Everyone agrees that the COVID-19 world-wide economic shutdown, interrupted supply chains, Russia's barbaric invasion of the Ukraine, fuel shortages, and persistent rampant inflation all add up to, at the very least, economic uncertainty. However, no one wants to use the “R” word. The word shouldn’t scare us because we have to manage our businesses through every economic cycle, but recession may well be coming. There is certainly the potential. What it will look like for the construction industry however is indeterminate.

The Recession 2007-2014

Few construction professionals can agree on how an impending recession will affect various segments of the construction industry. The most recent recession, referred to by some as the Great Recession, provides us with some data on what the impact of a recession on the construction industry might look like.

Utilizing U.S. Census Bureau data on "the value of construction put in place" I took a  look at the industry's response to the collapse of the mortgage market and the recession contagion that followed from 2007 to 2014.

• The construction industry was undoubtedly one of the hardest hit by the 2007  recession. The construction sector peaked in March 2006, when it reached $1.2 trillion, but by July 2014 the total monthly valuation for all construction put in place (both public and private) was $981 billion.
• Total monthly valuation for private construction, largely driven by the housing sector (which accounted for as much as half of all private construction in 2006) took the biggest hit, falling over 50 percent: from $961 billion in March 2006 to $466 billion in January 2011.
• Public funds, largely in the form of the American Recovery and Reinvestment Act of 2009—more commonly known as the “stimulus”—helped to buoy the construction industry. Monthly valuation of public construction projects reached its peak of $322 billion in July 2009, when the economy was in the worst phase of the recession. However, by July 2014, monthly valuation of public construction projects had dropped to $279 billion.
• In February 2006, monthly valuation of new private-sector, home construction peaked at $470 billion. Then the bubble burst, and by May 2009, monthly spending had bottomed out at $91 billion.
• As of July 2014, valuation of public education construction was $63 billion—two-thirds of its March 2009 peak ($93 billion).
• Health care construction steadily declined from its November 2009 peak ($40 billion). By July 2014, private health care construction valuation was just $29 billion.
• Manufacturing was dealt a serious blow during the recession, with monthly valuation falling over 50%—dropping from its January 2009 peak of $64 billion to just $31 billion in December 2010.
• Energy is the only major economic sector in which monthly valuation for construction put in place was higher at the end of the recession than its pre-recession levels.

(Stats by Forrest Burnson, Market Research Associate, Software Advice)

This provides us with some insight into how our industry generally reacts during an economic downturn or recession.

Brace Yourself

Will the current economic disruption be followed by another recession? Many of our business leaders including Treasury Secretary Janet Yellen and Jamie Dimon, CEO JP Morgan Chase think so.

• There are two main factors that has Dimon worried: The Fed's so-called quantitative tightening, or QT, is scheduled to begin this month and will ramp up to $95 billion a month in reduced bond holdings... “We’ve never had QT like this, so you’re looking at something they could be writing history books about for 50 years,” Dimon said. Central banks “don’t have a choice because there’s too much liquidity in the system”. Referring to the tightening actions he said “They have to remove some of the liquidity to stop the speculation, reduce home prices and stuff like that. During the response to the 2008 financial crisis, central banks, commercial banks, and foreign exchange trading firms were the three major buyers of U.S. Treasuries”. “The players won’t have the capacity or desire to soak up as many U.S. bonds this time,” Dimon warned.
• The other large factor worrying Dimon is the Ukraine war and its impact on commodities, including food and fuel. “Oil could hit $150 or $175 a barrel. You’d better brace yourself,” Dimon said. “JPMorgan is bracing itself, and we’re going to be very conservative with our balance sheet... “Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this… That hurricane is right out there, down the road, coming our way.”

Is Recession Around the Corner?

If Jamie Dimon is right, we are in for quite a shock. Although the current economic conditions are not identical to the period preceding the 2007 Recession, they are in many ways more obvious, ultimately more disruptive, and probably more enduring.

• The sudden withdrawal of government stimulus money and rising interest rates will certainly have a negative effect on the housing market.
• Rampant materials cost inflation is impacting the planned scope of the government infrastructure package by increasing unit cost and depressing the number of public projects that will fit into the overall budget.
• The limited availability of materials and skilled labor is hindering the ability of contractors to deliver projects on time and on budget. All segments of the construction marketplace have been slowing. That factor alone could extend a construction recession for months if not years.

The question remains: Is recession just around the corner?