Contractors Were Right

Thomas C Schleifer, Ph.D.

Since the beginning of 2023 I have been cautioning contractors to beware of the potential for a coming recession. To my frustration, contractors have been ignoring us and pressing on with business as usual. “It will all work itself out like it always has,” they said. “Let’s take advantage of this government spending spree and save the worrying for later when the spigot goes dry.” Well, my friends, you were RIGHT!

Where Did the Recession Go?

Last year, Fed policymakers relentlessly raised interest rates starting with 1/4 of a point on March 17, 1/2 point on May 5, 3/4 of a point on June 16, 3/4 point again on July 27 and, finally, 3/4 of a point on September 21. In February 2023, the Fed again raised the rate by 25 basis points and additional hikes of .25% occurred again in both March and May. As the central bank was fighting furiously against the fastest inflation in decades, my colleagues and I were talking as though a recession — economic contraction rather than growth — was not a question of “if” but “when.” Possibly in 2022. Probably in the first half of 2023. Surely by the end of the year. We were trying to predict the effect this inflation battle would have on construction. 

The construction industry historically lags US economic cycles. When the economy begins to expand, construction remains stuck in the previous sluggish environment for a year or two until construction expansion really takes hold as postponed designs are completed and contracts go out to bid. At the same time, when a downturn comes construction perks along for a while completing the contracts that were executed during the expansion. 

This year, after eight quarters of the Fed’s aggressive interest rate hikes in its fight against inflation, the predicted recession is nowhere to be found.

• The unemployment rate, at 3.6%, is hovering near a five-decade low. The jobless rate is roughly where it was in the strong labor market that preceded the pandemic.  Employees are not hopping from job to job as freely in search of higher pay. At the same time, millions of workers have joined or rejoined the work force, helping to ease the labor shortage.
• Consumer spending continues to grow. 
• Corporate profits remain robust. 
• The housing market, the segment of our industry that is usually most sensitive to rising interest rates, has shown signs of stabilizing after slumping last year.
• Unemployment is hovering around the 3% level.
• At the same time, miracle of miracles, Inflation has slowed significantly and looks set to keep cooling. The Consumer Price Index in June was up just 3 percent from a year earlier, compared with a peak of 9 percent last summer, offering hope that interest-rate increases are nearing an end. All of which is beginning to lead economists, after a year spent being surprised by the resilience of the recovery, to wonder whether a recession is coming at all.  

Let’s Listen to One Last Expert

Jan Hatzius, chief economist for Goldman Sachs puts it like this; “The recent progress in inflation and the labor market as well as in consumer spending and other areas suggests the economy is gradually moving past the disruptions of the past few years. We’re seeing the other side of the pandemic,” he said. “The pandemic created all of this enormous turbulence in economies, and now I think it’s going away, and to me that’s the overriding theme.”

Why Have We Gotten It Wrong?

Because the world has changed. We no longer have national economies operating independently of one another. We now have one world economy in which individual countries dominate the supply of certain commodities while others dominate consumption at varying rates. It appears to be no longer valid to analyze the supply and demand equation within national borders. We can no longer rely on our tried and trusted formulas. We now must look at the worldwide integration of supply and demand as well as the currency used to facilitate international trade to understand how the world’s economy functions, and to predict future cycles.

Next week we’ll look at how construction fits into this “new world economy”. We’ll come back to project selection after this economic interlude.

For a deeper look into the prospering in a cyclical market  read more here: MARKET

For a broader view into growth, read more here: GROWTH 

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