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July 1, 2009

THE RECESSION’S OVER

*This may not apply in your area.

Remember, you read it here first: The recession ended on March 31. At least, that day ended the last quarter of declining real gross domestic product. Many people mark the onset of a recession by a twoquarter drop in inflation-adjusted GDP; conversely some think any upturn means the bottom is behind us.

The reality is a bit more complex. The “official” determination of business cycle peaks and troughs is made by a committee of academics appointed by the not-for-profit National Bureau of Economic Research. The panel considers several variables and pinpoints turning points to a specific month, not to a quarterly measure such as real GDP. The committee waits many months to make a call, to be sure that it has sufficiently complete data and has not been fooled by a false rebound.

Nevertheless, there are several reasons to believe the worst is over for the economy as a whole. On April 1, workers began taking home a bit more of their paychecks, as withholding was reduced by the American Recovery and Reinvestment Act, also known as the stimulus bill. Unemployment benefits were increased, with expanded and lengthened eligibility. A variety of other provisions added to disposable income, which should lead to an increase in consumer spending, the largest component of GDP. The stimulus bill also is boosting federal purchases of goods and services and is helping state and local governments avoid some of their spending cuts.

In other areas of the economy, for construction companies and their suppliers, for example, the recovery will be extremely uneven in timing and degree. Highway contractors are already benefiting from a trickle of new projects, funded by the stimulus bill. President Obama announced on April 13 that 2,000 projects had been awarded in the first eight weeks after he signed the bill, and states already had identified at least $8 billion worth of projects, with many more bid lettings or actual contract awards to come in the near future. Other federal, state and local agencies have been moving to quickly award the various pieces of the stimulus funds for which they are responsible.

The Associated General Contractors of America created a Web site, www.agc.org/stimulus, that lists 61 separate programs with $135 billion or more in construction-related funds. Most of this money must be obligated—committed to specific projects—by Sept. 30, 2010. That will mean a further boost for public construction, which currently totals around $300 billion per year.

The money will show up in four broad categories: transportation; building construction; technology and energy; and water and environment.

Transportation funding accounts for about $48 billion:

  • $27.5 billion for highways and bridges
  • $8.4 billion for transit
  • $8 billion for high-speed rail
  • More than $1 billion each for Amtrak and airports.

Funds for building construction total $30 billion or more, depending how much of the $8.8 billion of discretionary funds at governors’ disposal winds up in construction.

  • The Defense Department will award $7 billion for military bases and housing.
  • The General Services Administration has $5.6 billion to spend on civilian federal buildings, with another $9 billion available from other civilian agencies.
  • More than $8 billion will go to community development and housing programs.

Technology and energy also receive nearly $30 billion:

  • $11 billion to build a “smart grid”
  • $7 billion to enhance broadband and wireless access to unserved and underserved areas
  • $6 billion for energy conservation and alternative energy
  • More than $5 billion for weatherization.

The smallest category, water and environment, receives some $21 billion, a huge percentage increase, which includes:

  • $7.4 billion for clean water and wastewater programs
  • $6 billion for cleanup of nuclear research and weapons production sites
  • $5 billion for the U.S. Army Corps of Engineers.

 

DRY TIMES, WITH BRIGHT SPOTS

Private and state or locally funded construction are in for a rough year, or longer. Demand and credit have dried up for developerfinanced projects, such as office, retail, warehouse, hotels and multifamily construction. Hospitals, universities and colleges have deferred long-term construction as their endowments and capital campaigns have incurred investment losses. Manufacturing construction, the strongest category in 2008, will sag as factories remain far below capacity. State and local governments, pinched by falling revenues and balanced-budget strictures, will often find it easier to cut new construction than to lay off workers in existing buildings.

The only bright spots in construction, aside from stimulus, appear to be in power and military work. Power construction includes conventional power plants, transmission lines and wind farms. Military projects center on bases that are receiving upgrades under the recommendations of the Base Realignment and Closure Commission. Unfortunately both these categories are relatively specialized and unsuitable for many contractors.

The scarcity of most types of projects, plus the global economic slowdown, make this an ideal time to hunt for bargains on construction, for the time being. Many public agencies are reporting bids 10% to 30% below expected levels. For once, prices for numerous materials are well below last summer’s levels. Projects that used to draw two or three bidders are attracting 20, 30 or more. Even labor costs are going up less rapidly. As a result, some states will be able to award more stimulus projects than initially expected, which will add further to demand for steel and other materials.

Ken Simonson is chief economist for the Associated General Contractors of America in Arlington, Virginia.