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Recession & Recovery

The Silver Lining Is...We’ve Been Here Before

A glance at past recessions gives us good reasons to be optimistic today.

By Charles Linn, FAIA

The U.S. construction industry is so intertwined with the well-being of the economy as a whole that even a hiccup in one can quickly cause nausea in the other. Consider that in 2006 there were $689 billion worth of construction starts. By the end of last year, that number dropped by $134 billion. When so much money is pulled off the table, the repercussions bounce around the globe. Architects make up a tiny part of this massive food chain, but that doesn’t matter if you have been laid off, are laying people off, or know people who are.

But one could think of today’s recession and the three that preceded it (1980–82, 1989–93, and 2000–02) as descendents of the crisis of 1973–75. Then, OPEC’s quadrupling of oil prices, the cost of the Viet Nam war, and high inflation drove the economy into its most severe recession since the Depression. (View key figures from past recessions) These periods of economic crisis share familial characteristics. By parsing their DNA and finding the traits they share, one may be surprised to find there are reasons to be optimistic now.

Interest rates, inflation, commodity and fuel prices are very low right now. These indicators usually track together. The recession of the early 1980s is the classic example of how high inflation and interest rates can bring the economy to its knees. In an attempt to stop inflation, which was over 10 percent for three years running, in 1981 the Federal Reserve took the radical, unprecedented step of raising interest rates to over 19 percent, basically forcing the economy into a coma. But, inflation quickly dropped to near 6.5 percent in 1982, and as measures such as tax cuts and deregulation of the banking industry occurred, the economy began to come back. Today’s low interest rates and low inflation will help construction recover when the current credit crunch eases. Severe building materials price increases as well as shortages bankrupted many contractors in the early 1970s. And, similarly, the run-up of building material and fuel costs in the years prior to the current recession were already a drag on construction. This time around, their near-collapse will help make recovery construction affordable.

The government is intervening (for better or worse). Although the Treasury Department has never bought worthless mortgages or stock in investment banks before, we do know a few things that don’t work. Wage and price controls don’t work. Deregulation, which allowed the savings-and-loan industry to invest in risky and downright fraudulent development deals in the 1980s, does not work. The idea that companies will police themselves because it is in their best interest to do so was proved to be incorrect both in recent years and when those thrifts were blowing themselves up in the 1980s. Government-funded public projects greatly helped architects and contractors in the 1930s, and seem like one of the best options available today.

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Operation Iraqi Freedom is finally winding down. Conflict hurts the domestic economy. The Iran-Iraq War, Iraq’s invasion of Kuwait, and the aftereffects of the destruction of the World Trade Center all made bad economic conditions worse, creating oil-price spikes, damaging consumer confidence, and driving down the Dow. Money that could have been used to fund public projects on American soil during the last two wars with Iraq went overseas. The current war is estimated to have cost $600 billion so far and contributed greatly to our deficit spending. Funding for the recovery will still have to be borrowed, but what is loaned to us will be spent at home–at least it will if the war in Afghanistan does not get out of control.

Once a recovery begins, construction employment picks up very quickly. In the two years after the recessions of the early 1980s and 1990s, 650,000 and 570,000 construction workers, respectively, went back to work. One difference is that those recoveries started with home building, which usually picks up before commercial work. Although there is now a glut of housing in parts of the country, the tax credit for first-time home buyers that has just been signed into law will help. And, as baby boomers turning 30 helped the 1980s recovery, echo boomers started hitting the Big 3-0 last year. As these thirty-somethings move into new housing, they will need all of the civic and service buildings it takes to create communities. Furthermore, this recession has a new wrinkle that none have had since the 19th century: immigrants in pursuit of the American Dream are savers and they buy houses. They are now a major force in the residential market, and they will continue to drive it upward.

When recessions pare workforces, and clients want to get more for their money, firms that aggressively adopt ideas and technologies that enable efficiency gain lasting advantages. The IBM PC was introduced late in 1981, for example, and AutoCAD 1.0 was released a year later. In the 1990s recession, CAD stopped being a novelty flaunted by top firms in their marketing brochures and became ubiquitous. Soon email and Web sites gave early adopters an advantage. This time, architects who embrace integrated project delivery, building information modeling, and hone their green design capabilities will be winners when the recovery occurs.

Mergers, acquisitions, and bankruptcies also come with every recession. But each one is unique, and what happens this time may surprise us.

 

Data: McGraw-Hill Construction, Bureau of the Census, Bureau of Labor Statistics

 

 

 

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In McGraw-Hill Construction’s Economic Stimulus Plan special section: Browse comprehensive resources related to the U.S. economic stimulus plan and read additional coverage from BusinessWeek, ENR, and other publications.
McGraw-Hill Construction

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