2011 Economic Forecast

2011 Economic Update

Editors’ Note:  As regular readers of the APM News may recall, I have been continually pessimistic about the prospects for an economic recovery in the construction industry.   With 2011 now upon us, will the industry begin to see daylight after three dismal years?   I believe so, and here’s why…

First An Update

Engineering News-Record (ENR) is still reporting a significantly depressed industry.   For example, the October 18 issue (page 20) notes: “On a year-to-year basis, total construction through the first eight months of this year (2010) was $539.4 billion, which was down 11.2% from the same period a year ago.   Most of the decline has come in the private non-residential building sector, which is down 26% from a year ago, compared to a 5% decline in public works and a modest 2.3% gain in homebuilding from last year’s record low.”   ENR also notes the continuing high level of construction unemployment.   In September, 17.2% of construction workers were unemployed leaving 1.46 million workers without jobs.   Hardest hit were specialty trade contractors losing 20,900 jobs in September alone.  

What The Experts Are Saying

According to McGraw-Hill Construction (MHC), “The

construction market has yet to see signs of recovery from the current recession, but the recovery may be coming next

year (2011) if factors such as employment and bank lending fall into place.”  “Robert Murray, MHC’s vice president of economic affairs, foresees an 8% increase in total construction starts…in 2011.   Much of that prediction is based on the single-family housing market, which is finally seeing substantial growth with starts rising 27%...”   “Murray explains that, for the construction market to realize those gains, employment will need to show growth, banks will have to loosen lending, and state and local governments will need to contain their budget difficulties.”

“The current year (2010) was notable for the slowing of the declines of prior years.”  “…early stage of recovery has, in effect, been pushed back due to the stall that we had in the overall economy this year.”

Current Assessment

Many design, construction and consulting firms have significantly reduced their staff during the past three years.    As a result, the remaining staff members are generally top performers able to quickly and effectively respond to client needs.   There have also been a substantial number of mergers and acquisitions allowing firms to reposition themselves in new markets, gain enhanced expertise and develop new relationships.    Competition has been substantially reduced in many project types and geographic locations.   Large firms have grown larger in some cases as they seek national and international clients.  

The Near-Future

A turnaround will not be immediate, but will begin in late 2011.  The Wall Street Journal (WSJ) noted this prediction in a November 5 article, “He Saw Trouble Coming.  Now He Sees It Going.”    The article focuses on Ian Shepherdson, chief United States economist for High Frequency Economics.   “As a reader of economic tea leaves over the last five turbulent years, Mr. Shepherdson has a darn good record.     For instance, unlike the throng of economists who failed to see the housing crisis coming, Mr. Shepherdson warned his clients in the fall of 2005 that real estate would crash and a recession would ensue.”

“He was early, of course, and now acknowledges that he was not nearly emphatic enough in his warnings.  But, he was fundamentally right back then and has been consistently on target since….He (now) sees the beginnings of a turn in the economy that could translate to a rise in gross domestic product growth and an improving employment picture in the second half of 2011.”  

“The basis for his view is a shift, albeit nascent, in commercial and industrial bank lending.  The trend is real, he said, and as it gains steam small businesses should receive more credit, for which they have been starved.  And because these companies employ half of the nation’s work force, this credit expansion will translate into real employment gains.  The depression in small businesses explains pretty much everything in the weakness of this cycle.”

“Here are the data that have caught his eye.   At this time last year, the total stock of commercial and industrial bank credit was $1.32 trillion; it was contracting at a blistering pace-about $7 billion a week.  Indeed, between the peak of such lending in October 2008 and the trough in June of this year, total commercial and industrial bank credit fell by one-quarter.  Now the contraction has stopped.  The data have recently turned positive and should continue climbing…”

“My overwhelming condition for things to get better in the small-business sector is credit, so the positive data are a hugely exciting development.”…“I don’t think we will see all of these gaps close by December (2011), but over the next 12 months, I think we will see a transition out of a sluggish 2 percent (GDP growth) economy to a real, properly growing recovery.   And, the second half of 2011 may be the true turning point for unemployment.”  “By August of next year (2011) there is a very good chance that we will be on a recovery path.”

Another indication that change is in the air comes from the nation’s corporate giants.   The Associated Press notes (November 16): “From Caterpillar to Chevron to Google, some of the best-known names in corporate America are scooping up smaller companies, finally putting the piles of cash they’ve been sitting on to use and positioning themselves for a stronger economic recovery.    The volume of mergers and acquisitions is still running well below what it was in 2007 before the Great Recession, but the burst in activity is a sign of economic vitality and shows that companies are starting to shake off some of their caution.”

“M&A volume reached $2.25 trillion in the first 10 months of the year, a 28 percent increase over last year.”  “It’s an early indicator that confidence is shifting,” says George Geis, faculty director of the mergers and acquisitions program at UCLA.

While construction will lag in this recovery, many signs are now pointing to a positive future for the industry.