If Things are Bad Why Does the Data Look So Good?

By Joe Salimando

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:

1. Higher employment levels than we might otherwise suspect.

2. Despite #1, mediocre electrical materials sales for distributors and manufacturers. Why? For the most part the work above does not generate a lot of electrical material sales. If a contractor builds a business out of work that includes servicing transformers and keeping load centers clear of dust, his company is more likely to buy a lot of vacuum-cleaner bags than busbar!

3. Electrical contractors are moving in all directions. I've seen this myself in a few NECA meetings. It's hard for the association, in some respects. I've not seen contractors screaming at each other! But as "electrical contractor" comes to have so many different meanings -- a sound contractor here, a datacom-only contractor there, a service-trucks-only company over yonder -- the commonality is reduced.

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.


Data Points

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.

Nonresidential Construction Spending

billions of current dollars, NOT seasonally adjusted
(actual dollars spent)

Year Q1 Q2 July + August 8-month Total   Value In 2003 Dollars
Total Construction
1998 $130.1 $164.7 $124.4 $419.2 $474.5
2003 $185.5 $225.6 $164.6 $575.7 $575.7
Selected Nonresidential Only*
1998 $30.2 $34.7 $24.5 $89.4 $101.2
2003 $34.0 $37.6 $26.4 $98.0 $98.0
* Selected nonresidential = office, hotel/motel, commercial, health care educational, religious, and amusement & recreation. Source: U.S. Dept of Commerce.

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.

Construction Contract Value, Year-To-Date

in millions -- NOT seasonally adjusted or inflation-adjusted

Segment Jan.-Aug. '03 Jan.-Aug. '02 Change
Residential $183,627 $167,809 + 9%
Nonresidential $102,405 $107,828 - 5%
Nonbuilding* $62,321 $74,118 - 16%
TOTAL $348,353 $349,755 0%
Source: McGraw-Hill Construction/Dodge. * Nonbuilding construction = mostly public works.

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.

Nonresidential Contract Value - '01 vs. '03

  In Current Dollars In 2003 Dollars
8 months, 2003 $102,405 $102,405
8 months, 2002 $107,828 $110,650
8 months, 2001 $115,931 $120,840
Change '03//01 - 13.2% - 18%
Source: McGraw-Hill Construction/Dodge. * Nonbuilding construction = mostly public works.

Joe's Take

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:

1. We're all a bunch of crybabies. Things are fine, yet we complain. We should all shut up and be quiet!

2. Many states are having budgetary problems right now because they "accustomed" their financial planning to spend every dollar that came in during the very good times -- and a lot of dollars came in thanks to the stock-market boom of 1995-2000. They are "reining" things in right now (or raising taxes).  Perhaps companies and persons are having the same trouble " adjusting" from the Great Times of recent memory to the current Pretty-OK times. In this explanation, we're not crybabies; we're a bunch of spoiled brats.

3. The numbers are wrong. This would mean the construction $ figures are in error, the BLS data for our industry (and all others) are way off, and so forth. Conspiracy theories are floating around to this effect -- and don't get me wrong, I actually DO think our national government is monkeying with inflation so as to understate it. But I can't even begin to think about all of the numbers above being really, really wrong. Can you?

4. Companies and households were run very poorly in the Great Times. No one saved (unless you count payroll deductions for 401-K accounts and such). Budgets expanded. NOW, when things are not-great, but not-bad . . . people are refusing to acknowledge the need to adjust behavior from the top of the graph. Companies that expanded capacity in the boom won't cut it back; they are "waiting" for times to get better. Instead of being a cheap sedan, homeowners are refinancing their homes and using that money to buy the $35K SUV with every option offered by the greediest auto dealer. In this analysis, we're a nation of idiots.

5. Another explanation is that we all deserve great times all of the time, and we're going to get them back. This seems to be the "thinking" of Greenspan, all of the homeowners who refinanced and spent most or all of the money, the folks buying up NASDAQ stocks at extremely high valuations right now -- and many others. This thinking and behavior seems, to me, to be totally disconnected from reality. Yes, just like the corresponding period of 1999.

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:

(a) works for me, as the numbers I've presented above actually look GREAT to me;

(b) if we've already seen the worst of a decline, we've really seen no decline at all -- a 7% to 12% drop from an all-time peak is a BLIP, not a decline, goshdurn it!

(c) I can't intellectually comprehend how things are going to get a lot better going forward, on a sustainable (several years of gains) basis, if (b) is true; and

(d) better -- for me -- to prepare for the worst case and adjust if my analysis is stupid, than to be an optimist whose hopes are crushed.

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:

  • A lot of less-than-profitable suffering among distributors, including a small but significant number of company executives in the "we'll hang on and someone will buy us out" mode. Yes, the overcapacity in electrical distribution refuses to eliminate itself!
  • Relentless spending and employment cuts by manufacturers, with many executives "hanging on" until the nonresidential recovery bails them and their companies out. Hint: One does not cut back on capacity by firing the marketing department!
  • Complaints of "tight" pricing by contractors, who have been willing to absorb break-even (or less) contracts in the past -- for a short while -- to keep their "core" employees on the company payroll. The problem: This kind of vicious-circle bidding does not come to a "natural" end, in my experience, but keeps going round-and-round until every contractor in an area realizes there's more work around than he/she/it thought. My fear for the contractors is that this won't happen soon enough this time around.

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!

 elephantanm.gif (6692 bytes)

Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To e-mail him, click on the link in his name; or call 703-255-1428.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer's obsession with elephants, not his political leanings.


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