Laquidara-Carr:  

Well, the current index number is 75 and that happens to be the same number it was last quarter. So, one thing we're seeing is a consistently strong construction market. But there are some interesting trends when you dig a little deeper into that number. And most of them relate back to Q3. Most of them show that some of the changes we saw on Q3 really are holding through. They weren't just us statistical anomalies. So, in Q3 backlog went way up and while in Q4 we saw slight step back, really when you compare the Q four numbers to any numbers before Q3, we see those elevated levels sustained. So that wasn't just a weird little growth in Q3, that was a real backlog increase. We also see optimism about new business staying positive. So, the current number is 76 on that and that suggests that over three quarters of the contractors are very optimistic, highly optimistic about their ability to find new business in this.

In the coming year, revenue is still 69 which is the same number it was last quarter. And that's sort of similar to backlog in the sense that it shows that a change that we saw last quarters holding true, but it's also the opposite of backlog in the sense that it's a lower figure than we were seeing before. So again, we're seeing that odd conundrum of backlog increasing in a greater optimism about backlog and revenues decreasing. But still, I do want to point out that 69 is still a pretty positive optimistic number. It's just a bit of a step back from what we saw before Q3 2018

 

Ben Johnson:

  So, since this is the final quarter of 2018 to have, we seen any trends in the last year?

 

Donna Laquidara-Carr:  

Well it looks like contractors are starting to get a little bit more conservative in terms of their expectations despite the positive backlog. For example. You know, in addition to asking contractors about their confidence in the market in the next 12 months, we also asked them to look out a little bit further and go out to the next 24 months. And you know, that's always been more conservative than the 12 months out of, you know, forecast, which makes sense. There's greater uncertainty about what they're expecting 24 months out. But we have seen that level of confidence that 24-month confidence declined consistently throughout 2018 from 40% in Q one to just 26% now a substantial drop. So, a, we also see that reflected in that those slightly depressed revenue numbers and another trend that we've noticed is really an increasing concern over the year about the cost of materials.

 

Ben Johnson:                    

So, do you think that is just a function of concerns over the tariff impact on construction industry?

 

Donna Laquidara-Carr:  

Well, there's no doubt that they're concerned about the tariffs. We've asked them about that explicitly in the Q2 and Q3 surveys. But our Q3 findings show that the specific concerns about tariff impact on construction industry going down slightly, but the concerns about overall material cost fluctuations going up. So, we are really quite convinced that while the timing was very close to when the tariffs were initiated, the tariffs are not the full picture, that they're seeing elevated costs in materials that are not just due to the terrace. And while cost is a bigger issue than shortages currently in terms of the percentages to report that they're concerned about it. We have seen this steady growth in those who think that shortages are going to have a high impact on their business. In Q one that was just 10% but now in Q4 it's 22% now 22% is still less than a quarter of the contractors who were highly concerned about this. But still that leap up from 10% to 22% suggests this is something we need to keep an eye on going forward.

 

Ben Johnson:                    

So how did a work force issues play into this quarter? Right? Is it still at the same level that it was at the beginning of 2018?

 

Donna Laquidara-Carr:  

Yeah, it's still a very critical concern for contractors. We actually saw a notable increase of about four points between Q3 and Q4 and the percentage of contractors who expect to hire new workers. So, you know, there's still a very active construction market out there seeking new workers. And then we see that challenge remaining pretty consistent. In particular we see not just the challenge in finding skilled workers in general, but their real levels of concern about skill levels. Between Q2 and Q4, we saw an eight-percentage point jump from 50% to 58% and those who were highly concerned about the skills of the workers they hire. So again, that seems to be a pretty critical issue. We ask a follow-up question to those that say they're concerned about the levels of skill, so that 58% in this last quarter to see if they think that problem has worsened in the last six months.

And interestingly, that percentage has also been increasing since Q4 2017 and Q4 it was less than a third 31% but now it's 40% who say, yeah, we've seen that problem getting worse. So, this does seem the skill issue does seem to be an accelerating problem in the industry, not just something that's holding steady. Anecdotally, we've also had a few contractors who report in the open text questions of the study. That retaining workers is a big challenge. It might be a question we look at including in some of the future studies because it's such a big issue, this idea of retaining workers. So that's a real problem because okay, you're getting these workers that don't have the skills you think they need. You have to hire people to do the work. So, you train them. But the second you train them, you make them very valuable commodities out on the job market. And so, you know, we do see this concern that they're investing in training these people, but then they can't keep them.

 

Ben Johnson:                    

  So, any last thoughts about what the Q4 CCI reveals about the Industry today?

 

Donna Laquidara-Carr:  

Well, I think it shows the contractors just like, I think a lot of us out there are watching what's going on with the economy. You know, we're all sort of on the edge of how much longer this growth can go. And they're right there with us. They are seeing, they're seeing so much work right now that it's hard for them not to be optimistic and that really comes through very strongly. But they're not certain that they're going to keep seeing that level of work in the future. And even if they are, they're really uncertain about being able to staff their projects or procure their materials in a way that is going to be affordable by the time they complete the project. Right. You know, you've got to estimate those costs early on and with material prices becoming more uncertain, that becomes a big issue. So, you see a lot of things feeding uncertainty into the market and I think that really suggests it's going to be interesting to see how 2019 evolves for the CCI.

 

Ben Johnson:                    

So now that the CCI report has been around for two years, do you have any, any thoughts overall about the, its first two years or your involvement in it?

 

Donna Laquidara-Carr:  

We've certainly found it to be a fascinating process. I mean, when we look at what we've seen, especially in the questions of the quarter, but also, you know, for, for the first-year things are very, very steady. 2017 was not a year of a lot of change. So, you know, we kept seeing the same results coming back and it was sort of like, okay. And that wasn't surprising, and it would be upsetting if we saw anything different from what all the other evidence, we had from dodge about what was going on in the industry. Right. It very much aligned with what our economists were saying with what everything else was saying and that's good. But it was, it was nice after completing the second year to see some changes, some shifts, even if they're not necessarily great for the industry, things like the, of the rising concern about materials, it became very clear that these things would emerge from the study. And that was satisfying as a researcher to see that we really were capturing things that marked alterations and changes in the industry.

 

Ben Johnson:                    

So, thank you so much for giving your insights over all these CCI podcasts, Donna.

 

Donna Laquidara-Carr:  

  It's my pleasure.

 

Ben Johnson:                    

  So, thank you so much for joining us today on "A Podcast That Builds", please join us next time when our topic will be advanced technology on the job site. You      can get a free copy of the report referenced in today's show construction.com under Resources. You can also reach Dodge at (877) 784-9556. Thanks for                listening.

 

Episode Links:

Q4 2018 Commercial Construction Index Report