We recently released our 14th edition of Onvia’s quarterly Market Snapshot report, revealing the latest trends in government contracting in the state, local and education (SLED) marketplace. The 2nd quarter of 2017 continues the strong growth seen in Q1, following three quarters in a row of slight declines during the uncertainty leading up to the 2016 elections. But this recent shift was not the only one over the last few years. The year-over-year percentages of growth rates in formal bids haven’t remained consistent or progressed in a single direction but have shown some strong cyclical or “up” vs. “down” phases since we began this series in early 2014.
The patterns visible in the chart below represent deviations from what would otherwise be the long-term stable or incremental percentage trend (i.e. typically around 1-2% growth from the previous year no matter what, etc.) These swings in the growth rate can be caused by changes in fiscal policy (i.e. spending more on pensions, Medicaid and reserves, with less in other areas), procurement strategy (i.e. buying more without advertised bids) or purchasing confidence (such as worries about the 2016 elections and potential impacts on future revenue).
The first 2014-15 “down” cycle
By mid-2014 agencies were noticeably pulling back on issuing traditional bids. This counter-intuitive trend was happening at the same time SLED agency spending on goods and services was recovering with steady improvement in growth rates. Based on the Bureau of Economic Analysis (without adjusting for inflation), spending on goods and services trended from 0.2% in 2013 to 2.0% in 2014 to 3.1% in 2015. Clearly government was now spending more on contracting, but the dollars were not lining up with the number of new bids.
The key to understanding this period was a fundamental evolution in how agencies were making purchases. In our quarterly reports, we pointed to a greater focus on efficiency, with changes in buying methods that helped reduce the need for formal, advertised bids.
This 2014-15 ‘down cycle’ period was a time when short-staffed agencies were facing pressures to buy things in more efficient ways – with less turnaround time and more predictability - including co-op purchases.Ben Vaught, Director, Onvia for Government
Large national co-ops have reported strong growth over the last 5-7 years but Onvia’s last two annual agency surveys noted minimal change in usage from 2016 to 2017. With our survey noting a full 14% of all spend already going to co-ops of all types (and 65% of agencies now using national and 74% using local/regional co-ops), this key method may have reached a mainstream plateau. Any further increases may be more incremental and no longer limit growth rates for bids and RFPs.
The second 2016 “down” cycle
The recent three-quarter “down” phase in 2016 can be attributed to greater caution resulting from an uncertain election year. Although the economy continues to be slow, there seems to be a greater confidence this year in its direction and stability, with supporting evidence from metrics such as a stable stock market and low unemployment.
Our recent survey of contractors indicated overall confidence was up in 2017 by 5% versus 2016, and there was a significant uptick in the share of companies reporting the current economy was more of a positive factor in their outlook as opposed to a cause of uncertainty or business risk.
While there is certainly uncertainty in the air, overall there is a sense of confidence in the economy that I believe will translate into more tax revenue and larger budgets.Office supplies vendor in Onvia’s Survey of Government Contractor Sales Expectations 2017-18
The short “up” cycles
One of the reasons why the occasional “up” cycle rises so high relative to the long-term average is that these are times when agencies are not only deciding to move forward after a period of reduced volumes, but are also fitting in additional purchases that had been delayed or ignored during the “down” periods. This helps explain the appearance of a temporary spike rather than a more gradual increase. The recent increases may seem unusually robust but one should consider:
- The strong first half of 2017 follows three negative quarters in a row during the 2016 election year
- Recent 2017 growth was assisted by $200 billion in new infrastructure projects approved by voters in November 2016
- 2017 growth was not just in infrastructure
If the market had not paused or stagnated through most of 2016, the last six months would surely not have been as strong in comparison.
Summarizing the pattern
The last three and a half years can be broken down into defined “up” or “down” segments. Since 2014 this market has experienced two periods of decline or stagnation lasting 3-5 quarters in duration and averaging between -1 and -2% in severity. These were offset by three short periods of solid recovery averaging 4-5%. Overall, growth was 0.7% counting both “up” and “down” phases. However, over the last 12 months the growth kicked up to 2.0%, or over twice that pace.
Implications for quarterly sales volume
Savvy vendors already grasp the seasonal nature of most types of purchases, with Q1 and Q2 containing a larger share of bids and RFPs every year. So how can companies use these cycles to improve their forecasts? What we are suggesting is not that a Q2 could end up as low as a Q4 or vice versa but that there is an additional “purchasing cycle” dynamic operating on top of the normal pattern of seasonal differences.
|Share of Annual Bids/RFPS (Avg. of 2014-16)|
|Avg. Q1||Avg. Q2||Avg. Q3||Avg. Q4|
Admittedly, some of these movements can be influenced by an unusually high or low period a year before (i.e. a -4% quarter makes it that much easier to get +4% growth next time from a smaller base, etc.) But upon closer inspection, other forces like confidence in economic and revenue growth are also driving factors. For example, one year ago the market was nearly flat at -1%, but now it’s growing by 5%. This cannot be explained simply by a smaller starting point in 2016.
Evidence such as an improved stock market, as well as results from our 2017 surveys of contractors and agency buyers, helps to support the explanation of pent-up demand. An appreciation of which leg in the cycle we are currently in can assist with sales planning, expectations for volume and in understanding the mentality of buyers.
Further year-over-year growth in bids and RFPs at the current high rate of 5% is not likely based on historical trends and prior examples of the short-term “up” phases in the cycle. With a long-term average run rate of 0.7% and the recent 4-quarter average of 2.0%, we expect the trend line to become normalized at a more sustainable level over the next few quarters. But even if agencies slow their growth to a bare minimum in the next six months, the overall 2017 average should still show a noticeable improvement over last year.
Contractors are encouraged to continue monitoring these quarterly trends as well as look for our upcoming 2018 Forecast report that will be released in November of this year. The Forecast will provide further clarity on how the purchasing cycle will be moving in Q4 and throughout 2018 to help contractors with their forecasts and annual sales planning.