TWIA Commercial Property & Casualty
Construction backlog stagnates, squeezing smaller contractors
Aug
Dive Brief:
- Construction backlog stagnated at 8.4 months in July as smaller contractors felt the brunt of the pain and builders’ profit confidence hit nearly a two-year low, according to a Tuesday release from Associated Builders and Contractors.
- Firms with annual revenue under $50 million pushed the backlog level lower over the past month, according to an ABC member survey. Only the largest contractors, those with over $100 million in annual revenues, have a longer backlog than this time last year, according to the report. That combo cratered contractors’ outlooks for making money going forward.
- “Contractor confidence regarding profit margins now stands at the lowest level since November 2022, which comes as little surprise,” said Anirban Basu, ABC chief economist. “There are now strong indications that elevated interest rates have finally taken their toll on a number of privately financed construction segments as well as the broader economy.”
Dive Insight:
Although larger contractors have managed to secure a longer backlog and manage through economic headwinds, smaller firms are increasingly feeling the pinch, said Basu.
ABC’s Construction Confidence Index readings for sales, profit margins and staffing levels all decreased in July, but remain positive, albeit barely, according to the report.
With a score above 50 indicating builders expect growth, July’s profit margin score of 50.6 means the outlook is just marginally above water and is down from 55 a year ago. This decline in confidence reflects the growing concern over profitability as contractors grapple with rising costs and uncertain economic conditions.
Lingering high construction material prices, which are still nearly 40% above pre-pandemic levels despite easing inflation, continue to drag on industry activity, according to ABC. For that reason, Basu said the Federal Reserve’s highly anticipated interest rate cut is now assured, and should help spur renewed construction spending.
“With construction spending down for the past two months, the industry eagerly awaits lower interest rates,” said Basu in the release. “Given recent economic turmoil, the Federal Reserve will begin cutting rates at its September meeting.”
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