emerging trends: seismic shifts will require more than an ...emerging trends: seismic shifts will...

Emerging Trends: Seismic

Shifts Will Require More Than

an Incremental Response

Tim Tokarczyk

Principal, FMI

2FMI Corporation Copyright 2019

Change


Headlines- Week of September 25, 2009

Leaders of G-20 Vow to

Reshape Global EconomyBin Laden Message to

Europe Appears on

Internet

Chrysler: Check

Engine Now

Iran Admits

Existence of New

Uranium Enrichment

Plant

Gaddafi Delivers 1st

UN Address

Congress Debates

Reauthorizing

PATRIOT Act Spy

Methods

Discussion

What are the biggest changes you’ve seen in your business

over the last 10 years?


2019 performance and outlook for 2020

Current Market Conditions


Segments performing well in 2019 and outlook



Segments not performing well in 2019 and outlook



Other key segments in 2019 and outlook


Construction Industry

Trends & OverviewLooking ahead to 2020


Predicting the next U.S. recession

Construction Industry Overview:

Looking Ahead to 2020


Predicting the next U.S. recession

*Prediction Strength = Correct Predictions −False Positives

Recessions Considered

Indicators / MetricsRecessions Considered

Correct PredictionsFalse

PositivesPrediction Strength*

Flag/Warning Timing

Risk Assessment / Trending

PREDICTIVE INDICATORS

Yield Curve Inversion 5 5 0 100% <1-3 year HIGH ↓

Money Supply 7 7 1 86% <1-3 year MODERATE ↑

New Home Sales 6 6 1 83% <1-3 year MODERATE ↑

Unemployment Rate 6 4 0 67% <1 year MODERATE ↔

Months Supply of Homes 7 4 0 57% <1-1 year LOW ↑

U.S. Trade Balance (BOP % Change) 6 5 2 50% ~1-2 year MODERATE ↓

Lumber Sales 2 2 1 50% ~1-2 year HIGH ↓

MBS Held by Banks 2 2 1 50% <1-2 year LOW ↑

Copper Price (Doctor Copper) 7 6 3 43% <1-4 year MODERATE / HIGH ↓

Rental Vacancy Rates 9 4 1 33% <1-2 year MODERATE ↓

Residential CPiP 6 3 1 33% <1-2 year HIGH ↓

Stock Market Performance 3 2 1 33% <1 year MODERATE ↑

Consumer Confidence (OECD) 7 5 4 14% ~1-3 year MODERATE ↓

Heavy Duty Truck Sales 7 5 5 0% ~1-2 year LOW ↔

Manufactured Goods, New Orders 2 1 1 0% <1 year MODERATE ↓

Unemployment Claims 7 5 5 0% <1-2 year MODERATE ↓

OTHER NON-PREDICTIVE INDICATORS / METRICS • The analysis above shows that the current economic environment is at high to moderate and increasing risk levels for the next 6-12 months. Expansion is expected to continue for the short-term.

• More than three quarters of the predictive indicators above are currently reading or trending in the moderate or high-risk territory, suggesting a strong likelihood of a recession to occur in the mid-term (likely 2020 or 2021), and some likelihood to occur as early as Q4 2019.

Nonresidential Buildings CPIP Trending UP

Nonbuilding CPIP Trending UP

Oil Price (WTI) Trending DOWN

Search Engine Volume Trending UP

Consumer Price Index (CPI) Trending UP

Gross Domestic Product Trending DOWN

Consumer Sentiment Trending UP


Yield Curve Inversion

Money Supply

New Home Sales

Unemployment Rate

Months Supply of Homes

U.S. Trade Balance (BOP % Change)

Lumber Sales

MBS Held by Banks

Copper Price (Doctor Copper)

Rental Vacancy Rates

Residential CPiP

Stock Market Performance

Consumer Confidence (OECD)

Heavy Duty Truck Sales

Manufactured Goods, New Orders

U.S. Trade Balance (Values)

Unemployment Claims

2019 2020 2021 2022

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

< 5

0%

Given the recent predictive flags raised, timing

suggests a high-risk economic climate of landing into a

recession

as early as Q4 2019 and as late as Q1 2022

L M H M L

> 5

0%

Predictive Flag Raised

High Risk Assessment

Moderate Risk Assessment

Low Risk Assessment

50

%

Pre

dic

tio

n S

tre

ng

thPredicting the next U.S. recession


Areas adversely affected by last recession



Office

Highly dependent on employment

High office vacancy rates

Key DriversValue of Office Construction





Lodging

Leisure travel was down

Low occupancy

Varies with unemployment rate

Key DriversValue of Lodging Construction





Commercial

High unemployment rates

Low consumer spending

Commercial construction lags 12-18 months behind residential

Key DriversValue of Commercial Construction



Looking Ahead to 2020Discussion:

Which types of projects in your current portfolio or backlog will continue to be funded if there is a downturn

in the market?


