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The 2011 economic indicators that will have the most impact on the electrical market paint a picture of an economy that's finally bounced off the bottom and is on a slow upward trajectory toward more profitable times. But like an airplane struggling to gain altitude, there's going to be dips and turbulence before we reach cruising altitude.
Expect the commercial construction market to lag other market segments because of lingering lending problems and overbuilding and for the industrial MRO market segment to lead all others in 2011. The housing market is improving, but it accounts for less than 20 percent of total sales of electrical products through distributors. That being said, the rest of the construction market depends on housing to spark demand for stores, restaurants and many other types of commercial development, and the industrial market needs homeowners to load up their new houses with new purchases and keep factories cranking out appliances, furniture, big-screen televisions, patio furniture and other big-ticket items.
Best bets for 2011 continue to be lighting retrofits of existing facilities and basic industrial MRO supplies. Lighting manufacturers are investing millions in R&D on LED lighting systems, but until the prices come down they won't revolutionize the market. And it will be a long time — if ever — before LEDs become more cost-effective for open-area office lighting than T5 or T8 fluorescent lighting systems, which produce a fast ROI for building owners. Whether the solar or wind markets make sense in your region in 2011 depends in large part on climate and local utility and government incentives. One “over-the-next-hill” technology that you should start researching now is electric vehicles (EV). GE, Eaton Corp., Siemens, ABB, Leviton and Schneider Electric are investing big bucks in EV charging stations and they are expecting electrical contractors to handle the installations. You will start hearing about EV charging systems being installed in 2011.
In this article, Electrical Wholesaling has collected economic data for the segments of the construction and industrial markets that will have the most impact on the electrical business in 2011. This data should prove more valuable than the general economic forecasts you find in the business pages of most newspapers, because they focus more on retail sales, consumer spending and macroeconomic information rather than on data that directly affects the electrical market.
Copper Prices
Source: U.S. Geological Survey, MetalsWeek and www.metalprices.com
Forecasting copper prices has always been a dicey business, but this year's wild swings in copper pricing gave everyone who watches this jittery market a bad case of whiplash. Copper prices topped $4 per pound in early November, but then plummeted 25 cents/pound in less than a week because of concerns over Chinese fiscal policy. It's hard to believe copper prices have climbed more than a dollar in six months and doubled in the past five years when you consider copper's historical price band used to be between 80 cents and $1.20 a pound.
National Office Vacancy Rates
Source: Grubb & Ellis
Well, at least the office vacancy rates have stabilized, although a national vacancy rate of 17.8 percent during the third quarter is certainly nothing to brag about, particularly when you consider one of the green lights for office construction is usually a 10 percent vacancy rate. The only markets in Grubb & Ellis' data with a sub-10% downtown vacancy rate are Fort Worth, Texas (7.3%); Raleigh-Durham, N.C. (7.6%); Columbus, Ohio (8.8%); Charleston, S.C. (9.8%); New York (9.9%); and Memphis (9.9%). On the flip side, 22 markets had downtown vacancy rates topping 20%.
Electric Utilities
Source: McGraw-Hill's 2011 Construction Outlook
The always-volatile market segment for construction of power plants is still on a downer in 2010 and is expected to decline 10 percent in 2011 to $16 billion. That's a combined decline of 49% since its recent high of $31.4 billion 2008. The dismal number may come as a bit of a surprise to industry observers tracking the construction of wind farms and utility-grade photovoltaic facilities. McGraw-Hill Construction data shows at least eight wind farms broke ground in 2010 that had a contract value of at least $300 million.
Purchasing Managers Index
Source: Institute for Supply Management
The Purchasing Managers Index (PMI) is one of the most widely watched indicators of the health of the industrial market, and during 2010 sent out some of the most positive signals of any economic indicator published in EW National Factbook. The purchasing managers who responded to this monthly survey are definitely bullish — for all of 2010 the PMI Index stayed comfortably above the all-important 50-point measure that indicates the manufacturing arena is expanding. Below 50 points indicates the industrial market is generally contracting.
Institutional Construction
Source: McGraw-Hill's 2011 Construction Outlook
This market is really a collection of market niches — schools, universities, hospitals and other healthcare facilities, churches, government buildings and public entertainment facilities — each with its own set of drivers and challenges. Overall, McGraw-Hill expects this market segment to decline one percent in 2011 to $122.3 billion and that the healthcare segment will be the strongest, with a six-percent increase (as measured in square footage of new construction) to 72 million square feet.
AIA Architecture Billings Index (ABI)
Source: American Institute of Architects
This leading indicator tracks inquiries for new construction projects received by architects and billing trends at those design offices. The ABI finally turned positive in September, topping the 50-point mark that indicates healthy billings activity. Inquiries spiked almost eight points to 62.3 points and billings hit 50.4 points, the first time the Architecture Billings Index ventured into positive territory since late-2007. Indicative of the slow-and-shaky recovery in the construction market, the ABI dropped again in October to 48.7 points.
