Category: Ohio

In our Economic Indicator report dated March 2020, we stated that Covid-19 had not yet impacted the East Coast construction market, but that it would. Well . . . it did, and I am sure we all felt the impact over the past four months. The four indicators we follow all show the same trends – there will be a decrease in industry volume and industry margin this year and 2021. Two of these indicators, the Architect’s Billing Index (ABI) and the Dodge Momentum Indicator (DMI), are excellent predictors of commercial construction activity 12 months into the future. Both indices lead us to believe that there will be fewer construction opportunities in the 12-18 months ahead.

However, last week I dug a little deeper to see if I could find any broader trends, and one piece I came across was an article where Fortune Magazine surveyed the CEOs of the 2020 Fortune 500 companies. A couple of interesting questions were posed, and the responses help add to the story told by the indicators:

When do you expect capital spending at your company to exceed 2019 levels? Over half of the CEOs felt the return would happen in the next 18 months, and an overwhelming 82.1% think that cap-x spending will exceed 2019 dollars before the end of 2022.

• 2020 – 19.0%
• 2021 – 35.7%
• 2022 – 27.4%

Which country or regions do you see as presenting the best investment opportunity in the next year? With no other country being close, the answer was the United States – 74.3%.

After the pandemic passes, how will the world have changed? One preselected answer was – Nationalism will rise, and global supply chains will become less common. 80% of the CEOs either strongly agreed or agreed to this statement.

Given the information I have today, I prefer to keep an “a glass half full” view and continue to watch and report on the quality and quantity of our backlog as we move through 2020 and 2021. In conversations with our clients, I find most remain optimistic, and as a result, our backlog remains solid. We have seen a slight drop in the number of new opportunities, and that is understandable. As a result, we are also seeing an increase in bidding competition, which will ultimately lead to lower prices for our clients. If your business continues to thrive, now is a great time to get a better “bang-for-your-buck.”

Dodge Momentum Index Suppliment

We’ve been producing our quarterly economic indicator since 2009. Over the years, we’ve used a variety of economic indicators in our reports. Starting in 2020, we decided to narrow our focus on four A/E/C specific economic indicators. We continue to focus on the Associated Builders and Contractors Backlog Indicator, the AIA Architectural Billings Index, and FMI’s Non-Residential Construction Index. In addition, the Dodge Momentum Index, a well-respected 12-month leading indicator for construction spending, will be a new indicator in our quarterly report. This report is a special supplement to our traditional economic indicator to introduce the new measurement we are including going forward.

COVID-19 And the US Construction Industry

Two things happened to me this week that changed my evening reading. First, a long-time peer group member of mine sent out an email that he had purchased-material stuck in US Shipping ports due to Coronavirus fears (he wanted to know if I was experiencing the same issue). Second, the virus has hit the US, with the first cases spreading along the west coast.

In early articles, I found that there are plenty of documented impacts of the decreased Chinese production and the related devastation to the global supply chains. The US and international companies have felt the effect in the automotive, technology, and airline industries. Most recent articles are starting to speculate on the pending impact on the construction industry.

One good article quoted Richard Branch, Chief Economist for Dodge Data & Analytics. He stated that, “the American construction industry will not be immune to the coronavirus’ impact. For commercial builders that rely on Chinese-made goods or materials, this could mean higher material costs and potentially slower project completions.”

By Branch’s estimate, “building product imports from China account for nearly 30% of all US building product imports, making China the largest single supplier to the US.”

Our industry is already facing labor shortages, and the related labor cost increases, as well as material price fluctuations from inflation and tariffs. COVID-19 is another threat to the industry that we will consider during project planning.

While Miles-McClellan has not experienced any of the above issues related to the virus, my friend’s phone call now makes sense. We intend to start discussing this issue internally and working with our clients to bring strategies where necessary.

Here are three quick strategies for all of our owners to consider:

1. Lockdown bids for 60-90 days, giving a little more time for decision making at a set price.
2. Consider diversifying the supplier base with an increase in priority on local goods and services.
3. If using products from overseas, build-in a schedule and budget contingency for future unknowns.

Stautner, J. (2020, February 27). How the Coronavirus Could Impact the US Construction Industry. Retrieved from constructioncitizen.com: https://constructioncitizen.com/blog/how-coronavirus-could-impact-us-construction-industry/2002271

Let’s look at some of the changes in the Construction Economic Indicators that I have witnessed since our last posting in August 2019. In this analysis, I’m diving into the Midwest and Southeast Regional numbers of the American Institute of Architects Architecture Billings Index (AIA ABI), and the Associated Builders and Contractors Construction Backlog Indicator (ABC CBI). In both cases, the Midwest Region numbers fall below the National and the Southeast Regional numbers – this may be an indication of a slowdown in our Ohio market during late 2020.

The AIA’s ABI for the Nation and the Southeast Region has been above 50 for most of the year, while the Midwest Region has been below 50 for the last two quarters (A score > 50 indicates growing architect billings, and a score <50 indicates a decline in architect billings). At the end of the 3rd quarter, the National ABI reported at 49.7, while the Midwest Region dropped to 45.3. The Southeast Region remained in growth territory at 52.3. This indicates that we most likely will experience a decreasing number of new opportunities during the 4th quarter of 2020.

The ABC’s CBI has shown a steady level of backlog at the National level, Midwest, and Southeast Regions throughout 2019. The Southeast Region is currently leading the way at 10 months of backlog, which is higher than the National level of 9 months. The Midwest Region has been steady all year with 7 months of reported backlog.

