After the Great Recession

After the Great Recession

 

 

 

Howard Birnberg

 

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Despite huge government stimulus spending, the Great Recession continues.  Although technical measures from economists and government statistics have shown some growth in the economy in recent quarters, to many businesses and individuals, this growth is an illusion.    Consumer spending bumps up and down without a clear direction, unemployment declines only due to people dropping out of the workforce, and the construction industry shows no signs of lasting improvement.    Keynesian economic theory argues for more stimulus spending and lower interest rates to spark a recovery; however, more spending increases the federal deficit and some current interest rates are already near zero.    Other theories argue for cutting both the deficit and taxes, but this is near impossibility when economic conditions have reduced federal tax revenues already.    Cutting taxes will require huge cuts in federal spending (if deficits are to be reduced) resulting in further depressed economic conditions.    Reduced taxes to taxpayers will have no near term impact as most will use the additional funds to cut debt.    While this will enhance the bottom line of lenders, it will do little to stimulate the economy.      Cutting the federal deficit is a commendable goal, particularly when the significant increase in total U.S. Public Debt since 1980 (and particularly since 2000) is examined (see Table One).  

 

Table One

 

United States Public Debt

 

Year                     Dollars ($Billions)                  Percent of GDP

                        (gross debt undeflated)

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1940                              50.6                                        42.8      

1950                            256.8                                        94.0

1960                            290.5                                        56.0  

1970                            380.9                                        37.6

1980                            909.0                                        33.4

1990                         3,206.3                                        55.9

2000                         5,628.7                                        58.0

2008                         9,985.8                                        70.2

2009                       12,311.4                                        86.1

 

Source:   U.S. Bureau of Public Debt

 

 

 

One growing fear is long-term stagnation of the U.S. economy.    It could occur.   In the early 1990’s, Japan’s booming economy ground to a halt.    The period was called the “Lost Decade” as stimulus spending and interest rates near or at zero failed to pull the economy out of the doldrums.   The first decade of the new century has been only slightly better for Japan.  Only an aging workforce and no immigration have kept unemployment in check. 

 

Current Assessment

 

Reporter Gary J. Tulacz (ENR, July 5, 2010) recently wrote: “The U.S. construction market remains mired in a recession, with few, if any, markets spared.   In 2009, design firms looked for a turnaround this year, but so far there has been little relief.    Industry companies now await a bounce back in 2011.   However, leaders of the largest U.S. design firms, those on the cutting edge of any recovery, say there still are too many economic, political and financial uncertainties to predict when the marketplace will turn a corner.”

 

The fear of a “double dip” recession may be overstated, but the current slowing of the economy is real.   Consumer spending is stagnant, unemployment and the fear of losing jobs has made many individuals uncertain about the future and construction spending adjusted for inflation is near or at post World War II record low levels.    Many of the problems resulting from the bursting of the housing bubble remain including the loss of equity by even those homeowners not facing foreclosure.    Large banks are not lending to consumers and small businesses no matter how well qualified.      Much of the growth in recent months in the sale of existing homes came from federal tax breaks.    With the end of these breaks, the housing market nearly collapsed.   Unemployment of the construction workforce exceeds 20% and many workers are dropping out of the search for jobs.   Economic growth during recent quarters has been the result of stimulus spending and companies rebuilding inventories cut during 2008 and early 2009.

 

Despite the bad news or the absence of good news, some in the construction industry remain optimistic.  According to Engineering News-Record (ENR) (July 5, 2010, page 35): “After more than two years in the doldrums, design firms are starting to hear the rumblings of a recovery, but it could be many months before talk turns into action.  With private developers still severely hampered by the credit crunch and many public entities facing budget shortfalls, the funding stream for projects remains a trickle.”    (However,) “…many firms remain cautiously optimistic about the outlook.”    Others are not so certain.   Joe Brown, chief executive of Los Angeles-based AECOM, sees the current recession carrying on well into next year.   ‘The recovery was supposed to be clean-cut and finished by the second half of 2010, but that’s not happening…if you’ve been holding your breath until late 2010, you’ll suffocate…”

 

ENR also identifies the budget problems faced by states and local governments.   A recent article, “Cash-Strapped States Hold Off on Projects” (July 5, 2010, page 38-39),  noted: “With recession-stricken states stripping road and bridge projects from their improvement agendas and no federal surface transportation reauthorization bill on the horizon, transportation design firms are trying to make the most of a sluggish market.   Little of the $40 billion allocated to transportation under the American Recovery and Reinvestment Act (ARRA) has found its way to design firms, as states stay true to the ‘shovel-ready’ theme and applied the bulk of the funds to routine maintenance, paving and design-build projects…”   Seemingly, only contractors and sub-contractors are benefiting from the ARRA funds.  According to an article in the June 28, 2010 edition of ENR (page 23), “Federal stimulus spending apparently is helping the transportation sector, which is 22.5% above a year ago.”

