This was supposed to be the summer when the construction market would turn around. That has not turned out to be the case for most companies in the industry. There is a growing sense in the industry that there will be no more a “summer of recovery” in 2011 than there was one in 2010 or 2009. With concerns not just about the health of the construction market but the American economy as a whole, industry confidence is beginning to fall.

This disappointment over market prospects is shown in the most recent ENR Construction Industry Confidence Index survey. The CICI for the second quarter of 2011 fell to 46 on a scale of 100, down five from 51 in the last quarter. This slide brings the CICI below 50, which would signal a stable market. The 690 executives of large construction and design firms responding to the survey believe the market still has a way to go before recovery takes hold.

What is the CICI?
The CICI measures executive sentiment about the current market and projections for where it will be in the next three to six months and over a 12- to 18-month period. The index is based on responses to surveys sent out to more than 3,000 U.S. firms on ENR’s lists of the leading contractors, subcontractors and design firms. The latest results are based on a survey conducted from May 28 to June 13.

More Respondents Anticipate Decline than Recovery
This quarter, 38% of all respondents say the market continues to decline, up from 32% in last quarter’s survey. Only 13% believe the market currently is improving. The pessimism extends to the period from three-to-six months from now, as only 20% of respondents believe the market will improve by the end of the year. This compares to 31% who believe it will still be in decline. Respondents were more confident of a market rebound in 2012, with 48% saying the market will improve in 12-to18 months, while only 10% saying it will continue to be in decline.

One striking finding from the CICI survey this quarter is a sharp drop in confidence in the overall U.S. economy. In the first quarter’s survey, 29% of respondents believed the economy was improving while only 13% believed the overall economy was on a downward trend. In this quarter, those figures are nearly reversed, with only 16% of respondents who believe the U.S. economy is improving, while 27% believe it is declining. Applying the CICI formula, the overall economy would have a 53 rating in the second quarter, down 18 points from 71 in the first quarter.

Individual Market Sectors See Little Change from Previous Quarter
Applying the CICI formula to individual market sectors, respondents feel that most either were about the same or slightly down from the first quarter. The only markets that gained were multi-unit residential (up 3 points to 55 on a scale of 100) and higher education (54) and health care (67), both up a point. The only significant fall-off in CICI ratings from the first quarter were two of the stronger markets. Survey respondents are most optimistic about the power market (at 71), even though the level of optimism is down 4 points from last quarter. Also off 4 points was the hazardous waste market (59)

Among other markets still in positive territory are: petroleum and petrochemical at a 66 rating, down two from the first quarter; industrial process and manufacturing at 58, down two; and water/sewer/wastewater at 55, down one. The transportation market continues to be less than sterling now that most of the stimulus money has been expended. It has a subpar rating of 48, the same as in the first quarter.

Overall, survey respondents continue to be pessimistic about the general building markets. The commercial office market continues to be the lowest rated at 37, unchanged from the first quarter. Also unchanged is the retail sector at 42. Other sectors include: entertainment & cultural at 44, and hotels & hospitality at 46, both down one from the first quarter; and K-12 education (45), and distribution & warehouses (47), both down two from the first quarter.

Concerns Continue About Financing and Materials Prices
The CICI survey also asked participants to gauge changes in credit availability for financing projects, and finds that securing financing continues to be challenging. Only four respondents claim that credit is much easier to obtain, and only 17.0% of respondents said it was somewhat easier to obtain. In contrast, 8.0% said it is much tougher to secure credit for project financing; 18.1% said that it is only somewhat tougher to obtain; and 57.6% said that credit availability is about the same as it was six months ago. So clearly, there has been little optimism about the state of project financing among survey participants.

Another area of concern among construction executives is materials and equipment prices. The CICI survey asked them whether they have seen upward price pressure on materials or equipment in the past six months, and 81.3% said they have. Metals were mentioned most often as subject to price increases, led by steel and copper, with many also saying that aluminum has been subject to price increases. The other major area of concern is the rising price of oil and petroleum-based products, such as asphalt and plastics. A few respondents also find transport fees and fuel surcharges from suppliers are appearing or have increased.

Risk Mitigation on the Rise
Risk mitigation in a prolonged recession is a major issue. The CICI survey asked firms whether they had adopted new construction risk mitigation policies in the past six months. More than one-third, 37.5%, said they had, while 57.7% said they had not. The most common new strategy was aimed at analyzing the financial health of potential clients. General contractors stated they were also ramping up their review of subcontractor finances and qualifications and, in some cases, requiring sub bonding. For subs, many commented on increasing review of the general contractors’ past payment and dispute history to “avoid getting burned.” Among designers, many cited a more thorough review of contract documents. Other risk management strategies include more discipline in making bids and being more aggressive in the collections process.

Upswing in Optimism Still Possible as Year Advances
Overall, the CICI survey for the second quarter shows that executives in the industry are not hopeful that the market will turn around any time soon. However, 2011 is showing similarities to 2010. In the summer of 2010, troubling economic news both in the U.S. and abroad caused the stock market to plunge in mid-summer, leading to a strong dip in the CICI index in the third quarter of 2010. The difficult economic news this spring may be having a similar impact on the current CICI rating.

However, the economy and the stock market rebounded in the fall of 2010. This resulted in a new sense of optimism about the overall economy and the prospects for a construction recovery in the long term, and it was reflected in a jump in the CICI index in the fourth quarter of 2010. The big question is whether history will repeat itself. Industry executives are watching to see if the market and the economy will recover from the current summer swoon or whether this will be a longer-term downturn.