Next month, I'll report here on the three construction forecasting conferences I attend in October. Looking ahead is always interesting, but right about now it seems (to me) more interesting than I can remember. The reason: I'm not really sure what's going on NOW; how do you make a projection when you don't have solid grounding in the present? For example: With the economic recovery supposedly on track, and one month of positive employment numbers (+ 57,000 in September), the stock market -- stuck at this writing in a trading range at a very high level -- is banging on the door of new highs (and Dow 10K).
BUT WAIT: Insider selling over July-August-September ran at $36 of stock sales for every $1 of stock sold. Yes, the "insiders" (= big owners of stock and executives of the companies) -- who must report sales to the SEC -- have sold over a 90-day period at a rate more than double the "normal" rate of selling (which is $15-to-$1). In August, the ratio was $32 of sales for every $1 of buying by the insiders. That's $2.4B of stocks sold, only $75M bought. Then in September . . . it got WORSE ($44-to-$1).
What the heck does that mean? I don't know, but I'm trying to find out. What on earth could it mean against the backdrop of all of the optimism voices by analysts and government officials, as well as stock buyers? I don't know. But I am trying to find out. How?
At the NECA show, I listened to manufacturers -- and I got the same messages in listening to manufacturers & national distributors at NECA that I have been getting about the economic recovery from real people. It's a "chainsaw" recovery; if you put it on a chart, you'd see "upticks" and "downticks" . . . one after another. At least, that's what I hear from individuals who work at supplier companies. I regard face-to-face (or F2F, as it's abbreviated) meetings with real people in real businesses as about 200 times more valuable than what can be obtained from newspapers, government data, or stock-market pundits on TV.
So here's what I'm hearing: One guy says June was stupendous, July fell off a cliff; another says "we've had a gradual increase until September, which was significantly below last year." Of course, this person doesn't have to add that 9/02 was no garden party. These are manufacturers and distributors who sell nationally, not local electrical contractors. The numbers my sources see every day are national in scope.
I have a lot of theories. One of them -- provisionally provided here, don't hold me to it -- is that Something Is Going On in electrical contracting. I've previously noted that employment numbers, as provided by the U.S. government, don't add up. Electrical construction field employment is higher than I would have guessed, given the fact that construction was started on 300M sq. ft. of office space in 2000 and has literally shriveled up (McGraw-Hill's mid-year revised estimate is that the figure for 2003 will be just 143M sq. ft.). The residential new construction market isn't hot enough to make up for just that.
What's Going On? I'm not sure. But I am starting to suspect there's just enough of "other" out there to keep a lot of employees of electrical contractors occupied. I'm talking about VDV, IBS, security, sound, A/V in company board rooms, subcontract work for companies like Johnson Controls, and more. There's even some weird stuff. I heard about a unique truck stop electrical/datacom/and more service offering being installed only by electrical contractors. It allows the truck stop owner to provide air conditioning, cable TV, and broadband access to truckers.
Of course, telecom and datacom fell off a cliff; and new construction isn't soaring. But there just might be enough service and maintenance, MACs work in VDV, and even more of this "off the beaten path" stuff to keep some contractors busy. If this IS true, here's what we might expect to see:
Evolution For Dummies: This market mutation is coming with all kinds of different ideas and challenges. For example: Service and maintenance, VDV MACs, IBS work, security, sound, and more of this stuff is not only NOT construction. It also moves electrical contracting from the construction industry to a hybrid. This industry is no longer about new construction. There is a significant service component; electrical contractors are, in some respects, in the service business.
That has changed things. This major shift is not yet done. The signs of it were visible (if you looked), but not the dominant message of the Orlando show. But I am coming to believe that this theory might be an increasingly apt description of what's happening out there. And I think this theory might have legs.
I'm afraid that, as I complete this column, construction data for September are not yet available (from neither the Census Bureau, which tracks what's finished, nor McGraw-Hill Construction/Dodge, which tracks what's just been started or is about to start). So the tables below give you only eight months of perspective.
This first table provides a perspective: Is 2003 really great as compared with, say, 1998? I know -- the 365 days of 1998 took place during the stock-market bubble (which you think is over -- ha!). But the construction volume insanity, driven by the fast-track data center/telecom boom and the dot-com stupidity, really didn't hit an extreme stride until 1999; and, in fact, 2001 was a bit better year than 2000 in much of construction.
So here we compare 2003 with 1998. As you'll note, I adjusted the eight-month totals in two categories for each year for inflation (i.e., the fact that our dollar in 2003 isn't worth as much as it was in 1998). Even with that adjustment, the residential boom has today's construction market 21% higher than that of five years ago. To get that "noise" out of our lives -- as more electrical materials are installed into nonresidential buildings -- the final two data lines compare "selected" nonresidential markets. I did the selection, so sue me if I omitted your favorite.
As is easily noted, the nonresidential totals through 8/31 were higher five years ago, adjusted for inflation, than they are today . . . but not by much. Looking at $101.2B and $98B, I would call this FLAT. We've essentially come back off the 1999-2001 high in nonresidential. You might well ask why; my best answer, provisionally, is that the money that Alan Greenspan, Freddie Mac, Fannie Mae, the Bush Administration (three tax cuts in three years), the Europeans, the Chinese, and the Japanese are pouring into our economy is going into houses. So far.
That's the past; McGraw-Hill's numbers provide a guess at the future. In the table directly below, I've compared this year's eight-month totals with last year's -- without adjusting anything for inflation. Keep in mind these are "construction starts" or, if you will, contracts actually signed (seeming to indicate that construction has begun on this much work in the January-August period).
What do the numbers below have to do with the numbers above? The relationship is this: As the contracted-for construction below actually takes place, the numbers, in theory, migrate from the table below (starts) to the table above (construction put-in-place).
