Uncertainty Dogs Contractor Outlook

Last year's business rating fell short of expectations, landing at "average" instead of "good". Areas of strength included some New England states. Weaker areas included areas of the Great Lakes and South Atlantic regions.

This year is projected to be better, yet uncertainties are keeping projections from breaking past "good". New England sees another strong year, but the overall majority of states are in line with the mid-level outlook.

After exceeding expectations in 2002, contractors fell below their outlook in 2003. This year, they've stayed the course and forecast a "good" year.

Highway/heavy contractors are not as optimistic as their siblings, reflecting concern over the uncertainty of highway funding and states' fiscal shape.

Volume didn't come in where contractors anticipated last year. That doesn't mean they don't expect the work, however, since the percentage expecting increases is greater than that anticipating decreases to a net of 35.

Fleets grew at a good pace in 2003, but uncertainties are keeping expectations low for 2004. The outlook for this year is the lowest since 1992, with the net between the percentage of fleets expecting to increase and those decreasing at 17.

Fleet-replacement rates continue to fall below double-digit numbers, down from the high of 12.2 percent reported in 1996. For 2004, no change in that rate is anticipated among contractors.In this story:

• Fleet acquisition trends

In 2002, contractors surprised the industry by outperforming expectations. Last year, the opposite happened.

After more than a decade of accurately forecasting business performance, contractors have missed the mark for two consecutive years. Consider the hesitant economic recovery and ongoing partisanship in Washington, though, and understand contractors' inability to forecast performance.

Failure of Congress to adequately address and support sustained highway-funding legislation continues to give contractors doubt over the future. Government agencies won't commit to projects, and contractors have seen the states struggle with budgets.

Although an "average" 2003 fell below "good" expectations, contractors predict 2004 really will be "good." No surprise, highway/heavy contractors are less optimistic than building contractors and diversified (doing both highway/heavy and building).

Positive economic news at the end of 2003 (and after this survey took place) should help business this year, but committed support for highway funding and a return to fiscal health among states are also necessary.

More than seven in 10 contractors rely on some level of publicly funded work; 35.5 percent of the work done last year by contractors was public, up from 33 percent in 2001. Next year, contractors forecast 36.4 percent of the work will be public.

Water and sewer work will again see strong growth this year, but more important is the return to growth in spending on highways and streets, power and transportation projects. The pace of new residential construction work will slow this year. Nonresidential will return to a growth mode, although still below spending levels of a couple of years ago. Health care and education construction will show another year of spending growth.

Contractors expect all this to play into volume growth this year. In 2003, expectations were good for growth, but the percentage of contractors reporting growth outpaced the percentage reporting decline by only a net of 2 points. This year, that net soars to a projection of 35 with 46 percent saying volume will increase and 11 percent predicting decreases.

Leading the optimistic charge are contractors in the Mid-South, South Atlantic and Mountain regions. Each of these areas reported nets higher than 50 (percent saying volume will increase minus that calling for decreases).

Contractors, despite the hesitancy, expanded their fleets at the rate expected. About 36 percent expanded fleets and 8 percent decreased, so the net was a strong 28. Large fleets were even more aggressive, with a net of 48 reported among fleets with replacement value greater than $25 million.

Expectations are slow this year, perhaps reflecting the delayed optimism of the economy and highway funding. Two-thirds of contractors expect fleet sizes to stay the same as 2003 in terms of numbers of machines. This year's anticipated fleet growth is the lowest forecast since 1992.

Contractors' fleet-replacement rate—how they turn over machines—is mired at a lower level. Since the high rate of 12.2 percent in 1996, fleets have reduced their turnover to 9.3 percent in 2003 with an anticipated rate of 9.2 percent this year. Larger fleets, greater than $25 million replacement value, will be replacing equipment at higher rates. In 2003, that rate was 11.7 percent; this year it should be around 11 percent.

Overall fleet health has fallen over past years, and 2003 does not show a change in that trend. Four