2008 economic outlook for builders

A month into 2008, it’s still far too soon to know whether it’s the “happy new year” everyone wished for or whether it’s the start of a year that builders will be eager to kiss goodbye eleven months from now.

Janus, the ancient Roman god, is always pictured as having two faces. One face looks forward, the other looks backward. He stands in the doorway of time, symbolizing transition. The mythical old gatekeeper, of course, gave his name to the first month of the calendar.

glass half full half empty.jpgJanuary, then, is the time to look ahead to the new year as well as back at the old year. Rural builders, like everyone else, are standing in that doorway.

In the last weeks of 2007, the American public turned its pessimistic face toward the new year, according to the Gallup Poll. In mid-December, many folks were not upbeat about the economy. Gallup figures showed people were as likely to say, “Things are good” as they were to say, “Things are not so good.”

Rural Builder magazine asked some of its sources in the industry to take a Janus-like stance and check out the view. In light of what lies behind, what does the industry think lies ahead?

Not surprisingly, the vision is hazy. Nobody’s crystal ball works 100 percent of the time. Even some folks who hang their credibility on their projections are waffling.

Edward Lazear, chairperson of the White House Council of Economic Advisers, says he expects the drag from housing on the economy to continue “at least through the first half of 2008.” The housing market decline, Lazear admits, was more significant than expected.

The Federal Reserve, according to USA Today, says it expects the economy to expand in 2008, but far more slowly than earlier predictions. Unemployment, the Fed concedes, will edge higher.

The glass is half full
The corps of Rural Builder magazine sources, however, characterizes itself as an optimistic bunch.

In the cheering section is John Fuog of Fuog/Interbuild in Purcellville, Va., who was happy to report at the end of 2007, “Business is up about 18 percent.” His forward-looking view shows a “good backlog” of projects in the 2008 pipeline. But, cautiously, he adds that, overall, business is “spotty and stressful.”

Fuog sees more bright than gloom for 2008, partly because he’s an optimistic sort of guy by nature. It turns out he was right a year ago when he gave the young 2007 picture a big thumbs up. At that time, he noted, Our phone is still ringing and we are working every day and have a good backlog of work.”

Kim Gee, vice president of Gee Building Systems in Shenandoah, Iowa, says her company ended the year at a better pace than it began. She ponders 2008 by quipping, “I am pessimistically optimistic…or is that optimistically pessimistic?”

Gee is seeing a lot of what she calls “tire kickers.” “I would say that those buildings I did not get came down to price, price, price. They were looking for lowball price,” she says, and “warranty was not even in the picture” among shoppers who wanted lumberyard specials instead of quality, custom buildings.

Tracking an 8 percent increase over 2006, Robert Kramer of Delmarva Pole Building Supply in Wyoming, Del., has several commercial projects in the pipeline going into 2008. Kramer is upbeat about his company’s ability to maintain or show small growth again this year.

“We remain cautiously optimistic,” he says. “We intend to adjust to the market instead of expecting the market to adjust to us.”

The glass is half empty
Back in late November to mid-December, “adjustment” was a key word.

The Commerce Department sounded almost euphoric about a 4.9 percent growth rate during the summer, the best in four years, and not nearly as gloomy as many economic doom-mongers led people to believe. Still, an adjusted forecast for the new year dropped the projected growth in gross domestic product from 3.1 to 2.7 percent.

And guess what? The housing market slump, along with rising food and energy costs, were given as reasons for the Bush administration’s downgrade of its economic growth forecast for 2008. Reported by Fox News, that tidbit certainly was not news to rural builders.

Still the Bush administration continues to forecast solid growth for 2008 and expresses confidence that the economy is resilient, according to a Reuters news Service story on November 29.

Playing the up-again-down-again numbers game seems to depend on who’s keeping score.

On December 19, Fortune magazine reported that it asked four experts how bad the economy is going to get. Specifically, the questions were, “What’s ahead for 2008?” and “Will we see a recession?”

Answering them were Bob Rodriguez of First Pacific Advisors, who manages the FPA Capital and New Income funds; Susan Byrne, who heads Westwood Holdings Group; Sarah Ketterer, CEO of Causeway Capital Management, who pilots its International Value fund; and John Eade, president and director research for Argus Research.

Eade says “no” to the recession question. He bases his response on the fact that for nearly 16 years (63 quarters), Americans have continued to spend, despite previous recessions, terrorist attacks and hurricanes.

He sees no reason for consumers to change their habits, although spending might not be as robust as before. But recession? No.

Agreeing with him is Ketterer, CEO, Causeway Capital Management. But she thinks that conditions might make it feel like a recession because of a continuing decline in house prices.

Who’s saying the R-word?
Countering their logic is Bob Rodriguez, CEO, First Pacific Advisors, who says, “I put it (the chance of recession) at north of 70 percent. The consumer is getting hammered unmercifully with interest rates and food, energy and medical costs. We’re looking for employment numbers to finally get hit in ‘08,” according to Fortune.

Speculating on how consumers will withstand a big price decline in housing, Eade believes employment is key. He doesn’t believe the jobless rate will drop far enough to curtail spending.

The fourth panelist, Byrne, chairperson and chief investment officer, Westwood Holdings Group, sees new jobs bringing people to the Southwest and the Sunbelt, where home prices are steady.

Similarly, a December 5 newsletter from National Association of Home Builders indicates good news. The editors there predict the housing recovery will start sometime in 2008, with the bulk of the downswing already in the past.

