Trend Tracker November/December 2019

July 20th, 2021 by Nathan Hobbs

Economic Driving Instructions: Check Your Speed, Tap Your Brakes, but Keep Trucking

By Michael Collins

Ask a lot of building product suppliers when they knew the last recession had arrived and many of them can pinpoint a specific project they lost, or a bad month. A dozen years later, those events are still seared into a lot of people’s memories—many of whom found themselves scrambling to survive a 75% drop in housing starts and a 15% decline in major remodeling expenditures.

But past isn’t prologue. Recent forecasts suggest that, most likely, we’ll see the economy grow at a slower pace sometime in the next few years, before returning to more robust growth. This is particularly true for home building and remodeling, as those business sectors are more shielded from the general global malaise.

Take the latest forecasts by Mark Boud, chief economist at Metrostudy, which specializes in data on the new-home market. He predicts housing starts will decline by about 20,000 units this year, to reach 1.23 million. After that, Boud predicts starts will slip by another 20,000 units to reach 1.2 million in 2021, before recovering to 1.25 million in 2024. That’s not growth, but those total starts numbers are still better than any other year (aside from 2018) since 2007.

Meanwhile, a survey in August of members of the National Association of Business Economists (NABE) found that the group projects gross domestic product (GDP) will go up by 2.4% this year and 2% in 2020. A recession is defined as a decline in GDP for two successive quarters.

The third indicator is a recent market forecast by FMI, the construction industry advisor and consultant. It predicts that the material value of residential doors and windows at the manufacturer level will decline 3.6% in 2019 to reach $21.69 billion. The study goes on to predict that the market will recover by 2020 and return in 2021 to the $22.505 billion level seen in 2018.

All of these predictions are predicated on the economy’s usual sources of friction: the most common of which include labor shortages, housing affordability, regulatory red tape, trade tensions and fewer people moving. While these factors are pesky enough to slow economic growth, they aren’t enough to stop it.

How should door and window manufacturers respond? First, don’t expect that any naturally rising tide will arrive in the next few years and effortlessly lift your sales. If you want more revenue, you’ll have to win more market share with new products or new ways to approach customers that haven’t yet worked. Second, continue learning how to operate more efficiently. Practitioners of lean manufacturing will be the first to tell you that it’s a never-ending process.

Also, try this mental exercise: How would you respond if sales fell by 10%? By 25%? Do you have protocols in place to protect you, such as commission structures that are geared for lower payouts at lower sales volumes? Can you pick out your most valuable employees, regardless of how long they’ve worked for you, so that you’ll be keeping people based on merit rather than seniority? Odds are you won’t have to invoke those cutback plans, but planning for worse times than your experiencing should help you make the best possible decisions.

Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.
mcollins@buildingia.com

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