Has the economic recovery groundhog seen its shadow and retreated back into its burrow?
By William Atkinson
In September 2010, the National Bureau of Economic Research, a committee of Boston-based academic economists, said the recession that began in December 2007 actually ended in June 2009. This marks the longest and deepest recession since the 1930s. The 18-month recession was longer than the two 16-month (and more shallow) recessions that occurred in 1973-1975 and 1981-1982.
Despite the recession being “officially” over, the committee:
- Expressed concern over how slowly the economy was recovering;
- Left the door open for a “double-dip” recession (which last occurred in 1981-1982); and
- Noted that housing and commercial real estate continued to remain mired in the recession.
In January, the New York Times noted that even though the recession is officially over, unemployment remains high, home values continue to remain depressed, and state budgets are in deep trouble. This could lead to more layoffs, service cuts and tax increases, the Times added.
According to the Associated General Contractors of America (AGC), despite the ending of the recession (economic growth for six quarters in a row: the third quarter of 2009 to the fourth quarter of 2010), construction is not keeping pace. “Construction spending fell again in the last two months of 2010, and the preliminary total for the year was the lowest since 2000,” reported Ken Simonson, AGC’s chief economist. Still, noted Simonson, there were and are some bright spots. Power construction has been climbing, and he expects this to continue through 2011.
A survey of contractors by AGC and Navigant Consulting found that more firms expect to hire workers in 2011 than expect to reduce their work forces. However, nearly half of the respondents said they didn’t expect a real turnaround until 2012, and just over one-third said it would not be until at least 2013.
“Economic growth has become increasingly broad-based, fueled by a combination of consumer spending, exports and business investment,” said Anirban Basu, chief economist for Associated Builders and Contractors. In the long-term, this should mean good things for virtually all construction segments.
Still, because of a slowdown in government spending, “Construction volumes in publicly financed segments may be suppressed going forward as governments slow the growth of, or shrink, both operating and capital budgets,” noted Basu.
So what does all of this mean for precasters? In sum, it seems that, on the plus side, the economy is improving. On the minus side, construction-related economic activity is returning very slowly, and it may be a year or more before things really get back on track (assuming no double-dip recession or other unexpected crises).
Below, some NPCA members have weighed in with their observations of the economy, as well as what, if anything, they are doing to prepare for future growth.
Wieser Concrete Products (Maiden Rock, Wis.) is in a few different markets. “Some of our markets have shown a bit of an upturn, and I think the upturn is sustainable for some of these markets,” says Andy Wieser, president. “One of these is the agricultural market. There seems to be some ‘legs’ to this upturn.”
In some of the other markets, though, such as housing, septic tanks, manholes and pipe, Wieser doesn’t think the recovery is here to stay yet. “There are a lot of homes that are still on the market, and a number of lots that have not been developed and sold,” he explains. “I think we are still a few years away from a turnaround in these areas.”
In terms of the highway industry, such as box culverts and bridges, Weiser believes that there will be some government influx. “I think there is some stimulus money that hasn’t been spent yet,” he notes. “However, with the reduced budgets that states have, some of the highway money will be taken away. So, I don’t think we will see a big upturn in this industry either for a while.”
In sum: “I don’t think we are anywhere near the end of this recession,” says Wieser.
“I think we have seen the bottom in terms of the economy,” suggests John Lendrum, president of Norwalk Concrete Industries, Norwalk, Ohio. “However, I have some concerns with what happens later this year when the stimulus dollars dry up. I don’t know if there will be enough private money available to keep things moving.” His company works primarily in Michigan and Ohio, states that have budget shortfalls, so they won’t have the money to spend at the levels they had in the past. “Tax revenues need to catch up before we can continue the public works projects,” he adds.
There is also still a serious problem with housing, according to Lendrum, and until people start building houses again – which also leads to building subdivisions, convenience stores and interchanges – he anticipates continued tough times. “As a result, I don’t think we will come out of this entirely in 2011,” he said.
“Our business on the U.S. side was severely affected when the recession occurred,” says Chris Pink, president of C.J. Pink Ltd., London, Ontario. “While the U.S. economy is about 10 times larger than the Canadian economy, our U.S. business is currently less than 10% of our Canadian business.” However, in the last few months, Pink has begun to see a few “green sprouts” in terms of its U.S. business, in that it now at least has some jobs to quote. “Last year, there was virtually nothing to quote on,” he notes.
