Hold on to Your Hats

Hold on to Your Hats

The Post-Pandemic Economic Recovery is Off and Running

The Good News: All Flags Are Up for the Economy

  • Economic output grew at a 6.4% annualized rate in the first three months of the year.
  • Personal consumption grew 10.7% – the second-fastest pace since the 1960s.
  • The US economy is less than 1% off its pre-COVID peak.
  • World Bank predicts a 6% U.S. GDP growth for 2021.
  • S&P 500 companies have reported the strongest earnings growth in more than a decade.
  • Dow is near all-time highs. 
  • The Fed is laying low at zero interest rates.
  • Continuing Jobless claims down from high of 19m in May 2020 to 3.8m now.
  • Consumers are paying down debt and saving more than they have in decades. Americans repaid almost $83 billion in credit card debt during 2020.

The Construction Industry Lags

The construction market follows the US economy, so it will take a while before the construction recovery kicks into gear. Funding needs to make its way through congress to begin the long process of design, permitting, and contract awards which historically takes 12 to 18 months. We can celebrate the beginning of an economic recovery, but the real celebration comes when we begin to see more work. In keeping with the Daytona analogy, we need to beware of false starts.

Only the Best Drivers Finish the Race

Cyclical market periods of revenue growth are as exhilarating for construction executives as the Daytona 500 is for top NASCAR drivers. But like the Daytona 500, we can’t start until the race begins. Transitions from a declining market to a growth market must be navigated carefully. Placement and speed into and out of the curves must be calculated in advance and executed with skill. 

Curves in Every Recovery

I am always careful when it comes to market cycles. However, after this long COVID winter, I am eager to embrace the economic indicators above and welcome, with you, the light at the end of the tunnel. But I cannot forsake the mantra I have repeated for the last 40 years:

The beginning of economic growth cycles does not automatically generate construction work.

Economic recovery is an indicator of a construction recovery down the road.

Like the turns at Daytona, the following top ten troubling turns must be anticipated and managed mindfully if we are going to take full advantage of the construction revenue growth this pending post-pandemic recovery represents. The construction market recovery is not here yet but it’s never too early to pre-plan your approach for when it happens.

Tom’s Top Ten Turns

  1. The failure rate is three times worse during recovery than during a downturn. Everyone is thinking “salvation” during recovery periods, not “failure”. Be aware — the curves listed below can be fatal.
  2. Avoid unfamiliar work/unfamiliar geography – Aggressive expansion into new projects is like driving at Daytona for the first time; the risk factor goes way up.
  3. WIP Financing – The euphoria of potential revenue expansion distracts from the expanding working capital requirements resulting from slow-pay that destroy cash flow.
  4. Aggressive underbidding – Too many construction professionals bid aggressively in the rush for the first new projects. Be careful. Wait for the “feeding frenzy” to subside.
  5. Skilled labor shortage – This is already an industry problem and will only get worse as work picks up.
  6. Narrowing profit margins from aggressive competitive pricing. The excitement and optimism of a growth cycle can cause you to focus on the revenue windfall and ignore the capital erosion that results from aggressive bidding leading to diminished profits.
  7. Materials Inflation – already occurring. Supply will lag expanding demand and prices will skyrocket.
  8. Materials shortage – same cause – even more dire consequences since work can actually stop.
  9. Owners expanding bonding requirements – Manage your capital and your relationships with your surety carefully during expansion. More work and bigger jobs imply bigger bonds and more demanding owners. 
  10. Growth eats cash and diminishes capital. Recognizing this reality at the beginning of a growth cycle helps you take proper precautions in advance. 

You Can’t Make Hay Until the Sun Shines

There is no doubt we are entering into an economic recovery that the construction industry will eventually benefit from. Avoid the impulse to “floor it” and end up spinning out at the first turn. Aggressive economic growth periods look like a contractor’s windfall. However, this is not one yet because construction lags the economy. This is a pending opportunity with associated risks that must be carefully and professionally managed in order to reap the benefits.

To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org.

For more information on navigating the covid recovery, read more here: https://simplarfoundation.org/?s=covid+recovery

For a broader overview on Economic Recovery click here: https://simplarfoundation.org/?s=Economic+recovery.  

To receive the free weekly Construction Messages, ask questions, or make comments contact me at research@simplarfoundation.org. This and all prior messages are also posted on our Blog site: https://simplarfoundation.org/blog/.

Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you. Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.