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Nonresidential Construction Continues on Growth Path

The nonresidential construction sector continues to grow at a solid pace, reflecting 18 months of improving activity despite rising costs of construction materials and labor and a slight decline in regional economies where most construction activity is taking place, according to the FMI Nonresidential Construction Index Report (NRCI) for Q2 2015. The Index reflects the observations and sentiments of a sampling of construction industry executives nationwide.

FMI’s NRCI for Q2 2015 came in at 64.9, essentially unchanged from the previous reading of 64.8 in Q1. The index paints a mixed picture of the current state of the nonresidential construction sector. On one hand, the NRCI component for the overall economy dropped 1.9 points to 76.9 points this quarter.

While down from its peak of 81.1 a year ago, this component still indicates that panelists contributing to the index remain bullish about the economy. Similarly, indicators for the economies where panelists do the most business stood at 76.7, suggesting continued growth on a broad scale.

Highlights from the NRCI point to diverse forces driving the industry as we enter the midpoint of the year:

  • Panelists’ Construction Business. Panelists’ business is now improving with the overall economy indicating deeper, more sustainable growth.
  • Nonresidential Building Construction Market. The nonresidential building construction market where panelists do business is up 1.9 points to a solid 76.4. This NRCI component is in line with overall economic growth, auguring for continued health in the industry.
  • Expected Change in Backlog. The measure of expected change in backlog improved 3.2 points this quarter to reach 71.7, while current backlog remains at a solid 10 months.
  • Cost of Construction Materials and Labor. The index component for the cost of construction materials dropped one point to 21.4. The component drops as prices increase. The cost of labor components dropped sharply by 5.2 points to 12.5. Both labor and material cost increases reduce the overall NRCI score.
  • Productivity Flat. The productivity component continues to hang around 50.0, or little improvement. It is currently at 51.0.
  • Green Construction. Owners’ views concerning “green construction” indicate that the most important factor characterizing the green construction category is lower energy costs. Only 17 percent of panelists have more than 50 percent of their projects in the “green” category.

“While the current and future outlook for nonresidential construction appears stable if relatively unchanged, things could become more dynamic,” said Phil Warner, research consultant for FMI. “In fact, improvements in profitability would happen faster if costs of materials and labor weren’t rising faster than construction pricing. There is also an increasing amount of evidence that more contractors are capacity-limited.”