Revenue Jumps on Better Margins, but is it Just the Calm Before the Slowdown? | Construction Podcasts

Listen to Dodge's Ben Johnson and Donna Laquidara-Carr discuss the state of the construction economy for Q3 of 2019. Below is a transcription of this construction podcast.

                                     Ben Johnson:                    

Welcome to this episode of "A Podcast that Builds". I'm your host Ben Johnson. Today we'll be talking about the Q3 2019 CCI commercial construction index report and I'm joined by Donna Laquidara-Carr. Welcome, Donna.

 

Donna Laquidara-Carr:  

Thank you very much, Ben.

 

Ben Johnson:                    

So first let's take a second to remind our listeners what the CCI commercial construction index report is.

 

Donna Laquidara-Carr:  

Well, every quarter we survey general contractors in our contractor panel, and we do this for the U.S. Chamber of Commerce and the USG. We want to find out what the contractors feel about their business and we use that to create an index which we ask about three things in particular that add in together to that index number, revenue backlog and their competence and being able to secure new business. We also survey on other issues every quarter that impact their business to have a better and deeper understanding of why they're answering the way they are. Things like profit margins, the ability to access financing and their concerns about the construction labor shortage. And then finally, every quarter we ask about a unique topic or trend to capture how the industry's evolving. All of these findings are combined together in a short report.

 

Ben Johnson:                    

So, I guess that begs the question, what is the current index number for the third quarter of 2019?

 

Donna Laquidara-Carr:  

The current index number is 77 which is the highest since the CCI was first tracking that number since Q1 of 2017.

 

Ben Johnson:                    

So, is it the revenue or the backlog or the confidence number that you think is pushing it up this quarter?

 

Donna Laquidara-Carr:  

Oh, it's definitely the revenue number. Confidence has really been remaining consistent for the last year or so. And backlog is recently spiked up, but right now it's currently at the same high level that we saw it at the last quarter. Revenue, though we've seen the numbers going down throughout most of 2018 and the beginning of 2019 this is the first quarter actually since the Q1 2018 where we've seen that reverse. And not only did it reverse revenue, went way up, it actually went up to about the same levels it was at in Q1 2018 jumping up from 66 to 72.

 

Ben Johnson:                    

So, with all these growing concerns about a recession, isn't that a surprising finding?

 

Donna Laquidara-Carr:  

It might be, but there's a few things to think about when you think about this finding first, um, one quarters change in data isn't necessarily that meaningful. You know, if we don't know if this is just a blip or a true reversal in the trend, so we do have to wait to see till next quarter what happens. Second you want to bear in mind that we're asking about their optimism about their work one year out and even revenue is influenced by that. And right now, contractors are not feeling any kind of a slowdown. They have these very high levels of backlog, which we have seen consistently over a few quarters and the ratio of their current ideal backlog right now is over 80%. So very, very positive given that even if a recession where to start to be evident tomorrow, many of the contractors surveyed won't feel that pinch for probably at least a year. And then finally we did also see an uptick in profit margins this quarter. So not only are they seeing higher revenues, but they also seem to be managing the issues that they are facing around materials and the construction labor shortage as well enough to be pretty positive about their overall outlook.

 

Ben Johnson:                    

So, in opposition to all these positives, are there any negatives showing up?

 

Donna Laquidara-Carr:  

We definitely are still seeing issues around the construction labor shortage that has remained completely consistent since we've started, and it remains true and right now we have about 70% this quarter who say that they're challenged to meet schedule requirements and that they're putting in higher bids for projects as a result. So those two factors still are a huge point of concern in terms of their overall influence on the construction industry. And also for the first time since we started asking it around the middle of last year, we've seen an increase rather than a decrease in the percentage who expect a high business impact from the tariffs. This is now mind you when it first launched and we first launched that question a little bit over a year ago that, that the tariff, those who were concerned about that high business impact on the test was really high. But now we've seen that it, since that point we've seen it steadily go down. This is the first quarter where we've seen another uptick back up and it is a notable one with an eight point increase for those.

 

Ben Johnson:                    

Why, why do you think that is?

 

Donna Laquidara-Carr:  

Well, we don't have any direct data on it, but if you look at the timing of the fielding, its kind of makes sense. When we did the Q2 survey where it was at its lowest, there was a lot of optimism that we were going to straighten things out with China soon and that, um, the, we were going to see the tariffs go away when we did the Q3 survey. It was in July and in July there was suddenly a new high new level of concern that we were going to be living with these tariffs for quite a while. And I think that influenced it.

 

Ben Johnson:                    

Thanks for listening to "A Podcast that Builds". The CCI report on which the show is based is available for free construction.com or you can follow the link in the show notes. You can reach Dodge at construction.com or at (877) 784-9556. Join us next time where we'll have a short episode discussing resiliency in construction. That's all for this one. We'll see you next time.