After falling to unprecedented low levels over the past two years, nonresidential construction may be moving beyond government and public works stimulus projects into private-sector development, according to a pair of key indicators of future construction activity.
Construction backlog orders increased 4.5% in the first three months of 2010 to just under 6.1 months, up from 5.8 months in the fourth quarter, according to the Associated Builders and Contractors (ABC). The Construction Backlog Index (CBI), which measures the amount of construction work under contract to be completed in the future, rose sharply in February and March, up more than 17% over the two months.
The index rose in all the nation's regions except the West from February to March. However, only the northeastern U.S. region saw a higher backlog compared to the same period a year ago. The West remains weak, which may be due in part to serious state and local fiscal issues and the weak housing market.
"Overall, the nation's nonresidential construction industry is in the early stages of a rebound," said ABC Chief Economist Anirban Basu, who described the rising backlogs as a sign that nonresidential construction's recovery is spreading beyond government-financed projects.
Backlog has been fairly flat for several months in the infrastructure category, at 9.33 months in March. However, order in both the heavy industrial and commercial/institutional categories have been rising, coming at 6.61 months and 6.31 months in March 2010.
Basu noted that the flatness of infrastructure construction backlog shows that much of the money associated with the stimulus package has been funded and is already reflected in backlog.
While the rising CBI "illustrates that the improvements recently seen in various other indicators, including construction spending, will continue through much of the balance of 2010," Basu cautioned that it's too soon to tell whether the momentum will continue through 2011. The rising numbers don't necessarily mean the effects of the recession or over or even approaching an end, and nonresidential construction indicators tend to lag the overall economy by 12 to 24 months, he said.
"With the broader economy having been in recovery for the better part of a year, and with stimulus spending still having an impact, the expectation is that for now, backlog will remain stable or better in the months ahead," he said. "There are many forces at work that suggest that the sector's recovery may not be sustained as stimulus monies are steadily drawn down and commercial construction remains weak due to high vacancy rates and tight credit," Basu said.
While the Northeast saw the highest construction backlog at 7.31 months in March 2010, the South and Midwest are still down compared to the same time last year. In the West, backlog stood at 5.76 months in March, roughly the same level as in August 2009.
Meanwhile, the American Institute of Architects monthly Architecture Billings Index (ABI) bolstered hopes that construction activity will be stronger this time next year. The index, which measures billings for design service on nonresidential construction projects, rose for the third straight month, jumping from 46.1 in March to 48.4 in April, its highest level since January 2008. The industry views the index as an indicator for hard construction 9 to 12 months in the future.
Demand for the services or architects and other design professionals still hasn't moved into positive territory because only score of 50 or above would indicate an increase in billings, but inquiries into new projects rose again to 59.6. As with the order backlogs, the northeast saw the billings index move to 51, indicating significant growth in demand.
"It appears that the design and construction industry may be nearing an actual recovery phase," said AIA Chief Economist Kermit Baker. The economic landscape is improving - not across the board, but at a gradual pace - and positive demand for design services and construction may be within sight, he said.
