Battling a bad case of recession

Industry faces economic downturn with high hopes for 2002

By Chris Thompson
Editor at large

The construction industry has settled into its long winter nap with a feeling of cautious optimism that it will awake next spring to a more stable economy and stronger consumer confidence.

The caution is rooted in the fact that the nation is caught in the stranglehold of a recession. That, however, is tempered with a sense that the recession's grip might not be too powerful.

"We usually lead the nation into and out of recessions because we're an industrial manufacturing state," said Terry Ludeman, the state's chief labor economist. "I don't see much recovery in the next three months. It'll probably be March or April before there is a recovery, and that coincides nicely with construction. My guess is construction will not be too affected by the recession."

Construction stood tall in 2001 despite the Sept. 11 terrorist attacks and the recent announcement that the country actually entered a recession in March. And industry observers said they see no reason to predict gloom and doom for 2002.

"Generally, things are up, but we'll need to be patient," said Steve Stone, executive vice president of the Associated Builders and Contractors of Wisconsin. "We still have an economy that's unsure if it is coming back or not, and there are post-Sept. 11 things we are dealing with. But somewhere in mid- to late-2002, we'll see a strengthening of the economy. We won't go any further back."

Fed to the rescue

The Federal Reserve Board, which oversees national lending rates, has played a large role in the industry's relatively stable climate and its hopes for a solid 2002, Ludeman said. The Fed cut interest rates 11 times in 2001, a trend that spelled good news for construction.

"It was certainly a nice coincidence that the Federal Reserve moved very rapidly with interest rate cuts, so construction is actually stronger than we would have expected it to be," he said. "One thing driving construction is low interest rates. Construction is very susceptible to be influenced from interest rates, and I don't expect a dramatic change in interest rates next year, even if the economy recovers."

That is especially heartening for residential construction, which often lives and dies by fluctuating interest rates. Matt Moroney, executive director of the Metropolitan Builders Association in Milwaukee, said the Fed's actions are cause for a positive forecast for 2002.

"Why I'm optimistic about the future of construction is interest rates are very low, and if we look at the rapid appreciation that housing has seen, it's a good investment to buy homes," he said. "In general, economic indicators say we've bottomed out, and we should start to see a steady climb."

By the numbers

“I think we’re pretty optimistic about 2002. It’ll be pretty good, but we won’t be setting new records.” Michael Fabishak Executive Vice President Associated General Contractors of Greater Milwaukee

Residential construction might not be flying high at the end of 2001, but Moroney said the figures, at least in the greater Milwaukee area, show growth.

"In Wisconsin, I sense that consumer confidence has increased since Sept. 11," he said. "I was just looking at our October numbers, and year-to-date, in October, we're up 3 percent in the number of building permits in Milwaukee compared to this time last year."

That increase reflects 2001 figures for much of the rest of the industry, said Mike Fabishak, executive vice president of the Associated General Contractors of Greater Milwaukee. State construction set an all-time high for volume in 2001 at $11 billion, edging out the previous record of $10.78 billion in 2000.

Fabishak said he's seen a decline in construction in the Milwaukee area by about 4 percent, but he said he hesitates to blame the economy. The completion of Miller Park and other large city projects contributed to a slight depression in volume, he said.

In forecasting for the upcoming year, Fabishak said he sees yet another dip in construction by about 3 percent or 4 percent.

"But that softening is off of what would have been a historical high for Milwaukee in 2000," he said. "I guess what we would be looking at is some softening because those are extraordinary numbers, but it's nothing to be particularly alarmed about."

Based on his calculations and his industry analysis, Fabishak said 2002 should be a good year.

"I think we're pretty optimistic about 2002," he said. "It'll be pretty good, but we won't be setting new records."

Who's at risk?

Optimistic predictions and high hopes aside, the recession is bound to affect at least some portions of the state's industry.

Predictions as to who will get hit and who will survive unscathed depends on who is forecasting.

Ludeman said he sees trouble ahead for heavy construction and road building.

"State governments are having difficulty with revenues and are in a cautious mode in terms of spending, so that industry will be flat for awhile," he said.

"Residential construction is all about interest rates, so that will continue to be strong. Industrial construction is interest rates and the economy, so my guess is if the economy recovers, we'll see some jump in that industry."

