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2005 Forecast Finds Optimism Among Contractors

CIT Equipment Finance, a unit of CIT Group Inc., announced Dec. 8 the results of the 29th annual CIT Construction Industry Forecast. The 2005 outlook indicates that U.S. construction industry leaders are predicting a strong year ahead as their confidence hit an all-time high. Of nine U.S. regions surveyed, six showed an increase in optimism.

“In last year’s CIT Construction Industry Forecast, U.S. construction industry executives told us that they could see the light at the end of the tunnel after several years of economic uncertainty,” said Roy Keller, president of CIT Equipment Finance. “This year, it looks like the industry has made its way out of the tunnel altogether and the forecast is brighter than at any time in the last decade.”

Now in its 29th year, the CIT Construction Industry Forecast independently surveys U.S. construction executives on their perceptions of the state of the industry and trends for the coming year. More than 900 contractors and equipment distributors were surveyed via telephone interviews across the country.

The Optimism Quotient (OQ) is the Forecast’s 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. Generally, a number of 100 or higher indicates strong optimism in the industry’s one-year outlook while a number below 100 indicates a more cautious projection.

The 2005 Construction Industry Forecast’s overall optimism quotient rose six points-from last year’s 103 to 109-the highest-ever rating since the OQ was developed in 1995. The OQ for contractors dipped one point, and it rose 13 points for distributors (see chart above).

Regional Highlights

The United States was divided into nine regions for the survey:

  • West South Central: Arkansas, Louisiana, Oklahoma, Texas.
  • East South Central: Alabama, Kentucky, Mississippi, Tennessee.
  • Mountain: Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah, Wyoming.
  • South Atlantic: Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia.
  • Pacific: Alaska, California, Hawaii, Oregon, Washington.
  • New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont.
  • Middle Atlantic: New Jersey, New York, Pennsylvania.
  • West North Central: Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota.
  • East North Central: Illinois, Indiana, Michigan, Ohio, Wisconsin.

Here are the key 2005 regional highlights:

  • The OQ increased in six of nine U.S. regions.
  • The East South Central is the most positive region, posting an OQ of 125, one of the highest regional OQ ratings in the Forecast’s history.
  • The East North Central region experienced the highest year-over-year OQ increase (16).
  • The East North Central, East South Central and Pacific experienced the highest year-over-year OQ increases (10-16).
  • Three of the nine regions showed double-digit OQ increases for 2005.
  • Three of the nine regions scored below the baseline 100 on the OQ scale.
  • Five of the nine regions recorded OQs above 110.
  • Only three regions reported that they were less optimistic this year than last, and their OQ scores declined by only one or two points each.
  • The New England region had the lowest OQ rating (90).

U.S. Construction Trends

Equipment Overview. After back-to-back years of growing optimism about the future, many U.S. construction contractors feel confident enough to increase their investment in new and used construction equipment in 2005. While the percentage of contractors planning to buy new equipment stayed about the same, they are planning to spend considerably more on their purchases in 2005 than they did in 2004. On average, contractors who plan new-equipment purchases expect to invest $79,223 in 2005-double what they planned to spend in 2004.

Consistent with contractors’ plans, 54 percent of equipment distributors expect to sell more new equipment in the coming year, up from 51 percent a year ago.

Rental Overview. As they look ahead to busier project schedules in 2005, contractors expect to be slightly more active when it comes to leasing and renting construction equipment they will need to get the work done. Sixty-three percent of contractors said they rent the kinds of equipment that they do not need to use all the time. Fewer contractors (23 percent) cited cost as a motivator for renting equipment than last year, when 37 percent of respondents said they rented equipment because it was more cost-effective.

As demand for rented and leased equipment rises, so will rates. An equal number of distributors and contractors (52 percent) anticipate that rates will increase in 2005. At this time last year, only 30 percent of distributors planned to hike their rental rates in 2004.
Sixty-seven percent of distributors said they compete head-to-head with large equipment rental firms, down markedly from the 76 percent that said they faced such competition in last year’s survey.

Finance. More than half (51 percent) of distributors expect their net income to increase in 2005 and 42 percent expect it to stay about the same, compared to 49 percent and 40 percent, respectively, a year ago. Contractors are slightly more cautious, with 35 percent anticipating that net income will grow (compared to 36 percent in 2004) and 56 percent expecting it to stay the same (versus 53 percent last year).
Eighty two percent of contractors and 79 percent of distributors said that there their company’s total financing costs will increase in 2005.

