Why Inanimate Construction Equipment Sucks at Predicting the Future
I paced the lobby. I flipped through the pages of ‘Concrete & Aggregate Magazine’ or some such thing that you’d find in the lobby of a construction company, not actually reading, just nervously flipping. I tapped the arms of the chair, waiting for him to arrive. Him was the Victorian State Manager of Lendlease, one of the largest construction and development firms in the world, and I was a no-name nobody who got an introduction through a mutual friend. I was new to the Melbourne building industry at the time, and was looking for insights, anything really. Some words that I could fashion into a direction. The problem was, that I had no idea what I was going to talk to him about…
Whether he picked up on this or not I cannot be sure, but his demeanour told me from the start he was ready to be done with me and get back to the business of building mega buildings. We sat down with our coffees, he looked at me expectantly, and I said the first thing that came to my mind:
‘So I’m new to the industry here — what can you tell me about it?’
He stared at me with a look of disdain, and responded, ‘I think if you just take a look at the skyline and all the cranes you’ll get a pretty good picture that business is booming, you moron.’ Ok, he didn’t call me a moron, but his tone and condescending glare said as much. The rest of our chat went just as well, and we parted ways as soon as he was able to slam his coffee without burning a hole in his throat.
That meeting with Mr. Lendlease has left a long term impression on me, though not because of the looks of disdain, the uncomfortable silences, or the long walk home. What I’ve remembered most was his comment about the cranes.
The building industry has been on a pretty good run in recent years. It’s kept everyone fat and happy, regardless of the periodic whinging you hear from big developers. The big question in the back of everyone’s head, though, is how long will the good times last?
One consulting firm thinks they have the answer. Rider Levett Bucknall, a quantity surveying firm, has since 2012 been publishing the RLB Crane Index, a bi-annual count of cranes adorning the skyline of each of Australia’s largest and most active cities. The current number of cranes compared against the number of cranes in the air six months prior is a fair proxy for the state of the industry, according to RLB.
Cranes, RLB reasons, are a very tangible and measurable picture of the industry taken from where the action happens in the field. Lots of cranes in the air means there’s lots of projects on, and if there’s more than there was 6 months ago that must mean things are looking up.
The newspapers eat this sort of thing up, with the AFR and The Age both devoting prominent articles to the release of RLB’s most recent report in early April. The crane report is easy pickings for them, so when RLB’s report found fewer cranes on residential projects than 6-months ago, AFR headlines spread the gloom: ‘CRANE INDEX POINTS TO RESIDENTIAL SLOWDOWN’. The salad days are coming to an end apparently, as foretold by the all knowing eye-in-the-sky.
Trouble is, the crane index — and the headlines — are nonsense.
In technical mumbo-jumbo speak, the crane index is what’s referred to as a lagging indicator. This means that it is a measurement which looks backward — how many cranes there are today versus how many there were in the past. As many people know when looking at numbers like this (and many tend to forget), past results mean next to nothing in terms of what happens in the future. This is true whether it is the stock market, the exchange rate, or really any time you look backward for guidance as to the future. So the RLB index shows that Sydney lost four cranes in the last 6-months and things are looking grim? It could just as easily add 14 in the next six if a couple of big projects start up, or the government starts throwing money at projects, or tax regimes change, etc., etc.
There are also many scenarios where less cranes could amount to more projects being on the go. What if two large projects with six cranes wrapped up, and four new ones on cramped sites started up which only had space for one crane each?
Construction does also occur without the use of cranes, which I know is a painfully obvious point yet one the crane index fails to consider. The index effectively disregards small to medium projects and also those little land developments, which themselves amount to a couple of billion dollars in terms of annual revenue for the industry.
Perhaps the biggest way that the crane index gets it wrong is that it brushes aside the slightly messy and complicated time aspect of construction. A good example which illustrates this is a project in Victoria called Mason Square which, according to the AFR, has seven cranes, the most of any project in Australia. These seven cranes have been erected within the last six months, thus has just shown up in Melbourne’s crane numbers as a big plus and by itself pushed the current numbers above those of 6-months ago. Construction, however, is a long game and the Mason Square project is no different. The land for the project was first purchased and planned for development in 2013, a full five years ago. With a project that has been a work in progress for five years, does it really make sense to measure its impact on the market at the very tail end when it finally got around to erecting cranes?
Don’t get me wrong, the crane index is a nice tangible way to look at the action happening in the building industry, however all the flaws make it hard to take seriously as something that’s more than just fun numbers. The crane index would be much more interesting and useful if the data were looked at in tandem with some forward indicators like building permits or the like, and combining them for a more robust prediction. It’d also be worthwhile looking back to review how the crane numbers trended in comparison to what actually happened in the market. This sounds like a good exercise for RLB, though I doubt they care that much — they’ll not want to spoil the bi-annual free marketing bonanza that comes with their current report.
Looking back on my meeting with the Big Cheese from Lendlease, I don’t hold much of a grudge for being made to feel like a fool. I was partly responsible by being completely unprepared for the meeting, which I won’t let happen again any time soon. I imagine that I did come off as a complete moron, but I take solace in knowing he was wrong about a couple things— I’m not a complete moron. And that for all his experience, the inflated title and fancy suit, he had no idea about the cranes.