Are there any surprises in 2003 contracts so far, vs. 2002? Nonresidential is not down as much as it was earlier in the year. Nonbuilding construction is taking a big hit, however -- the stimulus provided by George, Alan, Freddie, Fannie, Jacques, the Chinese renminbi peg, and the Japanese Minister of Finance is being offset somewhat by state and municipal spending cutbacks.
Finally, I thought I'd try to adjust the eight-month figures from McGraw-Hill for inflation. I was actually able to find (by sheer luck) the through-eight-month numbers for 2001, so I added them to the table -- which covers only the nonresidential market. What's important here is the "In 2003 Dollars" column, which adjusts 2002 and 2001 upward for inflation. If "things" feel "down" compared with 2001, they well should -- through August, contracts for new nonresidential construction are down 18%, in real terms, from 2001.
What spooks me about the numbers is that they are NOT down a lot more. Our economy has been acting as if it hit a brick wall. Customers and developers are cautious, I hear. Yet the numbers, as adjusted for inflation, show a nonsteep decline from 2001, the best year for construction that most can remember. In general, I would say things are pretty good . . . unless you assume that all of the years "should" be the best year we ever had!
Just to check my assumptions, I went to the Bureau of Labor Statistics site and harvested from its recently revised national database the number of "production workers" employed in electrical contracting. "Production workers" = foremen, journeymen, apprentices, helpers, and a few others. In 2000, the industry averaged 758,400 of these folks (that number is upwardly revised from my earlier reporting because BLS changed the way it tracks employment).
In 2001, the industry average was 759,400 (precisely 1,000 more workers, on average, over a year). For 2002, the 12-month average was 705,600. That's down 7.1%. FROM THE PEAK. A reasonable reaction to such a figure would not be "woe is us" but . . . "big whoop."
How about 2003? Well, it's not over yet -- and developing an average based on eight months of data is just not savvy with construction's seasonality. However, July saw 710,300 workers in electrical contracting, and August saw 714,800, according to BLS. In 2001, the figures for those two months were 781,100 and 774,300.
So . . . July was down 9% in electrical contracting employment nationwide, from the best year ever. August was down 7.7% from, allow me please to repeat, the best year EVER for electrical construction employment. Whoop whoop whoop?
Just to see if I was crazy, I went back to the BLS site and got the numbers for a category it calls "nonresidential construction." I have no idea what's in there, but the employee number for August 2003 was only 11.9% below that of August 2000 (a higher figure than August 2001 for this category). A 12% drop from an all-time peak doesn't seem horrible to me.
In the event I haven't said this enough in the past few paragraphs: 2000-2001 were GREAT times in the construction business, in terms of sales. They were also great in other industries. But many other industries are dying out there. I've read that high-tech manufacturing has fallen from 91% of capacity in the boom to something like 63% right now (in the U.S.). I'm not sure whether or not that number takes in telecom, but the most recent number I saw for telecom is that manufacturing in that industry is running at 50% of capacity.
In contrast, the employment figures in electrical construction for 2000-2001 -- those 758K-759K numbers -- are probably a good estimate of about 93% to 95% of "headcount" capacity in the industry (which means even at the peak there were pockets of unemployment, geographically . . . at the same time that electrician shortages were popping up elsewhere).. By my back-of-the-envelope figuring of The Worst Case, employment-wise electrical construction right now might be deemed as running at 87.5% of capacity.
If this is as bad as is gets in the current economic cycle, everyone in this industry should drop immediately his/her knees and pray to the god Ganesha in thanks for this boon -- the boon being the downside was so mild. Of course, when you get up off your knees, you need to then make a contribution to The Elephant Sanctuary so that Ganesha will know you were serious about it!
So -- what the heck is going on here? My mind embraces a number of possibilities:
6. A final possibility is that we have seen NOTHING yet of bad times. This explanation would contend that the "other shoe" has yet to drop and, when it does, we'll see the big declines in construction spending, electrician employment, and so forth . . . and the tables I've created above, if revised some time from now, will look a lot worse.
My thinking is that this explanation:
However, I have to dismiss some of my own pessimism here. I am out of step with the times. I drive a cheap sedan. I have damn little debt, and on purpose. Certainly, our country has suffered (and remains mired in) an extended economic malaise. Perhaps the solution of flooding the world with dollars, running huge and expanding budget deficits every year, adding $500B year to the total national debt, and running trade deficits of 5% or more of GDP is going to work. My thinking is that last sentence is a recipe for catastrophe. I'm as spoiled as the next guy -- I don't wanna catastrophe!
Further, while I think I have been correct in a lot of what I've written here over the past five years, I don't credit myself with the ability to see catastrophe coming. If I don't think I can do that, you shouldn't think I can do that, either!
What's happening in electrical construction despite all of the numerical indicators can be summed up, I think, as:
If you can accept that three-point analysis, you might see that THIS logically follows: It has crossed my mind that the worst case -- my #6 above -- would, given the current situation, be really horrible for many people in this industry. However, a steep economic turn in the wrong direction would correct the overcapacity problems in all three of our industry's subsectors above, as well as one heck of a lot of other business. Therefore, not only is my scenario #6 a good projection of what might be coming (although the time frame is extremely unclear) . . . but it is, in a way, needed.
That's one analysis, anyway. And it is a horrid one; it's bad to have an economic collapse in a nation with 290M citizens and 260M guns in circulation. I like to be right, but it will be more satisfying for me to write a follow-up column on this one, as 2004 draws to a close, about how great things have been and just how wrong I was.
I'm not sure why this analysis will turn out to have been wrong. But I look forward to writing that column!
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