Better Days Ahead, as 'Great Recession' Fades

Jan. 1, 2011
Leading economic forecasters predict good economic growth over the next 12 to 18 months.

Contractors who have been waiting and hoping for some good news about the economy can begin to take heart: the wait is almost over, according to economist Jeff Thredgold, president of Thredgold Economic Associates, Clearfield, UT, a professional speaking and economic consulting company. He served 23 years with KeyCorp, one of the nation’s largest financial services companies, as senior vice president and chief economist.

Thredgold says that what is now being called "The Great Recession" is officially over — statistically if not emotionally. The recession technically ended in the third quarter of 2009, after a run of 18 months, with a peak-to-trough contraction of gross domestic product of 4.1% and a loss of more than 7 million jobs. However, the economy has returned to growth (albeit slow), and a growing economy is what portends better days ahead.

"The thing that helps all of our respective communities and businesses is when the economy is growing versus declining," Thredgold says. "We've been through an incredibly tough two-and-a-half year period, but both the U.S. and global economies have returned to growth. Roughly 25 states have added jobs the last 12 months, after every one of them got hit with recession. So you will see the numbers getting better across the country. The job growth numbers are getting better, we think home prices will stabilize around the middle of next year, state and local tax revenues will improve, business conditions will improve, and consumer confidence numbers will rise both nationally and in their respective communities."

The bottom line for contractors? "If you've been hanging on for the past couple of years, doing all the things you're supposed to do to control your costs, and making smart decisions while waiting for customers to come in the door they will," Thredgold says. "It's not going to be boom conditions, but it will get better."

Thredgold points out that economic predictions for the future are often divided into two camps: very positive and very negative. On the negative side are economists who say that the country is destined in 2011 to slide right back into a so-called "double-dip" recession. More optimistic economists point out that never since the Great Depression has the economy come down violently without turning around and going back strongly the other way. The reality, he said, will probably be somewhere in the middle.

Hoping for Up to 2.5% Growth
"There are still issues with home prices, the price of commercial real estate, and the ability to finance either one. There are also issues with still near double-digit unemployment and our anxiety as consumers, as parents, as grandparents, about the terrific deficit. But our best guess right now is economic growth running at 2 to 2.5% after inflation over the next 12 to 18 months," Thredgold says.

New employment data continues to be disappointing, but employment tends to be a lagging indicator of the economy. Although there have been good gains in private sector job growth — about 850,000 jobs in the first nine months of 2009— the economy needs to add about 130,000 net new jobs every month just to meet the needs of a rising population and a rising labor force. "It takes that many new jobs just to keep the unemployment rate where it is," according to Thredgold.

"We expect the unemployment rate at the end of next year to be around 9% and it may take us five or six years to get back to the kind of levels that we would consider acceptable levels of unemployment in this country," Thredgold says. "However, a high unemployment rate presents an opportunity: when the unemployment rate is around 10%, enormously talented people have been displaced and you have an excellent selection of quality people who are looking for work. So now is a good time to look to strengthen your team and improve the quality of people you employ."

Finally, Thredgold says it's important to have faith in the economy. "You are part of one of the most powerful, flexible, innovative, dynamic, and imaginative economies in the world," Thredgold said. "There are many people — your competitors — who are still hiding under the mattress waiting for whatever tragedy is coming next. They're making no positive decisions. Be optimistic and take a more positive approach. Be proactive and expect to see gradual improvements in the economy."

Jeff Thredgold can be reached at 801/614-0403, or by e-mail at [email protected].

THE RESIDENTIAL HVAC MARKET: Not heavenly, but no longer hellish
By Ken Simonson

The long-awaited upturn in residential markets should finally arrive in 2011. Multifamily rental properties should do especially well. Gains for single-family housing are less certain. And the improvement will not reach all regions of the country.

The major driver for both multifamily and single-family markets will be employment. Despite a stubbornly high unemployment rate and intermittent overall job increases in 2010, private-sector employment expanded in every month from January through November—a cumulative rise of 1.1 million private jobs. Businesses continue to act cautiously about hiring, but sales and earnings have been rising at an accelerating rate in many industries. That suggests the hiring tempo will pick up in 2011.

Many of the hires will be recent graduates who have had to live with their parents or roommates. As their income increases, they will be ready to rent on their own. Already, many markets have seen small drops in rental vacancies and increases in effective rents. As these trends gain momentum in the new year, multifamily construction will kick in.

Single-family housing should also be helped as well by rising employment. Consumers have increased their savings rates and reduced their debt substantially since 2008, meaning more households now qualify for mortgages. Meanwhile, mortgage rates remain low, although they have ticked up from all-time lows in mid-November. House prices have dropped in nearly all markets. The lower prices and moderate mortgage rates make houses affordable for more families. Together, these factors should boost sales of both existing and new houses.

The second half of 2011 will mark the completion of many military base expansion projects that occurred following the recommendations of the 2005 Base Realignment and Closure Commission. As large numbers of military and civilian families move to these locations, they will need housing. Many of the bases are in rural areas without large surpluses of vacant housing; consequently, these markets will be among the leaders in residential construction. Because the personnel will typically be moderate-income and assigned to a base for only a few years, they are more likely to be looking to rent than to own.

Page 2 of 2

Another set of locations that appear ripe for construction are areas with shale oil and gas drilling. The leading areas at the moment are the Marcellus shale in western Pennsylvania and West Virginia and the Bakken formation in western North Dakota and eastern Montana. In 2011, it is possible that the New York and Ohio portions of the Marcellus will be exploited, along with a strip in Wyoming. All of these areas are candidates for a surge in both rental and owner housing.

Single-family construction is unlikely to resume in highly overbuilt markets, such as inland California, Nevada, Florida and Chicago. These areas have huge supplies of unsold condos and foreclosed single-family homes that will keep new construction to a minimum. In short, 2011 won't be heaven but it will be better than the hell of 2008-10 for many residential HVAC contractors.

Ken Simonson is chief economist, Associated General Contractors of America. He can be reached at 703/387-5313 or by e-mail at [email protected].

THE COMMERCIAL HVAC MARKET: Some ups, some downs
By Ken Simonson

The only certainty about nonresidential markets in 2011 is that every category will perform differently than in 2010. Given the 15% decline in total nonresidential construction spending from 2009 to 2010, that might sound like good news. But closer examination shows there will be losers as well as winners.

Hospital work should be an early winner. Hospitals were doing record amounts of new building and reconstruction in 2008. