This time last year, approaching 2018, the factors posing the greatest barriers to optimism for contractors were political and economic uncertainties, followed by rising material costs and interest rates. Ending 2018, political and economic uncertainty still is and always will be present, but more recently, tariffs and interest rates have become frequent water-cooler talk.
In the past 24 months, the sheer volume of industry headwinds, negative news and natural disasters seem to have had little impact on construction equipment purchasing habits. What gives? Are construction owners and purchasing managers becoming numb to information overload, or is it simply prevailing industry fundamentals? It is most likely a combination of both, but the underlying data is hard to ignore.
The 2018 Numbers
Private construction spending is up 6.1 percent over the past year. Residential and nonresidential have increased 5.1 percent and 7.2 percent, respectively. Real gross domestic product (GDP) grew at a 3.5 percent annual pace during the third quarter, and the unemployment rate dipped to 3.7 percent, with job openings nationwide at an all-time high.
A recent channel check with over 20 distributors by Wells Fargo Securities indicates that new equipment deliveries continue to remain longer than historical averages. Production lead times, as of Q3 2018, for an excavator range from 9 to 29 weeks, depending on the manufacturer. This is an improvement of a few weeks from earlier in the year. In addition, manufacturers of mid- to large-size truck chassis have seen even longer lead times for delivery, often approaching up to one year.
The 2018 Wells Fargo Equipment Finance Construction Industry Survey reported that both contractor and distributor confidence/optimism were at a 20-year high. For the most part, respondents expected increases in sales, rentals, and profitability. Overall, they were right, and all signs point toward another solid year of construction equipment spending in 2019.
The 2019 Predictions
Unlike political and economic uncertainty, the impact of tariffs and interest rates are more easily gauged. For example, several original equipment manufacturers have already announced 2- to 3- percent price increases starting Jan. 1, 2019. On a $250,000 piece of equipment, that can equate to an additional $7,500. On top of that, a 1-percent rise in interest rates would add another roughly $6,900 in interest over a 5-year loan, assuming $250,000 borrowed. Other variables aside, that is a net increase of 5.8 percent.
The United States economic outlook in 2019 is relatively positive overall, with a forecasted real GDP growth of 2.7 percent. There are pauses for concern, however, especially in construction equipment. This is not because of expected soft demand, but instead attributed to a tight supply of new equipment that has pushed used equipment values to an 18-month high, according to a Rouse Services equipment report. Lastly, the scarcity of skilled workers could temper growth.
What to Do with this Information
Some economists say that we are in the eighth inning of a 9-inning recovery, but don’t buy into that yet for construction. It will be important for the industry to work through issues, such as changes in production capacity, talent and used equipment costs in order to keep the rally going. Further infrastructure changes loom over the horizon, but would the addition of a congressional bill deepen the current industry challenges? Perhaps, but not immediately. So, focus instead on these trends and questions as you begin work in 2019:
- Data is everywhere. Use it to your advantage. More contractors are utilizing predictive modeling for maintenance and growth capital expenditures. The ability to track and predict labor, parts and service costs could drastically increase your return on investment.
- Consider placing capital expenditure orders sooner than later. Long delivery times and higher interest rates tend to be bad for business.
- Consider joining a consortium for purchasing and capital expenditures. Economies of scale may reduce prices and delivery lead times.
- Understand the impact of the lease accounting rules, mandated by the Financial Accounting Standards Board, that change for public companies Jan. 1, 2019, and for private companies Jan. 1, 2020.
- Are you taking full advantage of your tax position as a result of major tax reform in late 2017? A quick check-in with a tax accountant or attorney would be money well spent.
- The impact of tariffs is too early to assess, and the real effects will likely not be seen for 6 to 12 months. However, be prepared and budget for those effects, along with increased labor costs and rising interest rates, now.
- Collaborate with local high schools, trade schools, and other vocational programs to develop a formal training curriculum that attracts, trains and retains skilled workers.
Disclaimer: Opinions expressed in this article are general and not intended to provide specific advice or recommendations for any individual or association. Contact your banker, attorney, accountant or tax advisor with regard to your individual situation. The author’s opinions do not necessarily reflect those of Wells Fargo Equipment Finance or any other Wells Fargo entity.