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Good News, Bad News

Sep 21, 2011 1:38 PM, All, Mike Eby, Editor-in-Chief

Firms on EC&M's 2011 Top 50 Electrical Contractors list face another year of construction recession

Throughout 2010 and the early part of this year, a few pockets of growth in the construction market made me think the worst market downturn I’d seen in my career was finally in the rearview mirror. Health care markets were carrying the load, energy efficiency projects were taking hold in many sectors, and renewable markets were hot. Even the manufacturing sector seemed to show a little life. It appeared we had finally made the transition to that slow and steady growth phase we kept hearing about. However, a number of recent reports have once again dampened my spirits.

Our annual report on the Top 50 Electrical Contractors is a great example of this good news/bad news environment. This elite mix of companies posted a small decrease in electrical and datacom revenue in 2010, as compared to 2009. But there is some good news. Nine posted increases of more than 20%. The bad news is nine more posted declines greater than 20%. Many of the Top 50 reported sales goals were not met because increased competition forced them to adjust their bids for smaller profits. Most of these top players continue to focus on lean practices, hire only when absolutely necessary, and delay the purchase of large capital equipment. Despite these strategies, 20 of these firms are forecasting a decrease in revenue this year. Even worse, 70% don’t expect the construction economy to improve until 2013.

Reed Construction Data (RCD) recently lowered its construction outlook and increased its probability of another recession taking hold to 30%. RCD now projects a 4.8% decline in spending this year (previously forecast as a 4.2% decline) and a modest 4.8% rise in spending in 2012 (previously forecast as a 10.5% rise). The group has also lowered its expectations for expansion in 2013, which is now expected to be 10.2%, down from 14.4%. RCD is forecasting all but one of the non-residential market sectors to decline this year — an overall decline of 8.3%. RCD also pulled back its 2012 forecast in this category to a mere 3.3%, from a previous level of 8.9%. So what’s the good news? At least they’re not forecasting another outright recession.

On the design front, the AIA Architecture Billings Index dropped for the fifth straight month. The lack of available financing is still a major deterrent to project growth. In fact, many design firms feel that financing has become even more restrictive this year. The only bit of good news is the inquiries index is still showing a little bit of life.

The residential sector continues to be a mixed bag. Single-family building permits and home sales figures remain at anemic levels. A lack of financing options, difficulty in coming up with a down payment, and limited confidence in investment value are keeping potential buyers at bay. The upside here is these issues have fueled some recent activity in the multi-family market. If you can’t buy, then you’ve got to rent, right? Depending on what index you trust, the lack of new single-family construction has also spurred growth in residential remodeling. The Residential BuildFax Remodeling Index (BFRI) rose 23% year-over-year in June to 129.5 — the highest number in the index to date. The BFRI measures remodeling activity by analyzing monthly building permit data across the country. On the other hand, the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University notes that spending on home improvements is expected to remain volatile and weak over the next several quarters. This group projects that annual remodeling spending through the first quarter of 2012 will be down 4.0%.

What are you doing to survive in this fragile economic climate? Can you and your business combat another 12 to 16 months of this type of volatility? If you’ve figured out how to take advantage of this crazy market, I’d be interested in hearing from you.

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© 2012 Penton Business Media, Inc.

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