Pricing remains a large concern in the United States, because there are so few jobs available. “There are a lot of people chasing a few jobs,” adds Pink. “Every time that happens, pricing is negatively affected. While we are seeing some growth in the U.S. economy, I still don’t know if it is the first sign of a full-blown recovery or if it is just a temporary blip, which could be followed by another downturn.”
However, in talking with other precasters in the United States, Pink finds that one thing everyone agrees on is that things are definitely better now than they were a year ago.
So how has the Canadian economy fared? “The Canadian economy wasn’t hurt as much as the U.S. economy,” replies Pink. “We noticed that the dip in the Canadian economy was almost as severe as the dip in the U.S. economy, but it was much shorter. It seemed to last only three to four months, then began to bounce back.” Some sectors of the Canadian economy are still struggling, though, such as automotive, but the businesses that Pink services are doing well.
According to Bill Wilkinson, owner of Wilkinson Heavy Precast in Dundas, Ontario, things are obviously a lot slower than they were eight to 10 years ago during the boom. “There is a recovery, though,” he says. “It is slow, but it is also steady. There are a lot of initiatives in place in Canada to try to get the economy growing again.”
However, over the last 24 months, Wilkinson’s company in specific has seen some amazing growth. One reason is that during the Canadian recession, a lot of businesses were leery about spending money. “They wanted to sit back and wait,” he explains. “However, in our type of business, customers can put most jobs off only so long, because a lot of it is infrastructure. After two or three years, come hell or high water, those jobs have to be done.”
Despite the realization that the economy is coming back slowly, some precasters are looking toward the future, so they will be prepared.
“Precasters still need to keep an eye on what they will do when things start to recover,” says Lendrum. “The precaster who is the most prepared and the most flexible is going to be the one who can ramp up the quickest.” As a result, he believes, precasters have to continue to invest in their people, such as keeping their training current. Then, when business does come back, these people will be prepared and be able to move quickly.
“While you may not need to buy new equipment, you need to make sure that you do keep the equipment that you have maintained properly,” adds Lendrum. “You also have to keep your information technology, software programs and communication programs current. Again, when things do come back, you want to be able to ramp up very quickly.”
Should precasters consider moving into new product lines? “This can be a good idea if you are comfortable with those products,” replies Lendrum. “However, you have to take into account how much capital and cash you would need to invest in order to do this. If it requires a large investment in things such as forming equipment or additional production space, this may not be the best time to get started, because it takes away from the core business that you need in order to survive.” He also believes that precasters have to take into account additional longer-term costs, such as more training, more inventory, more production help, more sales help and more office help.
Wieser believes that hiring people in this economy can be done rather quickly. However, he doesn’t think it is a good idea to start hiring people until you have the sales and until there is a real need for the people. “On the other hand, I think it is a good time to start upgrading some equipment and possibly upgrade buildings, especially with the tax advantages that are available, such as 100% depreciation,” he says.
Precasters should consider doing this with two caveats, though. First, if you don’t have the need to do any of these upgrades, then it doesn’t make sense to do so. “You don’t want to spend money unless it is necessary,” explains Wieser. “But, for example, if you have been putting off buying a new forklift that you need, then this is a good time to do it.” Second, it depends on the strength of your company, cash flow and profit position. “Even if you need something but don’t have the money, it is not a good time to buy something,” he adds. “For example, the depreciation is only valuable if you have profits to depreciate against.”
Even though things picked up rather quickly in the Canadian economy, Pink didn’t take any steps to ramp up in terms of either workforce or equipment. “The reason is that we maintained the capacity we had before we went into the dip, and we continue to feel that this capacity will continue to take us a long way,” he explains. “I don’t see any rapid growth in the near future where we would need to add capacity.”
For Wilkinson, things are a bit different. “As a result of the growth we have been seeing, we have been involved in more hiring,” he says. “We have loosened the purse strings a bit. In fact, we are so busy that we are hiring people right now.”
William Atkinson, Carterville, Ill., is a freelance writer who covers business and safety issues.