Since the pandemic began, the construction industry has been inundated with so much doom and gloom surrounding the state of the economy. Recession! Pricing volatility! Supply disruptions! Labor shortages! Even if there is a reason for tightening spending, fear causes panic and panic can cause rash decisions. It’s time to take control of how you strategize in your business and prepare for a changing economy.
To better understand economic impact, we enlisted the help of Dr. Chris Kuehl, Managing Director at Armada Corporate Intelligence, who will share his economic wisdom and forecasting for the next few quarters. In addition, we’ll arm you with tips from STACK to strengthen your operation in unpredictable times, explain how to use technology to your advantage, and how to maintain financial wellness.
Dr. Kuehl on the PMI and His ‘Prescription’ for Upcoming Quarters
The Purchasing Managers Index (PMI), a standard measure of economic trends, is based on the survey responses of people tasked with making purchases for their employers in the manufacturing and service sectors.
The important thing from the perspective of the survey is that they are not manipulating or trying to influence the data. Once they respond there is a very strong database that can be used to determine how much activity is taking place in the economy. Businesses do not buy materials when they are anticipating a downturn and they tend to buy more when they sense a growth opportunity.
The diffusion index used in reference to the PMI has become a common tool and is designed to be simple. Any reading over 50 suggests growth and numbers under 50 suggests contraction as compared to the previous month. A few months ago the readings were quite impressive (in the 60s). They have fallen since then but are still in that expansion territory at 52.8.
As can be seen in the chart below, there has been a sharp decline over the last few months, but the important point is that the numbers are still lingering in positive territory (despite the fact that quarterly GDP numbers dipped into negative territory in both Q1 and Q2 of 2022). This is not exactly news to cause dancing in the streets, but it also suggests that some of the gloom and doom may be overhyped. The crucial consideration now is what happens in the next couple of months. There are hints that GDP numbers might improve and if the PMI data does a similar recovery that reduces the chances for a recession in 2023.
Source: https://tradingeconomics.com/united-states/business-confidence
What does this mean for your business? The data is saying two important things. The first is that there has been a definite decline in purchasing activity over the last several months and that means that projects are getting delayed, acquisitions of equipment have slowed, and inventory levels are starting to shrink. This is a good time to start exercising caution regarding the next few quarters.
Just as important is the fact that these numbers have not yet fallen into what would be considered contraction territory. They are still above 50 and that still suggests growth. If one looks at construction in general, the growth areas continue to be in logistics and supply chain but the fastest growing segment for commercial construction has been in manufacturing. There has been a 20% rate of annual growth in construction related to manufacturing as there has been a surge in technology investment (robotics) and these companies need facilities that can support that growth.
7 Ways to Strengthen Your Operations While Still Exercising Caution
Now is the time to conduct an audit of your business operations. As Dr. Kuehl said, a PMI reading above 50 still suggests growth in the future, but it’s time to get strategic about money coming in, purchases, and the roadmap for surviving the ups and downs.
1. Just keep bidding. No one can perfectly predict today’s economy or what the demand for construction will be like in the future. You never know when you’ll need that next project to keep you afloat. With a pipeline of new work, there is always a cash flow keeping you in the black.
2. Take the jobs that guarantee success! By having your preconstruction team analyze your actuals you’ll be able to know what project opportunities NOT to take because of a low likelihood of succeeding and also improve accuracy on future estimates to better calculate your cost per square footage (or cubic yard, etc).
3. Stay in your lane. Stick with the trade where you’re already an expert. You’re guaranteeing a streamlined workflow – from preconstruction to construction – and better profitability.
4. Use technology to stand out among the competition – like STACK customer Jackson Masonry. STACK increases accuracy and allows them to deliver bids faster so they can keep up with bigger local businesses. If the industry expects any slowdown, you’ll want to be in a leading position.
5. Retain your talent. Now is not the time to lay off your high performers, but rather, identify them! Mirror their processes to help lower-performing individuals. And give teams industry-leading technology and tools like STACK to maximize performance, empower individuals, and increase collaboration.
6. Continue to build high-performing teams! Using best-in-class solutions to attract top talent is essential. Gen Z and Millennials are tech savvy and expect a company that invests in technology.