Construction expansion is set to continue, underpinned by robust economic growth, with building businesses profit margins expected to remain stable.
- The robust performance is set to continue in 2018
- The outlook for infrastructure investment growth remains uncertain
- Payments take 38 days on average
In 2017 the US construction industry continued to expand, with a value added sector growth rate of 2.3%. It is estimated that private residential construction spending increased more than 7% and non-residential construction about 4%, while public construction spending decreased 4%-6%.
US construction expansion is set to continue in 2018, underpinned by robust economic growth, with building businesses profit margins expected to remain stable, as price increases are offset by higher costs. Construction starts are expected to increase about 5% in 2018 with commercial construction forecast to pave the way with a double digit growth rate. Construction spending is expected to increase 7%, mainly due to a surge in the private residential segment.
However, despite repeated announcements by the US administration that it will invest in infrastructure improvements, a public construction spending increase remains uncertain, as political gridlock and shifting priorities have so far stifled promises to boost infrastructure spending. At the same time a combination of rising prices and higher interest rates (the Federal Reserve tightened its monetary policy in December 2017, and additional interest rate hikes are expected in 2018) may dampen the housing market in 2018, particularly in the first time home buyers segment, which has been expanding since 2011.
Both construction businesses leverage and dependence on bank financing are generally high. Companies that show consistent profitability, healthy balance sheets and prompt payment trends are generally able to obtain lines of credit, while viable and promising projects continue to be attractive to lenders in the growing market. However, the volatile nature of the construction sector continues to bottleneck financing options for companies with liquidity issues.
Payments in the US construction industry take 38 days on average, while 60 day and even 90 day terms are not uncommon. Over the last two years, payment experience in the construction sector has been decent, and the overall number of late payment notifications received in 2017 increased only slightly compared to 2016. No insolvency increase is expected in 2018.
Due to several years of stable growth we have continued to increase our risk appetite for the industry throughout all major segments (residential, commercial, public construction and construction materials). However, caution is advised with smaller construction businesses, which still show higher bankruptcy rates than their peers in other industries.
When available, financial statements are to be reviewed annually with supplemental soft credit information reviewed more frequently. Trading experience will be used to gain a better comfort level in gauging the relationship between our customers and their buyers. Reduction or withdrawal of cover is considered if the buyer shows significantly worsening results, including losses, heavy debt levels, problems with working capital, cash flow, liquidity or deteriorating payment trends.