The most obvious sign of the weak economy is payroll job losses. Payrolls declined by 2.6 million in 2008, the worst year for job losses over the past 60 years. Job losses pushed the national unemployment rate up to 7.2 percent in December, and have undermined consumer confidence. Even with a modest rebound in December, in the fourth quarter of last year, the University of Michigan’s Consumer Sentiment Index produced its lowest quarterly reading since 1980.
Although minor compared to the magnitude of the downturn, some benefits have resulted from the recent economic weakness. The drop in oil prices has helped contain energy costs for households and businesses. Additionally, for the construction industry, there has been a reversal in prices for key construction commodities. Prices for steel and other metals, gypsum products, lumber, and cement have all weakened recently, which will help to stabilize construction costs and make more projects feasible.
The Obama Administration is crafting an economic stimulus package to cushion the economic downturn. While still under discussion, it appears that this package will be large and broad-reaching in terms of areas covered. Current estimates are that the total package will run at least $750 billion over two years, and that it could rise to $1 trillion as it works its way through Congress. Given that our economy generates about $14 trillion a year in activity, this package would account for about 3 percent of activity in our economy over this two-year period.
Most elements of the evolving stimulus proposal generally fall in one of five areas, each with distinct advantages and disadvantages to stimulate our economy:
- Tax cuts and direct rebates. These components can take effect quickly, while also providing ongoing relief. A disadvantage is that they tend not to have as positive an effect on long-term economic growth as other proposed components, in part because households use some of these savings to pay down debt, and some spending is for imported goods that do little to help our domestic economy.
- Unemployment, health-care benefits, foods stamps, and other temporary programs. These “safety net” programs tend to help households in the most dire economic conditions and that have been the most severely impacted by the downturn. A downside is that they only provide temporary relief and do little to help create longer-term economic growth.
- State fiscal relief. Most states are unable to deficit spend to help during a downturn because of balanced budget provisions. Federal government grants can help prevent counter-productive increases in state and local taxes. Also, state and local governments could use these funds to provide housing assistance to at-risk households from the subprime lending crisis. To date, federal assistance has been provided only to banks and Wall Street firms and not to households of people who have had their homes foreclosed due to unscrupulous lending practices.
- Business investment incentives. For new jobs to be created, businesses will need to invest in new plants and equipment. The credit crisis is making borrowing difficult for many businesses. New investment incentives for businesses, however, are unlikely to produce immediate job growth.
- Investments in infrastructure, education, health, and energy. In addition to technology investments and creating more incentives for green investments, the construction and manufacturing industries are targeted under current proposals. Construction accounts for about 10 percent of economic activity, but has borne more than 25 percent of job losses in 2008. Jobs created in construction are domestic jobs, since very few are outsourced. They also produce longer-term benefits and help generate additional jobs through spin-off activity. Again, though, timing is an issue, since many of these projects take time to launch.
Previous recessions point to significant downturn
Architecture billings began to decline in early 2008 according to the AIA, and construction contract awards for nonresidential buildings began their descent about 4-5 months later, according to information on construction starts from McGraw-Hill Construction. There have been three major nonresidential construction recessions since 1980 as defined by the value of construction starts:
- The early 1980s recession began in the first quarter of 1980 and lasted through the fourth quarter of 1982
- The early 1990s recession began in the third quarter of 1989 and ended in the first quarter of 1993
- The early 2000s recession began in the first quarter of 2000 and lasted through the first quarter of 2004.
By the end of 2008, nonresidential construction starts declined 7 percent in inflation-adjusted dollars according to McGraw-Hill Construction estimates. At this stage of the construction cycle, this decline is comparable to previous major construction downturns. In the early 1980s recession, activity had declined 8.6 percent three quarters into the downturn, while the early 1990s recession generated an 18 percent loss over a comparable period. However, the early 2000s recession generated only a 4.5 percent drop at this point.
If this recession plays out like previous ones, there still are significant declines ahead. In the early 1980s recession, nonresidential construction activity fell by almost 28 percent before growth resumed, a figure exceeded in the early 1990s recession (31 percent) and almost matched in the early 2000s downturn (25 percent).
However, the composition of these losses was quite different in these cycles. In the early 1980s recession, commercial/industrial activity dropped 34 percent while institutional facilities declined only 12 percent. The early 1990s recession saw a more significant 48 percent decline in commercial/industrial activity, but a milder downturn on the institutional side with only a 7 percent drop. The early 2000s recession was relatively mild for commercial and industrial activity, which declined 29 percent, while quite severe for institutional construction with a fall of 21 percent.
According to the AIA Nonresidential Construction Forecast Panel, this downturn will be structured more like the early 1990s recession, although hopefully not as severe. This group is calling for declines of approximately 25 percent in 2009 to 2010 in commercial construction, almost 20 percent for industrial activity, while only 7 percent for institutional buildings. These projections predate the passage of any federal stimulus program, and the ultimate implementation of such a program, and the scope of activities covered if such a program is put into action, will no doubt affect both near-term and longer-term trends in construction activity.