Recession and Construction Industry

Is a recession expected in 2023? Will I be at risk of losing my job? How is the recession impacting construction market? Are you prepared for the upcoming recession?

These are common questions that arise during times of uncertainty, and currently, we find ourselves in such a period. The world economy has experienced many fluctuations since the pandemic, causing turbulence across various market segments. It is natural to be cautious, but without proper knowledge, caution can quickly turn into fear and anxiety. In this newsletter, we will examine the current market conditions, understand what a recession is, and explore its impact on the construction industry and those involved in construction.

First and foremost, let's comprehend what a recession entails. A recession refers to a significant, widespread, and prolonged downturn in economic activity. Typically, two consecutive quarters (or six months) of negative gross domestic product (GDP) growth indicate a recession.

Several factors contribute to a recession, including financial crises, monetary policies, reduced consumer spending, external shocks, government policies, and more. Presently, it is a combination of some of these factors, such as geopolitical tensions, energy market imbalances, persistently high inflation, and rising interest rates, that seems to be causing a gradual recession.

How does this recession impact the construction industry? Historically, the construction industry has been adversely affected during periods of economic recession in the United States. For instance, during the Great Recession (December 2007 – June 2009), the industry witnessed nearly 2.5 million layoffs and the downfall of approximately 150,000 construction companies.

However, the current situation differs slightly due to the rollercoaster of economic uncertainty we are experiencing. Last year, we observed a significant backlog of projects in the pipeline, which provides a glimmer of hope amidst the dark tunnel.

Let's take a look at what industry experts have to say:

George Pfeffer, a member of the management committee team at DPR, stated, "Our early signs, like most contractors, indicate that a slowdown of some sort is coming as our projects are being pushed to later time frames."

Ken Simonson, AGC chief economist, mentioned, "Nonresidential construction has shown stronger growth in the second half of 2022 compared to the second half of 2007. During that time, both single and multifamily residential construction were declining, which likely reduced demand for related retail, street, school, and public safety construction. Demand for other types of nonresidential construction was also slowing."

Barry Wurzel, president of Wurzel Builders, cautioned, "Raising interest rates excessively leads to fewer construction starts. Interest rates are likely to continue rising, and there may be some challenging times ahead over the next six months or more."

Michael Hardman, vice president of Turner & Townsend, noted, "Analysts expect a continued escalation in material prices over the next couple of years."

According to experts, it seems that we are heading towards a downturn that may last a bit longer. However, there are ways to navigate through these difficult times and emerge successfully.

What can a construction company do?

Construction companies can not only survive but also thrive even under challenging economic conditions by employing certain strategies and leveraging their inherent strengths. Here are some factors companies can utilize:

1. Leveraging strengths: Construction companies possess specific expertise and capabilities in managing construction projects. By leveraging their technical know-how, experience, and industry networks, they can position themselves advantageously even during difficult economic times. This may involve focusing on specialized areas of construction, targeting niche markets, or offering unique services that differentiate them from competitors.

2. Controlling costs: Cost control is crucial for any business, including construction companies. By effectively managing expenses, controlling project costs, optimizing resource allocation, and negotiating favorable contracts with suppliers, construction companies can maintain profitability and financial stability. This becomes particularly important during economic downturns when demand may decrease, and margins may tighten.

3. Cultivating worker loyalty: The construction industry heavily relies on skilled labor, and maintaining a loyal and motivated workforce is essential. By investing in employee training and development, providing competitive compensation packages, fostering a positive work environment, and offering growth opportunities, construction companies can attract and retain talented workers. A loyal and skilled workforce contributes to improved productivity, quality construction, and customer satisfaction, helping the company thrive even in challenging economic conditions.

4. Building financial strength: Establishing a strong financial foundation is crucial for construction companies to weather economic downturns. This involves prudent financial management, maintaining sufficient cash reserves, managing debt levels, and diversifying revenue streams. By being financially prepared and having access to capital, construction companies can seize opportunities such as acquiring distressed assets or participating in public infrastructure projects during economic downturns when other companies may struggle.

What can individuals do?

During an economic downturn, construction professionals can take several steps to increase their chances of survival and minimize the impact on their careers. Here are some strategies to consider:

1. Enhance skills and knowledge: Invest in continuous learning and professional development. Acquire new skills, certifications, or qualifications that are in demand in the industry. This improves your marketability and increases the likelihood of securing projects or job opportunities during the downturn.

2. Diversify expertise: Expand your range of expertise to become more versatile in different areas of construction. For example, if you specialize in residential construction, consider developing skills in commercial or industrial projects. Being flexible and adaptable opens up more opportunities during an economic downturn when certain sectors may be more affected than others.

3. Network and collaborate: Build and maintain strong professional networks within the construction industry. Attend industry events, join trade associations, and engage in online communities. Networking can lead to new project leads, partnerships, and referrals, even during a downturn. Collaborating with other professionals or firms on projects can also help mitigate risks and increase the chances of securing work.

4. Maintain client relationships: Nurture relationships with existing clients and keep communication lines open. During an economic downturn, clients may scale back projects or postpone new ones. However, by staying connected and offering value-added services such as cost-saving suggestions or innovative solutions, you can position yourself favorably for future projects when the economic situation improves.

5. Efficient cost management: Effective cost management becomes crucial during challenging economic times. Review your expenses, identify areas for potential savings, negotiate better terms with suppliers, and streamline operations to maximize efficiency. By managing costs effectively, you can maintain profitability and financial stability during the downturn.

6. Maintain financial reserves: Build and maintain a financial cushion to withstand the impact of an economic downturn. During prosperous times, set aside a portion of your earnings as reserves to help sustain your business during lean periods. Adequate cash flow and financial preparedness can provide a buffer against reduced project volume or delayed payments.

In conclusion, it is evident that a slowdown is approaching, potentially leading to a recession that will adversely affect the construction industry through layoffs and reduced work opportunities. However, with proper planning and knowledge, one can navigate through this wave successfully.

We hope this newsletter has provided some insight into the economic uncertainty we are currently experiencing and instilled the courage to keep moving forward.