U.S. Economic Update Notes Positive Trends with a Few AsterisksJune 15, 2012
Michael Collins, Managing Director of the Building Products Group of the investment banking firm Jordan, Knauff & Company, updated Southeast Region members with a very detailed and incisive dissection of the current and future state of the U.S. economy, while focusing on the fenestration industry.
During the presentation, Collins pointed to some positive economic indicators but also noted that the road to recovery is a long, slow process.
In early 2012, job creation neared the critical mark of 200,000 jobs created per month, at which economic recovery is seen to be self-sustaining. However, new job levels have backed away from that mark in recent months. Additionally, small businesses resumed hiring and unemployment claims are dropping; even the heavily-hit construction payrolls have apparently bottomed out after free-falling from 2009 through 2011. But, long-term unemployment, joblessness lasting longer than six months, is still a problem.
In regards to the fenestration industry, door and window industry merger and acquisition (M&A) activity has decreased significantly since the twin peaks of 2004 and 2007, showing up at less than half that level in 2011. Of the 328 transactions since 2000, 75 percent were undertaken by strategic buyers already operating in the window and door industry, while 25 percent were undertaken by financial buyers such as private equity groups. In the Southeast Region, overall M&A activity declined steadily since 2007, although the states of Texas and Florida stand out as being home to the largest number of M&A deals in the region.
Cumulatively since 2006, fenestration industry plant expansions (77) were closely balanced by plant closures (74) over the same period. Industry bankruptcies and business closures dropped substantially from 18 in 2008 through 2009 and 2010, although they inched up again in 2011. Collins considers it "a positive sign that many companies are being purchased out of bankruptcy, rather than being liquidated."
In the residential market, prospective homeowners are having difficulty obtaining mortgages, despite rates being at an all-time low. This, partnered with the large inventory of unsold homes and their falling prices, creates an uphill battle for the residential market. However, against these negatives, Collins cites the increasing pressure for household formation and high home affordability. Additionally, the number of seriously delinquent loans has peaked and is beginning to slowly decline.
Collins points to several indices that show a promising trend, among them the NAHB/First American Improving Markets Index, the existence of 101 metropolitan areas logging improvements, single-family home starts (recovering, but from a low base) and improving existing home sales. Low apartment vacancies are also a positive, spurring resurgence in multi-family housing starts.
Remodeling and Repair Market
The remodeling and repair segment has headwinds of its own. Fewer home equity loans to fund remodeling projects are available due to decreased home values. Also, decreased selling prices call into question the wisdom of investing in a home that is losing value. And ultimately, fears of employment instability put many projects on indefinite hold.
Despite these factors, Collins points to the flowing:
- The continued rise in energy efficiency remodeling
- Increased investing in distressed properties
- Harvard’s Joint Center for Housing Studies prediction for a return to growth in remodeling this summer—albeit on a very regional basis.
On the commercial side, Collins sees both positives and negatives. Although lending standards have been easing over the last several quarters, lack of available financing has put constraints on new commercial construction. Capital spending constraints among cautious businesses depress commercial remodeling as well, along with the drying up of the pool of stimulus money and lagging macroeconomic factors.
Still, there is some support for this sector in the form of good performance in power and energy construction, as well as strong forecasts for building in the manufacturing sector. Additionally, office, retail and lodging construction appear to have bottomed out. There has also been an increase in construction of hospitals and warehouses, and falling commercial property prices appear to have finally bottomed out. The AIA’s Architectural Billing Index, languishing well under 50 since 2008, is now trending back up across that meaningful boundary.
Collins closed the update with a breakdown of foreign competition, notably Chinese window and door imports and related trends. While import levels have generally dropped during the recession, data shows that Chinese door and window manufacturers have gained market share at the expense of other importers and domestic manufacturers. He also admonished members to use technology to gain a competitive advantage, including social media platforms such as LinkedIn.