If you are searching for economic trend information to factor into your 2007 sales forecast, then you have come to the right place.
In this article, Electrical Wholesaling has collected economic data for those segments of the construction market with the most impact on the electrical business. Economic forecasts in the business pages of most newspapers focus more on retail sales, consumer spending and macroeconomic information than on data that affect the electrical market directly. In the next few pages, you will see that key economic indicators are pointing to another good year for the electrical market in 2007.
First published in 2002, the Economic Factbook is intended to be a companion piece to Electrical Wholesaling's annual Market Planning Guide published each November. The Market Planning Guide provides sales data and key employment statistics readers can use to estimate the size of their local markets. This article takes a broader view to provide electrical distributors, independent manufacturers' reps and electrical manufacturers with national data on trends in construction, industrial spending and demographics.
Total Construction
Source: McGraw-Hill's 2007 Construction Outlook
McGraw-Hill expects total construction to decrease 1 percent in 2007 to $668 billion. That's still a healthy amount of construction by any measure. The only reason the forecast calls for any decline at all in total construction is the state of the single-family housing market, which accounts for a whopping 40 percent of all construction. If you take out the 5 percent decline McGraw-Hill expects in single-family housing, its 2007 total construction would call for a 3 percent increase. Total construction is important to track because it covers the largest elements of the construction business as they relate to the electrical market.
Total New Housing Units
Source: National Association of Home Builders (NAHB)
The staggering declines seen in many boom-and-bust markets are difficult to fathom when one thinks of the insane amounts of building in those same markets in recent years. However, NAHB says the 12.1 percent decline in total housing starts it has forecast for 2007 is actually part of a fairly typical historical housing cycle. NAHB expects the housing market to bottom out in 2007 and start to rebound in 2008. Residential business doesn't have as much impact on the electrical wholesaling industry as the commercial/industrial market, but homebuilding is a bellwether industry that reflects the state of consumer confidence and the mortgage markets.
Residential Improvements
Source: U.S. Census Bureau
Another good indicator of consumer confidence is how much homeowners spend on their homes. When they are feeling good about their jobs in particular and the economy in general, they will spend more fixing up their homes. While consumers aren't spending as much in 2006 as they did in 2005, their spending on residential improvements remains well above historical levels. Only a relatively small percentage of the $200 billion-plus in residential improvements trickles into the electrical market, but it's still an important indicator to watch.
Income Properties
Source: McGraw-Hill's 2007 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. The 2007 forecast calls for a 1 percent decline after three years of double-digit increases. This market segment was much stronger than expected in 2006, and key indicators point to another healthy year. Despite the potential for a slight decline in 2007, the surge of construction projects already underway and the number of large projects under consideration will carry the day in this $155 billion market segment.
Office Vacancy Rates
Source: Grubb & Ellis
Historically, a market isn't ripe for new speculative office construction until its office vacancy rate hits 10 percent or less. On the flip side, vacancy rates of 20 percent-plus will cripple office construction in a city for years. While the national office construction rate of 11 percent is the best seen in years, the real story is in the office vacancy rates of individual metropolitan areas. Charlotte, N.C., Boston, downtown Manhattan and Washington, D.C., are enjoying vacancy rates of less than 10 percent, while Detroit, Kansas City, Mo., Dallas, and Hartford, Conn., are all suffering with vacancy rates topping 20 percent.
Institutional Construction
Source: McGraw-Hill's 2007 Construction Outlook
With a 7 percent increase projected for the construction of schools, hospitals and medical clinics, stadiums and other institutional buildings, this market segment is one of the strongest in the entire construction market. New stadium construction is expected to continue, as cities want to get a piece of the entertainment dollar that comes with the new restaurants, hotels, parking lots and other service businesses that new stadiums attract. Long-term demographic trends will continue to support the construction and renovation of educational and medical facilities for years to come.
Electric Utilities
Source: McGraw-Hill's 2007 Construction Outlook
This market is very tough to forecast because of the long approval process involved with the construction of new power plants and the recent history of boom-and-bust building cycles in this market segment, where wild swings of 20 percent or more are common. The 2007 forecast calls for a 20 percent decline, but that follows a 65 percent increase in 2006. Over the long haul, the U.S. power grid's need for additional capacity would seem to support massive new construction of power plants.
Purchasing Managers Index (PMI)
Source: Institute for Supply Management
In recent months, one of the key indicators measuring the industrial market's health is picking up a gradual decline in the confidence of the purchasing managers responsible for making equipment purchases at industrial plants. In the closing months of 2006, purchasing managers were still marginally optimistic about projected spending, but this monthly survey indicates their confidence began to slip mid-year. A reading above 50 percent indicates the manufacturing arena is generally expanding; below 50 percent indicates that it's generally contracting.
Machine-Tool Orders
Source: American Machine Tool Distributors Association (AMTDA)
Machine-tool orders can give you a quick read on the health of the industrial market because they reflect the sales of the equipment on the factory floor that manufacturers use to shape, mold and form metals for use in their products. This economic indicator historically has a lot of “bounce” to it, and double-digit month-to-month spikes and drops are common. The September 2006 numbers had a nice 31 percent increase over August, and a 40 percent increase over September 2005. The AMTDA expects 2006 to post the best results for U.S. investment in advanced manufacturing equipment since 2000.
Capacity Utilization
Source: Federal Reserve Board
With the most recent capacity utilization rates near 82 percent, the industrial market may be poised for new construction and retrofit. This figure is markedly higher than the early years of this decade, when the U.S. economy was floundering after the dot-com crash. The industry average for capacity utilization from 1972 to 2005 is 81 percent, and 80 percent is generally considered the point where factories begin expanding their facilities or retrofitting existing manufacturing lines.
Work-On-The-Boards
Source: American Institute of Architects (AIA)
Inquiries regarding new project work and billings for completed projects or projects in progress at architectural firms are leading indicators of future construction activity. When you want to get a general sense of how busy architects are, check out the monthly Work-On-the Boards survey available at the AIA's Web site, www.aia.org/aiarchitect. Any score above 50 for inquiries or billings indicates a growth market. AIA members are expecting modest gains in activity next year. Larger firms are the most optimistic. Overall, architectural firms are expecting moderate growth of between 3 percent and 4 percent in billings in 2007.
Manufacturing
Source: McGraw-Hill's 2007 Construction Outlook
While the McGraw-Hill forecast says new construction of factories in 2006 and 2007 will increase at 13 percent and 14 percent respectively, the move to less expensive manufacturing sites around the globe make the industrial market one of the smaller segments of the overall construction market. However, the market is moving in the right direction, and has grown at a double-digit annual rate since 2003.
K-12 Student Enrollment
Source: National Center for Education Statistics
The construction climate for local schools will remain solid for the foreseeable future due to far-reaching demographic trends. The children of Baby Boomers are still filling classrooms in near-record numbers. Local and state budget concerns occasionally snuff out school projects, but overall the growth trend in this market segment is unmistakable. The recently passed $10 billion bond issue funding new schools in California will support an enormous amount of school-related construction in the Golden State.
Higher Education Enrollment
Source: National Center for Education Statistics
The demographic trends driving the new construction and renovations of K-12 facilities is having the same golden touch on colleges and universities. American School & University magazine forecasts $44.6 billion in new construction, modernization and additions. In addition to new or upgraded power systems, this work will include lighting retrofits, new security systems and upgraded voice-data-video (VDV) networks for classrooms, libraries, dormitories and other campus buildings.