Economic Factbook

Expect at least one more year of solid growth in the commercial and industrial markets.

Are you searching for economic trend information and forecast data to factor into your 2006 sales forecasts? You have come to the right place.

In this article, Electrical Wholesaling has collected the economic data for segments that have the most impact on the electrical construction market. The economic forecasts in the business pages of most newspapers usually focus more on retail sales, consumer spending, and macroeconomic information that doesn't affect the electrical market as directly. Electrical distributors, independent manufacturers' reps and electrical manufacturers need data on construction trends, industrial spending and production.

First published in 2002, Electrical Wholesaling's Economic Factbook summarizes the key construction, industrial and related economic data of most interest to professionals in the electrical market. It includes 2006 construction forecasts for the housing, commercial, institutional, industrial and utility markets; statistics to gauge the health of the industrial market; and data regarding the demographic trends now driving construction of education facilities, one of the hottest market segments.

Total Construction

Source: McGraw-Hill's 2006 Construction Outlook

McGraw-Hill expects total construction to grow 3 percent to $654.3 billion in 2006. Although that doesn't sound like a huge increase, it's pretty sizeable considering the housing market is starting to cool down. The housing market helped bolster total construction sales through some lean years. In 2006, income properties such as offices, stores and condos and an increase in factory construction are expected to lead the market. Total construction is important to track because it covers the largest elements of construction business as they relate to the electrical market.

Total New Housing Units

Source: National Association of Home Builders (NAHB)

In 2006, NAHB expects total new housing units (single-family houses, multi-family units and manufactured home shipments) to decline 4.4 percent from 2.03 million units in 2005 to 1.94 million units. That's still a stellar growth rate. Although the residential market accounts for 27.6 percent of electrical sales, according to EW's Market Mix, it's not quite as important to distributors' economic health as higher-volume commercial and industrial business. However, we have seen a subtle shift in the Market Mix toward residential business over the past few years.

Residential Improvements

Source: U.S. Census Bureau

The amount of money spent annually on residential improvements over the past 10 years has almost doubled, according to U.S. Census figures. That would come as no surprise to Home Depot and Lowe's, which have enjoyed spectacular growth during that time span. Although a relatively small percentage of the $190 billion-plus in residential improvements will trickle down directly to electrical distributors through work done by residential electricians, this statistic is an important indicator of consumer confidence. If home owners are spending more money on their nests, it helps fuel the U.S. economy in many different ways.

Income Properties

Source: McGraw-Hill's 2006 Construction Outlook

This market indicator monitors an important sweet spot in the building market: the construction of new income properties such as office buildings, stores, warehouses and multi-family housing. When this market is hot, the electrical industry has a good year, but when it's soft, distributors, reps and manufacturers feel its pain. McGraw-Hill forecasters expect a 7 percent increase here, after an unexpected 10 percent bounce in 2005 and a 16 percent increase in 2004.

Office Vacancy Rates

Source: Grubb & Ellis

Historically, a market isn't ripe for new office construction until its office vacancy rate hits 10 percent. Although the national figure is an interesting benchmark, it's more important to look at the rates in specific local markets. Some markets are already at, below or nearing the 10-percent vacancy mark, including Washington, D.C.; New York; Raleigh, N.C.; Las Vegas; Orlando, Fla.; and Portland, Ore. On the flip side, St. Louis, Kansas City, Houston, Cleveland, Dallas, Detroit and Atlanta are all suffering with 20-percent plus downtown vacancy rates.

Institutional Construction

Source: McGraw-Hill's 2006 Construction Outlook

McGraw-Hill expects a healthy 7 percent increase in the construction of hospitals, schools and other institutional properties in 2006, following a 6 percent increase in 2005. All of the long-term demographic fundamentals are in place for continued growth in educational construction. Health-care construction looks good long-term, too, as the aging of the U.S. population will power the hospital market for years to come. Retrofit work in this segment is also solid.

Electric Utilities

Source: McGraw-Hill's 2006 Construction Outlook

Although maintenance and capacity issues exist with the U.S. utility grid, McGraw-Hill expects utility construction to drop 1 percent in 2006 to $6.8 billion. That's down from a high of $24.1 billion in 2001. Utilities are still reeling from the overbuilding of the late 1990s. In anticipation of demand created by deregulation, in the late 1990s utilities in Texas and California invested heavily in new power plants. When demand didn't materialize, utility construction collapsed with annual declines of 50 percent, 27 percent and 19 percent from 2002 to 2004, respectively.

Purchasing Managers Index (PMI)

Source: Institute for Supply Management

Purchasing managers at manufacturing plants tend to be an optimistic bunch when forecasting their projected spending, and they are feeling good in third-quarter 2005. The PMI monthly readings of 59.4 and 59.1 in September and October respectively were new highs for 2005 and they indicate respondents are still bullish about the economy. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it's generally contracting.

Machine-Tool Orders

Source: American Machine Tool Distributors Association

Although machine tool consumption dropped 2.4 percent in September 2005, the $294.8 million monthly total was one of the highest sales figures in the past two years. The year-to-date total of $2.2 billion was up 10.2 percent compared with 2004. This statistic can give you a quick read on the health of the industrial market because it measures the sales of the equipment on the factory floor that manufacturers use to shape, mold and form metal for use in the products that they produce.

Capacity of Utilization

Source: Federal Reserve Board

The most recent 78.6 percent capacity of utilization rate is even with 2004, but it's a nice improvement over 2002 to 2003, when nearly 25 percent of all industrial capacity was unused. During this two-year period, capacity of utilization rates were the worst the industrial market had seen in 25 years. Next year should see further improvement in this closely watched statistic. The industry average for capacity of utilization from 1972 to 2003 is 81 percent, and 80 percent is generally considered the point where factories begin expanding their facilities or retrofitting existing manufacturing lines.


Source: McGraw-Hill's 2006 Construction Outlook

Although the U.S. industrial market continues to suffer from some gut-wrenching downsizing and job losses, business is actually picking up. The McGraw-Hill forecast calls for a 9 percent increase in the construction of manufacturing buildings in 2005, following a 3 percent increase in 2005. However, that increase is coming from a low level. The $8.6 billion forecast is the highest since 2000, but it's far from the level of activity in the late 1990s, when this indicator topped $14 billion in 1997.

K-12 Student Enrollment

Source: National Center for Education Statistics

Far-reaching demographic trends will continue to demand more school construction, but local and state budget concerns will occasionally trip up some projects in the short term. According to American School and University (ASU) magazine, new construction and renovations from 2004 to 2006 will top $89 billion. A ton of this work will be in lighting. According to ASU, lighting upgrades were part of a retrofit 74 percent of the time.

Higher Education Enrollment

Source: National Center for Education Statistics

Although the K-12 construction pace will slow in the next few years, the children of baby boomers are entering college in near-record numbers in a demographic bulge unlike anything ever seen. Enrollments in this segment of the educational market will climb steadily over the next 10 years. According to American School and University magazine, over $59.2 billion in construction projects on college campuses will be started from 2004 to 2006. Over $20 billion of that is in modernizations and additions.

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