We’ve come out of 2020. We transitioned in 2021. What will 2022 bring us? Forecasting can help you to see where the market is going, what things you need to be thinking about and preparing for, so that you may position your organizations to be successful, no matter what comes down the pike.
With the issues the construction industry has seen over the past 18 months; supply chain issues, staffing issues, inflation, et cetera, it leaves many people wondering if this is a real recovery or not. That’s the million-dollar question that everyone wishes they had the answer to. So what can we look out for to better prepare for the unknown?
The bulls and bear markets are always present no matter what the economy is. It doesn’t matter if we are in a durable or a fragile economy, there will always be winners and losers and opportunities no matter what. This is important to remember because even when things are great, there are going to be some markets that are down and when things are bad, there are other things that will be going up.
For the construction industry, the great recession was a five-year period from a peak in 2006 to a low in 2011. During that time, total construction declined by roughly 40%. However, of the 19 different construction segments we track, about half of those grew during that recession period and half of them declined. On the extremes, you had the single-family homes segment down roughly 80% and at the same time, you had the power segment grow by more than 90%. Admittedly, comparing these two segments is like comparing apples and dump trucks but the point about some aspects increasing while others decrease remains a strong point.
The perfect storm equation is to be able to diversify industry segments into your business plan. When one of your segments is declining, you can pick up business in a growing segment. However, just because something offers no relatively significant opportunity in terms of market size or growth projections doesn’t necessarily mean it is a good fit for your organization. The segments need to fit with your company culture. What things make you who you are? What are your strengths or weaknesses, your resources, and everything else that would be required to potentially be successful in a particular segment? Too often do companies looking for diversification get caught in that “shiny object syndrome” where it looks good and they go after it only to find out later that it was just a big bug zapper and it doesn’t work out.
The construction industry is constantly evolving; how business is procured, how service providers are selected. Things are also changing from an environmental perspective, and not the green kind. The business environment of construction is starting to determine who’s in the driver’s seat and who has the competitive advantage.
Studying economic indicators can help you to evaluate the current market and predict where the market may be heading. FMI tracks over 400 different economic indicators that go into their forecasting model. You probably don’t have the resources to track that many indicators but Jay has a favorite indicator that comes out frequently, is free, and makes life easy. The Chicago National Activity Index looks at 85 different economic indicators and distills it down to one number that can quickly give you a sense of good, bad or indifferent.
While the Chicago National Activity Index is a great overview of the general economy, there is still a need to look at industry-specific data.
Designers and architects are on the front end of the construction process, they know what’s coming. When analyzing the AIA, anything over 50 suggests that the market is in expansion mode.
The most recent report from the end of September was 55.6.
This is a broad-based index similar to what ABI is doing but this is now contractor specific. Again, anything over 50 means that the market is in expansion mode. The most recent report from 2021 Q4 was 53.8, which is in the positive zone but it is down from where we were last quarter at 59.7. This could be due to some of the supply constraints and not necessarily a demand issue.
This index is on a scale from 0 to 100 and represents the largest design firms and contractors in the country. The report from this quarter was 74.9, which is down slightly from last quarter at 79.7. To put this into perspective, 79.7 was the highest rating it has had in five years. This number could indicate that the market is shifting towards larger work or the type of work that favors the larger design firms and contractors.
As leaders of your organizations, you need to be thinking about, not only the near-term things but thinking strategically and using the indices to guide you. When most industry professionals were asked, if they would do anything differently if they knew what was going to happen before it happened, the overwhelming response was they wouldn’t change the decisions they made but they would have made them sooner. Being diligent in analyzing the economy will help you to plan for the ebbs and flows of the future as well as prepare your organization for expansion into other industry segments and marketplaces.
Watch Jay’s entire presentation and hear more about forecasting, project characteristics we can expect over the next several years, top 10 things E&C leaders must consider in a post-pandemic world, and more.