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CIT Forecast Reports Cautious Optimism for 2007

Fri October 06, 2006 - National Edition
CEG



CIT Construction, a unit of CIT Group Inc., a global provider of commercial and consumer finance solutions, announced the results of its 31st annual CIT Construction Industry Forecast. Among its conclusions, the survey found that a majority of respondents were cautiously optimistic about 2007, while many expect to increase spending on new and used equipment in the coming year.

CIT Construction surveyed more than 900 contractors and equipment distributors throughout the country by telephone on their perceptions of the state of the industry and trends for the coming year.

“The CIT Construction Industry Forecast highlights the fact that the U.S. construction industry remains cautiously optimistic about 2007,” said Ron Riecks, president of CIT Construction. “While the level of optimism varied across the U.S., many respondents indicated they planned to increase their spending on new and used equipment in the coming year, which portends to more activity in the industry. I interpret this as good news for CIT and the construction industry as a whole and look forward to a busy 2007.”

The Forecast uses the Optimism Quotient (OQ) as the primary indicator for assessing and comparing the respondents’ level of confidence in the health of the construction industry. The OQ is a weighted and averaged number that expresses construction executives’ perceptions of the industry’s prospects for the coming year as compared to the previous year. Generally, a number of 100 or greater indicates strong optimism in the industry’s one-year outlook while a number below 100 indicates a more cautious projection. The 2007 outlook indicates that while the industry is cautious about the year ahead, the underlying data proves much more enlightening than the OQ scores when considered alone.

2007 Optimism Quotient — Cautious Optimism

Although the 2007 Construction Industry Forecast’s overall national OQ fell 16 points — from last year’s 102 to 86 — other signals indicate a positive outlook for the coming year. Contractors indicated that they expect to spend more on new equipment this year, up approximately 11 percent from last year. Twenty-nine percent of contractors plan to spend more on used equipment, up 15 percent from 2005. Used equipment spending plans have risen steadily for three consecutive years.

The OQ for distributors fell 24 points to 91 while contractors also exhibited a decrease in their optimism, evident from an eight point decline in OQ levels from 89 to 81.

Regional Highlights

• The West South Central region (Arkansas, Louisiana, Oklahoma, Texas) is the most positive region, posting an OQ of 122.

• The Mountain region (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming) leads the nation in bidding opportunities.

• Pacific region (Alaska, California, Hawaii, Oregon, Washington) contractors expect to see a net income growth.

• The West North Central region (Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota) predicts an increase in this year’s equipment rentals.

• The New England region (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont) had the lowest OQ rating (66).

U.S. Construction Trends

Equipment Overview • Forty-five percent of contractors expect to acquire equipment next year. That is comparable to 49 percent last year. While fewer distributors expect an increase in new equipment sales, they anticipate a 20 percent increase in revenue in 2007, up from an estimated 18 percent in 2006.

For the twelfth consecutive year, trucks lead the list of expected equipment purchases, while more contractors this year than last expect to acquire heavy-equipment, including cranes and off-highway trucks.

Rental Overview

While little growth is seen in the equipment rental market, rental rates are expected to climb in 2007. While contractors generally own their equipment, they expect to meet 14 percent of their 2007 needs through equipment rentals or leasing, down slightly from a projection of 16 percent in the 2006 Forecast. Contractors indicated that the primary reason for renting equipment is due to their limited use for the equipment. Rented or leased equipment is expected to meet approximately 39 percent of non-builders’ and 19 percent of builders’ needs.

Half of the distributors surveyed expect their equipment rental income will grow in the next year. The number of distributors planning to raise rental rates increased for the fifth consecutive year to 55 percent.

Anticipating a softer demand for rental equipment, distributors have less ambitious equipment acquisition plans. Fewer distributors expect to meet the rental equipment demand by growing their equipment fleet, ending a three-year expansion of rental inventories. However, those who plan to add to their fleets expect, on average, to grow their fleet size by 22 percent — the highest estimate since 2001.

Finance

Most contractors and equipment distributors surveyed are confident about their ability to maintain or grow their profits in the coming year. More than half of each group said their net income will stay about the same, while 30 percent of contractors and 34 percent of distributors said income will increase.

On average 21 percent of contractors believe income will increase, while non-builders anticipate year-over-year income to grow approximately 30 percent — almost twice their estimate a year ago. Distributors are more conservative in their estimates for 2007; they see income rising by approximately 15 percent as compared to a 20 percent projection in the 2006 Forecast.

Seventy-one percent of distributors and 28 percent of contractors expect sales of $1 million or more while 25 percent of distributors and 4 percent of contractors believe their 2007 sales would top $10 million.

Business Strategies

An increasing number of builders have made residential construction the foundation of their businesses. In the 2000 Forecast, 50 percent of builders surveyed indicated they concentrated on residential construction — today that number has grown to 75 percent. Only 13 percent of builders prefer commercial construction, including commercial buildings, office buildings or warehouses over residential construction.

Non-builders’ interest in the residential market has declined. Their interest is focused on excavation and clearing, earthmoving and reclamation, water and sewers, and logging.

For the fifth consecutive year, approximately 30 percent of distributors said they plan to diversify their business as a marketing strategy for the coming year.

Relationships continue to be a major driver of business in the construction industry, according to both contractors and distributors. Ninety percent of contractors and 80 percent of distributors said industry friends and colleagues were a valuable source of business information, while industry journals, daily newspapers, meetings and seminars also are highly regarded.

Technology

The Internet has continued to be an effective sales tool and both distributors and contractors rely on it to connect with customers, prospects, employees and others in the industry. Ninety-seven percent of distributors and 79 percent of contractors said they use the Internet as a business and information tool and 73 percent and 57 percent, respectively, consider the World Wide Web to be a valuable source of industry information.

The number of distributors who plan to use the Web to prospect for new business and find new customers increased from 1 percent to 12 percent in the last year.

Issues and Opportunities

Most contractors still think residential construction will provide the best opportunities in the year ahead. More than two-thirds of builders and one-third of non-builders said that home and apartment construction is their best opportunity for 2007; those are the highest percentages for both groups in many years.

The most serious problem for contractors for the last two Forecasts and for distributors for the last three has been the shortage of workers, specifically qualified technicians and other skilled employees.

The number of builders favoring residential construction over any other opportunity has grown from 53 percent to 68 percent in six years; the number of non-builders of like mind has doubled since 2004. For the first time since 2002, 20 percent or more of both builder and non-builder groups see commercial construction as their best bet for the year ahead, possibly a positive indicator for this lagging sector of the construction industry.

For more information, visit www.CIT.com.