Building Toward Recovery

By Jeremy Quittner

Construction leads the way, but the recovery is affecting a broader base of businesses, according to a new study.

The construction industry continues to add fire to the economic recovery, according to the March private company index from Sageworks.

While the Sageworks index supports a host of other recent data that point to a housing market recovery, it also indicates economic improvement for a broader segment of private companies.

“Construction is growing sales and growing profitability, which is a good thing for companies in that industry,” says Libby Bierman, an analyst for Sageworks. “But things are pretty positive for [all] private companies, with average sales for the entire sector showing double-digit growth.” Construction is a key indicator to watch because it affects so many other industries, such as the wholesalers and retailers that provide supplies.

Sageworks analyzes 1,000 financial statements from private companies every day. The companies range in size from less than $10 million to over $1 billion. The current data is for the six months ended March 31.

Total sales across all industries increased 10 percent for the last six months, about flat from the same time period a year ago. Meanwhile, profit margins increased significantly: 7.3 percent compared with 4.5 percent in the same time period.

Sales increases in the construction industry jumped to 13.2 percent from 10.4 percent a year ago. Profit margins more than doubled to 4.5 percent.

“The construction industry has grown at a very healthy rate for the past two years, which is encouraging, ” says Brian Hamilton, Sageworks’ chairman, noting that the real estate industry was the worst hit and the last to rebound from the recession. However, that doesn’t mean the pace will continue, bolstering other sectors.

Four years into a recovery, “can we say for the next three years the construction is going to be strong? I don’t know. You are betting against odds on that one.”

The increases in profitability across the board are largely due to companies increasing efficiency, Bierman says.

The picture isn’t entirely rosy, however. Manufacturers’ sales growth increased, but at a slower rate than last year, declining nearly 5 percentage points to 10 percent. Wholesale businesses fared worse, with sales growth slowing by nearly half to 7.7 percent.

Wholesale businesses had been on a tear in 2012, increasing revenues by 13 percent for the year, so they had a much bigger base to improve upon, Bierman says.

The number of days it takes private companies to get paid has also crept up by 8 days, to 46 for the period ending March 31. That could be a worrisome trend in the future, suggesting customers are having cash concerns.

Generally speaking, though, “private companies are growing their top line and bottom line and this bodes well for future investment in companies and hirees, and provides a strategic cushion for business owners to make decisions,” Bierman says.

Jeremy Quittner is a staff writer for Inc. magazine and He previously covered technology for American Banker and entrepreneurship for BusinessWeek.

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