Emerging Trends: Seismic
Shifts Will Require More Than
an Incremental Response
Tim Tokarczyk
Principal, FMI
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Change
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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?
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2019 performance and outlook for 2020
Current Market Conditions
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Segments performing well in 2019 and outlook
Current Market Conditions
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Segments not performing well in 2019 and outlook
Current Market Conditions
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Other key segments in 2019 and outlook
Current Market Conditions
Construction Industry
Trends & OverviewLooking ahead to 2020
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Predicting the next U.S. recession
Construction Industry Overview:
Looking Ahead to 2020
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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
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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
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Areas adversely affected by last recession
Construction Industry Overview:
Looking Ahead to 2020
Office
Highly dependent on employment
High office vacancy rates
Key DriversValue of Office Construction
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Areas adversely affected by last recession
Construction Industry Overview:
Looking Ahead to 2020
Lodging
Leisure travel was down
Low occupancy
Varies with unemployment rate
Key DriversValue of Lodging Construction
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Areas adversely affected by last recession
Construction Industry Overview:
Looking Ahead to 2020
Commercial
High unemployment rates
Low consumer spending
Commercial construction lags 12-18 months behind residential
Key DriversValue of Commercial Construction
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Construction Industry Overview:
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?
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Historical construction spending during a recession
Construction Industry Overview:
Looking Ahead to 2020
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
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Historical construction spending during a recession
Construction Industry Overview:
Looking Ahead to 2020
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
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Historical construction spending during a recession
Construction Industry Overview:
Looking Ahead to 2020
Transportation
Safety, efficiency and greener energy use
Growing population
Increased demand for mass transit
Key DriversValue of Transportation Construction
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Historical construction spending during a recession
Construction Industry Overview:
Looking Ahead to 2020
Education
Student enrollments increase during a recession
Aging school facilities
Federal aid to assist declining state revenues
Key DriversValue of Education Construction
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Historical construction spending during a recession
Construction Industry Overview:
Looking Ahead to 2020
Power
Environmental regulation
Solar and wind power investments
Large investments in alternative energy projects
Key DriversValue of Power Construction
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How focused are your senior leaders on industry trends?
What about your next-generation leaders?
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Megaprojects
Construction Industry Overview:
Looking Ahead to 2020
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Megaprojects: By the numbers
Construction Industry Overview:
Looking Ahead to 2020
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
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Megaprojects: Trends
Construction Industry Overview:
Looking Ahead to 2020
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%).
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Megaprojects: Trends
Construction Industry Overview:
Looking Ahead to 2020
Historical Megaprojects CPiP as %
of Total (2012-2018) = 1.8%
Forecast Megaprojects CPiP as
% of Total (2019-2028) = 16.7%
Present
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Construction Industry Overview:
Looking Ahead to 2020
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
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Megaprojects: How do we manage risk?
Construction Industry Overview:
Looking Ahead to 2020
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
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Megaprojects: How do we manage risk?
Construction Industry Overview:
Looking Ahead to 2020
Trust
Cohesion & Collaboration
Transparent & Authentic Leadership
Nimble & Autonomous
Teams
Educated & Experienced
Owner
Key Factors
to a
Successful
Megaproject
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Venture capital invests almost $1 billion in construction tech
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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.
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We are awful at predicting what future technology will be capable of
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Adapted from Geoffrey A. Moore. Crossing the
Chasm. 1991.
Technology Adoption Curve
Where are we
as an industry?
Where is our
company?
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Labor challenges persist and intensify
Thinking Strategically
About Our BusinessBuilding a Plan
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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
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What is it like to work for this company?
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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.
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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.
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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
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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
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How would you evaluate the strategic thinking skills of your current senior
leaders?
How would you evaluate the skills of your next-generation leaders?
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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
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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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2015
2016
2017
2018
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
nt
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.
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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
Predictive Indicator
Similar pattern…
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U.S. Unemployment
-
2
4
6
8
10
12
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2014
2015
2016
2017
2018
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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2018
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
Predictive Indicator
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?