This Week's Herman Trend Alert

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  The Herman Trend Alert

August 15, 2001

Economy Picking Up

As we rolled into the new century, the United States economy was moving forward at a pretty good clip. Then, late last year, the growth slowed a bit. This slowdown was a big surprise for a lot of people, including business leaders-- many of whom had not been in management positions when the economy wasn't strong.

The unfamiliar can be scary--and, when we're frightened, we sometimes over- react to perceived threats. Many corporate leaders were understandably shortsighted, worried that we might slip into a recession. To protect the company, they cut costs aggressively.

Some layoffs have been appropriate. Some changes were needed in people, departments, functions. Unfortunately, some employers cut too deep. They reduced their workforces too much. We warned that when the economy picked up again, these employers would be in trouble. Valuable people would be gone, and the loyalty of remaining employees would be fragile.

The time of reckoning is approaching.

Our sources in various fields and strategic positions are feeding us information that, when put together, suggests that the economy is heating up again. In response to inquiries from journalists and clients, we share our expectation that strong growth will be felt again by late third quarter or early fourth quarter.

Are you ready?

The Conference Board's Measure of Business Confidence now stands at 52, up from a reading of 45 last quarter. (A reading of 50 or more reflects more positive than negative responses among CEOs polled.) The latest indicator, a viable early signal, is a significant rise in help-wanted advertisements placed in newspapers. Reports tell us that advertising volume is up across the country. Manufacturing production is up and inventories are low. Some say the stock market is stronger. Watching these signs, we feel very optimistic that we are moving from slowdown into growth again.

Executive teams we have briefed--and many of them ask us not to reveal their identity: it's a strategic thing--admit they are not ready for a fast-growth period again. They've cut back, retrenched. They don't yet have the strength to operate aggressively in an active market environment.

Interesting times . . .

Comments from our readers: Roger,

I got your recent trend alert about the economy. I believe you are right on. I network with a lot of architects, furniture salesmen, and contractors who provide an interesting perspective of what is going on:

The furniture folks have not had a good 2001 (Companies have laid off workers - why do they need new furniture?). There is little work to bid on and most furniture manufacturers will be slashing prices dramatically (from what I hear) in the 4th quarter.

However, every architect I have talked to has not experienced a slump. They have continued with projects or have started new ones. What they report is that projects have been "on-hold" (projects are finished but not sent out to bid). Owners are waiting for the construction market to cool off and bid prices to go down, then the projects will be bid and built at a lower cost than today's market rates.

Most contractors I talk to state that they are busy, but the "pipeline" (future projects) is not full and they are "concerned" (this means bid prices will be declining).

This scenario means that approximately a year after projects are bid there will be an increase in employment demand for people to fill the factories and buildings (they take a year to build and a year to design, acquire the site etc.). Most architects state that owners are looking at year-end to bid the projects that have been on-hold (i.e. 4th qtr. 2002 or 1st qtr 2003 employment surge).

As a footnote to this scenario, the architecture profession is dying because they laid off all the young folks in the 1991 mini recession and they all left the field for higher paying jobs in other fields - never to come back. The trend continues. The number of people taking the architect's registration exam nationwide is down by two thirds since 1990! Young people coming out of school are highly trained and have real problem solving, analytical and computer skills that can result in starting salaries 2-3 times greater than architecture salaries in fields like consulting and computer animation. I have a friend in LA whose husband has an architecture firm. She says none of the architectural graduates from the area schools went to work for local firms last year because they could make 2-3 times as much money working for Dream Works or Disney doing animation. Starting architecture salaries were $20,000 vs. $45,000-65,000/ year for animation jobs. My nephew lives in LA, makes $75,000 a year as a computer programmer. He lives in a dumpy apartment and drives a nice car. Young people can't make it on starting architecture salaries. I would also like to point out before architects hire college graduates, they give them tests on AutoCAD and other programs. These graduates have real skills - they are productive and have problem solving and design skills that make them useful from day one of employment. If you saw the latest Star Wars movie and marveled at the planet of cities and beautiful buildings in the background - they were all done by twenty something architects on the computer!

Architects are poor business people, are poorly paid and don't pay their help well. They are reaping the rewards of what they have sewn. What I am seeing is a transformation in the building profession. It used to be that architects did complete sets of drawings then bid the project and supervised construction. They were the owner's representative and trusted advisor. Now architects are doing the design, then turning their design over to a contractor who has in-house architects complete the construction drawings and supervise construction. This new type of project delivery is called design-build and will comprise 50% of the construction market within a few years. For most owners, the most important shift is that with design-build they develop long-term relationships with the contractors, not the architects. The architects, not the contractor offer the commodity product in this new scenario.

While architects are crashing and burning as business people they are leading the world in education. Because of the Internet revolution, many colleges will face stiff competition from on-line universities - especially when the tuition gap widens. Universities are aware of this and are looking at architecture schools as models of the future university. For many current university students, their contact with professors is limited to taking notes in a large lecture hall and a weekly session with a graduate assistant. There is not much value here compared to on-line learning. I have a friend who got a masters in Engineering from NC State. He never set foot on the campus. He got weekly videos of the lecture, sent in his homework and had the personnel department at work administer exams over his lunch hour. Architects have always used the studio system for education. From 2-5 afternoons a week, professors divide their time between 10-15 students and "help" them or "guide" them in design and provide feedback for more advanced students. There are no exams but "Juries" are the grading mechanism. In the Jury system individual students present their work in a professional manner to real architects and professors in a pressure packed environment, where they get real and often painful real-time feedback. I have a friend who is a former dean of the architecture school at the University of Colorado. He says that this is the new model for bricks and mortar universities once their costs have spiraled out of control to the point no one can afford them anymore (he gives them a few more years).

Keep those trend alerts coming!

Barry Lynch, AIA, MBA, CFM

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