Through the glass darkly
That’s also the outlook offered by builder Donna May, president of Cross Metal Buildings in Bulverde, Texas. She characterized 2007 as a very good year, but acknowledged that the first quarter of 2008 is going to be slower. She predicts that things will “pick up and finish strong for the year.”

The most promising aspect, going into 2008, said May, is that “most economic indicators are actually positive. The Fed seems to be finally responding with reduced interest rates.”

Optimistic, yes, but Rural Builder magazine’s cadre of observers acknowledges that there are, indeed, things to worry about. A host of foibles and factors figure into the ways business people look at their futures.
Kramer confesses he’s concerned about the housing economy, particularly in regard to the way it affects property values. Potential customers have a more difficult time using home equity lines of credit and that’s the way the vast majority of them finance the construction of their accessory buildings, he says.

Bill Coleman, vice president of American Building Components in Nicholasville, Ky., says business was “off” approximately 10 percent in 2007. “The overall economy and its softness has slowed demand for our products,” he continues. “A sizeable portion of our business is residential roofing and the housing industry has impacted us negatively as well.”
Coleman cites the uncertainty of what changes upcoming elections will bring. He’s predicts there won’t be much of an increase in activity until then.

Waiting and watching to see what happens in the November 2008 elections, however means that another year will have gone by before anyone gets some of their questions answered. By that time, there will be new questions.

Agreeing with his nervousness is May, who says she’s apprehensive about continuing conflicts and wars around the world, public perceptions of the strength of the U.S. economy and rising costs of materials.

A very real, issue for her company, which does business in Florida, was that “housing tanked there and everyone is very cautious about new investments.” But, she adds, “nationally there is caution as well, primarily due to housing concerns and international issues and upcoming elections, of course.”

In Iowa, Gee puts it bluntly. “The economy sucks. Hopefully, with the possible positive and upbeat tempo that a new presidency will bring, we will see a better ‘buy’ attitude. People are just plain scared to take on another debt…or to get rid of cash,” she said.

Yet, she sees some reason to hope because “farmers are finally making some money. They are buying based on some grain futures profits,” she adds. In her grain-growing part of the nation, as farming goes, so goes the economy.

Builder Steve Nikkel, owner of Orchard Construction, Inc., is already using the R-word. His area northeast of Detroit is intimately tied to the auto industry’s fortunes.

“Orchard was fortunate to finish 2007 in a positive manner, especially since the first four months were non-existent,” he says. This year is going to be more unpredictable…Michigan has led the nation in this downturn — it is a recession here — and it has not started to even come close to beginning an upswing.”

In late November, Michigan posted the nation’s highest unemployment rate, 7.7 percent.

He continues, “What we thought was our target customers has changed. Competition is coming from all directions — home builders, out-of-work carpenters, excavaters, you name it. We have to sharpen our pencils even further and look to cut additional costs.”

Gee understands his apprehension. As she puts it, “We cannot compete when a bunch of carpenters get together (and pay no worker comp or care about safety) and decide they can build a machine shed. In a year, they are gone like the wind, along with customers’ building and cash.”
Add there are other challenges and obstacles.

Asked what’s on their worry list, rural builders name things as diverse as the graying of the baby boom work force, whether interest rates are going to rise or fall, and just how long this period of uncertainty will drag on.

No rose-colored glasses here
The ability to forge ahead, despite challenges, separates those who are successful from those who just wish they were.

One of the successful builders is Scott Foley, Ultimate Construction in Cottage Grove, Wis. Foley believes in “telling it like it is.”

After topping his own best years each year for the past 10, Foley saw 2007 finish five percent lower than 2006. That figure alone doesn’t upset him, but he’s noticing some trends that haven’t been factors before.

For example, says Foley, shipping costs and price increases linked to oil/fuel prices have meant that some projects have not gone forward. Still, those who can afford to proceed with projects are pushing ahead, realizing that transportation costs will not come down.

At the same time, Foley is taking note of bigger numbers of contractors bidding on jobs: where only one or two bid on large jobs in the past, now five to 10 are getting into the act; on smaller jobs, the numbers have doubled. More competitors bidding on fewer jobs means that some builders are “doing the work just to work,” and not to cover the overhead, Foley says. “The quality of work those guys are doing is not to standard. That’s going to make it hard for the good guys in the future.”

In the end, he says, the builder that just had a truck and some tools will not be around and the pool of good employees will rise again. Among the survivors will be builders who do quality work, he explains, and those are the folks who are now positioned to make it through tough times.

Thus, having local ties and a good name in the community are crucial to Gee’s philosophy, too. “We are a local business that donates to schools, sports programs and local charities…and even though we deal with a national company, Wick, we make our money and spend it here.”

Keep on keeping on
Foley, realistically, points out that the industry was due for a “flat” or downturn to clean out the bad. He doesn’t see anyone’s backlog of jobs lasting a long time, while the new home market is going to be out for awhile. There are other discouraging signs, such as a deepening pool of home mortgages being foreclosed.

Still, amid the negatives, optimism continues to come to the surface.
“Our industry is vibrant and strong,” is Fuog’s assessment. He cites the proactive sharing of information and keeping an open mind as qualities that work in the industry’s favor.

Adds May, “Our industry is evolving rapidly. The investment glut of a year or so ago has tapered off, but self-storage is now a strongly recognized investment vehicle. This is a benefit, and there are new challenges in keeping up with change.”

As for the long view, perhaps Coleman best expressed his optimism: “2009 is expected to show improvement and we look forward to this,” he said.
Indeed, there’s always next year.

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