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Construction Trends Remain Favorable for Enhanced Profitability


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Procore’s National Construction Industry Health Indicator stands at 80.9 as of May 3rd, 2016. The aggregate indices’ three major subcomponents, construction investment, construction labor, and commodities/materials, stand at 88, 82, and 72, respectively. The index is designed to generate readings ranging from 60 to 100.

For the most part, construction trends remain upbeat. The typical firm is busy, with many companies report record or near-record backlog. Some are turning away work for the first time in years. This is reflected in the lofty construction investment sub-index reading. In recent months, nonresidential construction spending has been flat. While one of the explanations for this is continued soft U.S. macroeconomic growth, another is that a growing number of construction segments are faced with significant supply constraints, particularly with respect to construction labor. In other words, the capacity to increase construction service delivery in America has become increasingly constrained.

For the most part, construction trends remain upbeat.

The ongoing difficulty in securing construction-ready workforce has begun to bid up wages, which all things being equal makes construction firm profitability more difficult and less likely. However, the more significant cost increases recently have taken the form of rising commodity prices. After falling significantly during the latter stages of 2014 and throughout 2015, construction materials prices have been rebounding more recently, including in the form of higher oil and iron ore prices. This contributed to the relatively low reading in the commodities/materials sub-index. 

The implication is that expanding profitability may become more challenging for construction firms going forward. Owners of projects have become accustomed to receiving lower bids, and in certain markets, there are firms still willing to price projects embodying low profit margins and few contingencies. The situation will become more problematic if inflation begins to accelerate, pushing interest rates and borrowing costs higher. 

On the other hand, the U.S. economy appears poised to avoid recession in 2016. Given significant backlog among many firms, this implies that most firms will remain busy beyond 2017 and hopefully beyond.

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