The anemic U.S. economy has created a tug of war between drywall contractors and the general contractors who hire them. But instead of yanking on a rope, which would be fun and entertaining to watch, they’re tugging on each others’ job contracts and areas of expertise. Sometimes the grab is for both projects and the people who work on them.
Take Poellinger, Inc., a drywall contractor based in La Crosse, Wis. Mike Poellinger, president and general manager, says his estimators are working double-time, and some are burning out. A general contractor in the area recently reprogrammed its business. It now takes on both framing and drywall hanging in addition to general contracting duties. In making that vertical move, the GC hired away one of Poellinger’s top estimators, leaving work for the remaining team of estimators to divide.
“He was with us for more than 20 years and was very successful,” Poellinger says. “But with the market shrinking, he thought he stood a better chance at the GC.”
“He was with us for more than 20 years and was very successful,” Poellinger says. “But with the market shrinking, he thought he stood a better chance at the GC.”
The GC thinks its chance of survival is improved by self-performing the drywall assemblies on projects. Yet, Poellinger keeps bidding for work alongside this GC, who is now a kind of competitor-customer doing basic drywall and, presumably, hiring out the finishing and specialty work.
It illustrates how the economy’s widespread joblessness, tight-fisted banking system, drab housing market, declining tax bases—and the rest of the economic mess you read about day after day—is changing markets coast to coast. Not every change involves a GC beginning to self-perform work. Sometimes it involves drywall firms going head to head by expanding their markets to areas they had never worked in before. At least there’s light at the end of the tunnel.
Anemic GDP
Despite what you may believe, the economy is growing. It’s dismal growth, a mere 1.3 percent annual-rate GDP for the second quarter 2011, according to the Bureau of Economic Analysis. But most economists see 1.5 to 2 percent GDP finishing the year.
“Growth has been very anemic, and as a result we’re not back to our prior peak in GDP,” says Dr. Martin A. Regalia, senior vice president for economic and tax policy and chief economist at the United States Chamber of Commerce.
Economists surveyed in October by The Wall Street Journal predict GDP growth to accelerate to 2.3 percent in 2012 and 2.7 percent in 2013. But, it all hinges on jobs—and how banks, central banks and politicians handle the debt crisis in Europe (see sidebar text and diagram).
“It will not be a straight road to recovery and the daily grind of economic statistics will darken our mood, but there is good reason to be hopeful for the future,” stated Jim Chessen, American Bar Association chief economist in NBA Update, an ABA newsletter.
Real GDP in 2010 increased in 48 states and the District of Columbia, the exceptions being Nevada and Wyoming. Unfortunately, construction spending was not a leading contributor to those gains, although that appears to be changing.
Here are some details:
Jobs. Unemployment remains high. The unemployment rate has exceeded 8 percent since February 2009, the longest stretch of elevated joblessness since monthly records began in 1948, according to Bloomberg Businessweek. It was 9.1 percent in September 2011, the latest figure available at the time of this writing.
Through September, the economy had recovered about 2.09 million of the 8.75 million jobs lost as a result of the 18-month recession that ended in June 2009, Bloomberg Businessweek reports. It’s certainly not enough.
“Commercial construction is probably the hardest hit of anything,” says Mark Billstrom, operations manager, Westin Construction, Bloomington, Minn. “Some would argue that residential construction is harder hit, but in our industry people are glad to be employed.”
Many Americans who would like a full-time job are settling for part-time work instead. They’re counted in the under-employment rate, which hit 16.5 percent in September, the highest reading of the year, Bloomberg Businessweek says.
Still, construction firms added 26,000 jobs in September, the most in seven months, reported USA Today. Construction trailed only health care, professional and business services, and information in the number of jobs created during the month.
Outlook: Job creation is ticking upward, though slowly. An October survey by The Wall Street Journal showed that most economists expect to see only 1.5 million jobs added during the next 12 months. It would be “barely enough to keep up with population growth,” The Journal says. By the end of 2013, the economists still expect an 8.2 percent jobless rate.
Home Sales. Home sales are low but trending upward. They increased in August, even with ongoing tight credit and appraisal problems and regional disruptions created by Hurricane Irene, according to the National Association of Realtors. Monthly gains were seen in all regions of the country.
Total existing-home sales (completed transactions that include single-family, townhomes, condominiums and co-ops) rose 7.7 percent to a seasonally adjusted annual rate of 5.03 million in August from an upwardly revised 4.67 million in July, the latest figures available at press time. It was 18.6 percent higher than the 4.24 million unit level in August 2010.
Yet, economists warn about jumping to conclusions about home sales leading to an upsurge in home starts. While housing inventory has shrunk—a good sign for future building—foreclosures continue to spread, and home prices are dropping. The closely watched S&P/Case-Shiller home-price index came in 5.9 percent lower for the second quarter from a year earlier.
Outlook: “You’ve got a market in the bottoming phase,” Regalia says. “We’re making progress. We’re working through foreclosures, but we’ve still got a long way to go.” Additionally, Reed Construction Data’s Daily Commercial News Online reports that more distressed homeowners are finding a means to avoid foreclose. While this is a good sign, it suggests many will remain in their homes rather than upgrade their housing by buying or building.
Homebuilding. Homebuilding is still in a funk. The National Association of Home Builders/Wells Fargo Housing Index declined in September to 14, the latest figure available at the time of publication. This index averaged 54 in the five years through December 2007, which shows the toll taken by high under-employment, tightened credit markets and expanding foreclosure activity.
