16 minute read
Pandemic and the Supply Chain
Pandemic Shocks Supply FROM ALL SYSTEMS GO TO A DEEP RECESSION IN ONE MONTH
BY: ANIRBAN BASU, ABC’S CHIEF ECONOMIST
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Reprinted from Construction Executive,Tuesday, May 12, 2020, a publication of Associated Builders and Contractors. Copyright 2020. All rights reserved.
The first reported case of COVID-19 occurred in China in November 2019. At that time, the U.S. economy was humming, supporting a 50-year low in unemployment and approaching 2020 with what appeared to be irresistible force. Worker and skills shortages were impacting many industries, including construction, driving wages higher in conjunction with a growing number of companies, states and municipalities raising minimum wages for a variety of reasons. The result was a consumer spending cycle that foretold of no immediate end. Rising home prices and a booming stock market intensified the spending power of economic actors and their confidence in the future, resulting in additional economic momentum. As if that were not enough, inflation and interest rates remained low, albeit steady, amid the lengthiest expansion in American history, keeping the cost of capital low. From the perspective of fomenting demand for the delivery of construction services, this represented a nearly perfect environment. Economists who had been predicting recession because of a set of emerging vulnerabilities (e.g., massive indebtedness at household and corporate levels, lofty asset prices) began to doubt their own projections. America’s economic expansion appeared indefatigable.
RECENT HISTORY: A SHOCK TO DEMAND
In an attempt to better understand the economic implications of the ongoing crisis, many people have attempted comparisons between the current period and other periods of economic distress. The most popular comparison appears to be with the 2007-2009 recession. Here’s what happened. Following the economic recovery after the 2001 recession—combined with low mortgage rates and demographics—created a demand for housing. Home prices drifted higher, inducing many renters to pursue homeownership in an attempt to participate in the rally. This produced further home price increases in much of the nation.
Mortgage bankers, seeing an opportunity to generate income for their financial institutions, began expanding their lending. Because associated loans are backed by collateral (the American home), and because that collateral
was becoming more valuable, perceived risk appeared low. But to continue to make loans in large numbers and to generate the requisite levels of liquidity, bankers needed new sources of funds. Those making mortgages looked to Wall Street to package mortgages together, securitize them and sell them to investors in the form of collateralized mortgage-backed securities. As previously made mortgages were sold off in large amounts, the resulting proceeds could be used to fund the next series of mortgages.
Major ratings agencies looked favorably upon these mortgage-backed securities, giving them a thumbs up. As if that were not enough, investors were able to buy insurance against default in the form of credit default swaps. This appeared to be a perfect setup, with more individuals participating in the American dream, investors safely earning returns and mortgage bankers, insurers, title companies, realtors and others earning large fees and commissions in the process.
This was also a phenomenal period for construction firms, as commercial construction followed residential development. The problem was that some people were allocated mortgages they could not hope to repay. By late2005 and into 2006, more Americans were missing their payments.
Predictably, credit began to dry up as lenders sought to avoid additional defaults and delinquencies. Suddenly,
there was a dearth of buyers. Home prices began to decline, and with it the collateral available to back loans. Major investment banks found themselves on the brink of catastrophe.
By September 2008, financial markets were crashing, unemployment was skyrocketing and the construction backlog began to dry up. The fundamental problem was that the financial system and broader economy were drained of liquidity and capital. The money disappeared. The global financial crisis that began when Lehman Brothers faltered on Sept. 15, 2009, produced a shock to demand.
In response, the Federal Reserve and the Treasury Department identified various mechanisms by which to pump money back into the economy (e.g. quantitative easing, TARP), and that ultimately helped to fashion the lengthiest economic expansion in American history.
2020: A SHOCK TO SUPPLY
While it is true that the economic dislocations suffered during that period were massive, including for construction firms, the current period defies comparison.
This time is truly different from all others in that America is now experiencing a supply shock. The economy went from the equivalent of 60 to 0 in the blink of an eye as social distancing directives permeated the nation, first and foremost in major employment centers on the East and West coasts.
