Are we there yet?
09:16:26 AM on 07/07/2010
Or to frame it in the context of the nonresidential construction market, are we at the bottom of the cycle yet?
Well, not quite yet.
By common consensus, the steepest economic recession since the Great Depression is over. But does it imply that the nonresidential construction market will inevitably follow suit? And more importantly, when will the market be back on the growth track again?
Let us address the first question above. A cursory glance at the past five cycles in nonresidential construction, stretching back to 1970s, shows that the market rebounds rather quickly (with a customary lag) following the general economic recovery after a recession. But this time around could be different. And the difference could be partially attributed to the nature of the current economic recovery.
The overall economic recovery ambles along without much conviction. The growth in output we cheered along during the fourth quarter of 2009 and the first half of 2010 seems to be running out of steam. The primary drivers of this growth were inventory restocking and the stimulus programs launched over the past year and a half. Now that the inventories have been replenished and the stimulus programs are winding down, other drivers need to come into play to maintain the momentum.
With foreclosure rates forecasted to be greater in 2010 than in 2009, the housing market recovery is anything but stable. Consumer spending, another potential growth driver, picked up during the first few months of the year but in the absence of associated income growth is unlikely to sustain. And with the high rate of unemployment persisting, consumers will be hard-pressed to rebuild their depleted balance sheets while simultaneously continuing to spend.
This palpable uncertainty over the economic recovery is reflected in the lead indicators of nonresidential construction like contracts awarded data and the architecture billings index. Both of these indicators have recovered from the precipitous decline rates of 2009 but have stagnated over the past few months. The good news is that nonresidential construction spending is expected to find steady footing by the year’s end following two years of freefall. The bad news is that there is no indication yet of a V-shaped recovery, a pattern that was predominant in the past cycles.
Although we are not quite there yet, we now have a fair idea about the bottom of the nonresidential construction cycle. Since we have been concentrating hard on getting a glimpse of the bottom we have not had the time to fathom how or when we are likely to climb out of this pit once we have reached the bottom. What do you think? Let me know your thoughts on the current state of the market and when you predict recovery. And, for more on what might lie in store for the nonresidential construction market, stay tuned for my next blog post later this month.