Featured SLED Analysis for November: The Economy, Stocks and SLED Bids

Posted by Paul Irby on November 30, 2018

Statistics

GovWin+Onvia’s research staff of more than 100 federal and state, local, and education (SLED) market analysts provide in-depth research reports, timely articles, webinars, presentations, and consultations to help clients build business development plans and navigate the government market effectively.

In this month’s feature we highlight a special feature from our recent report, State and Local Procurement Snapshot – Q3 2018, which examines how the timing of new government bids is tied to the stock market.

Since the Great Recession, the direction of the U.S. economy has been of particular interest to state, local, and education (SLED) government leaders, who are hoping for a continued economic expansion while at the same time preparing for the next downturn with rainy day funds and proactive planning. In this special report, we present for the first time evidence of just how closely tied the issuing of new competitive bids is to changes in the stock market. Understanding this “market timing” connection can help add additional clarity for SLED vendors interested in understanding bid trends, bid planning, and how business cycle changes are likely to affect advertised, competitive opportunities.

The Economy as a Major Factor for State and Local Governments

In recent years, the economy has been a key factor in resource planning and decision-making. SLED governments appear to be more aware than ever of economic cycles, having been caught unprepared by the severity of the Great Recession.

There are three basic ways that SLED governments can take the economy into consideration when making budget or purchasing related decisions:

  1. IGNORE IT. They can focus on keeping up with incremental needs, trusting that the resources will be there when needed
  2. CHECK ANNUALLY. They can pay attention only when setting their annual budgets and spending plans
  3. MONITOR AND TRACK IT. They can keep tabs on it throughout the year, prepared to make course corrections if needed

While traditionally stable and secure governments may have been able to get away with #1 (“ignore it”) in previous decades, the two economic downturns of the 21st Century seem to have introduced a greater sensitivity to possible impacts on annual budgets (#2) while also bringing an increased appetite for real-time monitoring (#3).

The Correlation Between Bids and Stocks

After exploring different economic indicators, we realized that the stock market itself seems to be closely connected to the pace of bids being issued, and is a more useful indicator of where a government’s future revenue may be headed. Probably the single most important of the stock market indexes is the Dow Jones Industrial Average (see chart). While GDP tends to be only moderately correlated with bid activity, we found a very strong 0.89 level of correlation with the Dow Jones index.

This consistency can be more easily seen when the last five years of bids are broken into the four phases shown (through Q2 2018). This analysis is still only based on five years of data and remains preliminary in nature, but so far it tells a compelling story about SLED governments paying fairly close attention to business and economic confidence. It’s as though they are genuinely worried about not missing the proverbial boat and getting caught unprepared when the business cycle does shift in a material way. They’d rather know in advance.

Source: GovWin+Onvia, S&P Dow Jones Indices, LLC, Dow Jones Industrial Average (DJIA), retrieved from FRED, Federal Reserve Bank of St. Louis

Why Would Bids be More Sensitive to Market “Timing”?

As our annual surveys of SLED government staff have showed, procurement teams are short-staffed following the Great Recession and focused on efficiency. They are actively reducing reliance on new competitive bids each time something is bought. They’d rather reserve a new, time-consuming bid process for something important, custom or expensive, which may stretch over a longer period. Otherwise, they often use cooperative or informal purchasing.

Vendors competing for these bids are often not paid until six months or longer after the bid is issued, so the money is probably coming out of a different quarter or even a different fiscal year. Three observations seem to follow:

  1. Competitive bids tend to have larger price tags, so they have a greater impact on budgets
  2. Because they involve committing future - not current - funds, bids are more speculative from a timing basis
  3. Unlike regular commodity type orders responding to immediate/critical needs, bids often involve investments that can be delayed or sped up without major consequences

Public officials will still continue to buy toilet paper and light bulbs on time even during a recession, for example, but they can always delay moving ahead on that new remodel for the City Hall or that big consulting contract to re-design the website, until there is more certainty in where revenues are headed.

What Type of Downturn is Government Most Worried About?

During the “Dot Com” slowdown of 2002-03, the disturbance to SLED government spending (in total dollars) was relatively minor. As Example 1 shows, state and local officials took the shortfall out of contract spending rather than force layoffs of staff. But the slowdown in spending on general purchases and investments only lasted one year and never dipped below 1.5% in growth rate.

Source: Bureau of Economic Analysis

The recovery came quickly and purchases returned to pre-downturn levels by 2004-05. Unfortunately for everyone, the Great Recession (see Example 2 below) was far worse than a temporary drop in growth.

Source: Bureau of Economic Analysis

This second table paints a “worst case” picture of what is possible when the economic winds completely reverse. In this case, SLED spending went from steady growth of 5-8% per year to zero growth in general buying, and negative change for capital investments like new roads and computer hardware. The downturn in spending lasted about five times longer than in the earlier “Dot Com” slowdown. Unlike in the earlier example, the 2009-13 slowdown was severe enough that cuts to purchasing were not enough to make ends meet. There were also staff reductions, since mandated healthcare and pension spending had to continue growing, but the total amount spent ground to a halt. As far as SLED governments go, the recovery in government spending did not really kick off until 2014.

Conclusion

It makes sense that given we are only recently recovering from the last painful downturn, the disruption is still fresh on the minds of gun-shy government officials and decision-makers. They generally feel a weight of responsibility to prepare for a recession as much as possible. While the use of rainy day funds is an important tool, which kept spending in the last downturn from becoming even worse, less is known about how these fiscal pressures and expectations for change might affect competitive bids. We’ve presented a new viewpoint that SLED governments will proactively adjust the timing of these bids to suit their purposes and their current outlook of where the economy and their revenue is headed in the near future. The evidence points to the stock market and economic confidence being an important factor as public officials are making these decisions.

Implications for SLED Government Contractors

Vendors should keep in mind that the volume of new bids is not necessarily going to flow as incrementally as the economy, because the emphasis will be on trying to stay ahead of the curve and anticipate future movement. In other words, it should track more with the subjective, speculative swings in economic confidence.

That means the SLED marketplace is bound to over- or under-shoot the mark at various times (as we recently witnessed with a softer-than-normal 2016 and bigger-than-normal rebound in 2017 for bids). However, over the long haul it should keep up with the economy’s incremental longer-term growth and offer enormous opportunity to the business community.

In summary, if you want to know where the trend of competitive opportunities in SLED government is headed, the answer may not lie in the current indicators of the economy as much as in which direction the stock market is pointed. Watch the markets, track the confidence, and look for evidence of a coming shift in the business cycle. If you can see it, chances are the government does as well. Expect them to be proactive, and like a good investor, ready to adjust their “portfolio” of competitive bids when the market sentiment changes.

You can read more of the analysis produced by both our SLED and Federal Market Analysis teams by clicking here. Or select the link below to request your free copy of the full State And Local Procurement report for Q3 2018.


 

Free Research Report


State and Local Procurement Snapshot – Q3 2018


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