After three rounds of stimulus help, the latest being Phase 3 of the CARES Act which includes $2.2 trillion in federal aid, even stimuli of this magnitude cannot hope to significantly contain the near-crisis. That’s because a stimulus helps the payments side of the economy, but it doesn’t position Americans to go back to work and begin adding to gross domestic product. Thus, despite the stimuli, U.S. unemployment is headed toward 20% and the second quarter GDP is set to decline in the range of 25% on an annualized basis, perhaps more.
Normally, construction backlog helps shield contractors from the early stages of economic downturn. Nonresidential construction is among the last economic segments to enter recession for this reason, as contractors toil on projects initiated before the downturn began. Here, too, this factor is different. Social distancing directives have impacted contractors in parts of Pennsylvania, Massachusetts, California and elsewhere. Projects are being postponed or even canceled in large numbers, as would-be purchasers of construction services strive to preserve their own liquidity. Consequently, backlog is not the shield that it normally is, and it is shrinking rapidly.
To try to understand the magnitude of the crisis, economists and other observers have been fixated on weekly initial unemployment claims. The frequency of this data is assistive because monthly and quarterly data have, thus far, failed to capture much of the damage done to the U.S. economy.
In the final two weeks of March, more than 10 million people filed a claim for unemployment benefits. Over the first three weeks of April, another 16 million filed a claim. Moreover, many others tried, but failed due to overwhelmed computer systems and bureaucracies. To put this into perspective, these 26 million claims were more than the previous 10 years combined. When the official jobs numbers were released in early April, the economy had lost 701,000 jobs on net, while the unemployment rate rose from 3.5% to 4.4%.
Much like the balance of the economy, the construction sector experienced a loss of jobs in March, losing 29,000 jobs on net. This was the most significant loss registered since February 2019 when wintry weather undid the industry’s momentum, albeit only briefly.
This time, weather played no role in fomenting job loss. What’s more, a near-term turnaround is not in the offing. If anything, matters are set to further deteriorate as commercial construction activity grinds to a halt and as state and local governments watch finances crash.
While certain construction segments will experience a jolt of activity during the foreseeable future, including fulfillment centers, medical facilities and data centers, most construction segments will experience decline, including office, lodging and retail segments.
According to the most recently available data, the construction unemployment rate stands at 6.9%—1.7% percent higher than at the same time one year earlier. The industry’s unemployment will climb rapidly during the months ahead, providing contractors with an opportunity (at least theoretically) to more easily recruit highly competent personnel. Construction wages are also less likely to rise rapidly given the significant dislocations of
construction workers in much of the nation.
LOOKING AHEAD
While the initial stage of recovery from the current downturn will be sharp as people return to work and the economic engine restarts, it will also be incomplete. Complete recovery from the recession will likely take years.
One of the reasons for this is that state and local government budgets are now under severe pressure. With retail sales, hotel and income tax revenues declining, many state and local governments are now experiencing the emergence of massive gaps in their budgets; budgets that must be balanced each fiscal year. There will also be many empty storefronts, fewer occupied apartments and office suites, as well as a diminished tally of employers available to jobseekers once the pandemic has passed.
The good news is that more stimuli is on the way. As of the end of April, there have been four stimulus bills passed by Congress. Phase 1 was an $8.3 billion bill in support of coronavirus vaccine research and development; Phase 2 was a roughly $104 billion package focusing on supplying paid emergency sick leave for some workers; and Phase 3 is the $2.2 trillion stimulus. Phase 4 includes another $484 billion deal that includes $321 billion to replenish the small business Paycheck Protection Program, which allocates $11 billion in administrative costs for the program. A fifth package, one focused on investments in infrastructure, also seems probable.
The hope is that the federal government will supply additional support to state and local governments. With interest rates so low, it actually is a good time for the federal government to float Treasuries. Failing that, the recovery to come is likely to be considerably weaker than forecasted, in part because shrinking state and local government outlays would undermine the expansion in the private sector.