I monitor Miles-McClellan’s backlog monthly and compare it to both the regional and national levels. We have been steady at about 25% above the national average. This results from both good and bad. The good – we have excellent relationships with our customers that lead to high levels of repeat business. The bad – industrywide manpower issues have prevented work from being put-in-place during 2019, pushing backlog into 2020. I expect to see backlog remain high throughout 2020 as our industry continues to solve the skilled manpower issue.

Because of the projected high backlog, we are carefully monitoring our Superintendent capacity and our skilled trade workforce. We want to continue to serve our clients well, and therefore, we know we cannot overcommit our resources.

If you would like to talk through the numbers above – including detail on our backlog – please give me a call. I always enjoy the opportunity to discuss our industry on both macro and micro levels.

We’ve lived and worked through one of the longest economic expansions in history. So what’s coming next? The more I study it, the more confused I get – but here are some of the facts and trends as I see them.

The US Consumer is strong and is keeping our economy growing. The unemployment rate remains below 4%. Gross Domestic Product is still above 2%, and the stock market continues to push all-time highs. On the other side of that coin, there’s still a lot of economic uncertainty. We have an ongoing trade war with China. International central banks are keeping their interest rates below zero. The US Federal Bank is balancing between a strong US dollar, a strong economy and a political push for lower interest rates.

Confused? Me too. I study the construction numbers that I understand – the Architectural Billing Index (ABI), the Associated Builders and Contractors’ Backlog Indicator, and the FMI Non-Residential Construction Indicator NRCI). These three indicators are generated by industry-specific groups taking surveys from their members. I participate in both the ABC and FMI surveys.

If I look at the three surveys individually, here is what I think is next.
ABC’s Backlog Indicator has been running very consistent between 8-9 months. I participated in the survey on August 25th and calculated our backlog at 8.8 months. We’ve been between an 8-11 month backlog during the past three years – so I don’t see an immediate concern.

FMI’s NRCI is an executive opinion of the construction industry’s health. Above 50 is positive, and tends to fluctuate between low-40s and high-50s. This current survey results of 53.3 support the results seen in the ABC Backlog survey. Together these two measurements show a construction industry that continues at a steady, positive pace.

However, the true lead indicator for our industry is the AIA Architectural Billings Index. This survey has a baseline of 50. If fees are growing, the survey results are above 50, and if fees are shrinking, the results are below 50. This indicator is pretty accurate and shows me what construction looks like 8-12 months from now. The past five months shows fees holding steady to decreasing. This tells me that I am going to have to work harder to find construction opportunities in the spring of 2020.

Moving forward, I will keep a close watch on the ABI and our backlog levels to see how they correlate. I will share some of the early results in the 3rd Quarter Economic Indicator report.

I invite you to share what you see from these three indicators (ABC Backlog Indicator, AIA ABI, FMI NRCI). Where do you think the economy is going next?

The U.S. economy grew 2.9% in 2018. While the economy is growing, GDP’s declining trend (Q1 = 4.1%, Q3 = 3.5%, Q2 = 2.2%, Q4 = 2.2%) signals growth is slowing. “In 2018, momentum accelerated. In 2019, we will see momentum decelerating. The inflection point was really the fourth quarter last year,” said Gregory Daco, U.S. economist at Oxford Economics. “This does not mean we’re headed for a recession. It just means growth will slow to about 2% this year and next.” (Long, 2019)

Despite the anticipated slow down, ABC’s Chief Economist Anirban Basu believes the demand for nonresidential construction services will remain elevated for the foreseeable future. “A major source of influence is the reemergence of public construction spending,” said Basu. “With nearly 10 years of economic expansion complete, many state and local governments are experiencing their best fiscal health in years, resulting in more funds to invest in roads, transit systems, schools, fire stations, and police stations. The combination of spending growth in certain private construction categories and rising infrastructure outlays will keep the average American nonresidential contractor scrambling to retain and recruit workers, especially in the context of a national rate of unemployment effectively at a 50-year low.” (Basu, 2019)

Results from the ABC’s Construction Confidence Survey showed that 70% contractor expect to increase staffing levels, and 56% anticipated rising profit margins.

In March, the AIA’s ABI dropped to 47.8 for the first time in two years. The AIA does point out the fact it was a hard winter and even though the ABI dropped below 50, backlog is at 6.5 months. Again, this does not indicate a recession, especially since “consumer finances remain generally strong, that financial market conditions are not currently too restrictive, and that the commercial construction sector is not yet overbuilt.” (Bryson & House, 2019)

Do you anticipate increasing staff levels? How has your 2018 influenced your 2019? We continue to focus on steady, strategic growth, delivering technical excellence, and satisfying our partners and clients. Whatever the economy brings us this year, we’ll be ready to continue to perform at our best and help our clients manage their projects in the most cost-effective, efficient ways possible.

References
Basu, A. (2019, May 23). Construction contractors confidence remains high in March. Retrieved from www.abc.org: https://www.abc.org/News-Media/News-Releases/entryid/16313/construction-contractors confidence-       remains-high-in-march
Bryson, J., & House, S. (2019). U.S. Recession? How Do We Count the Ways? Wells Fargo. Retrieved from https://www08.wellsfargomedia.com/assets/pdf/commercial/insights/economics/special-reports/recession-20190401.pdf
Long, H. (2019, March 28). GDP revised downward for 2018 as U.S. economy shows more signs of slowing. Retrieved from www.washingtonpost.com

Economic Indicators – 6 Year Trend (2013-2018)

We usually release a recap of the previous year. This year we decided to take a look back from a different perspective.