29 Jun Leading Indicator Points to a Recovery

Ever go to a doctor because you felt bad only to be told that you are on the road to recovery – yet you don’t feel that way.  Our economy could be experiencing the same condition. Leading indicator points to a recovery.

Our March newsletter highlighted a key indicator that has for the last 4 economic recessions successfully predicted the commercial construction recovery – new housing starts.   In my experience, each recession starting with the 1980 Carter years, the housing industry has led the construction industry out of each recession and just as important, into a recession by 12-18 months.

Since May of 2011, the housing industry has been on the rise.  In fact, new residential construction spending jumped 3.2% in March and rose 1.7% in May.  The industry has consistently grown since May 2011 representing at least 12 months of growth.

The data for the following chart was compiled by the National Home Builders Association comparing the YTD growth of the industry thru May 2012 as compared to the same period in 2011.  The chart reflects a consistency between the US, Southeast, and Georgia.

A growing economy, continued hiring, low mortgage rates, and slightly easier mortgage lending standards are all positive indicators that the housing industry will continue this upward trend.

So when will Commercial Construction show some life?

Shorter term indicators for Commercial Construction include Billings at Architectural Firms, Inquires for Architectural Services, Construction Renovations, and Small Retail building programs.  These indicators are mixed and not yet providing a clear indication that growth is eminent.

The Architectural Billing Index (ABI) is down for May, while inquiries are up.  Construction renovations are up and small retail is not reflecting a trend.  When the short term indicators do not give a clear indication we should expect continued uncertainty.  As noted above, the residential market leads the commercial market by 12 – 18 months and we are in month 12.

Why is this important?

Businesses that anticipate a market change ahead of their competition very often are rewarded with profitability or improve their profitability.  Businesses that do not take advantage of a trend often miss opportunities for capturing market share, hiring the right staff or enter a market during periods of increasing competition.

The old adage, the early bird catches the worm, is just as true today as it was in 1670 when the phrase was first coined.