Electrical Contractor Employment
Source: Bureau of Labor Statistics
Still no great news here. Electrical contractors had 26,600 fewer employees on the payrolls in September compared to a year ago, a sizeable decrease but not as big as the massive 118,000-drop from September 2008 to September 2009. Any drop in this statistic has a direct impact on the electrical wholesaling industry, because according to the 2011 Electrical Wholesaling Market Planning Guide data, on an annual basis an electrical contractor typically buys $39,510 in electrical products per employee.
Commercial Buildings
Source: McGraw-Hill's 2011 Construction Outlook
McGraw-Hill expects this all-important market segment to increase 16.9 percent to $44.9 billion in 2011 after experiencing double-digit annual declines 2008-2010. However, McGraw-Hill's 2011 forecast for commercial is still less than half the $101 billion in 2007 construction activity when the market topped out. Stores (19%); warehouses (30%); hotels (13%) and offices (13%) are all expected to grow in 2011, but any increase is coming off very low levels of activity.
Home Sales 2006-2012
Source: National Association of Home Builders (NAHB)
Another statistic that homebuilders watch closely in their local market areas is home sales, because there's not much need for new housing stock if a surplus of completed homes and older homes for sale exists in the market. Fortunately for home builders, this statistic is moving in the right direction for both the stock of new homes for sale and existing homes for sale. NAHB expects sales of new homes to increase approximately 37 percent in 2011 and that existing home sales will increase approximately 18 percent next year.
Total Construction
Source: McGraw-Hill's 2011 Construction Outlook
While expecting total construction spending to increase eight percent in 2011 to $445.5 billion, McGraw-Hill Construction says that's 40 percent below the market's peak in 2006 of $689.6 billion. Although the housing market and healthcare construction may have higher growth rates than other segments in 2011, housing is expected to be 65 percent below 2005 peak levels, and a still-tough lending environment is tamping down any real growth in commercial construction.
Total Housing Starts
Source: National Association of Home Builders (NAHB)
After hitting bottom in 2009, housing began a slow, painful recovery to some sort of recovery. NAHB forecasts that total housing starts will increase by approximately 33 percent in 2011, and that single-family homes and multi-family will increase by approximately 37 percent and 19 percent, respectively. The 2011 increases will still be approximately 55 percent below 2006 peak levels of homebuilding activity, and NAHB expects residential building activity in 2012 to be up more than 40 percent over its 2011 forecast.
Electrical Manufacturers' New Orders
Source: U.S. Department of Commerce
Electrical manufacturers' new orders climbed in fits-and-starts during 2010. They climbed steadily in early 2010 and finally cracked the $3 billion plateau mid-year, but over the past few months they have been up one month and down the next. While the generally positive trend during the year is encouraging, new orders are still down 24 percent from the current business cycle's peak in early 2008 when they topped $4 billion per month. The September figure of $3.2 billion is down 7.7% from August.
Machine-Tool Orders
Source: American Machine tool Distributors Association (AMTDA)
Machine-tool orders offer a quick read on the industrial market because they reflect the sales of the equipment on the factory floor that shapes, molds and forms metal. September's $399.8 million in machine-tool orders were up 66 percent from August and more than double from the total of $153.6 million reported for September 2009. This indicator often has wild swings — since the $126.3 million in orders registered in January 2010, this indicator has increased more than 200 percent.
Capacity Utilization
Source: Federal Reserve Board
Another indicator of market conditions in Industrial America is capacity utilization, which measures current output versus potential output of U.S. factories. The 80 percent utilization rate is generally considered to be the point where factories begin expanding their facilities or retrofitting existing manufacturing lines. This indicator came close to 80 percent on an annual basis in 2007, but it's been in the doldrums since then, sliding to less than 70 percent in 2009. The Federal Reserve Board expects this economic indicator to increase approximately four points in 2010.
Freight-car loadings
Association of American Railroads
One of Warren Buffett's favorite economic indicators, the amount of material being shipped by railroads, continued improving through early November. The Association of American Railroads (AAR), Washington, D.C., said through that time period weekly rail traffic continued to see modest year-over-year gains. U.S. railroads originated 288,056 carloads for the week ending Nov. 6, 2010, up 4.9 percent compared with the same week last year. For the first 44 weeks of 2010, U.S. railroads reported cumulative volume of 12,612,717 carloads, up 7.3 percent from last year.
Data are based on originations, are not seasonally adjusted, exclude U.S. operations of CN and CP, and reflect revisions to original reporting. Source: AAR Weekly Railroad Traffic
Truck tonnage
Source: American Trucking Associations (ATA)
Another one of Buffett's favorite indicators is the amount of freight trucks are hauling. The American Trucking Associations (ATA), Arlington, Va., measures this with its For-Hire Truck Tonnage Index, which increased 1.7 percent in September. The latest gain put this index at 108.7 in September, up from 106.9 in August. Compared with September 2009, freight tonnage hauled by trucks climbed 5.1 percent, which was well above August's 2.9 percent year-over-year gain. Year-to-date, tonnage is up 6.1 percent.