Historical construction spending during a recession



The ratio of

public to private

spending tends to

increase during a

recession as the

government tries

to spur economic

growth

U.S. Total Construction Spend vs. GDP





Health Care

Increasing elderly population

People still require medical care during a recession

Long term hospital projects usually do not cease construction during a recession

Key DriversValue of Health Care Construction





Transportation

Safety, efficiency and greener energy use

Growing population

Increased demand for mass transit

Key DriversValue of Transportation Construction





Education

Student enrollments increase during a recession

Aging school facilities

Federal aid to assist declining state revenues

Key DriversValue of Education Construction





Power

Environmental regulation

Solar and wind power investments

Large investments in alternative energy projects

Key DriversValue of Power Construction


How focused are your senior leaders on industry trends?

What about your next-generation leaders?


Megaprojects




Megaprojects: By the numbers



2013-2018

• Annual value of US megaproject starts increased from 3% to approximately 33% of all US construction starts

Currently• 674 megaprojects in planning; $2 trillion in investment

Next 5 Years

• Megaproject CPiP is expected to increase from $53 billion to $295 billion (~460%)

Next 10 Years

• Annual megaproject spending is expected to increase nearly 600%, reaching just over $350 billion


Megaprojects: Trends



West(30%) Midwest

(9%) Northeast(23%)

South(37%)

• Across the South significant states (by spend) include Texas

(28%), Louisiana (17%) and Florida (16%). Across the West

significant states include California (48%), Alaska (9%) and

Nevada (8%).

• The top three states across the U.S. for planned megaproject

spend represent 40% of the national total. These states include

New York (15%), California (15%) and Texas (10%).


Megaprojects: Trends



Historical Megaprojects CPiP as %

of Total (2012-2018) = 1.8%

Forecast Megaprojects CPiP as

% of Total (2019-2028) = 16.7%

Present




Discussion

What are the key implications of

megaprojects on our business?

How does this affect our strategy?

How does this affect our organizational structure and the way we develop

talent?

Megaprojects: Questions to consider


Megaprojects: How do we manage risk?



Reasons Megaprojects Fail:• Overoptimism & Overcomplexity

• Poor Execution

• Low Productivity

• Weakness in Organizational Design and Capabilities

• Lack of Resources

Solutions to Megaproject Challenges:• Stakeholder alignment and confirmation of

justification

• Resource and Expertise Acquisition

• Upfront Planning (3%-5% of capital costs on early

stage engineering and design)

• Oversight rigor across benefits, goals, schedules

and costs


Megaprojects: How do we manage risk?



Trust

Cohesion & Collaboration

Transparent & Authentic Leadership

Nimble & Autonomous

Teams

Educated & Experienced

Owner

Key Factors

to a

Successful

Megaproject

30

FMI Corporation Copyright 2019

Venture capital invests almost $1 billion in construction tech

31


Augmenting a carbon-based workforce with silicon-based

Drones and VR

Construction sites are

employing drones more

frequently for site surveys, and

tracking job progress..

VR has proven to attract next

gen talent, develop critical skills,

and possibly usher in remote

construction.

Autonomous Equipment

Construction equipment is quickly becoming

autonomous or semi-autonomous, led by

remote sites, delivering greater precision in

less time.

Trade Robotics

Similar to autonomous and semi-

autonomous construction

equipment, robotics have the

potential of reducing labor

demands and achieving 24 hour

construction.

32


We are awful at predicting what future technology will be capable of


Adapted from Geoffrey A. Moore. Crossing the

Chasm. 1991.

Technology Adoption Curve

Where are we

as an industry?

Where is our

company?


Labor challenges persist and intensify

Thinking Strategically

About Our BusinessBuilding a Plan


Next Steps: As you consider your business plan

Thinking Strategically About Our Business:

Building a Comprehensive Plan

What type of project is likely to

help ease the burden of a

potentially slowed economy?

What type of work is likely to

continue to be funded during an

economic downturn?

