Watching the TV news we hear lots of talk about stock market volatility, rising interest rates, and trade wars. Some mention concerns a coming slowdown. What is our reality? Listen to those economic gurus who are close to our world, they have better insights. So here’s a summary of what those folks are saying:
Anirban Basu, long time economic advisor for the Associated Building Contractors (ABC):
Momentum will persist for several more quarters. Contractors should stay vigilant as longer term inflationary pressure build. Despite a narrative fixated on tariffs and trade wars, global economic performance remains decent.
I think that sums it up.
Lets Look at the Indicators
According to the ABC, there are 500,000 unfilled construction jobs in the USA. Most are in the western and southern states. The lowest labor demand is in the Midwestern states. Job growth in our area is generally around 1% where in the west and south it’s 3 to 4%. Still, there are more jobs in our area than workers to fill them. But you already know that!
Residential Building Permits
Nationwide permits are down from 2017 about 7%. More so in the high growth areas of the west and south. But it’s not as bad here in the Midwest. That’s a very important indicator for the landscape trades. Keep an eye on this one.
Average Consumer Expectations for Business Conditions
Purely a “feelings” based number. However, it gives indications about consumer thoughts. So a 26 percent decline from 2017 means something. If people believe a downturn is coming that will affect the company they work for they tend to reduce their spending.
Several 1-3 percent per day declines have erased much of the growth we saw earlier 2018. It’s clear the market is jittery and 2018 will not end as good year. Does this mean coming recession?
First off, there is always a coming recession. Fiat money systems always have spikes and drops. So we know with a 7-10 year span there will be a downturn. Wise business leaders attempt to guess when it will and make sure they are ready. For such leaders being ready means being ready to profit from the downturn!
In a way, the stock market is another “feelings” based measure of future economic conditions. Traders and analysts are not gifted by God with special powers, and many are quite ignorant of street level business activity and mindsets. So, market declines are just an indicator. Persistent market drops can cause a self-fulfilling prophecy.
The stock market has been on a long run upward. There must be some breathers and even give-backs to make sure the market does not flame out. We’re seeing that now as traders fixate on tariffs and inflation. Technically, the bad news in the market is motivated by good news in the economy!? Analysts are looking at the continuing economic growth threatening higher inflation, thus higher interest rates. Neither is bad except when large and fast increases take place and indicate a growing economy.
Conference Board Leading Economic Index
Continues to move higher, which means we should have 2-3 quarters of continued growth. Historically when the components of this index shift unfavorably the economy is headed to a slowdown. In the past when we’ve had four months of slow down, we entered a recession. Perk up with the first month of negatives numbers, get concerned after the third.
Architectural Billings index
For the construction trades this is a big one. Readings above 50 mean healthy amount of construction projects are in the works. The readings have been above 50 for a long time and are seeming to stay there. Generally this index leads actual construction activity by 9 to 12 months, so that’s good news for at least 2019.
An aside; Many of the indicator numbers show a dramatic difference between the Midwest and western and southern states. Growth rates and economic development overall has been way higher in the west and south than the Midwest. The east has been somewhere in between. Certain markets like Washington DC, Houston, Orlando had been on fire with growth rates 2 to 4 times the Midwest.
That’s important to remember. All the talking heads live in the higher flying cities and that flavors their personal perspective. How the next downturn or recession will affect us will be different than higher flying regions. They have tended to fall first and the most.
ABC Construction Backlog Indicator
Another important construction trade index, measures how much construction work is booked but uncompleted. It continues to increase. Again good news, seeing a 3.8% increase for 2019. However, all that growth is in the west and south, we in the Midwest are relatively flat.
Not a direct indicator for the construction trades, but important. We are making more stuff. Reasons:
- More stuff is wanted
- Some manufacturing has come back to the U.S.
- Processes and people are being more productive
Manufacturers site government regulations as the key issue holding them back. Not a coming downturn.
Infrastructure Spending Climbs
The landscape trades usually don’t benefit directly by infrastructure spending. Funny thing happened. Trump cut the tax rates but many cities and States are now flush with tax money! So they are increasing spending to fix roads and sewers. A growing economy always means more tax collections. Clue to governments . . .do what you can to help businesses thrive and you’ll have all the tax money you want.
U.S. Census Bureau Construction Spending
Here’s their numbers for 2019 construction categories affecting the landscape trades;
- Lodging up 2.4%
- Office up 3.5%
- Commercial down 1%
- Health up 3.8%
- Recreation up 4.4%
The largest increases are in Conservation (8.1%), Water Supply (7.3%), Public Safety (6.4%).
What about inflation?
It’s happening. The Fed can control it somewhat by limiting interest rate increases. However, they overplayed their hand in the 2008 recession and really need to bump rates up to a normal level. But raising rates scares consumers and analysts. What’s the Fed to do? How would I know? Lets watch and see. Bottom line is rates will go up. It’s a question of how much and how fast.
But inflation is happening all around us. Landscape trade manufacturers are increasing prices. Several manufacturers stated even after increases prices in the fall, they will have a January increase too, and may need another mid season.
Bad? Not really. Normal price Increases help your profitability! Embrace them, don’t fear or complain about them. In fact you should be bumping your selling rates too. Why not, what cost do you have that has not increased?
Besides, we’re simply going back to what we knew for years. The 2008 recession brought about a period where prices actually dropped or held steady year after year. Not good for your supply chain.
Only dangerous if prices increase too much and/or too fast. When consumers feel the cost of a landscape project is too high they will scale back or push-off the work. While some of the 9 to 15% increases we’ve seen in recent months are high, it is expected the average will be 3-4% overall in 2019.
Evidence of over built markets is popping up in the high flying west and south states. Not so in the Midwest. Hence for those regions, lower construction spending for commercial and residential properties is hitting now. Meanwhile we’re holding steady. Not a threat for 2019 anyway, but keep an eye on spending forecasts.
Leading indicators point to a good 2019. As the ABC states, “The average contractor is likely to be quite busy in 2019, but beyond that the economic outlook is decidedly murky”. An open road to make hay, so go for it. However that open road has some tail lights showing up over the horizon, be ready to slow down.
Recessions usually happen 2 years after a peak in the confidence indicator numbers, watch for the peak.
Being ready means getting ready now;
- Build your cash (operating capital) reserves
- Lower your debt load
- Improve your balance sheet ratios
- Have a plan if the coming bump is more than a slowdown
You’ve got time to harvest more income in this cycle. Nobody can say for sure when a slowdown will occur or how bad it will be. Perhaps mild like the 2000 recession where the construction trades sailed right through. Be at ease, go make money, and keep you eyes open.