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Prepare for the Next Downturn


The U.S. economy “has been running hot—very hot,” the consulting firm McKinsey & Company says. Even though GDP contracted 1.6% in the first quarter of 2022 and 0.6% in the second quarter, corporate profits increased 6.1% in the second quarter, the Bureau of Economic Analysis, an agency of the Department of Commerce, says.

    

We are at an interesting juncture in the current business cycle, and McKinsey says it’s time to “shore up defenses and prepare for growth.” But how?



Conflicting Signals

It’s time for “transformational change,” McKinsey says. The last time something big like this happened we entered the Great Recession. But are circumstances the same? No.

    

President Biden recently signed into law the Inflation Reduction Act, a $1 billion package that includes the largest ever investment in sustainable construction. Last year’s Infrastructure Investment and Jobs Act created $1.2 trillion in funding for programs.

    

And business lately has been humming. ConstructConnect in August says the value of construction starts in July jumped 17% year-over-year in current dollars and increased 16% year-to-date for the first seven months of 2022 compared to January–July 2021.

    

Jobs are available; unemployment is low. Employers are offering higher wages. And reports indicate strong, though softening, aggregate demand for goods and services.

    

But, there are concerns. The U.S. Federal Reserve is raising rates to slow down an overheated economy and tame inflation. Most Federal Reserve Bank directors cite persistent supply chain disruptions and other cost pressures across sectors. And media reports suggest a growing number of owners are pulling out of projects over recession fears.

    

What should you do to prepare for the inevitable?



Something’s Coming

The McKinsey article, “Something’s coming: How US companies can build resilience, survive a downturn, and thrive in the next cycle,” has several ideas. It suggests taking three steps.

    

Step One: Establish a core team to digest the economic signals in your market. Have the team identify specific decisions you may have to make. They should figure out “how bad the coming storm might be,” McKinsey says, but also identify opportunities that may require shifts in strategy.

    

Step Two: Preserve your capacity for growth. Do this by raising productivity—the ability of workers to deliver more value per person. Improve your work processes. Invest in construction technologies, and collaborate more efficiently with building partners. In other words, get a grip on how to control costs.

    

Step Three: Make tactical moves best suited to your strategy. Establish small, cross-functional teams and empower them to act. Do more to develop your talent and make their job roles more flexible, which encourages agile decision-making. You could, and probably should, spend more money on collaboration technologies.

    

Many wall and ceiling companies are already pivoting their operations. For example, a leading wall and ceiling company is expanding its prefabrication facility square footage by 50%. Other industry contractors added prefabrication shops or expanded their manufacturing services during the pandemic. A lot is happening.

    

I even see more AWCI member contractors adopting automation technologies. Daley’s Drywall & Taping, Inc. and Nevell Group, Inc., for example, both recently signed multi-machine, multi-year leases with Canvas to independently operate Canvas’s drywall finishing robots on their job sites, according to a published report.



Make Two Bold Moves

McKinsey says the characteristics you need to leverage this business cycle include foresight, responsiveness and the ability to adapt. This is backed by data. The top 20% of companies (as ranked by total shareholder returns during and after the 2008 crisis) outperformed others in the months leading up to the crisis and during it. And they “extended their lead in the years that followed,” McKinsey says.

    

McKinsey’s study of the Great Recession showed that strong companies “reduced their debt by $1 for every $1 of book capital, while others added more than $3 of debt.” Those same companies, McKinsey says, also “cut operating costs by 1% before the downturn, while others expanded costs by the same percentage.”

    

As we advance in this business cycle, a downturn seems likely. You’ll need to adapt and, like strong companies do, clean up the balance sheet and cut costs. Then, invest into the downturn and divest early in the cycle. Some of you will probably do some M&A more so than others.

    

In short, do things differently.



Mark L. Johnson writes for the walls and ceilings industry. He can be reached via linkedin.com/in/markjohnsoncommunications.

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