First Down and Twelve Months to Go

Rich Walker
January 14, 2008
COLUMN : Industry Watch | Segments

In January, it’s customary to focus on football and the Super Bowl, as well as the business outlook for the coming year. From the perspective of early December as this is written, both of these are likely to feature a clash between the very large and the very powerful. In football, the Las Vegas line at this point favors the Giants and the Titans. In the economic outlook, we have big business and big government. By the time this appears in print, the face-off between big business and Uncle Sam is likely to be resolved. Or, at least we should know the first quarter score.

There is no doubt we are in difficult times, like going into the fourth quarter down three touchdowns. Indeed, the fourth quarter of 2008 has not been too kind to the economy, either.

When I prepared a similar outlook article early last year, we were concerned about the score during the first half. But, the real action was to come in the third and fourth quarters when big finance discovered sub-prime time bombs hidden in the mortgage-backed securities packages they had enthusiastically bought. The unprecedented “bail-out” of $700 billion, which may turn out to be a down payment, heralded the first of many records that would be broken–records of much greater import than pass completion percentages that we usually focus on in the fall. A 40 to 45 percent sell-off of the Dow, record unemployment (1.7 million jobs shed in 2008 through November, contributing to an unemployment rate that stood at 6.7 percent in early December and–some say–on its way to eight percent by the end of 2009), and auto sales at their lowest in 26 years, for example.

True to theme, the news in our corner of the world keeps coming like lost fumbles and 100-yard punt returns. For manufacturing in general, the Institute for Supply Management’s factory index dropped to 36.2 in November (anything under 50 signals contraction). Even typically healthier service industries contracted at the fastest pace ever, with its ISM index down to 37.3. Record foreclosures keep adding to a swollen inventory of unsold homes, contributing to the 20 percent drop in home prices in 2008 alone. It might be a buyer’s market, but there are fewer buyers due to rising unemployment and applicants being about as welcome at lending offices as a yellow flag on a touchdown run. Consequently, NAHB statistics show housing starts running at about 44 percent of the 2005 peak, on their way to a likely bottom of 33 percent in 2009. The typical official at a construction permit office feels about as lonely as the clerk at a Detroit Lions souvenir shop.

The commercial sector, holding up well earlier this year, is also taking some pretty hard late hits. McGraw Hill’s 2009 Construction Outlook calls for a 12 percent drop in commercial buildings (led by office facilities), and a 32 percent plunge in manufacturing buildings. Multi-family construction should fare better with a projected six percent drop (much better than 2008’s sharp plunge) as will institutional buildings with a tame three percent drop.

Perhaps I may be excused from my March optimism, as much more experienced economists failed to see this coming. But, despite the outlook from here in early December–amid what Fox News’ Stewart Varney called “the worst week of economic news” in arguably 80 year –I am still moved to look for the silver lining:

  • The Fed remains determined to keep interest rates low, with further cuts likely as of this writing.
  • Oil prices have plummeted, 70 percent off their July peak, which puts spending money back in consumers’ pockets.
  • McGraw-Hill Construction’s Green Outlook 2009 stated that the value of green building construction starts was up five-fold from 2005 to 2008 and could triple by 2013. Hospitals are likely to be a bright spot in commercial construction. Infrastructure and energy-related projects are also poised to soak up a good portion of the unemployment.
  • A variety of financial packages are being discussed to help rescue failed mortgages and stop the bleeding of foreclosed homes into unsold inventory.
  • A declining dollar continues to spur exports, which can counter the drop in domestic demand.
  • The “Black Friday” weekend kickoff of the holiday shopping season surprised everyone with consumer expenditures up 7.2 percent over 2007, according to the National Retail Federation’s 2008 “Black Friday” survey.

There are other specifics here and there, but overall attitude can be as useful in business planning as it is on the gridiron. I am not alone as a cheerleader in this regard.

Industry Week magazine’s Editor-in-Chief, David Blanchard, puts it well: “Despite a relentless cacophony of in-your-face doom-and-gloom on the front page every day, it turns out that Americans still tend to feel pretty good about their companies and their work situation. Based on a recent workforce study conducted by the Kenexa Research Institute, 73 percent of the workers in the United States are confident in their companies' future, 65 percent believe their companies are managed effectively and 80 percent feel that the products and services offered by their companies are of high quality.”

A positive outcome also depends on us. As I have often urged, armed with the insight of industry specialists such as Michael Collins, senior associate with the Chicago investment firm Jordan, Knauff & Co., we shouldn’t stand there with the ball, waiting for the linebacker to hit us. Rather than focusing on exactly when the down market will turn, he has said, window and door companies are better off looking to certain trends and pursuing efficiencies to emerge from the downturn successfully. As little as four yards gained per play can result in a score.

“The doers and the creators and the innovators in this country will keep figuring out a way to make things better,” Industry Week’s Blanchard concludes.

Ensuring a continuing supply of those motivated “doers” should be one of our objectives as we work through these doldrums. Bob Simpson, president of the Association for Manufacturing Technology, opines that the top priority for U.S. manufacturers is cultivating more young people to take an interest in manufacturing. I’d like to note that AAMA is doing its small part in this with its annual scholarship program for students focused on the building products industry.

For the future, the pundits are as disagreed on the end game as they are on the kickoff. Some say we won’t be out of the tunnel until well into 2010; others think mid-2009. NAHB’s David Seiders, for example, says the economy should regain its footing during the second half of 2009, although this depends on whether or not the government and financial industry fumble the ball or make some bad calls in helping overcome the mortgage market meltdown.

While we won’t know the outcome until the final gun, I wager that things will not be as bad as some are saying, and that we will come out of this stronger than ever as an industry and as a nation. Of course, any forecasts are dicey, so keep your eye on the ball. Who knows, with the advent of instant replay one action or indicator can be thrown into reverse and send us upfield in a hurry.
 

Rich Walker is president and CEO of the American Architectural Manufacturers Association, 847/303-5664, rwalker@aamanet.org.