The median sales volume projected contractor companies is up about 11 percent in this year’s survey to $600,000. Distributors’ median sales are up about 5 percent to $3.9 million. As construction activity picks up, it is clear that industry executives are keeping a close watch on both sides of the accounting ledger. They are focusing on growing sales, controlling costs and increasing net income.

Business Strategies. With a booming market for new housing and softness in commercial construction activity in many part of the country, contractors have focused most of their attention on residential construction in recent years. In last year’s survey, 71 percent of builders said that home and apartment construction was their primary business. But that number declined five points to 66 percent this year and more builders (21 percent versus 15 percent) said commercial construction was their main focus.

When asked to name their most important marketing strategies for 2005, more than one-third of distributors said they plan to diversify their business even further. At 34 percent, that is up two percentage points from last year and up a total of 10 points from the 2000 forecast.

As an indicator that the construction climate is improving, 30 percent of distributors expect the number of contractors in their area to increase in 2005-twice as many as predicted an increase two years ago.
Relationships continue to be a major driver of business in the construction industry, according to both contractors and distributors. Eighty-five percent of contractors and 88 percent of distributors said industry friends and colleagues were a valuable source of business information-the highest ranking in our survey. Industry journals, daily newspapers and meetings and seminars are also highly regarded. Distributors are significantly more likely than contractors to turn to the Internet for information; 69 percent of distributors said the Internet is a valuable information source, compared to 51 percent of contractors.

Technology. The Internet has become an essential business tool for construction companies all across the United States. Twenty-seven percent of contractors in this year’s survey now have a company website up and running, a 50 percent increase over the 18 percent of contractor companies that said they had an Internet presence in last year’s forecast. Nineteen percent of contractors without a current website plan to be online by the end of 2005. Due to the nature and size of their companies, even more distributors have an online presence-67 percent in this year’s survey compared to 69 percent a year ago. Twenty-seven percent of distributors who are not online today, hope to be in 2005. While there is already a high level of Internet use across the industry, more than half of contractors and three-quarters of distributors predict that their business use of the Web will grow in 2005.

For 2005, distributors predict that, on average, 11.7 percent of their equipment sales will be made over the Internet, up just slightly from last year’s estimate but up about 83 percent from the sales level projected in the 2001 survey.

Contractors also use the Internet to promote their companies and build their reputations in the business community. Sixty-two percent of contractors post information about their projects on the company Web site, an increase of 10 percentage points from last year’s survey and 58 percent post customer references.

Issues and Opportunities. Residential construction is viewed as the most promising business opportunity for 2005 by 62 percent of builders, down slightly from 64 percent who felt that way a year ago. Twenty-nine percent of non-builders agree with that assessment, up from just 16 percent last year. This marks the first time in at least six years that more non-builders see the prospects for residential building as being more promising than the commercial parts of the construction business.

For the fifth consecutive year, distributors were most positive about general construction opportunities. Forty percent of distributors said general construction was the industry’s single best opportunity, equaling the findings of our 2004 survey.

The rising cost of health insurance is still the biggest issue on the minds of construction executives taking part in the 2005 Forecast, though fewer industry leaders identified insurance costs as a problem this year than last year. In 2004, 89 percent of contractors and 87 percent of distributors said insurance costs were a major industry problem; this year, 81 percent of each group mentioned insurance costs.

About CIT Equipment Finance

CIT Equipment Finance is a leading lessor and lender in the construction, printing, machine tools, plastics, healthcare, and manufacturing markets. Further information can be obtained at the company’s Web site at

About the Author

CIT Group Inc., a leading commercial finance company, provides clients with financing and leasing products and advisory services. Founded in 1908, CIT has nearly $50 billion in assets under management and possesses the financial resources, industry expertise and product knowledge to serve the needs of clients across approximately 30 industries. CIT, a Fortune 500 company, holds leading positions in vendor financing, factoring, Small Business Administration loans, equipment and transportation financing, and asset-based lending. CIT has approximately 5,800 employees in locations throughout North America, Europe, Latin and South America, and the Pacific Rim. For more information, visit

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