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Economic Factbook

Dec. 1, 2004
Are you still searching for economic trend information and forecast data to factor into your 2005 sales forecasts? You have come to the right place. Electrical

Are you still searching for economic trend information and forecast data to factor into your 2005 sales forecasts? You have come to the right place.

Electrical Wholesaling magazine has collected the economic indicators 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 2005 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 2005 Construction Outlook

McGraw-Hill expects total construction to grow 2 percent to $585.5 billion in 2005. Let's watch this number closely, because the pieces may be in place for even better numbers. The company's 2004 Construction Outlook called for 1 percent growth, but the pace of construction in 2004 increased a healthy 9 percent, the biggest increase since the late 1990s. This data tracks the largest elements of construction business — the single-family housing, public works, utility, commercial, retail, institutional and industrial markets.

Total New Housing Units

Source: National Association of Home Builders

The continuing growth of the housing market has confounded the experts at the National Association of Home Builders (NAHB), Washington, D.C., running ahead of the association's forecasts at a double-digit rate. In 2005, NAHB expects total new housing units (single-family houses, multi-family units and manufactured home shipments) to decline 3.2 percent to 1.99 million units. Despite the contraction, NAHB says the housing market is still enjoying one of its longest joy rides in the post-World War II era.

Residential Improvements

Source: FMI's Construction Put in Place Estimated for the United States

With unemployment down and consumer confidence on the rise, look for residential improvements to see a nice boost in 2005. FMI is forecasting an increase of nearly 5 percent. This follows a 7 percent increase in 2004 in the cash spent on remodeling projects. While a relatively small percentage of the $125 billion in residential improvements will trickle down directly to distributors through work done by 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 2005 Construction Outlook

When this market is hot, the electrical industry has a good year, but when it's soft, distributors, reps and manufacturers feel its pain. They should be feeling pretty darn good in 2005 — McGraw-Hill forecasters expect a 9 percent increase here, after an unexpected 11 percent bounce last year. While the national picture looks good, the devil is in the details, as the health of individual metropolitan areas in this all-important market segment will be all over the charts.

Office Vacancy Rates

Source: Grubb & Ellis

With a national vacancy rate near a dismal 18 percent, the big picture in office construction is still not very pretty. Real help won't be on the way until all of this excess office space is absorbed and the vacancy rate drops to closer to 10 percent. However, some bright spots do exist. Washington; D.C.; New York; San Diego; Charlotte; and Raleigh N.C.; and Colorado Springs, Colo.; all have healthy office construction markets. On the flip side, San Francisco, Houston, Phoenix and Dallas are all suffering with 20-percent plus downtown vacancy rates.

Institutional Construction

Source: McGraw-Hill's 2005 Construction Outlook

McGraw-Hill expects a healthy 7 percent increase in the construction of hospitals, schools and other institutional properties in 2005, following a 1 percent increase in 2004. All of the long-term demographic fundamentals are in place for continued growth in this market. Student enrollments will flatten out at a healthy rate over the next few years, and the aging of the U.S. population will power the hospital market for years to come. Retrofit work in this segment is solid, too.

Electric Utilities

Source: McGraw-Hill's 2005 Construction Outlook

Utility construction is the black hole of the construction market. McGraw-Hill expects this market segment to slide 8 percent in 2005 to $5.5 billion. That's down from a high of $24.1 billion in 2001. Utilities are still reeling from the overbuilding of the late 1990s. During the late-1990s, utilities in Texas and California invested heavily in new power plants. When that demand didn't materialize, this business went in a tailspin and saw annual declines of 50 percent, 26 percent and 32 percent respectively, from 2002 to 2004.

Purchasing Managers Index (PMI)

Source: Institute for Supply Management

Purchasing managers were not as optimistic in the third quarter of 2004 about future market conditions as they had been earlier in the year. But the PMI monthly readings of 56.8 in 58.5 in September and October respectively, 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

Finally, some good news in the industrial market. The September U.S. machine-tool consumption total of $389.2 million was the highest monthly sales total in almost four years and was almost double the sales total registered during several of the months in the depths of the recession. Machine-tool demand had already been recovering before the historic spike in September. Machine-tool orders measure sales of equipment that shapes, molds and forms metal.

Capacity of Utilization

Source: Federal Reserve Board

The 77.7 percent capacity of utilization rate is an improvement over the numbers we saw from 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. Although this indicator improved in 2004, it still reflects the sour business conditions in this market. The industry average for this statistic from 1972 to 2003 is 81.1, and 80 percent is generally considered the tipping point when manufacturers will start investing in facilities.


Source: McGraw-Hill's 2005 Construction Outlook

The continuing troubles of the industrial market segment are well documented, but at least the 2005 McGraw-Hill forecast calls for a nice increase next year. The company's forecasters are looking for a 14 percent increase in the construction of manufacturing buildings. However, that increase is coming from a low level. The $8 billion forecast is a welcome improvement over recent years, 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. While increases in student enrollment will moderate some over the next few years, they will level out at a high level. According to American School and University (ASU) magazine, total construction in the 2003-2005 period will hit $93.7 billion.

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 (ASU) 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 is in modernizations and additions.