One of the questions I’m often asked is “What do things
look like out there?”, typically followed these days with “How long will these
better times last, when will it end?”.
Every contractor has their own experiences, their own challenges and
successes. The generic answer needs to
address the “typical” experience out there, the contractor who falls somewhere
in the middle of the bell curve.
The answer I give today is things are generally pretty good
out there, not as euphoric as it was just prior to the great recession, circa 2006
or 2007) but increasingly good in recent years.
My perspective is that things bottomed out, for the average private
commercial/industrial contractor, sometime in 2012.
Each year since 2013 we’ve seen further modest improvement, stabilization
and good earnings for contractors here in Southern California.
Frankly, a few years ago, I thought based on listening to
economists and others that 2017 might be the peak and we’d fall off from there
for a while. Well we are within a
handful of weeks from getting out of 2017 and things still look pretty
good. Backlogs are strong into 2018,
with some of my clients reporting commitments into 2019. Business optimism
remains strong. Of course a large geo-political event could
put work to a halt like we saw after 9/11, commitments notwithstanding. That being said, it looks like we have good times for the foreseeable future and we can only hope it continues.
The concept of "reversion to the mean" creeps into my mind as we currently enjoy the 3rd longest economic expansion in U.S. history. Hopefully the Federal Reserve and others whom have control over how our economy behaves pull on the all the appropriate levers in all the right ways at all the right times, or something close to that metaphor.
The concept of "reversion to the mean" creeps into my mind as we currently enjoy the 3rd longest economic expansion in U.S. history. Hopefully the Federal Reserve and others whom have control over how our economy behaves pull on the all the appropriate levers in all the right ways at all the right times, or something close to that metaphor.
A quick look at the Architectural Billings Index, a
leading indicator we’ve touched upon a number of times over the years on this blog
shows that here in the West, things appear to have softened some with a reading
of 48.4 for September 2017. These numbers are just
indications of work to be performed, more of a guideline than a rule. If you aren't familiar with how the index works, click on the link in the preceding sentence for more background. One poster on the AIA website from the West
indicated that a few of their projects were put on hold, citing rising
construction costs and labor shortages.
Interesting, makes sense given the data out there, particularly with the
historically low unemployment levels we are currently experiencing.
These regional numbers for
September 2017 are shown in the table below:
West
|
South
|
Northeast
|
Midwest
|
National
|
|
September 2017
|
48.4
|
54.0
|
56.9
|
50.4
|
49.1
|
By contrast, taking a
look back to July 2014 numbers, we see the following:
West
|
South
|
Northeast
|
Midwest
|
National
|
|
March 2013
|
51.9
|
53.6
|
54.6
|
53.9
|
51.9
|
Perhaps the lower input costs for
materials in 2013 as well as the more available labor market created
conditions for increased construction activity, correlating to our experiences
in 2013 and the ensuing years. At that
time, the unemployment rate quoted by the Bureau of Labor
Statistics for March 2013 in the West was 8.3%, the highest in the nation
with supply of labor more available than today.
Could the current labor
market and the implied labor shortages be a precursor to slowing construction
activity? Or possibly stable construction activity with increasing prices? Inflation in construction
inputs could also be a factor to watch.
For the immediate future, it seems to be steady as she goes.
The actionable takeaway from this data is to always be vigilant regarding your fixed overhead, keep it low and be prepared to make dispassionate decisions regarding your variable costs, including your labor.
The actionable takeaway from this data is to always be vigilant regarding your fixed overhead, keep it low and be prepared to make dispassionate decisions regarding your variable costs, including your labor.
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