Everything that we do is based on our performance;
it’s our namesake and our crowning jewel. We hang our hat on a
good, safe day’s work and our ability to execute jobs at the highest
level. By raising the bar and driving the standard of our industry
forward, we’ve made a career out of changing what it means to be
an industrial contractor.
YOUNG PROFESSIONALS GROUP UPDATE “IF YOU’RE NOT AT THE DINNER TABLE, YOU’RE THE DINNER”
BY: KATIE ROUTH, DIRECTOR OF ADMINISTRATION MAY 20, BATON ROUGE We recently kicked off a webinar series for ABC Pelican Young Professionals titled “Back to Work – The New Normal” to keep the group informed as we transition to our new realities. Because one of our mantras at ABC is “Get into Politics or Get Out of Business,” we held the first webinar halfway through the first regular Louisiana legislative session so that the group could hear the latest on economic recovery efforts from local lawmakers. About 40 ABC Pelican and ABC Bayou Young Professionals participated in this initial webinar.
We were fortunate that three Louisiana lawmakers, Julie Emerson, Scott McKnight and Richard Nelson took the
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YOUNG PROFESSIONALS GROUP UPDATE continued time to give the group a legislative update while at the Emerson said. In addition to tort reform, Emerson Louisiana State Capitol during such a busy session. has a passion for deregulation and licensing reform. From tort reform to capital outlay to state revenue to This session, Emerson was focused on bills regarding the construction budget to special sessions, our YPs licensing fees so that it is easier for folks to enter the learned how these lawmakers are fighting for free workforce. “This didn’t make it pass committee, but enterprise and our businesses. we’ll try again next year.”
After a brief welcome and overview of the webinar, each lawmaker gave a brief introduction. Julie Emerson, a state representative for Lafayette and St. Landry, has been serving since 2015 and also owns a public relations business called Lagniappe Communication.
ABC Pelican’s very own Scott McKnight, 2020 Board member, is an East Baton Rouge Representative and won his campaign this past fall. “I feel like I’m fighting an uphill battle sometimes,” said Emerson. “Sometimes it takes 12 years to pass good legislation and 12 seconds to pass bad legislation.”
McKnight said that this session has been a little fast, so lawmakers have had to pull nonessential bills.
“We are in an extremely different session than what is standard, but as a newbie, I don’t know the difference,” McKnight said during introductions.
St. Tammany Representative Richard Nelson grew up in Mandeville and spent seven years as a Foreign Service Officer for the State Department. Nelson then worked for project management consultants firm when he returned home.
After introductions, we posed these timely questions about legislative topics these three lawmakers were tackling daily.
Question: What bills are you passionate about?
“Tort reform has been on our minds for about 40 years, so longer than some of us have been alive,” McKnight was pleased that one of his bills went through Education Committee that helps share data amongst local entities to help the JumpStart Program.
Question: Why do you think it’s important for the younger generation to get politically involved?
McKnight was quick to answer this question with ABC’s tried and true motto of “you get into politics or get out of business.” He then went on to say the wise words of his father: “If you’re not at the dinner table, you’re the dinner.”
Nelson explained to the YPs that “we look at things through a different lens than our parents or grandparents did” and that the younger generation is much more willing to take chances and make mistakes. “It’s already broken, and we cannot do any worse than we already are…so let’s try to make it better,” Nelson said bluntly.
Question: What bills are being put forward to increase state revenue?
Nelson touched on the legalization of sports betting and how we could anticipate that it would be on the
YOUNG PROFESSIONALS GROUP UPDATE continued ballot in November. McKnight discussed lawmakers’ Pelican and ABC Bayou provided updates. efforts to get relief to our existing business lines. John Freeman of Brown & Root is the 2020 YP “But what I’m seeing is more in the cut process instead Chair for ABC Pelican. He discussed the volunteer of adding to the new lines of revenue,” McKnight said. opportunities for Workforce Feeding Frontlines, encouraged the group to join the ABC Pelican YP Question: Can you discuss the recent push for tax LinkedIn Group Page and encouraged ideas for cuts for the oil and gas industry? upcoming YP webinars.
