The swing’s the thing
By Cees Bruggemans, Chief Economist of FNB.
As in politics, a turnaround in cyclical conditions starts with one data point changing direction.
Subsequent data are then needed to confirm the change of direction, but it crucially starts at a specific point in time, both regarding downswings and upswings.
Recognising this crucial change early takes some doing, for it often occurs at times of much conflicting data, or there is a lack of subsequent confirmation, often at the end of a long decline in data, in which underperformance has become the new accepted norm.
Yet pent-up demand builds up, income rises and oversupply is steadily whittled away. At some point the system is ready for an upswing, like barren land waiting for rains and warmer temperatures after a particular bitter winter.
Our building industry probably finds itself at this crucial juncture at this very moment.
FNB/BER building confidence peaked in 2Q2007 at 89, meaning 9 out of 10 people engaged in the building sector pipeline (architects, quantity surveyors, contractors, subcontractors, manufacturers and retailers of building materials) expressed satisfaction with conditions.
Since then four years of deteriorating conditions have gone by. For the past five quarters, the industry moved essentially sideways at very low activity levels, with many people leaving the industry.
In the latter half of 2010 there was probably a false dawn as architects and quantity surveyors signaled improved confidence, suggesting a new cyclical upturn.
But in 1Q2011 all this fell flat and the general building outlook remained morose.
Yet residential building plans passed turned positive as long as a year ago.
In July 2010 cement sales volumes were still 16% down year on year, with no sign of any change in direction.
But in subsequent months, this year on year change started to get smaller, a classic cyclical signal that cement sales were bottoming, usually a harbinger of an upturn in the offing.
By May 2011, monthly cement sales volumes were still 2.8% down on a year ago, but there was one sales day less in the month compared to May 2010.
When adjusted for selling days, May 2011 turned out to be 2% up on a year ago, the first time this had happened in many years, traditionally a strong signal a new cyclical upswing was underway.
This should surprise. For four years the residential building market had been hobbled by rising interest rates and the national credit act, severely affecting households’ access to new credit.
But after four years of cyclical decline, with new residential building completions falling to half their normal long-term averages, boom-time oversupply steadily being whittled away, interest rates already for a year at 30-year lows and the economy two years into recovery, an upturn was bound to happen sometime once households and developers had adjusted enough.
With the quarterly FNB/BER building confidence index for the third time in a year striking a low of 24 (meaning only one-in-four building industry participants expressing themselves positively and three-quarters feeling anything but positive), the detail of the survey offered some cheerful news.
Four out of the six sectors (architects, quantity surveyors, main contractors and manufacturers of building materials) expressed a slight rise in confidence.
The fact that retailers of building materials still dropped their confidence to nearly zero had probably a lot to do with structural changes in their sector, with foreign entries promising stiff new competition.
Subcontractor declines in confidence probably reflected existing work still running down, a lagging indicator.
Meanwhile, most significantly, main building contractors during 2Q2011 for the first time in five quarters signaled an upturn in activity levels.
Though activity levels are still down on a year ago, this year-on-year decline is now easing as we see the first quarterly up-tick in activity (just as with cement).
As for all these activities and participants, the swing’s the thing. A reader queried whether one extra bag of cement sold makes a summer trend. The rejoinder is that an uptrend has to start sometime.
Giving a year of positive building plans passed, higher activity levels at building contractors and cement sales turning positive, in an economy two years into recovery, with good income growth and the lowest interest rates in decades, it was bound to happen sometime.
That it was historically two years late, relative to the economy and interest rate cycle, had everything to do with exceptional credit conditions and this indigestion having to be worked off.
With building activity low enough long enough, and the larger economy reviving, recovery is now apparently also belatedly coming to the building industry.
Will these new green shoots survive long enough or be trampled shortly by a new cyclical interest rate upswing?
For a while it looked as if the building industry would lose an entirely cycle to structural change. But if a vigilant anti-inflation SARB is prepared to stay supportive of an economy only modestly growing while warily watching global risk events unfolding, it might delay the raising of interest rates.
If so, this budding building revival may stand a chance to firm up some more in coming quarters. Even so, any upswing is unlikely to become very strong just as yet.
Source: Cees Bruggemans, FNB, June 13, 2011.