Construction Backlog Indicator Unchanged at 8 Months

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Associated Builders and Contractors (ABC) reports that its Construction Backlog Indicator (CBI) remained unchanged at 8 months from the third quarter through the fourth quarter of 2012; however, it is up 2.4 percent compared to a year ago. CBI is measured in months and reflects the amount of construction work under contract, but not yet completed by nonresidential contractors.

“CBI failed to rise during the fourth quarter of last year, a reflection of numerous factors, including fiscal cliff fears, highly constrained public capital budgets and lackluster macroeconomic growth,” said ABC Chief Economist Anirban Basu. “However, backlog did not decline, suggesting that nonresidential construction spending is likely to remain flat during the initial months of 2013 and then possibly trend higher during the latter part of the year.

“There are myriad sources of risk to the nonresidential construction outlook, including automatic sequestration, which likely would result in a pullback in federally financed construction projects, Basu said. “As the president and Congress struggle to agree on ways to reduce the federal government’s large deficits, this debt presents major issues for contractors in the form of higher future interest rates and slower long-term expansion.”

Industry Highlights

•All three industry segments experienced increases in construction backlog compared to a year ago.
•Construction backlog in the heavy industrial segment contracted by half a month from the third quarter to the fourth quarter 2012, falling from 6.73 months to 6.23 months.
•The largest year-over-year increase in backlog was in the infrastructure segment, where CBI rose by 0.63 months.

Analysis

“The decline in heavy industrial CBI is consistent with the recent loss of momentum in the nation’s industrial production growth,” stated Basu. “The export environment has been challenging in a number of product categories due to global economic deceleration during the past two years, which explains some of the lost momentum.

“Backlog in the commercial construction category increased for a third consecutive quarter, a reflection of ongoing recovery in consumer spending, including tourism, and growth in professional services employment,” Basu said. “The year-over-year expansion in infrastructure is reflective of growing construction spending in categories such as power, utilities and transportation.”

Highlights by Company Size

•During the fourth quarter, construction backlog declined for all firm categories except those with annual revenue in excess of $100 million.
•The largest firms, those with annual revenues greater than $100 million, report an
•average backlog approaching 11 months.
•On a year-over-year basis, all firms except for those in the smallest category (annual revenue below $30 million) experienced increases in CBI.
•Firms with annual revenue between $30 million and $50 million registered the largest annual gain (2.5 months), consistent with the fact that much of the improvement during the past year has occurred among subcontractors in this revenue category.

Analysis

“The smallest firms continue to face the shortest backlog and greatest uncertainty,” said Basu. “Construction backlog among this group actually has declined during the past 18 months.

“In general, larger general contractors and subcontractors, which tend to have more solid banking and insurance relationships, appear best positioned to gain market share by taking on larger projects,” said Basu. “The fragile nature of smaller firms may help explain why these contractors are alone in terms of experiencing a long-term decline in average backlog.” Read More