When developing market forecasts, you can use economic trend data obtained from various trade associations, publishing companies and government agencies to help you make good business decisions. Electrical Wholesaling gathered recent economic data from a number of sources to give you a quick snapshot of many aspects of the construction market that affect the business of electrical distributors, electrical contractors, independent manufacturers reps and electrical manufacturers.
New to the Market Planning Guide, this section helps give a sense of the macroeconomic trends shaping the electrical construction market. Unfortunately, with the notable exceptions of health-care, residential and education construction markets, the numbers don't forecast much growth. Still, the historical trends and forecast data offer quick insight into key elements of the electrical construction market.
Total Construction
Source: McGraw-Hill's 2003 Construction Outlook
This well respected construction forecast calls for a 1 percent overall decline in construction spending to $495 billion in 2003. The figure covers the construction of single-family homes; public works projects; electric utilities; income properties (offices and multi-family housing, like townhouses and apartments); institutional buildings such as schools, universities, hospitals and other health-care facilities; and manufacturing buildings.
Top 10 Markets for Single-Family Housing Permits
Source: National Association of Home Builders
Over the past decade, virtually all of the fastest-growing housing markets in the United States have been in the Sunbelt. According to the most recent NAHB numbers available at press time, with the exception of Minneapolis, that song remains the same. Atlanta, Phoenix, Dallas, Las Vegas, Orlando and California's Riverside and San Bernardino Counties have made every Top 10 housing construction list in recent years. After new homes are built on this scale, there's always a corresponding bump in the construction of retail strip malls, restaurants, big box stores and other retail establishments to serve the needs of these new residents.
Single-Family Housing Starts
Source: National Association of Home Builders
While single-family housing starts are expected to slow down to 1.271 million starts in 2003, according to the National Association of Home Builders, Washington. D.C., they will settle in at a pace that's far above all but the best years of the 1990s. A key driver to this continued growth is the influx of first-time homebuyers among recent immigrants to the United States. Assuming that mortgage rates stay low, this market should remain strong for several years.
Income Properties
Source: McGraw-Hill's 2003 Construction Outlook
One word sums up the office market over the last few years: Ouch! While McGraw-Hill is forecasting a 2 percent increase in this category — due in part to an increase in multi-family housing construction — the office element of this market isn't going to get a whole lot better any time soon in most markets. The biggest problem is that the 2003 national office vacancy rate forecast by Grubb & Ellis is 16 percent. Once companies start hiring again and absorbing all of this vacant office space, office construction will increase. This is one of the most cyclical segments of the construction market, and industry veterans are used to wild swings here.
National Office Vacancy Rates
Source: Grubb & Ellis and Reis Inc.
Although the national vacancy rate percentage is in the mid-teens this year, there's a wide disparity between markets, with some doing much better or worse than others. Earlier this year, Grubb & Ellis reported that San Diego was one of the few major cities with downtown and suburban vacancy rates of less than 10 percent. San Francisco was at the other extreme, with vacancy rates near or over 20 percent. The office vacancy rate is a key economic indicator in the commercial construction market because developers are not going to build anything new if there is too much vacant office space available.
Purchasing Managers Index
Source: Institute for Supply Management
The most recent PMI figure of 48.5 indicates that the manufacturing economy failed to grow in October for the second consecutive month. The Purchasing Managers Index is based on a monthly survey of purchasing executives at manufacturing firms on a variety of factors that reflect the health of their businesses. The various factors are combined into the PMI. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
Monthly Machine-Tool Orders
Source: American Machine Tool Distributors Association
August 2002 consumption of machine tools of $139.7 million was up 4 percent from a month earlier, but down 33.6 percent from August 2001. Total consumption year-to-date is down 24.7 percent compared to the same period in 2001. Over the past two years, machine-tool orders have slid to some of the lowest levels seen in a long time. The monthly statistics provided by the American Machine Tool Distributors Association on machine tool orders are one of the most important indicators of the health of the industrial market because they are a measure of 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.
Electric Utilities
Source: McGraw-Hill's 2003 Construction Outlook
It's been a wild ride in the utility market over the past few years. With deregulated power markets in Texas and California, the two states lead the charge in power plant construction from 1998 to 2001. From 1998 to 2001, power plant construction jumped from $3.4 billion annually to $23.7 billion. When oversupply became an issue in 2001, there wasn't the need for new power plants, and construction dropped off a cliff. Spending on power plant construction dropped 39 percent this year, and McGraw-Hill's 2003 Construction Outlook expects it to drop another 24 percent in 2003.
Capacity of Utilization
Source: Federal Reserve Board
This statistic measures how much manufacturing capability factories are using. It's similar in a sense to how vacancy rates measure the health of the office market. If a city has 20 percent of its office space vacant, there isn't any demand for new office construction. If a factory is only using three-quarters of its capacity, it's not going to need to add any new manufacturing lines. Today's capacity of utilization rate of about 75 percent is the lowest seen in over in 20 years, according to the CEO of one electrical manufacturer.
Manufacturing
Source: McGraw-Hill's 2003 Construction Outlook
You won't find many encouraging statistics in the industrial sector, the black hole of the construction market over the past few years. McGraw-Hill expects industrial construction to improve in 2003 by 6 percent, but that's after this market was off 26 percent in 2002 compared to 2001. There are pockets of prosperity in the industrial market, specifically in the auto industry where some new plant construction is underway or on the drawing boards in the South. Still, this market's karma won't change until manufacturers in a broad array of industries start getting a steady flow of new orders.
K-12 Student Enrollment
Source: National Center for Education Statistics
While the National Center for Education Statistics says enrollment for grades K-8 will peak this year at 38.4 million students, and decline modestly through 2008, enrollments in grades 9-12 will rise from 15.2 million this year to 16.1 million in 2007. It's a matter of simple demographics. The children of baby boomers (those people born 1946-1965) are now of school age, and since this age group is the largest demographically, it's fueling the surge in U.S. school construction.
Higher Education Enrollment
Source: National Center for Education Statistics
The same demographic trend that pushed K-12 school enrollment to record numbers over the past few years is slowly but surely working its way to colleges and universities. The children of the oldest baby boomers have already graduated from college, but this generation's peak years population-wise are still to come. The National Center for Education Statistics says higher education enrollments will increase over the next 10 years, from 15.6 million in 2002 to 17.7 million in 2012.
Institutional Construction
Source: McGraw-Hill's 2003 Construction Outlook
Institutional construction spending covers schools, colleges, hospitals, health-care facilities and government buildings. It's one of the healthiest segments of the entire construction market. McGraw-Hill's forecast for a 1 percent increase to $94.7 billion in institutional construction spending next year would keep this market at record heights. Construction spending at schools and universities will remain strong in 2003, as will health-care construction. McGraw-Hill expects health-care construction will climb 2 percent in 2003, after an 11 percent increase in 2002.