 

The Near Future

 

Assuming the United States does not enter into a period of prolonged stagnation, what does the near future hold for the construction industry?    Last year, in my community, a local supplier of stone products opened a new, expansive showroom.   At the time, he commented: “I wanted to be ready for the next wave.”   If his business survives, he will be waiting for many years to come.    The economy is undergoing a catharsis, and a dramatic change in direction.   Gone is the desire for more of everything—larger homes, more goods, more debt.   Consumers, who account for nearly 70% of economic activity in the nation, are looking to simplify and to cut debt.    The ‘Baby Boom’ generation is aging and has been badly hurt by the Great Recession.    Many will never recover the lost equity from homes and stocks.    Others, formerly holding good jobs are now unemployed or underemployed and will permanently join the economic underclass.       One observer wrote:  “We had a good sixty-year run, but that’s over now.”   Maybe not over--just different.

 

In a May 2010 article, the Associated Press noted:  “White flight?  In a reversal, America’s suburbs are now more likely to be home to minorities, the poor and a rapidly growing older population as many younger, educated whites move to cities for jobs and shorter commutes.    An analysis of 2000-2008 census data by the Brookings Institution highlights the demographic ‘tipping points’ seen in the past decade and looming problems in the 100 largest metropolitan areas, which represent two-thirds of the U.S. population…The suburbs now have the largest poor population in the country.   They are home to the vast majority of baby boomers age 55 to 64; a fast-growing group that will strain social services after the first wave of boomers turns 65 next year…A new image of America is in the making, said William Frey, a demographer who co-wrote the report.”

 

What This Means for the Construction Industry

 

In the July/August issue of the APM News, I commented:   “Given the current state of affairs, many would question if architects have much of a future (in the construction marketplace).   Certainly, the marketplace has moved dramatically for the profession.    Historic “bread and butter” markets and delivery methods are comatose and show no signs of revival in the near future.   Firms that will survive and prosper will recognize that owners have many options that often do not include architects.   The future for designers will include much less design and much more programming, planning, financial analysis and related services.  Mergers with management and specialized consulting firms will be common and recognize the reduced role of architects in the building and construction process.”    

 

The Great Recession has also resulted in the disappearance of many design firms.   Some vanished due to insolvency; others from mergers or acquisitions.    Consolidation has reduced competition.  Unfortunately, at the moment, the diminished level of available work has meant strong competition for the few jobs out there.    This will change as the construction economy eventually improves.    The form of the competition will change.    As client needs and options evolve, new and diversified competitors such as specialized healthcare and educational consultants will compete with traditional design firms.  

 

Green design is here to stay.    It is no longer sufficient for owners/institutions/agencies to talk about green.   There is a real incentive to implement elements of green design into new and existing construction.   For example, the cost of solar installations has dropped by as much as two-thirds in the past year alone.   Combined with a 30% federal investment-tax credit for residential installations, solar is extremely cost effective for many users with a payback within as little as five years.   However, energy savings are only part of the reason for the growth of green design.   The U.S. Green Building Council has established Leadership in Energy and Environmental Design (LEED) standards and increasingly, these are being incorporated into local building codes.    Sustainability incentives are also being incorporated into local regulations.  

 

Some markets are now struggling, but will become strong opportunities for some designers and consultants in the near future.   The healthcare reform legislation passed by Congress and signed by the president earlier this year will be phased in over the next few years.     As a result, the demands on healthcare facilities and providers will change and grow.   Education will also return as a strong market.  

 

Whatever the condition of the economy, technology continues to advance.   While it remains to be seen if Building Information Modeling (BIM) will be a game changer for the industry, the ability to integrate new technology is an expensive and endless challenge.     Training of design and construction staff in new technology and important subjects such as project management has been widely neglected during the downturn.   When workloads improve, many organizations will need to play catch up on their staff training.

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Howard Birnberg is the executive director of the Association for Project Managers (www.apminfo.com)   He may be reached at 312—664-2300, email hbirnberg@gmail.com