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Three key trends, more forays into high-tech and the importance for construction

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

There are so many ways in which the world is changing that events often seem to be caught in a swirl of incomprehension wrapped in a cloak of confusion. In fact, if one breaks things down a bit, a discernible pattern does emerge. Three of the key forces at work are the emerging market effect, aging baby boomers in the rich economies and ever-greater forays into the world of high-tech. The interaction of these three does help to explain a great deal of what is going on.

There are so many ways in which the world is changing that events often seem to be caught in a swirl of incomprehension wrapped in a cloak of confusion. In fact, if one breaks things down a bit, a discernible pattern does emerge. Three of the key forces at work are the emerging market effect, aging baby boomers in the rich economies and ever-greater forays into the world of high-tech. The interaction of these three does help to explain a great deal of what is going on. The emerging market effect – whereby millions of previously poor people around the world are being raised up into the middle class – is having a huge impact on Canada and the United States. For Canada, an offshoot has been the marked pick-up in demand for raw materials, to go into consumer products being sold abroad and to help with the construction of much needed infrastructure in the likes of China and India. In turn, this means mega investments in resource projects in Canada and, since our labour force is growing older, a big problem will be finding the skilled workers to do what is needed. This has been the subject of other articles by me and will be mentioned only in passing here. Formerly poor nations have been making leaps and bounds by utilizing cheap labour to produce goods for export. Therefore, it’s no coincidence that manufacturing in the industrialized world has suffered even as the middle class has expanded so rapidly in Asia and other formerly disadvantaged parts of the world. The shift in manufacturing to developing world economies will eventually slow. To some degree, it’s already happening. The very process of rescuing workers in India and China from poverty seeds its own adjustments, since there are already demands for higher wages and better working condition. Availability of relatively low-cost energy will also play a role in where manufacturing can be carried out cheapest, but that’s a forecasting issue and we’re getting ahead of ourselves. In more recent times, the decline in manufacturing in the U.S. and Canada has been coincident with other important changes. For example, the shift away from manufacturing in the U.S. has been accompanied by a surge in the number of high-tech jobs. There is a chicken and egg question to be sorted out – i.e., which came first? I’m sure there will eventually be university research papers on the subject. Have more and higher-paying jobs in the high-tech sector soured the taste of North American workers for the manual labour that goes into construction and manufacturing? And laborers elsewhere, willing to work for less, have seized their chance? Or have the smartest entrepreneurs simply spotted where our advantages lie – i.e., in innovation and scientific research – and concentrated their efforts accordingly? The upshot has been to create the terrific opportunities in the new fields of knowledge-based enterprise. In any event, the advances in high-tech business and employment have been fortuitous, although they do present another problem with respect to labour markets. The reason is two-fold. Neither skills nor inclinations are easily transferable between working with one’s hands in manufacturing and undertaking the more sedentary and mind-occupying tasks of writing computer programs and manipulating data. Second is the large generational divide. For young people, it’s the environment they’ve grown up in and learned to take for granted. Therefore, 20- and 30-year-old adults are more adaptable to the new world of systems analysis and computer programming. The dot.com boom of the early 2000s quickly became a bust due to unrealistically high expectations. After 2001, employment growth in the industry slowed, but did not disappear. In fact, during the recession, high-tech jobs were among those least affected by the downturn. There were pockets of struggle, but the overall impact was never as severe as for almost all other sectors. This has shown up most clearly in the performance of the NASDAQ index. It has been the clear leader among North America’s major indices. NASDAQ has more than doubled (+116%) versus its trough level in the recession. It’s also now higher (+4%) than its peak in October 2007 before the recession. The benchmark composite index is made up of more than 3,000 companies. Before becoming too starry-eyed over NASDAQ’s achievement, however, it should be pointed out that a big part of its success has been due to Apple Inc. The enormous growth in sales of Apple’s main product lines, consisting of the iPod, iPhone and iPad, has elevated that company’s market capitalization (number of share times their value) and driven its equity prices higher. As a result, Apple’s shares make up 11% of NASDAQ’s total valuation. Second-place Microsoft accounts for only 6%. As goes Apple, so goes NASDAQ. That having been said, the number of new jobs created in high-tech has been a tremendous boon to the economy. Never mind the traditional jobs in hardware and software development. (Yes, even high-tech now has traditional mainstays – companies like Intel Corp., Cisco Systems Inc., Dell Inc. and Hewlett Packard). Consider the new employment opportunities created in the last half-decade or so. In services, there is the increased volume of retail sales that is now being generated over the Internet. What’s being sold includes not only all manner of goods and services, but also extends to entertainment in the form of books (Amazon Kindle digital downloads), videos (Netflix and Amazon have supplanted Blockbuster and Jumbo) and games (of the X-Box variety and Zynga/Farmville mutations on Facebook). Revenue and employment is also being generated by the wave of advertising that has migrated to blogs, social media sites, search engines and other web portals. Introduction of the iPhone five years ago in 2007 is credited with creating a whole new sub-industry on its own – software applications. An estimated 500,000 “apps” have been written to run on Apple’s device alone. This has given rise to thousands of small start-up companies and has accounted for significant hiring at many existing firms. For example, most major companies wanting to make a cyberspace impact understand the need to have an “app” that can be installed on the desktop of a PC, laptop, tablet or cell phone. The next waves in the high-tech sector are already upon us. Again, the number three crops up. There are three major characteristics – more interaction with the “clouds” for program usage and data transference; more data compilation and analysis to improve productivity; and the move to ever-faster digital connections. The second point above, in particular, offers huge potential. Streamlining payables, receivables and inventory is now standard practice. The next phase – and the one many analysts think will herald another boom in the dot.com sector – is analyzing existing and new data to a much greater extent. Companies will be making better use of the information they already have or expanding what they can acquire. We’ve already seen the advances in how companies find, establish and analyze the buying patterns of customers. In some cases, that means re-working a product line to make it more attractive. In others, it’s a case of fulfilling a perceived need in a better fashion. It also means targeting and disseminating ads to specific individuals as they move about in their daily lives. Who hasn’t already received a suggestion by text message about a local eatery they might like to try or a sporting event they would be sure to enjoy? For our industry, of course, the question is what all of this will mean for construction. Obviously, one important fall-out will be in terms of how construction firms and building product manufacturers conduct and structure their own internal operations. Managers will have to keep in mind that most of the new high-tech jobs will be filled by people other than the baby boom generation. This will present a challenge to employers in manufacturing and construction who are also looking to attract fresh faces. In terms of activity levels, there are the obvious implications – for example, the need for more microwave towers in the move from G3 to G4. Finally, there is the matter of how greater prosperity in one area of the economy (e.g., high-tech) finds expression – through consumer spending, business purchases and investments – in so many others. Any listing of the world’s top billionaires includes people who have helped guide firms in knowledge-based industries to the pinnacles of their divisions. The largest IPOs these days are for companies involved directly or indirectly in high-tech. Enterprises engaged in computer hardware, software, systems and networking, data processing and analysis, plus telecommunications have become part of the basic structure of the modern world’s economy. Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

by Alex Carrick last update:Mar 7, 2012

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