Given the performance of the financial markets, which have generated devastating losses since the peak of share prices in October 2007, the U.S. economy appears to be in recession—and the worst may be yet to come.
Banks and other lenders continue to maintain tight credit standards despite monumental efforts by the U.S. Treasury and the Federal Reserve to re-open the lending spigot. To keep this financial crisis from spiraling out of control, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke sat down with congressional leaders on Sept. 18. The outcome of the meetings was a proposal to purchase up to $700 billion of troubled assets from financial institutions to promote market stability.
Effect on Construction
Taxpayers are hoping the money the government provides to the U.S. banking system will be lent back to Main Street, but for now, that is not happening. Banks and other lenders continue to maintain tight lending standards not only for consumers, but for businesses, too. As data characterizing the economy increasingly reflects deeper deterioration, bankers appear less willing to use the government’s money to lend to Main Street and more keen on acquiring financial assets at a discount.
Construction increasingly feels the impact of these tighter lending standards. In the Federal Reserve’s quarterly survey of bank loan officers for January 2008, 80 percent of respondents reported they had tightened standards on commercial real estate loans. By July, that figure stood at 81 percent, and that was before the financial meltdown of September and October.
Many nonresidential builders might respond to predictions of a deep downturn as overblown and unlikely. After all, private nonresidential construction spending has held up quite well through the nation’s housing downturn and subsequent financial crisis. According to the U.S. Census Bureau, private nonresidential construction spending totaled $415.95 billion in August, which, despite being down slightly from July levels, was still 13 percent higher than the level of construction recorded in August 2007.
Skepticism regarding downbeat outlooks is common during times like these because many commercial construction segments lag the overall economy by as much as two years, with the implication that commercial contractors will be impacted by the financial freeze in 2009 and beyond. Today’s level of activity largely reflects the economy as it was before the credit crunch, when projects were planned and financed more easily for global and domestic investors alike. By implication, the longer the credit crunch remains in place, the deeper and more protracted the downturn in nonresidential construction will be.
Additional Complications
This spreading global malaise as a result of the credit crisis is perhaps most clearly reflected in declining asset prices around the world. As a prime example, oil prices have been sliced by more than half, and a myriad of other commodities prices have plummeted, including metals like aluminum, copper and nickel, which have declined by a third or more in price.
All things being equal, this seems like good news, particularly for contractors that have been pummeled by rising construction materials costs for years. But all things are not equal. Prices are falling largely because the outlook for the global economy has become so dire. For the United States, this means the one sector of the economy that has been expanding without direct government assistance—exports—will no longer drive economic growth as it did during the initial months of 2008.
On top of that, many state and local governments are in desperate fiscal shape due to slowing income, retail, property, recordation and other tax collections. This has jeopardized many publicly financed projects, including road and bridge improvements, schools and government buildings. Because states often take years to recover fiscally, it is likely the pace of publicly financed construction may be hamstrung for years to come. Recent examples include cancelled courthouse and school projects in Wake County, N.C., and the Maine Department of Education delaying issuing bonds to finance 12 school construction projects by six months.
Outlook for Recovery
One of the critical questions entering 2009 is what incoming President Barack Obama and Congress will do during the first 100 days and beyond. Many policymakers have identified deregulation or a lack of regulation as the primary culprit behind the financial crisis of 2008, which means more regulation of the nation’s banking system is on the way. If this regulatory redress goes too far, the recovery from this period may not be as brisk as many contractors want.
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Friday, September 3, 2010