CIT Equipment finance, one of North America's leading providers of financial services to the construction industry has been doing an industry forecast for 28 years. They have developed a methodology that provides an insight into what the next 12 months will bring. After interviewing industry leaders at all levels, they put the results into an "Optimism Quotient" that serves as an excellent barometer for construction market's future. Following is CIT's forecast.

CIT's 2004 outlook indicates that U.S. construction industry leaders are significantly more positive about the industry's prospects than at any time since 1999. Of nine U.S. regions surveyed, eight showed double-digit improvements in optimism. CIT Equipment Finance is one of North America's leading providers of financial services to the construction industry.

"This year's forecast tells a much different story than last year's," said Roy Keller, president, CIT Equipment Finance. "The overall year-over-year growth in optimism was the most impressive in the 28-year history of the CIT Construction Industry Forecast and this bodes very well for the industry's prospects. Our forecast has been a consistent and accurate predictor of what lies ahead."

Now in its 28th 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. Over 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 2004 Construction Industry Forecast's overall optimism quotient jumped 14 points – from last year's 89 to 103 – the highest level since 2000, when the forecast accurately predicted a softening in the U.S. construction industry. The OQ for contractors and distributors rose 13 and 16 points, respectively (please see chart below).

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

Following are the key 2004 regional highlights:

• The OQ in six of nine U.S. regions rose 14 points or more
• The West South Central is the most positive region, posting the highest OQ (118) of any region in the past five years
• This was the second consecutive year this region had the highest OQ
• The Mountain, South Atlantic, West South Central, and Pacific regions experienced the highest year-over-year OQ increases (18-20)
• Eight of the nine regions showed double-digit OQ increases for 2004
• The East North Central region is the only region to experience a decline in OQ (-1)
• The East North Central, West North Central, New England and Middle Atlantic regions had the lowest OQ ratings in 2004 (90-92)
• No region had an OQ below 90 for the first time since 2000

A statistical summary of each region follows:

• Finance: Industry-wide, executives are slightly more positive about their financial prospects than they were in 2003. Eighty-nine percent of contractors and distributors surveyed expect to generate at least as much net income in 2004 as compared to 85 percent in 2003. Concurrently, 68 percent of contractors and 66 percent of distributors anticipate higher financing costs for 2004 – up significantly from 2003 (when 51 percent and 56 percent, respectively, thought they would rise). Cost of capital was cited as one of the industry's most significant issues by 42 percent of contractors and 44 percent of distributors.
  For the second consecutive year, the rising cost of insurance was the top issue on the minds of construction industry executives. Eighty-nine percent of contractors and 87 percent of distributors mentioned insurance costs as one of the most pressing issues facing the industry in 2004 (compared to 85 percent and 87 percent, respectively, last year). Also, 49 percent of contractors and 64 percent of distributors cite profit margins as a major concern for 2004. Cash flow was cited as a major problem by 42 percent of contractors and 56 percent of distributors.
• Equipment: Contractors continue to take a conservative approach to investing in new or used equipment. Roughly 44 percent of contractors surveyed said they will purchase equipment in 2004 versus 49 percent in 2003. Just half of these contractors indicated that they will purchase new equipment. Twenty-three percent plan to purchase only used equipment (21 percent in 2003). Distributors, on the other hand, have a more optimistic view of the 2004 new equipment market. Fifty-one percent predict that their new-equipment sales figures will be higher next year (versus 43 percent in the 2003 forecast). Distributors and contractors share similar views in the used-equipment market. Neither group thinks used-equipment sales will be much different in 2004 than they were in 2003. Only 38 percent of distributors predict that used-equipment sales will increase in 2004.
• Equipment Rental: As equipment fleets grow older, more contractors continue to find it necessary to use rental equipment to back up the equipment they own. Twenty percent of non-builders said covering for equipment that breaks down is one of their top reasons for renting – twice as many cited breakdowns as a reason last year.
  Competition with large equipment-rental companies is becoming the norm for distributors. Seventy-six percent say they compete directly with rental companies, up from 71 percent last year. This year, 86 percent of distributors with light-equipment rental business said they had competition from rental outlets – an increase of 21 percent in just one year.
• Business Strategies: With fewer commercial construction opportunities available, builders have focused more on the vibrant homebuilding market. Seventy-one percent of builders reported that residential and apartment construction was their primary source of business, outdistancing commercial construction that ranked second with just 15 percent. Non-builders and distributors are much more diversified. Sixteen percent of non-builders (same as 2003) said that excavation or clearing was their top business area. Twenty-five percent of contractors listed earthmoving and reclamation as their top business source, down slightly from last year.
• Technology: The Internet continues to grow in importance as a business tool for the U.S. construction industry. Fifty-two percent of contractors and 63 percent of distributors consider the Internet to be a valuable source of industry information. In addition, for the fourth consecutive year, more than 75 percent of distributors say that their business use of the Internet will grow in the coming year. Seventy-seven percent of distributors and 54 percent of contractors say they plan to use the Web more in the coming year. On average, distributors expect to make 11.4 percent of their equipment sales and 9.5 percent of their equipment rentals online in 2004, up significantly from 2003.
• Issues and Opportunities: The number of builders naming residential construction as the industry's single best opportunity has increased consistently in each of the past six years. Sixty-four percent of builders said residential construction was their top opportunity (62 percent last year and 32 percent in 2002) versus only 16 percent of builders who said non-residential construction was their top opportunity.

Contractors

What is your projection for construction activity in 2004 compared to 2003?

Increase…37%

No change…52%

Decrease…10%

What is your projection for bidding activity in 2004 compared to 2003?

Increase…49%

No change…41%

Decrease…10%

Distributors

What is your projection for residential construction activity in 2004 compared to 2003?

Increase…32%

No change…50%

Decrease…18%

What is your projection for non-residential construction activity in 2004 compared to 2003?

Increase…45%

No change…42%

Decrease…13%

Contractors

How do you view the overall business outlook for 2004 compared to 2003?

Better…46%

Equal to…45%

Worse than…10%

Distributors

How do you view the overall business outlook for 2004 compared to 2003?

Better…62%

Equal to…30%

Worse than…8%

CIT Annual Forecast

CIT Group Inc. New York, New York