Welcome to Part 2 of this series where we analyze recent patterns in state, local and education (SLED) government contracting and examine where the market is headed in 2016. In case you missed Part 1, you can read it here. Catch up on Part 3 of this series here. In order to uncover longer-term trends in SLED contracting activity, we took a close look at bid & RFP annualized growth rates over the last two years (2014 and 2015). The chart below shows that SLED government purchasing growth has been trending higher in recent quarters, but the market has clearly seen its share of volatility. Growth in the market was up in 2015 by 0.3% over 2014 but the last two years included distinct growing and declining micro trends: Substantial growth in the first six months of 2014, decline in the middle four quarters and positive growth in the second half of 2015. With All the Ups and Downs, What Will 2016 Contracting Look Like? The distinctive “V-shaped” trend line, with the significant downward phase from Q3 2014 until Q2 2015, does not suggest steady growth. However, based on the recent forward momentum in bid & RFP growth rates and evidence that some of the factors causing the V-shaped dip may be shifting (which we’ll cover in Part 3 of this series), we expect that 2016 will be a year of modest growth. The Q4 2015 growth rate of 4.6% over Q4 2014 is impressive. For starters it is a full 4% higher than the Q3 2015 annualized growth rate. Some contractors may interpret this recent spike to be the start of an expanding trend that will lead to even higher rates of growth, while others may attribute it to agencies putting off purchasing decisions until the end of the fiscal year rather than scheduling them to occur at regular intervals. Our analysis of the last two years provides a sense of what levels of increase are typical for a growing market. If we combine each of the quarters where a positive growth rate was seen (Q1 ’14, Q2 ’14, Q3 ’15 and Q4 ’15) and ignore the declining quarters, the market was advancing by an average of 3.0% in additional opportunities. In the first half of 2014, the growth rate averaged 3.5%; in the second half of 2015, the market recovered and made up for the missing volume in 2015 with a 2.5% average growth rate. Therefore, we can interpret that the SLED market is capable of growing in opportunities at a rate of between 2-3% per year on average during periods of time when government agencies are able to increase their number of competitive procurements. No quarter over the last two years has exceeded 5% growth so a large one-time increase over 5% in this modest growth environment seems unlikely. The results from Q4 2015 of 4.6% growth is probably best viewed as a relatively strong quarterly growth rate rather than a more typical level that can be expected in 2016. Adjusting for Reality: Not Every Quarter Likely to Grow With the economy growing at only 2.4% after inflation in the past year and the SLED contracting market up just 0.3% for the same period, a scenario of modest growth in government opportunities of somewhere around 1-2% overall seems reasonable assuming no significant deterioration in market conditions or acceleration of the consolidation/efficient purchasing trend. Growth at this pace would allow for some quarters in the typical 2-3% range we discussed and one token/random flat or negative quarter that may moderate the trend. If the market grows in at least 3 of the 4 quarters in 2016, we will see a different, stronger pattern emerging. The $1.5 Trillion Dollar Question The $1.5 trillion dollar question is whether the forces that created the V-shaped dip in 2014 and 2015 will appear again in 2016 for more than a single “exception” quarter. Read part 3 of this series here where we look further into the reasons behind the deep V, when growth rates sank as low as -4.9%, and discuss whether the market could see another round of declines in the number of competitive opportunities or if conditions have fundamentally changed for the better. Until then we invite you to learn what happened in Q4 2015 by level of government and industry in the latest edition of our SLED market snapshot.