here is a big problem with the popular and generally accepted construction forecasting method of consensus. When a contractor is asked in a survey how he or she sees the market six months ahead, or a year, or even more, you get an opinion—presumably an educated one. But there is no way to screen out optimism.
When many contractors are surveyed, you get more opinions—and more optimism.
There seems to be some belief that the larger number of respondents somehow implies accuracy or validates collective opinions. Some seem to think a greater number of opinions eliminates positive bias. Some may also think that negative bias balances the findings.
The failure rate in the construction industry will be reduced when we accept the reality that the construction market is cyclical and adopt a business model that allows us to prosper during both growing and declining markets.
The media then publishes the survey opinions, lending them greater validity, and the large number of consensus surveys seem to drown out more scientific forecasts based on data.
Another problem with these surveys is that we tend to believe that majority rules. Reporting that 59% expect a market turnaround in six months, while 26% do not, and 15% are undecided, is often interpreted as that the 59% is correct.
Quite a number of contractors have told me that they tend to believe the scientific forecasts until they read so many surveys that predict the market will be just fine. They then feel compelled to go along with the (optimistic) majority.
Why is this important?
The failure rate in construction will be reduced when we accept the reality that the market is cyclical and adopt a business model that allows us to prosper during ttimes of both growth and decline. The seven major construction downturns since World War II establish conclusively that our market cycles roughly every 10 years. To prosper during both the growth and decline markets, we need to have some indication of when to expect changes in the cycle.
As soon as the market softens, competition intensifies, so a buyer’s market begins to develop and then prices and potential profits diminish. Trying to maintain volume in a declining market is, in effect, an attempt to increase market share—and increasing market share always comes at a price.
Data has been collected on US economic cycles since 1854, and the ratio of expansion periods to contraction periods has improved dramatically since then. We have enjoyed prosperity because our nation has spent a lot more time in a growing economy than in a shrinking economy. The problem for our industry is that during a down cycle, profits decline, losses occur and business failures escalate.
Business cycles in the construction industry are painful because we can’t control them.
We do not see changes coming in construction market cycles because we are not looking for them, but we can’t claim they are unexpected because they occurred on average every 10 years.
There are choices: We could train ourselves to see them coming or we could listen to research that calculates market cycle timing. A prudent construction professional should begin to expect a decline as the market approaches 10 years since the last cycle.
What is surprising is that most construction professionals I ask are not aware that the market is cyclical; despite statistical data that proves it is.
Knowing When Change Will Come
The importance of knowing when to expect a change in the construction market cannot be overstated.
To prosper during a down cycle, we must operate differently than we do in a growth period. Failure to alter how we operate in a down cycle is the primary reason the industry has consistently suffered reduced profits, losses and business failures during downturns.
We can prosper in a down market by adjusting our operations. But that involves change and we all know how difficult that is. We can’t react if we don’t see the conversion in the cycle approaching.
Extensive research has demonstrated that we can forecast the construction market because it lags the US economy. That provides adequate warning.
When the US economy cycles down, the construction market continues to grow for plus or minus one year and then cycles down again. When the US economy cycles up, the market continues to decline for the same length until economic recovery begins to stimulate construction spending.
Construction markets lag at both ends of the cycle “announcing” the timing of cycle conversions. The current and last recovery cycles were accurately forecast and posted, but there was very little acceptance of the forecast data because there is limited acceptance to begin with that the construction market is cyclical.
That’s why it’s so important not to bury the bad news in forecasts and not to focus, unrealistically, on the idea that things are going to get better sooner rather than later.