{"id":11866,"date":"2023-01-18T10:07:12","date_gmt":"2023-01-18T18:07:12","guid":{"rendered":"https:\/\/essential.construction\/news\/recession-watch-why-the-next-one-will-be-different\/"},"modified":"2023-01-18T10:07:12","modified_gmt":"2023-01-18T18:07:12","slug":"recession-watch-why-the-next-one-will-be-different","status":"publish","type":"post","link":"https:\/\/essential.construction\/news\/recession-watch-why-the-next-one-will-be-different\/","title":{"rendered":"Recession watch: Why the next one will be different"},"content":{"rendered":"

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Almost all economists and contractors expect some sort of an economic slowdown this year.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Some have even baked a recession into their current forecasts. But the unanswered question on many observers’ minds remains <\/span><\/span><\/span><\/span><\/span><\/span>how this downturn will be different<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cOur early signs, like most contractors, is that a slowdown of some sort is coming as our projects are pushing to later time frames,\u201d said George Pfeffer, member of the management committee team at DPR, a Redwood, California-based commercial general contractor. \u201cWe\u2019ve been through several of these cycles and what we can say is there\u2019s always something different.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Pfeffer points to workforce shortages and volatility in commodities markets.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span>Material costs\u2019 trajectories<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a> play an important role in procurement strategies, he said. <\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

For example, electrical manufacturers and distributors told DPR there is currently a $1.5 billion order backlog of switchgear, components required to provide electrical power and distribution on a projects. As a result, DPR expects shortages in metal sockets and bus plugs due to this high demand, said Pfeffer.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

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George Pfeffer<\/p>\n

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\u201cIn terms of new work opportunities, we expect a more challenging market,\u201d said Pfeffer. \u201cThere is a lot in the mix, and we expect that to be sorted out in 2023, which may mean fewer customers moving forward on projects until there is more certainty.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Past as prologue<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\n

Looking at data from past downturns can help put the current environment in context.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Nonresidential construction employment growth averaged 3.3% in the months leading up to the Great Recession, according to the Associated General Contractors of America. This time around, that number was about 6.3% in the last seven months of 2022.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cNonresidential construction has been growing more strongly in the second half of 2022 than in the second half of 2007,\u201d said Ken Simonson, AGC chief economist. \u201cAt that time, both single and multifamily residential construction were tumbling, which probably pulled down demand for related retail, street, school and public safety construction, and demand for other types of nonresidential construction was slowing.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

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The national unemployment rate sits much healthier now too than in the months leading up to the Great Recession. It hovered at around 4.6% in the summer of 2007, whereas it was around just 3.5% last month, according to the Bureau of Labor Statistics.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

The construction backlog in November also reached its highest level since the second quarter of 2019, <\/span><\/span><\/span><\/span><\/span><\/span>according to Associated Builders and Contractors<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>, indicating new projects are still coming online now.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cIt\u2019s hard to imagine a significant spike in unemployment that we saw during the Great Recession,\u201d said Jeff Hansen, CEO of Adolfson & Peterson Construction, a Minneapolis-based general contractor. \u201cWe have a shortage today and jobs are still being created. I don\u2019t see a significant correction taking place.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

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Jeff Hansen<\/p>\n

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Given those differences, a recession in 2023 will have its own unique markers this time around compared to past economic downturns, said John Fish, CEO of Suffolk, a Boston-based construction contracting company.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cDespite rising interest rates and high inflation, the fundamentals of our economy are still strong,\u201d said Fish. \u201cWe have seen upward trends in our GDP, consumer confidence is still high, Americans still have money to spend, and we have seen strong jobs reports with low unemployment rates.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Interest rates take a toll<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\n

At the same time, interest rate hikes remain a concern for the construction industry, said Fish. The Federal Reserve boosted its benchmark rate in December to a range of 4.25% to 4.5%, up from 0% to 0.25% at the beginning of 2022. Meanwhile, two Federal Reserve officials recently said this month additional hikes could push rates above 5%, <\/span><\/span><\/span><\/span><\/span><\/span>reports Bloomberg<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

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John Fish<\/p>\n

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\u201cI often describe our economy as a sick patient and the Fed\u2019s interest rate hikes as medication for that patient,” said Fish. \u201cBased on the impact interest rates are having on the housing market, real estate development and consumer demand, we are seeing signs the medication is working. But we must be careful we do not overprescribe.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Raising interest rates too much means fewer construction starts, said Barry Wurzel, president of Wurzel Builders, an Austin, Texas-based general contractor.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cInterest rates will likely continue to go up and there may be some thunderstorms in the near future over the next six months or more,\u201d said Wurzel. \u201cInflation affects everyone in the chain.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

The amount of debt in the commercial real estate industry that will be maturing over the next two years, given the increase in rates, remains a top concern as well, said Hansen.\u00a0<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n