Emerson’s family works in this industry and “it’s hard,” she explained. “The label of this bill looks bad, but these are people’s jobs, especially in my district. They are going to lose their jobs if we don’t revitalize the industry.” Emerson went on to say that we have 25 percent unemployment in the state right now and “we must look for ways to recover.”
“The more we can do to get this industry online, the more trickle down we will see to different sectors,” said McKnight as a follow up to Emerson’s thoughts.
Question: What are the chances the recently cut construction budget gets reinstated?
“Capital outlay is always an interesting topic, and an important aspect of bringing business here,” discussed Emerson. “Investing in infrastructure is a great way to bring businesses and jobs here. We’re not in the best shape for recovery and there will be cuts across the board, so a robust capital outlay during this session looks pretty slim at this point.”
Question: Are we going to have one or possibly two special sessions this year?
Emerson, who is no stranger to special sessions, said “it’s hard for us to estimate where the budget will be, but nothing has been called yet. Since this session has been so short, it’ll be hard to get the full budget out… we may get a preliminary budget out. So, I anticipate we’ll have a first special session for the budget and may do a second special session in the Fall.”
Agreeing with Emerson, McKnight said that “this session doesn’t give us enough time.” “We want to keep this webinar series going,” said Freeman. “Whether it be topics on local businesses and different industries or hearing directly from the heads of ABC Member companies, let me know if you have ideas.”
Chad Pierce of EXCEL Group is the ABC Bayou Chair for 2020. He thanks ABC Pelican for inviting the Bayou YPs to join and encouraged them to participate in their upcoming fundraiser for the Second Harvest Food Group.
Thanks to all who tune in for the webinar. We’re looking forward to broadcasting more of these in the future!
National Safety Excellence Awards ABC PELICAN MEMBERS ARE LEADING THE INDUSTRY IN SAFETY PERFORMANCE
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Nine ABC Pelican contractors are leading this industry in safety performance, and those tireless efforts were recently recognized by ABC National.
While safety is in the DNA of each and every one of our members, we would like to personally congratulate these nine contractors for receiving a 2019 National Safety Excellence Award:
PINNACLE:
Primoris Services Corporation Starcon
EXCELLENCE:
Austin Industrial Brown & Root Industrial Services Cajun Industries GROUP Industries Merit Electrical Turner Industries
MERIT:
Barriere Construction
These ABC Pelican Members are nine of the 49 winners that will be honored with a National Safety Excellence Award, which will be presented at the 30th annual Excellence in Construction® Awards during ABC Convention 2020 in Nashville, Tennessee, on August 18.
“Associated Builders and Contractors is proud to recognize industry leaders consistently raising the standards of safety in the construction industry,” said 2020 ABC National Chair Tim Keating. “Their dedication to worldclass safety performance and commitment to total human health is the gold standard of the merit shop construction industry.”
The 2019 National Safety Excellence Award winners were selected from ABC member firms that achieved Diamond, Platinum and Gold status in ABC’s STEP Safety Management System in 2019. During the selection process, contractors were judged on self-evaluation scores, lost workday case rates, total recordable incident rates, leading indicator use, process and program innovations, and video interviews conducted by members of ABC’s National Safety and Health Committee.
The National Safety Excellence Awards are presented in three major North American Industry Classification System code categories: NAICS 236 – Construction of Buildings; NAICS 237 – Heavy and Civil Engineering Construction; and NAICS 238 – Specialty Trade Contractors. STEP, the standard for developing world-class safety management systems in construction, is designed to help both large and small contractors evaluate every aspect of their corporate safety and health programs and identify opportunities for improvement. According to ABC’s annual Safety Performance Report, the average STEP Diamond company is more than eight times safer than the U.S. Bureau of Labor Statistics’ average for the entire industry based on their total recordable incident rate.
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