AGC economist predicts trends affecting contractors here, nationwide
Wisconsin’s construction economy has taken a hit during the current recession, according to Ken Simonson, Associated General Contractors’ (AGC) chief economist. And while the impact has been noticeable in terms of construction employment numbers in the state, things should improve in the coming months with the exception of a few sectors, including publicly-funded construction projects.
Simonson spoke at an AGC luncheon Jan. 17 at the Milwaukee Athletic Club. The event was sponsored by AGC of Greater Milwaukee.
The construction sector fared better than some other industries nationwide during the current economic slowdown as, according to Simonson, the economy as a whole lost 80,000 in December of 2001 while the construction industry actually gained 5,000 jobs on a seasonally adjusted basis that month.
Meanwhile, according to a market report circulated by Simonson, the value of construction put into place nationwide in November and December of 2001 remained at the same level as in 2000.
Slower in Wisconsin
But the construction climate in Wisconsin was "a little bit chillier" than it was nationwide. Seasonal employment numbers in the industry peaked in March and then fell gradually through November, the last month for which state and local breakout numbers are available. By November, statewide non-farm employment had fallen by about 1%, according to Simonson. Comparing November of 2000 to November of 2001, Simonson said employment in Wisconsin’s construction sector was down 4%.
While the recession is real, according to Simonson, consumers and some industries are not feeling the effects substantially. Lower interest rates allowed homeowners to refinance their homes, reduce their payments and increase their expendable incomes. But despite 11 interest rate cuts, home sales were still off by 3% for the year according to December census bureau numbers. But more recently, a slight increase in residential building permits is a favorable sign, Simonson said.
Officials from AGC of Wisconsin and AGC of Greater Milwaukee were quick to point out that for the year, construction activity in 2001 hit an all-time high of just under $10.993 million, and claimed the falloff in the fourth quarter was due in part to the completion of several major projects, including the Calatrava addition to the Milwaukee Art Museum, the Midwest Express Center and Miller Stadium – combined with a slowing economy.
What’s’ next?
Simonson made a few predictions as to what the construction economy would hold for the year.
For the most part, with the exception of the health-care industry, fewer construction projects will be initiated by private industry. While both manufacturing and service sectors nationwide appear to be in recovery, it remains to be seen how long it will take that recovery to translate into building projects.
Citing a monthly index based on a survey of purchasing managers, Simonson said the manufacturing sector nationwide was not yet in recovery, and had not grown for the last 14 months. However, the index was within two percentage points of a positive number – as high as it has been in months, Simonson said.
A similar index that measures service industries has in fact shown growth for the last couple of months, he said.
"I am hopeful that, from both that survey and things coming out of the Census Bureau and the Fed, we are seeing strong signs that manufacturing has finally hit bottom or very close to it."
Another positive indicator for the manufacturing sector is the level of inventory of manufactured goods. In a recession, demand for manufactured goods can fall faster than supply, leaving significant inventories in the hands of manufacturers and those in the channel of distribution.
"This has been an inverted process where consumers never stopped buying," Simonson said, referring to inventory-to-shipments ratios nationwide. "But manufacturers – they were feeling the pain way back in the summer of 2000."
Production at manufacturing facilities scaled down quickly enough that, despite the slowdown, the ratio remained relatively stable.
"When manufacturers see those orders coming in, they cannot go to the warehouse," Simonson said. "They have to crank up the assembly line."
Home construction, landscaping and other disciplines associated with preparing a home for the market will present opportunities for contractors.
An update report released by Simonson Jan. 23 cited record-setting existing home sales in 2001, edging out the 1999 total, despite a slight dip in December. The median selling price was up 8% from December 2000, and the inventory of homes for sale was down to a low 4.2 months.
New home acquisitions drive consumer purchases, and this factor, along with stable personal incomes, will create opportunities for contractors.
But overall, retail will be "a mixed bag," as according to Simonson the discount chains like Wal-Mart and Target are faring well while specialty stores like the Gap are experiencing difficulty.
As the federal government looks for funds to pay for the war in Afghanistan, and as Gov. Scott McCallum tightens purse strings to account for a $1.1 billion structural deficit, government spending in Wisconsin and nationwide will face a slowdown.
Paradoxically, as activity in the private sector improves, government projects will slip, according to Simonson.
"Public projects have a longer lead time and are less subject to immediate economic changes because many of them are dictated by bonds or legislative decisions issued months before," Simonson said. "But in the next few months, the decline in tax receipts and increase in unbudgeted outlays for unemployment, welfare and security-related spending will force all levels of government to curb construction."
This means highway contractors, generals, consultants and subs that are heavily dependent on state and federal work nationwide can expect a reduction in available projects later this year.
On a state level, McCallum’s plans to phase out shared revenue with municipalities will also mean firms involved with municipal infrastructure including water, wastewater and streets could face a significant slowdown later this year.
Reduced state aid to municipalities would also force municipalities to look hard at education spending in order to prevent drastic property tax increases.
Highway trust-fund spending which under the Transportation Equity Act of the 21st Century is driven by excise taxes on fuel, will take a hit. Lower-than-projected excise tax revenue will put highway projects on the chopping block.
"Whenever fuel and truck excise taxes come in above the amounts projected in the bill, government has to increase its highway spending," Simonson said.
Projections for fiscal year 2002 were up substantially, but actual spending was well below the mark. According to Simonson, high gas prices last spring and the business slowdown that had silently spread through the economy mean that the federal budget, which the president will present to Congress in February, will contain a reduced allocation for transportation spending.
Power plant construction is almost sure to be cut, according to Simonson.
"The administration of course had come out with its national energy policy last spring and one of the sound bites I remember from that was that we would need a new power plant a week for the next 20 years," Simonson said. "Right away that forecast looked pretty shaky. The economy cooled off, and, after Sept. 11, that looks totally preposterous."
The Enron debacle, according to Simonson, has further put a damper on investment in power production.
Simonson predicts that lower oil prices will come in the months ahead as non-OPEC nations break their agreements with the oil cartel and increase production. This will mean lower prices for petroleum fuels as well as petroleum-based materials like asphalt and PVC pipe — and energy-intensive materials like aluminum.
And one of the most important materials for contractors – employees – will also be easier to find, according to Simonson.
March 1, 2002 Small Business Times, Milwaukee
