Monday, October 11, 2010
Outlook for 2011 and beyond
I’ve always enjoyed following the markets and the economy. One of the reasons I follow economic data is to gain insight as to what it might mean for the near and intermediate term in our economy and its impact on business. I get information from a variety of sources, as many of us do, including the U.S. Department of the Treasury (http://ustreas.gov/). From this website you can subscribe to U.S. Economic Statistics. You can choose from a variety of reports as well as frequencies of those reports. What does this have to do with running a construction business like many of you are charged with doing? Understanding economic information and, more importantly, how it impacts you and your business is of critical importance.
One piece of data from the Quarterly Data Update published at the end of September that jumped off the page for me was “Business Investment – Equipment and Software”. For 2009, the average business investment in Equipment and Software declined by approximately 5%. In the first quarter of 2010 this number showed an increase of just over 20% and for the second quarter of 2010 this same statistic showed an increase of just under 25%. It seems to me that if business is sharply increasing its spending on equipment, it follows that business will soon need to increase its spending on labor to operate and manage the equipment. This latest quarterly increase in equipment spending is the most since 1983 (similarly the U.S. was coming out of a recession which began in July 1981 and officially ended in November 1982). Back then, unemployment was at 10.4% in January 1983 and fell to 8% one year later in January 1984. I’m not saying our economic challenges and situation today is exactly as it was in the early 1980s. Instead, I’m focusing on the trend in business equipment spending. What I am suggesting is that business will need to hire labor to protect their investments in equipment much the same way labor was employed in 1983 following a similar spike in equipment spending. When unemployment decreases and people have jobs, consumption will resume, the housing market will improve and the need for building out retail, industrial and residential spaces will return. This of course will take some time to unfold but if the connection between equipment spending and job creation is real, as I think it is and if history is any guide, the timeline may not be as long as some people may think for improvement in our overall economy.
This information may not help you to sleep better tonight, reduce the number of bidders (including desperate and/or incompetent ones) on jobs or increase your margins and backlogs today. However it could signify better, or at least not worse, times ahead for many Americans. The quantitative easing the government has undertaken in the last few years (buying bad mortgages, TARP money to financial institutions, purchasing treasury bonds, etc.) will most likely come at a price for us and our children down the road in the form of inflation and other headwinds. That being said, my perspective is things will be better in 2011 even if marginally so for our overall economy. Health in the construction industry will most likely take longer as the need for building will lag the general recovery. Most, if not almost all, construction companies have already eliminated much of the excess in their operations. If you are one who has held on, either to people, idle/underused equipment or any other inefficient overhead, now is a good time to consider how long you really think you can hold on to those assets hoping things are going to improve significantly anytime soon and jeopardizing the health and/or existence of your company. If the people, for example, you are keeping in your organization have very unique, hard to replace skillsets and you have the capital structure to keep them on without harming your business, then perhaps keeping them makes sense. However, if on the other hand you can relatively easily replace the people, equipment, etc. down the road when revenue levels can support that spending, you should act now and get as lean as possible.
The good news is that this too shall pass. In the meantime, it is important to stay on top of what is happening out there in the market and our economy. The information you gather is useful in making business decisions that can help you live to fight another day and maximize opportunities when strong, healthy activity resumes.