When December rolls around, you have plenty of 2004 economic forecasts from which to choose. Unfortunately, most of the data in these forecasts doesn't relate directly to the economic indicators pertinent to the electrical construction market. Electrical distributors, independent manufacturers' reps and electrical manufacturers need data on construction trends and industrial spending and production. But the economic forecasts in the business pages of most newspapers usually focus on retail sales, consumer spending, and macroeconomic information that doesn't directly affect the electrical market.
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 2004 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 2004 Construction Outlook
This is an important statistic to watch because it covers all the key elements of the construction market — single-family housing, public works, electric utilities, income properties, institutional and manufacturing. With 2004 growth forecast at 1 percent, the construction market appears to have entered a phase of slow but stable growth. McGraw-Hill has forecast 1 percent growth rates for the previous two years, too. It's quite a contrast with the manic double-digit pace the construction business experienced in 1998 and 1999.
Total Housing Starts
Source: National Association of Home Builders
The housing market is enjoying one of its longest joy rides in the post-World War II era. Total housing starts (single-family and multi-family) are expected to slow down to a 1.7 million annual rate in 2004 and to 1.66 million in 2005. But that's an annual rate above any numbers posted during the 1990s. Although the residential market accounts for 27.6 percent of electrical sales, according to EW's 2003 Market Mix, it's not quite as important to distributors' economic health as higher-volume commercial and industrial business.
Residential Improvements
Source: FMI's Construction Put in Place Estimated for the United States
Home Depot, Lowe's and other big boxes will be mighty happy with this number: a 7 percent increase in the amount of money home owners are spending on residential remodeling projects in 2004. While a relatively small percentage of the $119.1 billion 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 2004 Construction Outlook
When income property projects are humming along, electrical distributors walk with more spring in their step. When this market and the industrial market are down, as they have been for the past few years, it's a devastating one-two knockout punch. McGraw-Hill's forecasters say construction of new income properties such as office buildings, stores, warehouses and multi-family housing will get up off the mat and grow 9 percent. Let's hope they are correct.
National Office Vacancy Rates
Source: Grubb & Ellis
With a national vacancy rate just below 18 percent in the third quarter of this year, and cities like Austin, Dallas, Houston, Phoenix and San Francisco suffering with 20-percent plus downtown vacancy rates, demand for new office space in many key markets is spotty at best. However, the regional numbers are most important in this sector, and some cities are doing just fine with office construction. Washington, Philadelphia, New York and Raleigh-Durham were all enjoying downtown vacancy rates of less than 13 percent in third-quarter 2003.
Institutional Construction
Source: McGraw-Hill's 2004 Construction Outlook
While McGraw-Hill is looking for a 1 percent decline in the construction of hospitals, schools and other institutional properties in 2004, this market is just catching its breath. The long-term demographic fundamentals are all in place for continued growth. Student enrollments will flatten out at a healthy rate over the next few years, and while the health-care market wrestles with concerns over funding from medical providers, construction won't stay down forever.
Electric Utilities
Source: McGraw-Hill's 2004 Construction Outlook
The 19 percent decline in 2004 that McGraw-Hill is forecasting for utility construction proves this segment is still reeling from the overbuilding of the late 1990s. In anticipation of demand created by deregulation, during the late-1990s utilities in Texas and California invested heavily in new power plants. Construction surged from $3.4 billion in 1998 to $23.6 billion in 2001. When that demand didn't materialize, the utility construction went in a tailspin. In 2002 and 2003, the market declined 49 percent and 23 percent, respectively.
Purchasing Managers Index (PMI)
Source: Institute for Supply Management
Purchasing managers have gotten progressively more bullish about the economic fortunes of the industrial market over the last few months. The PMI figures of 57 and 62.8 in the October and November 2003 surveys were some of the highest in recent memory. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it's generally contracting.
Monthly Machine-Tool Orders
Source: American Machine Tool Distributors Association
October U.S. machine-tool consumption total of $157.58 million was down 26.6 percent from September, and down 8.7 percent from the total of $172.52 million reported for October 2002. With a year-to-date total of $1.5 billion, 2003 is down 13.4 percent compared to the same period in 2002. Machine-tool orders measure 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
You get a pretty good feel for the dismal health of the industrial market segment when you realize nearly 25 percent of all its capacity remains unused. There isn't going to be a whole lot of demand for the construction of new manufacturing lines with this type of excess capacity. The back-to-back years of 75 percent capacity of utilization rates are the worst the industrial market has seen in 25 years.
Manufacturing
Source: McGraw-Hill's 2004 Construction Outlook
McGraw-Hill's 2004 forecast numbers reflect the decline in the industrial market. While the company's forecasters are looking for a 9 percent increase in the construction of manufacturing buildings to $6 billion, construction of factories is at a low level not seen in the past five years. While the construction of auto plants in the South brightens the industrial outlook in parts of that region, it's not a real pretty picture in most other regions of the United States.
K-12 Student Enrollment
Source: National Center for Education Statistics
Far-reaching demographic trends will continue to demand more school construction, although in the short-term local and state budget concerns will occasionally trip up some projects. While increases in student enrollment will moderate some over the next few years, they will level out at such a high level that any drop will be almost imperceptible. Look for the biggest increases in enrollment in Sunbelt states such as California, Texas and Arizona.
Higher Education Enrollment
Source: National Center for Education Statistics
While 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 $55 billion in construction projects on college campuses will be started by 2005. Approximately $41.8 billion is in new construction; the remainder in modernizations and additions.