ACHRNEWS

Adjusting to the New Economy

June 18, 2012
Contractors beware! If you are at all like me, you have been anticipating that the new residential construction market is just a year or so away from rebounding to previous heights. Recently, two reports from respected economists make me feel that I was being overly optimistic. In fact, it appears that the rebound may be several years away.

The head economist of the National Association of Home Builders (NAHB) recently spoke here in St. Louis. He provided some very interesting documentation which shows trends over the last 40 years. He showed the mean number of units built throughout the period. When there was a period of, say 5 years, of starts over the mean, there was a similar period of time when starts were below the mean. Interestingly, this is very consistent over the entire period. Where this is important to understand now is the fact that there was essentially a 12–13 year period that the housing starts were above that mean line. The NAHB’s forecast is that it will likely take nearly as long of a period of starts below the mean before we return to normality. The implication is that if the downturn started in 2008, it might be the year 2020 before starts will achieve a level above the mean.

Interestingly, shortly after this NAHB speaker appeared in St. Louis, a banking industry economist spoke to a local group of bankers and provided a nearly identical projection. In other words, instead of next year or the year after, we may be looking at another seven or eight years of below normal housing starts. Those contractors who have specialized in the new residential market need to take these projections seriously and make sure that their companies are sized to what is now the “new norm,” at a much lower level than had been anticipated. This means that if you have made some temporary adjustments in your overhead, you need to look at making them permanent adjustments. I realize that this is not easy. We recently had to ask two foremen, who have been with us for 25 years each, to go back to working with their tools. This is a very difficult adjustment for them and the company. But the fact is that we have to adjust our companies to the market that is out there. That is the only way we can survive.

It Affects All

For those contractors who are not in the new residential market, you may be wondering how this affects you. I believe that in the big picture it will have an effect on you and your business as well. The most important fact may be that it has always been considered that the homebuilding industry leads the country’s economy out of a downturn. If that trend continues, then it is likely that our economy will remain in this lower than robust state for a number of years going forward. Even those contractors not in the new residential market have seen how the troubled economy has affected their businesses. Customers, in many cases, have chosen to repair rather than replace, saving their money for unknown future needs. I believe the entire issue of dry-charged units and their popularity is also a reflection of the belt tightening of our customers and the economy.

Manufacturers have also been hit very hard by this new construction downturn. When the number of housing starts goes from over 2 million to around 300,000 — that’s over 1.5 million furnaces and air conditioners that are not being manufactured. Besides impacting the manufacturers themselves, think of all of the component manufacturers whose volume has decreased significantly. Eventually these greatly reduced volume levels will require adjustments in not only internal operations, but likely pricing as well.

The major point that I have taken from all of this information is that we as contractors have to make sure we have completely adjusted to the fact that this is, in fact, the new economy in which we are operating. Sure we will have seasonal and weather related adjustments, but we have to be prepared that the “new norm” for the next several years may be at a much lower level than we were used to during the 2000–2007 period. In other words, contractors beware!

Publication date: 6/18/2012