decline in non-residential construction. Looking at it another way, the value of
all private construction is up 4.7% in the same period while public construction
is down 5.1%.
Multiple reasons can be cited for the decline in infrastructure spending and
the overall decrease in public construction spending. Industry participants point
to a lack of appointments to key permitting boards and agencies that approve
large-scale projects. This issue, coupled with vacancies in strategic agencies,
has caused significant delays in new work permits. Some of the openings have
been filled in the last few months, but the openings and delays affected many
key, large-scale projects.
Other factors contributing to the decrease include shortfalls in a few large-population state budgets. In these states, projects have been approved — and
often awarded — but put on hold or delayed due to lack of funding.
This doesn’t mean the news is all bad or that the industry is down. In fact,
three key stakeholder levels — contractors, dealers/rental companies and
manufacturers — remain optimistic and anticipate continued improvement
in the industry.
Predicting the future is impossible. The best we can do is look for trends and
make educated assessments of what might happen. The Dodge Momentum
Index fell by 9.4% in September, marking the fourth consecutive month
of decline. This index is typically an indicator for non-residential building
activity for the next 12 months. Does this mean we are likely to see continued
declines in non-residential building activity? Not necessarily according to Ken
Simonson, chief economist for the Associated General Contractors of America.
In the October 6 edition of Data DIGest, Simonson noted similar index declines
were seen prior to the 2008 industry peak. The index rebounded in the following
months to be more in line with general economic growth.
In September, the Architectural Billing Index turned negative for the first
time in seven months, but the decline was concentrated in the West with
the Northeast, Midwest and South remaining positive. In addition, commercial, industrial and mixed billings remained in growth territory. In October,
the U.S. Homebuilder Confidence Index rebounded after a storm affected
decline in September. With single family housing starts typically following the
Homebuilder Confidence Index and a continued low inventory of new homes for
sale, conditions are present for continued increases in residential construction
activity, which typically stimulates other private construction activity.
Here’s the bottom line: If this year’s pattern holds, private spending could
take the lead again with an upside coming from a public construction increase.
If both of these occur, the good of 2017 could easily carry into next year for all
parts of the construction industry. m
JOHN CRUM has worked in the construction equipment finance industry for the
past 20 years, holding a variety of positions in sales and credit management.
He joined Wells Fargo Equipment Finance in May 2006 and currently serves as
national sales manager of its Construction Group, overseeing originations activities
in the U.S. and Canada.
For the first nine months of 2017, United Rentals reported rental revenue
increased by 11.7% on a year-over-year basis. Taking into account its acquisition of NES in April, pro forma rental revenues are up 6.5% and both
actual equipment on rent and time utilization are up significantly. M&A
activity has been robust with both large and small acquisitions happening at
a brisk pace, another sign that the rental market continues to be attractive.
New demand caused by recent natural disasters will only add to the
positive environment for participants on the supply side of the rental market.
New Equipment Sales
Major equipment manufacturers have fared well so far in 2017. For the third
quarter ending July 31, 2017, John Deere reported sales in its Construction
and Forestry segment increased worldwide by 29% compared to Q3/16. In
third quarter results ending September 30, 2017, Caterpillar indicated overall
sales improved 27% in North America, with the Construction segment
leading the way at a 31% increase. Komatsu reported North American sales
of seven major products increased 8% year over year.
Other manufacturers have reported robust sales in North America.
Volvo CE reported first half sales increases in North America of 16%, while
Case Construction reported a Q2/17 global sales increase of 13.6% in North
America and Asia as drivers of growth. These sharp increases will be difficult to repeat, particularly because the comparison periods to 2016 in many
cases were from declining inventory levels. However, the industry appears
to be set for continued increases in new unit sales going into 2018.
Used Equipment Prices
For used equipment, the accessibility of online auction and bidding, coupled
with increased transparency of machine condition and warranties has
lowered the margin between retail prices and auction prices of construction
equipment. This is a trend that will likely continue. In many ways, it makes
the evaluation of used equipment easier for industry participants. With that
backdrop, used equipment prices have stabilized in 2017 while certain asset
types have increased in value, notably wheel loaders, articulated trucks and
hydraulic excavators. Given the increase in demand anticipated for other
asset types needed for storm clean up, this is a trend that will carry over to
additional asset types for the next several months.
Impacts of the Hurricane Season
Devastating hurricanes swept through Houston and parts of Florida this
year. While it is difficult to find specific information about the overall
impact of a major storm on a specific industry segment, a few resources
relevant to H2/17 and 2018 are available and worth discussing. The first
is the producer price impact for construction materials. Damage from the
hurricanes has affected the price of multiple segments of construction
materials. From September 2016 to September 2017 building material prices
increased as a result of greater demand and scarcity of supply for multiple
products. According to AGC, the price of gypsum — used to make drywall
— has increased 8%. Cement has increased 4.5%, lumber and plywood
prices have risen 6.8% and asphalt is up 30.2%. These are more dramatic
examples, and the percentage increases might not hold throughout 2018.
But with rebuilding efforts forecasted to last months, if not years, certain
materials will experience long-term increases in pricing.
Without any measurement of activity related to the storms yet available,
overall construction activity for 2017 is up. According to the U.S. Census
Bureau, the total value of construction put in place, seasonally adjusted,
was up 2.5% from August 2016 to August 2017. The overall increase has
been led by a strong 11.3% upsurge in residential construction. For parts
of the industry related to residential construction, 2017 is shaping up to
be a very good year. On the opposite side of the coin is an overall 3.4%
Here’s the bottom line: If this year’s pattern holds, private
spending could take the lead again with an upside coming
from a public construction increase. If both of these occur,
the good of 2017 could easily carry into next year for all
parts of the construction industry.