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Wells Fargo: Digging Into the Construction Sector Outlook

Date: Feb 03, 2016 @ 07:00 AM
Filed Under: Construction

Crum:  I think given all of the other things going on in the economy, if we were to see a large increase in borrowing costs, there could be cause for a concern. Right now, we aren’t feeling the impact of the small increase in rates so I don’t view that as an area of concern – at least in the short term. In a more general sense, everyone is seeing continued turmoil in the stock market and in oil and gas prices, and these factors could give some people pause when thinking about their long-term investments. I’m not sure how much that affects contractors who have more work on hand these days, and are anticipating the profitability of those jobs.

In terms of today’s cheap oil and gas prices, I tend to look at this in a different way … in a more positive light. Many states did a good job over the last decade or so in stockpiling their tax revenues. For example, North Dakota comes to mind. In 2015, North Dakota saw a decline in the energy space, but many more contracts went to road jobs. That’s because there haven’t been as many trucks on the road and the state is now spending the money to improve its infrastructure.

Another positive impact relates to manufacturing costs. If you consider the refineries in areas like Texas and the Gulf Coast, as input costs get cheaper, conditions get better for companies that turn these petroleum-based products and natural gas-based products into other things. This is absorbing some of the impact from the decline in extraction of these resources … there’s a bit of an offset in that regard.

In terms of declining tax revenues, if you are a municipality paving roads, today the cost of paving a road from both a materials standpoint and the cost of fuel to powers the trucks and equipment is cheaper. That means you are going to be able to build more roads. We are starting to see the positive effects at the state and municipal level in terms of overall lower costs associated with these projects. Again, these are all positive impacts.

Equipment Finance Advisor:  The survey notes that contractors are looking to acquire more new equipment rather than used equipment. Can you explain why that is?

Crum:  I see a couple of things going on here. First of all for contractors, there is more certainty to the jobs that are out there and that’s coupled with the fact that they had a good year in 2015 and are expecting to fill those back logs.

That having been said, I’m not sure there’s a shift away from used equipment per se because it’s still a very big part of the market. With Tier 4 Final coming up and with technology improving, contractors feel comfortable “pulling the trigger” so to speak by acquiring new equipment. Additionally, many contractors simply can’t use older equipment on the larger public jobs and that’s a trend that we see continuing. The other piece is depreciation available on new equipment versus used equipment is greater. If you’re looking for tax incentives, acquiring new equipment is much better in that regard.

Equipment Finance Advisor:  According to the 2016 Construction Industry Forecast, contractors are indicating they will be purchasing more equipment in 2016 while distributors are saying purchases may fall? Can you explain what appears to be a “disconnect” between the distributors and contractors?

Crum:  Let me say it like this: in this year’s survey, there is an increase in the number of distributors who expect their new equipment sales to decrease. While 9% expected a decrease in 2015, this moved to 19% in 2016. This is not entirely unexpected simply because many of these distributors had a very strong year in 2015. If you’re coming off of an all-time high, anything less could seem disappointing by comparison. Even a slight decrease of 1% is still a decrease. It’s important to remember that these responses don’t address margins and other important factors that appear elsewhere in the survey. It only points directionally as to where distributors expect to be in 2016.

To sum it up – we think that with 2016 still in the highly optimistic category with an OQ of 108 all adds up to a great year in this sector. 

Executive Editor | Equipment Finance Advisor
Stuart Papavassiliou is the Executive Editor of Equipment Finance Advisor and ABL Advisor.

Contact Stuart Papavassiliou at 484.380.2964 or

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