Construction Backlogs Indicate 2018 to Be a Strong Year for Construction Spending

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The Associated Builders and Contractors’ (ABC) Construction Backlog Indicator (CBI) hit its highest level ever during the fourth quarter of 2017 when it expanded to 9.67 months, a 2.25 percent increase from the prior quarter. Backlog records were broken in the Northeast and in the commercial/industrial segment.

“The average nonresidential construction firm entered 2018 with significant momentum,” commented ABC Chief Economist Anirban Basu in a news release. “Construction spending is set to be elevated this year under virtually any conceivable scenario.
  
Basu attributes this record-setting demand to a number of factors, including still-expansionary monetary policy and accelerating global growth in much of the world, brisk foreign investment in U.S. commercial real estate, surging business/developer confidence, deregulation of certain key industries, higher energy prices, strong consumer spending, a recovering U.S. manufacturing sector and rising spending in a handful of publicly financed construction categories. Basu notes that the recently enacted tax reform is likely to serve as an additional tailwind to an already strong construction story. 

On the other hand, Basu points to reasons for caution as well, including expected price increases for softwood lumber, steel and aluminum, all of which will significantly impact construction prices.

“The result is an increasingly inflationary economy likely to produce higher interest rates over time,” Basu said. “Should interest rates rise too quickly, backlog is likely to eventually decline as fewer developments are green-lighted due to higher borrowing costs.”

Looking regionally, backlog in the South fell 2.9 percent during the fourth quarter, but remains nearly 15 percent higher on a year-over-year basis. Southern markets such as Orlando, Atlanta, Nashville, Dallas and Austin continue to be associated with significant construction momentum. The storms of several months ago also have helped lift backlog in Houston and other impacted communities.  

Backlog in the Northeast expanded for a fifth consecutive quarter as cities like Boston, New York and Philadelphia continue to experience brisk commercial investment. The region’s backlog has expanded by nearly 23 percent during the past year and now stands at its highest recorded level.

Backlog in the Middle States rebounded during the fourth quarter after declining during the prior two quarters. The 9.5 percent quarterly increase represented the largest quarterly increase in any of the four regions.

Backlog in the West continued to rise during the fourth quarter, but still stands at just 7 months. The 2017 California wildfire season, which was the most destructive on record and burned nearly 1.4 million acres, likely stalled a certain volume of construction projects and suppressed fourth quarter backlog.  

In addition, backlog in the commercial/institutional segment expanded briskly for a second consecutive quarter. At 10.1 months, the segment’s average backlog is at its highest level in the history of the series.  

Backlog for firms with annual revenues below $30 million increased by 0.4 percent during the fourth quarter and remains remarkable steady. For the past three years, backlog for this category has remained in a tight range between 7.2 months and 8.1 months. It is conceivable that the lack of pronounced growth in backlog for this group is due to a lack of available workforce. The lack of a reliably available workforce renders it difficult for smaller firms to commit to the larger-scale projects that would pump up backlog. 

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