LET’S TALK – CRISIS MESSAGE 7

7th Crisis-era Message to Contractors from Dr. Tom Schleifer: The Long-Term Outlook

7th Crisis-era Message to Contractors from: Dr Tom Schleifer

The Long-Term Outlook

 

The “Wait-and-See” contingency is convinced it is too early to predict the effect of this crisis on their businesses. I expect the optimism out of Washington, DC, and some in the news media are feeding this opinion. The construction industry has already been negatively impacted by the global crisis and the construction market downturn is following the same pattern as the prior eight downturns since WWII. What is being questioned is: Will the US economy and the construction market rebound quickly and completely? I join with my readers in wishing it would. However, as a researcher I am compelled to consider the data and to study the past to project the future. Those waiting are convinced that “this time it is different” and I agree that the cause is different, but that does not change the effect. The current construction market is closely following the models developed during research of the prior downturns.

 

The construction market is deteriorating, the pace is worrisome, and the bottom is not in sight. Obviously, the rebound can’t start until the market stops declining. Hardly anyone believes the US economy will get better in May or June and data for July will not be available until mid-August. Therefore, the “wait and see” group will be six months into the downturn before they find out if the US economy will begin to recover any time soon. The speculation is when the economy will bottom out, not when it will rebound. Some experts are talking about this fall or winter and some are saying 2021. Pick the timeframe you feel is appropriate and determine if you can hold out that long. Using your prediction for the beginning of recovery, when will most people be back to work, and will they be spending like they used to? Will the construction market immediately rebound when US economy levels out, or does it have to get back to it’s prior size before there will be enough work to go around?

 

Trying to determine when the US economy may recover is complicated by uncertainties beyond our borders. Health is a fundamental determinant of economic growth and sick nations around the world are handicapped in terms of production, consumption and aggerate growth. The less-developed countries of the world with poor health care systems and services, not backstopped by advanced healthcare infrastructure, will delay global recovery. The ability and willingness of developed nations to assist poor countries in this new-normal world will impact global recovery which, in turn, affects US economic recovery. Global economic growth is the driver of worldwide demand for commodities, but the global economy is shut down. Our trading partners cannot afford our goods and services and are having difficulty producing and transporting imports that we need. There are already reports of delays and shortages.

 

 

On top of this, the worldwide economic crisis has effectively collapsed the global oil market. This sent oil prices to unpresented levels which, in turn, is causing the energy sector to be a drag on the US economy. Consumers normally benefit from lower energy prices, but not this time because both flying and driving are practically at a standstill. Consumers plus business investments make up the bulk of growth in the US economy and both have been negatively affected by energy prices. Demand for oil is nonexistent. It cannot return until global growth picks up which includes air travel and jet fuel demand. These, however, are dependent on social restrictions being lifted. When that happens, we face the potential for changes in consumer behavior. Some experts are speculating that oil demands may not reach their previous peak for years. To prevent a wave of bankruptcies in the US energy sector we may see a government rescue of at-risk energy producers. Unfortunately, this might push oil prices even lower as it perpetuates the oversupply.

 

There is no known policy fix for this virus induced economic catastrophe and it will take a long time for US companies to repair their balance sheets. Some firms will not survive and there is the possibility that unemployment may reach a post-war record high before it corrects.

 

On the positive side the US consumer balance sheets were strong leading up to the crisis, personal savings were high and consumer debt, as a percentage of disposable income, was historically low. The federal government is pumping billions of stimulus dollars into the economy with various programs. Because we have never been here before it is impossible to predict the impact, but it should lessen the destruction and, hopefully, shorten the pain. There is speculation that the stimulus may exceed a trillion dollars (5% of GDP) and more if this continues to drag on. I don’t think that stimulus funding is going to prevent a recession, but it should slow the decline.

 

Next week I will address the productivity and profit implications of new work protocols and restrictions on construction sites being required by states and municipalities.

 

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Note: Information on  overhead management can be found on letstalkbusiness.net. Click on “Manual” and go to Managing Overhead in the table of contents.