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Blog/August 18, 2014

Nonresidential Construction Index Dips in Q3

Nonresidential Construction Index Dips in Q3The great man of letters and champion of reason, Voltaire might have been talking about climate change when he wrote, “Men argue. Nature acts.” Men and women argue about climate change and global warming, but nature does what nature does, be it drought, doldrums, snow, rain and hurricanes. Argue as we will, we inevitably enjoy and suffer the acts of nature. Much the same can be said about the economy. Pundits and politicians argue—incessantly—and the economic climate changes in spite of argument and often in reaction to climate change. For instance, nasty winter weather and a continuing drought in the West are among the key explanations for a slowing economy in the first quarter. Although there are many arguments about what to do about these events, it seems it is time to make some reasonable decisions about what, if anything, can be done to ameliorate the shock of natural events on our lives and the economy. Inaction can often be more damaging than a less than perfect action. If we can agree on the observations that we are in the midst of a global change in climate, whatever the underlying causes, then we might also consider the idea that we are experiencing a changing global economic climate. Last quarter we asked panelists for the NRCI to give us some idea of their R&D activities. Clearly, R&D is necessary to keep up or get ahead of the changing nature of the construction business. R&D activities are usually kept close to the vest, as we received few secrets in response to our questions. This quarter we asked panelists to tell us about their experience with joint ventures and partnerships, an activity that works best when partners are not secretive but open and collaborative with each other. The responses were mixed, indicating that JVs are not for everyone. Some do well to avoid them, and others have found success in forming them for successful projects.

Now the news. The NRCI dropped 3.3 points this quarter to 62.5, thus breaking the short run of solid advance in the previous two quarters. At first glance, one would say this is not good news. Although we prefer to see a constant rise in the Index, we note that a score of 62.5 is 2.2 points better than the one in Q3 2013. The NRCI is also still solidly in the growth range between 50 and 100. Although most components of the NRCI dropped this quarter, backlogs remain strong with expectations of improvement and productivity up a little. However, the signs of change are in the details. With the cost of materials continuing to climb and the cost of labor moving up sharply, both components weigh negatively on the Index. In the near term, higher costs of production don’t help contractors repair their recession-weakened bottom lines. However, these components are also signs of a growing economy as manufacturers see higher utilization rates, and unemployment drops closer to full employment levels, thus pushing wages up. Other components keeping the NRCI from rising faster are not as promising and show signs of inaction, as government continues to reduce spending and avoids making a final decision on the highway spending bill, while private investors sit on their hands waiting for others to act. Most market sector expectations are down, the exception being lodging, with the weakest sectors, education and health care, among the largest markets. The good news is that, in general, we are now at a point in the recovery where we can focus more on thriving than surviving; but thriving in the new economic climate will require not just being the strongest or biggest, but also the most adept at dealing with economic climate change.

Nonresidential Construction Index Dips in Q3 - 2

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