2009 Construction Outlook
January 20, 2009
SAN FRANCISCO – With some regional
variation, U.S. residential and non-residential construction activity is
expected to remain weak through most of the coming year, according to the 2009 Wells Fargo Construction Industry
Forecast. Survey respondents were slightly less pessimistic about
non-residential construction activity.
In its 33rd edition, the Forecast – published by Wells Fargo
Construction, a division of Wells Fargo Equipment Finance, Inc. – is based on telephone
interviews with over 900 executives of construction contracting and equipment
distribution companies from around the country. Surveys
for this year’s Forecast were conducted during a six-week period in
October and early November 2008, at a time of particularly heightened economic
uncertainty.
Many survey respondents expect
comparable levels of construction activity in the non-residential and
residential sectors. However, 43 percent
of contractors and 39 percent of construction equipment distributors foresee
less non-residential activity, while 55 percent and 48 percent, respectively, expect
residential work to decrease. Eleven percent of both contractors and
distributors believe residential construction activity will increase.
Non-residential construction appears to be in slightly better shape given that
15 percent of contractors and 17 percent of distributors forecast an increase
in that type of work.
“We took the pulse of the industry
during a period of unprecedented turmoil and that certainly influences the
numbers we are seeing,” said Ron Riecks, general manager for Wells Fargo
Construction. “There is no doubt that there are serious economic issues yet to
be faced, but construction is a cyclical industry. We’ve been down before, and
we’re confident the construction industry will rebound. 2009 is going to be a
difficult year but a government stimulus package with an infrastructure
revitalization component could go a long way to helping this industry recover
before the end of the year.”
Since many more respondents see activity decreasing than
increasing in 2009, the Wells Fargo Optimism Quotient (OQ) fell to 42 – down
from 80 in last year’s Forecast and
continuing a four-year decline from its peak of 109 in 2005. The OQ is the Forecast’s primary indicator of respondents’ expectations of local
construction activity and is based on responses to questions about local
construction activity for the coming year. In general, an OQ score of 100 or
more represents high optimism for increased local construction activity. A
score above 75 represents more cautious or measured optimism. This year’s lower
score indicates that many fewer respondents think 2009 construction activity
will increase than think activity will decrease – a decidedly pessimistic point
of view.
While 2009 is shaping up to be a challenging year, most
contractors (73 percent) and equipment distributors (63 percent) who foresee a
decrease in construction activity see a turnaround coming 12, 18 or 24 months from
the time of survey in October 2008. The largest share of these distributors (28
percent) and contractors (22 percent) predict that improvement will come 12
months from the time of survey.
The Forecast once
again highlights that construction is a regional industry. OQ scores are down
significantly in all nine geographic regions this year.
Scores
range from highs in the 50s in the East South Central and West North Central
regions to lows in the 20s and 30s in New England, South
Atlantic and Pacific regions. These sub-60 scores indicate that
many more respondents expect a decrease in local construction activity in 2009
than anticipate an increase in construction activity.
Key findings about industry issues
and opportunities in the 2009 Wells Fargo
Construction Industry Forecast show that 1) the recession poses a major
challenge for the construction industry, 2) the residential market continues to
deteriorate while nonresidential activity will fare only slightly better, and 3)
most executives see recovery 12, 18 or 24 months from the time of survey. Other
trends include:
- Equipment – More contractors plan to buy used equipment in 2009 than in 2008; the average age of fleets is up substantially.
- Rental – Contractors expect to rent equipment slightly more often; rental rates are expected to hold steady; and distributors’ share of rental market has grown slightly.
- Financial – Construction firms are focused on staying profitable; the credit crunch has not been as prevalent among contractors and distributors; and materials and fuel costs are still a concern.
- Business Strategy – Financing programs are the top strategy for increasing sales; distributors expect the number of contractors to decline; and more companies are buying/selling equipment on the Internet.
- Issue and Opportunity – Focus shifts toward commercial construction in 2009 as an area of opportunity; lack of work overshadows other industry problems; and more executives are concerned with financial issues than before.
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