December 2024
It was an absolute landslide during 2024’s final quarter, with optimism routing pessimism. All five CONFINDEX indicators were up on both quarterly and year-ago bases. One could attribute the rally in confidence to purely economic factors, including strong GDP growth during the year’s second half, stable construction spending and backlog, and Federal Reserve interest rate reductions implemented in both September and November totaling three-quarters of a percentage point.
But one has a sneaking suspicion that more than economics influenced survey results. The re-election of President Donald Trump appears to have reignited confidence among many economic actors, including within the categories of households, equity market investors, and construction firm leaders.
If one wanted, one could question whether such optimism is warranted. After all, the former and incoming president has proposed several policies that would drive up various costs, pushing inflation higher and potentially boosting interest rates in the process. Among these inflation-generating policies are tariffs, tax cuts, and deportations.
Contractors have already been contending with supply chain challenges, elevated construction input costs, and skills shortages in recent years. Tariffs on imports from China, Mexico, Canada, and other nations would presumably increase both materials and equipment costs, all else equal. Construction is also an industry associated with elevated propensity to utilize the services of immigrants. Policies restricting immigration would tend to drive costs of human capital higher.
Some contractors have also indicated that many projects have been postponed because of high project financing costs. If inflation continues to abate and the Federal Reserve continues to ratchet borrowing costs lower, a wave of construction projects would likely be greenlighted, creating an abundance of bidding opportunities for contractors during the years ahead. The back edge of the 2020s could simply be phenomenal for America’s contractors, whether in publicly- or privately financed segments. The newly elected president’s policies arguably threaten such dynamics by forestalling the arrival of lower interest rates by exacerbating economywide price pressures.
Despite such considerations, many of which were highlighted in survey respondent comments, contractors generally view election outcomes favorably. The Overall Confidence Index surged 7.4% during the fourth quarter and is up nearly 21% on a year-over-year basis. The Business Confidence Index expanded 6.4% for the quarter and is up 35% on a year-ago basis. In other words, contractors are indicating that business is already quite good and despite concerns regarding project financing costs and skills shortages, the mood is decidedly upbeat.
The Financial Conditions Index rose nearly 8% for the quarter and is up 12% for the year. This performance was likely driven in large measure by economic factors, including the onset of Federal Reserve rate cutting. However, longer-term interest rates have remained stubbornly high recently, and the election of Donald Trump has altered both near-term inflation and interest rate forecasts.
Approximately two months prior to the election, there was a conventional wisdom suggesting that the Federal Reserve was poised to cut interest rates six times in 2025. As it became clearer that Donald Trump’s elections chances were improving, the bond market responded by altering its predictions. Presently, the bond market is pricing in approximately two rate cuts for next year, with a growing number of economists indicating that there may be no rate cuts in 2025.
Nonetheless, positive considerations appear to be trumping negative ones. Many contractors indicate that the elimination of bureaucratic red tape, deregulation, including of the nation’s energy sector, and more rapid economic growth will more than countervail challenges associated with the Trump policy agenda. Accordingly, the Current Confidence Index, which is oriented around short-term expectations, rose nearly 7% on a quarterly basis and is up 16% over the past year.
Perhaps most tellingly, the Year Ahead Outlook Index rose 7% during the quarter and is up 27% on a year-ago basis. Several respondents indicated that they expect a potentially soft first quarter of 2025, followed by much stronger activity thereafter. Some indicated that their outlook has brightened through 2027. Again, one could attribute this outpouring of optimism to economic factors, including lingering expectations of lower interest rates. But non-economic (political) considerations also appear to be at work.
Looking Ahead
It is tempting to focus on divisive issues such as border security and tariffs in discussing the nation’s economic outlook. But the first order considerations likely revolve around more mundane considerations such as interest rates and credit conditions. The trajectory of interest rates will likely shape construction industry activity more than any other single factor. Should interest rates remain stubbornly high, it is conceivable that much of the confidence expressed during the fourth quarter’s CONFINDEX survey will steadily unravel.
About CFMA’s CONFINDEX
The CONFINDEX is CFMA’s proprietary confidence index survey that measures the confidence level of leading financial professionals in the U.S. commercial construction sector. CONFINDEX is compiled from four sub-indices measuring critical components of the financial health of a commercial construction company: Business Conditions, Financial Conditions, Current Conditions, and Year-Ahead Outlook. A reading of less than 100 indicates pessimism among the survey participants, while a reading of more than 100 indicates optimism among survey participants.