Commentary: An Idea For a New Predictor of Construction’s Future
For now, recession fears are fading. Some writers have asked why and what it says about economic indicators. You may wonder what such predictions are based on and which ones to trust.
Construction itself is a source of indicators and often determines the direction of the economy. I can tell you from a banker’s point of view which ones I trust, but it can be hard to sort through them all.
Every month, reports arrive from the U.S Dept. of Commerce, the Bureau of Economic Analysis, Federal Reserve Board and National Association of Realtors.
There are unconventional indicators as well. The waste industry reports garbage volumes, which equate to greater economic activity, and the fashion industry keeps an eye on hemline ups and downs, with the former linked by some to economic optimism.
Construction associations and consultants churn out many indicators for the industry.
On which would a construction lender rely?
During the building boom that preceded the 2008 financial crisis and recession, loan officers and inspectors at the bank where I worked saw a pattern in the jobsite data that developers must supply to their lenders.
At that time, requests for information and change orders started backing up and taking longer to approve. Subcontractors were projecting smaller completed work estimates in their mid-month pay request projections; suppliers of large mechanical and electrical equipment were reporting delays in delivery dates; contractors began shrinking construction crews.
Individual decision makers were beginning to think in terms of an unavoidable slowdown—and their actions were turning it into a reality.
Data we were seeing foreshadowed the Great Recession by as far ahead as 18 months. What are bank officers and inspectors seeing now? Nothing like we saw in 2008.
Let's look at publicly available indicators. Some of the most reliable ones involve jobs data. Others involve number of monthly hires, trending numbers of new unemployment claims and growth of factory overtime hours.
The ones I would watch are changes in housing-start numbers and auto sales. They usually correlate with turning points in economic activity.
If I was asked to create a Leading Construction Economic Indicator, I would suggest the rate of hiring by architecture and engineering firms. It could be the basis of a valuable new predictor
Since that type of information isn’t well publicized, here’s how I would do it.
The American Institute of Architects, which itself produces a sophisticated economic forecast for its members, also maintains a job board that lists job postings by region. Opportunities for design architects, plan examiners, interior designers and field architects are tallied in a moving display of design industry staff needs.
A monthly count of total job listings could be the starting point for a new and very insightful leading indicator, signaling trends in the construction industry.
To dig deeper into what that the “Job Board” listings might tell us, we can look at the ratio of job postings for design architects in relation to interior designers. Design architects are needed at the start-up phase of new project design while interior designers are needed later in the project's design life. The movement of that ratio may indicate the maturity of a trend for greater or lesser anticipated construction volume.
This is just a start and just one possible way to predict what is coming. The more reliable indicators we have, the more we can avoid guessing about any future economic downturn.
Chicago-based John Zander is a consultant to banks on construction projects. He can be reached at email@example.com