Fabishak, on the other hand, said he sees hard times for industrial construction.

"The most problematic part is business spending as inventory gets eaten," he said. "What we had was incredible production and capacity by manufacturers. Then we had a significant interruption, and as a result, that particular sector in general has not been significant in terms of construction."

But public work, Fabishak said, should remain strong.

The economy is a tough animal to tame, much less understand. But when it comes to getting a general notion of where the industry’s economy is headed in the next year, there’s no better place to turn than the ranks of the construction associations that have their fingers on the pulse of the industry. Following is a brief chart detailing whether construction associations see the Wisconsin economy is on the rise (thumbs up), on the fall (thumbs down) or simply treading water (thumbs sideways).
Associated General Contractors of Wisconsin
Associated General Contractor of Greater Milwaukee
Associated Builders and Contractors of Wisconsin
Metropolitan Builders Association
AFL-CIO
American Institute of Architects Wisconsin Chapter
National Association for Women in Construction
Wisconsin Underground Contractors Association
Wisconsin Association of Consulting Engineers
American Subcontractors Association of Greater Milwaukee
American Institute of Constructors Wisconsin Chapter

"Within the context of public building, specifically schools and the state, a lot will have to happen," he said. "If the need is there, you almost have to satisfy that. The state work for next year is mostly on the books. If you look at the public sector, it's fairly stable."

There is a basic economic theory dictating how downturns influence construction spending, Stone said. Based on history, he said a dip in the economy affects the residential, light commercial, heavy commercial, infrastructure and heavy industrial sectors, in that order.

"Then when the market picks up, the industry recovers in the same order," Stone said. "If it holds true to history, that would be our bounce-back scenario. Even if we're on a downward slope, heavy commercial and industrial are still doing good."

But if predictions that the economy has bottomed out and is now on the upswing are true, the recession will never have a chance to flatten the entire industry, Stone said.

"Maybe the downturn never gets to infrastructure and industrial," he said. "Maybe the upturn starts before that. I really think that by mid-to-late 2002 we'll be on an upswing. I think the recession would need a longer time to drag the rest of the industry down."

Wildcard in the wings

As with any economic theory, there's always the chance that unanticipated factors could come into play. Large projects -- such as Lambeau Field or a possible $7 billion in power plant construction -- could breathe new life into a stale economy, or consumers could bounce back faster than anyone expected.

"I think there is some pent-up demand in the marketplace for construction from the last three years because contractors have been so busy and projects have been put on hold," Ludeman said. "There is also a certain thing in the economy called the wealth effect -- how rich do people think they are based on market changes?

"Now, the market is almost back to the pre-September figures, so there is some relief for those who are fairly wealthy. And those are the people who generally take on large residential or commercial projects."

The "wealth effect" and its resulting freer spending could equal a faster recovery from any lows the construction market suffers, Fabishak said.

"It depends a lot on consumer confidence and their willingness to spend money," he said. "Discretionary building is predicated on whether the public will continue to buy as it has in the past. Considering the status quo, we feel good about 2002, assuming we can get stabilized."

Once consumers catch a whiff of a recovering economy, construction and other industries should rise in a reverse-domino effect.

"As uncertainty begins to dissolve and consumer confidence builds, as a developer you have to say the two lines have met," Fabishak said. "Construction in general follows the downward effect of the economy, and when the economy rebuilds, construction takes a while to come back. But this particular market is not as boom or bust as others."

Final analysis

The recession isn't going to create an easy environment for construction in 2002, but economic observers generally agree that the industry should survive relatively intact.

"Anytime there is concern about the economy, consumer confidence gets jolted, but if you look at the underlying indicators, it's pretty rosy," Moroney said. "We probably won't see the levels of 1999 when construction was robust, but I think we'll see that 2002 will be a healthy year."

That health might depend on the success of only a few sectors, Stone said.

"Heavy commercial and industrial will keep us healthy, and then in the third or fourth quarter next year, we'll see growth in the rest of the industry," he said.

Construction's recessionary tunnel might be dark in the beginning of 2002, but there is light ahead.

"You'd have a hard time convincing me they've been in a tunnel," Ludeman said. "I think construction is fairly strong. There'll be a couple of months in the winter when it will be slow, but then we'll see some jumping."

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