How should we be evaluating our current portfolio in

our respective markets?

Discussion

Discussion

Throughout your company, how

many leaders have no experience

leading in a recession?

What is employment brand?

What people thinkit’s like to work for your company


What is it like to work for this company?

40


Aligning Corporate Culture / Brand and Talent Efforts

Building a culture of engagement1:

• Do employees know how to do their jobs

effectively?

• Do they have the right resources to be

effective?

• Are they surrounded by people that they

like and respect?

• Do their managers care about them?

• Do they feel that they are advancing in

their careers?

1: Questions are based on an interview with FMI’s partner Leigh Branham, a nationally renowned expert and author of three best-selling books on the subject of employee engagement.

41


Building Your Next Generation of Leaders

55% of study participants do not identify and develop

high-potential employees—a missed opportunity to create

a sustainable leadership pipeline.

43


Family-Owned Business Succession Survival Rates

1st

2nd

3rd

Generation:

30% survive

Generation:

20% of those

survive

Generation:

10% of those

survive

Succession Truths: Learning from Data


Unaware of possible

alternatives 9% Key leaders

depart due to lack of transfer

plan16%

Other2%

Price owner wants is too high

16%

Children not capable of

running business

17%

Competent management leaves due to

nepotism9%

No competent successor

31%

SURETY INDUSTRY SURVEY

SUCCESSION TRUTHS: WHY PLANS DON’T WORK


How would you evaluate the strategic thinking skills of your current senior

leaders?

How would you evaluate the skills of your next-generation leaders?


Manufactured Durable Goods, New Orders

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Fe

b-9

2

Se

p-9

2

Ap

r-93

Nov-9

3

Jun

-94

Jan

-95

Au

g-9

5

Ma

r-96

Oct-

96

Ma

y-9

7

Dec-9

7

Jul-9

8

Fe

b-9

9

Se

p-9

9

Ap

r-00

Nov-0

0

Jun

-01

Jan

-02

Au

g-0

2

Ma

r-03

Oct-

03

Ma

y-0

4

Dec-0

4

Jul-0

5

Fe

b-0

6

Se

p-0

6

Ap

r-07

Nov-0

7

Jun

-08

Jan

-09

Au

g-0

9

Mar-

10

Oct-

10

Ma

y-1

1

Dec-1

1

Jul-1

2

Fe

b-1

3

Se

p-1

3

Ap

r-14

Nov-1

4

Jun

-15

Jan

-16

Au

g-1

6

Ma

r-17

Oct-

17

Ma

y-1

8

Dec-1

8

Mil

lio

ns

of

Cu

rre

nt

Do

lla

rs

Recession Durable Goods, New Orders Linear (Durable Goods, New Orders)

In 1992 definitions were re-written by the Census

Predictive Flag

False Positive

Predictive Indicator Significant

spike 07/2014

due to aircraft

orders


U.S. Trade, Durable Goods – Balance of Payments (BOP) Basis

$(1,000,000)

$(500,000)

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

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2019e

Mil

lio

ns

of

Cu

rre

nt

$

Recession Balance (Exports - Imports) Exports Imports

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

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2019e

Pe

rce

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Ch

an

ge

Recession Balance Percent Change

Predictive Flag

False Positive

Predictive Indicator

The estimate year, 2019, in this case is simply doubling imports and exports through Q2 to help

illustrate year end expectations based on mid-year data.


Stock Market Performance

NASDAQ

Composite

Dow Jones

Industrial Average

S&P 500

Market Performance, 1971-Current (NASDAQ, DJIA and S&P 500)

Source Yahoo Finance

10-Year and 2-Year Treasury Maturity Rate

Source FRED

Grey bars indicate recessions

Tech Boom 1.0

Tech Boom

2.0►

Predictive Flag

False Positive


Similar pattern…


U.S. Unemployment

-

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8

10

12

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Un

em

plo

ym

en

t R

ate

Recession Unemployment Rate

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

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Pe

rce

nt

Ch

an

ge

Recession Unemployment Rate

Summary Jump

Looking

back, we

were at high

risk of a

recession in

2016 and

2017.

Predictive Flag

False Positive


3

3.5

4

4.5

5

5.5

Ju

l-18

Sep

-18

No

v-1

8

Ja

n-1

9

Mar-

19

May-1

9

Ju

l-19

Past 12 Months

What does this mean for

us?

emerging trends: seismic shifts will require more than an ...emerging trends: seismic shifts will...

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