According to the U.S. Census Bureau and the Department of Housing and Urban Development, privately-owned housing starts in August were at a seasonally adjusted annual rate of 571,000. This was 5.0 percent below the revised July estimate of 601,000 and 5.8 percent below the August 2010 rate of 606,000.
Good news: permitting. According to the U.S. Census Bureau and the Department of Housing and Urban Development, privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 620,000. This was 3.2 percent above the revised July rate of 601,000 and 7.8 percent above the August 2010 estimate of 575,000.
Outlook: “I’m a little bit optimistic,” Regalia says. “But we’re still a ways away [from a healthy housing market], because the foreclosure process is slow.” He sees acceptable levels of homebuilding reached by the end of 2013.
Overall Construction
The U.S. Census Bureau of the Department of Commerce estimated the value of all put-in-place construction spending during August 2011 at a seasonally adjusted annual rate of $799.1 billion, 0.9 percent above the August 2010 estimate of $791.7 billion. The $799.1 billion breaks out as follows:
Private construction spending (residential single-family and multi-family, lodging, office, commercial, health care and more) was at a seasonally adjusted annual rate of $511.0 billion, up 5.6 percent from the comparable period one year ago.
Public construction spending (residential structures plus non-residential office, commercial, health care, educational and more) was $288.2 billion, down 6.3 percent from the comparable period one year ago.
Overall, during the first eight months of this year, construction spending amounted to $511.4 billion, 3.0 percent below the $527.3 billion for the same period in 2010.
“We’ve seen some initial investments in [non-residential] commercial structures [this year], but that has kind of petered out,” Regalia says. “The slow recovery, the slow growth and the fact that we have significant excess capacity all imply very slow but positive growth on the non-residential side.”
Interestingly, the American Institute of Architect’s Architecture Billings Index turned positive in August after four straight monthly declines. The August ABI score was 51.4, following a weak score of 45.1 in July. The score reflects an increase in demand for design services. (Any score above 50 indicates expansion in billings for commercial and industrial facilities, such as hotels, offices, multifamily dwellings, schools, hospitals, etc.) The AIA says there’s an approximate nine- to 12-month lag time between architecture billings and construction spending.
Outlook: “It looks like we will be seeing signs of improvement in 2013–2014,” says Lee R. Zaretzky, president, Ronsco, Inc. New York, N.Y.
Lending. Banks are caught in a kind of a Catch-22. If people had more jobs and better job security, then there would be a bigger demand for homes. However, few are going to build in overbuilt areas, such as where the foreclosure process is contributing to an excess home supply.
What’s more, borrowing standards are strict. Some economists say that a 20 percent down payment is a current requirement. Banks, they say, want to see more equity in mortgage transactions because they’re unsure about the stability of home prices. Of course, this varies by region and by market. But overall, banks are not pushing to make more loans.
Outlook: “You’re going to have development loans that are more risky than the mortgages themselves, and I just don’t see the banks jumping back into it in any great way over the next year,” Regalia says.
Income. Household incomes are down. According to Census Bureau data, from 2000 to 2010 median income in the United States declined 7 percent after adjusting for inflation.
The Wall Street Journal called it the worst 10-year performance in records dating to 1967. The paper showed a photo of people in front of a Family Dollar store in Memphis, Tenn., standing in a line to receive free products. No wonder an August survey showed consumer confidence hitting its lowest level in 31 years, according to the Associated Press.
Outlook: The income ground Americans have lost is not expected to be recovered for another 10 years—in 2021, according to The Wall Street Journal.
What to Do
Whereas many economists expected a larger GDP uptick this year, various economic shocks impinged on that growth, although they’ve since abated. The Arab uprisings and oil price spikes have moderated. The tsunami that slammed Japan and derailed the supply chain has improved. The United States handled hurricanes Irene and Lee. It could have been worse for the U.S. GDP, which continues to pickup modestly.
“On the down side you’ve got the European debt crisis, which is the number one, two and three factor affecting growth,” Regalia says.
The above analysis means the economy is heading in the right direction with some worry over Europe. Economists at Morgan Stanley and Bank of America Merill Lynch peg the probability of a double-dip recession, a return to contraction, at one chance in three. Regalia’s odds are slightly higher: a 40-percent chance of double-dip recession.
So, the odds favor developing your business now. Here are a few ideas:
Expand your trading area. “We are in seven markets, so if a project in one market is not our cup of tea we’ll pass on it,” says John Rapaport, director of operations, Component Assembly Systems, Inc., Pelham, N.Y. “A lot of subs are just in one market. They have to take every job just to keep the doors open.”
Focus on business basics. “We’ve put more emphasis lately on the seriousness of meeting goals,” says Craig Daley, president of Daley’s Drywall & Taping in Campbell, Calif. “The profit margins are not there, so we have to explain [to our crews] that there’s no slack like there might have been at one time.”
Balance quantity versus quality. “We’ve lost regular customers to people from outside [our market] who came in for less. It’s forced us to run leaner,” Poellinger says. “You never want to jeopardize quality, but you start looking at doing things differently, and maybe carving out more work that you don’t ordinarily perform, so you can cover your overhead.”
Really, the take-away from this year’s economic outlook report is about focusing on market share. Production is important so that crews can be ready to take on the next job. Finding ways to self-perform work, forming joint ventures and hiring beyond your normal trading area are all growing in popularity.
“We’re traveling farther than the past, hiring people in those markets and finding them to be very motivated. They want to stay on with us,” Poellinger says. “We did a project 30 miles away and hired right out of that locale. These guys came raring to go, and they’re still working for us.”
Mark L. Johnson is an industry writer and marketing communications consultant.
