Small Contractor Confidence Drops Substantially

Construction and contractor industry confidence in the economy has dropped by nearly 40 percent in the past three months, according to the results of a survey by the Buffalo Grove-based International Profit Associates Small Business Research Board.

The IPA SBRB Construction / Contractor Confidence Index fell to 30.7 for the most recent poll completed earlier this month, down from an index of 49.3 in May.

In contrast, this outlook was far more pessimistic than that of all small businesses for which the IPA SBRB Small Business Confidence Index (SBCI) dropped about 20 percent to 39.3 from 47.3 during the same three-month period.

According to the results of the newly issued survey, 26 percent said they had confidence in the general economy versus 48 percent in May. Concurrently, 38 percent of the respondents in the current poll indicated disappointment with the direction of the economy an increase of 11 percent from the 27 percent who expressed that opinion in May.

Nevertheless, 52 percent of the construction and contracting firms responding to the survey said that they are estimating revenues for the year will be about the same as last year while 40 percent said they would be better than their 2005 performance.

Of the respondents, 49 percent said they intend to maintain current workforce levels while 26 percent said they intend to increase hiring with 14 percent decreasing hiring and 9 percent of the construction and contracting firms unsure of their plans.

"The precipitous drop in confidence among the construction and contracting trades mirrors the concern we have heard from developers and builders about the slowdown in housing purchases and softness in commitments for new commercial projects," said Gregg Steinberg, President of International Profit Associates, the largest privately-held provider of management consulting and professional services to small and medium-size businesses in North America.

"This data is alarming, though, both in how quickly the confidence among owners and managers of construction and contracting firms has changed as well as the steepness of the decline," Steinberg added. "The confidence of construction and contracting firms, which had greater confidence than the universe of all small businesses just three months ago, has dropped by twice as much."

The cost of materials, energy and fuel costs, and taxes are listed by the respondents as their three leading business issues. The cost of materials was described by 25 percent of the participants as the leading concern (the same as the previous period), 15 percent named energy and fuel as a leading issue -- an increase from 3percent of the respondents in the May 2006 report. Taxes were listed by 14 percent as the leading issue.

Building Materials Up, Despite Drop in Price Index

Construction material costs are up, even as other producers eased up on price increases.

In July, the most recent data available, the PPI for finished goods slowed to a 0.1 percent increase, seasonally adjusted, down from 0.5 percent in June, noted Ken Simonson, chief economist for The Associated General Contractors of America. But the PPI for materials and components for construction accelerated to a 0.7 percent rise from 0.3 percent in June.

Since July 2005, the overall PPI has risen 4.2 percent, while the construction materials index climbed twice as fast, rising 8.3 percent.

"That gap actually understates the impact on nonresidential and multifamily construction," Simonson added. "Single-family building costs have been held down by falling prices for lumber and plywood, but these materials make up an insignificant part of the cost of other types of construction."

Major materials price increases over the past 12 months include: copper and brass mill shapes, such as pipe, wiring, faucets, and flashing, up 88 percent; wallboard and other gypsum products, 23 percent; plastic construction products like polyvinyl chloride (PVC) pipe, fittings, and membranes, 20 percent; steel mill products, 18 percent; aluminum mill shapes, 15 percent; and concrete products, 11 percent.

Furthermore, the PPI for diesel fuel-which affects the cost of running off-road equipment, construction vehicles and fuel surcharges for delivering materials to job sites-soared 26 percent over 12 months. That means the delivered costs of many materials have gone up even more than their prices at the producer's point of sale, which is what the PPI measures.

"Owners should not assume inflation is going away," Simonson warned. "For many of these materials, cost increases have been accelerating, not subsiding.

Others show big increases in prices of the raw materials used to make them.

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