World economic markets are now DISORDERLY.
In Econ 101 we learn that constraints on supply without attendant constraints on demand lead to inflation. In addition, we learn that in modern complex economies, government monetary policy (the printing of money) can disrupt the balance of this fundamental economic equation by artificially creating the wealth that fuels demand rather than wealth being “earned” by the productivity of the labor force. During COVID-19, not everyone was working but everyone had plenty of money and time to consume the goods they were not producing. By printing money that is not earned by a labor force producing supply, more money ends up chasing fewer goods thereby creating inflation. Welcome to our current economy.
But what if the government suddenly realizes that it has printed too much money and is fueling the inflation that is now plaguing its citizens? It stops printing money, of course. When it does, it takes liquidity out of the economy and demand begins to weaken because consumers can no longer afford the scarce goods that are priced high due to continuing inflation. The production and consumption equation that produces price stability has not had enough time to recover and the supply of goods is still too scant to offset weakening demand caused by evaporating liquidity. In other words, the demand side of the economy maxes out its credit cards. Prices do not come down in step with weakening consumption and inflation gets “sticky” causing an economic environment called STAGFLATION. Welcome to next year’s economy.
A Disorderly Construction Market
Contractors have always plied their trade during volatile markets. Construction is tied tightly to macroeconomic conditions and every bubble is followed by a recession. However, the current market we are experiencing goes far beyond volatile and is approaching disorderly. By disorderly I mean sudden expansions and contractions caused by unexpected burdensome factors. No one expected the COVID-19 pandemic, for example, and no one knew what affect it would have on the market over time. Other arduous factors also played a significant part in creating this disorderly construction market.
- The shortage of available skilled labor has both driven up the average wage and slowed down the tempo of construction projects adding to costs in both instances.
- The COVID-19 shutdown in China, (to pick just one country) limited the supply of materials and equipment used in construction and drove up their cost.
- The sudden resurgence of demand after the COVID-19 shutdown, clogged the supply chain and added to the shortage of essential materials on job sites across the country.
- Rampant inflation across both the equipment and materials sectors doubled and tripled contractors’ costs on various portions of the work on jobs already priced and underway.
- The sudden Russian invasion of Ukraine disrupted the already shortening supply of fossil fuels to international markets and the price of fuel across the world doubled (in some cases tripled) in a matter of months.
This combination of forces has disrupted normally functioning markets and has challenged the construction industry to maintain profitability in a disorderly marketplace.
How To Manage in a Disorderly Market
What are management’s options to preserve profitability in this disorderly market?
- Should we factor in cost inflation in all new bids? How much? How can we guess accurately?
- If we factor in cost inflation, will we remain competitive or should we take the profit hit over the short run?
- How about laying off home office staff if the market heads south?
- What about bidding only small jobs we can complete quickly?
- Shouldn’t we put a hold on all capital expenditures and make do with our used equipment?
- Isn’t bidding more aggressively going to help us secure available work in a shrinking market?
- Should we plan for a short recession or a prolonged downturn?
All good questions. The answers depend on where you think the market is going next, up or down. It is impossible to predict future market gyrations in disorderly markets. Rather, I tap into the wisdom of Warren Buffet, the legendary investor, who, when talking about how to invest in volatile markets, said –
“The Stock Market is a device which transfers money from the impatient to the patient.”
In other words, when markets start to become irrational, do nothing. Wait patiently on the side lines. That is my advice to contractors who are trying to manage their companies through this post COVID-19 mine field with too many uncertainties.
Finally, let’s listen to the sage voice of Sun Tzu in The Art of War –
“If you wait by the river long enough, the bodies of your enemies will float by.”
Right now, only patience will see us through.
Find additional information on topics discussed here in the book The Secretes To Construction Business Success, published by Routledge https://bit.ly/3G9ornf.
For a deeper look into inflation and the effect on construction, read more here: INFLATION
For a broader view into the construction market during this disorderly time, read more here: MARKET
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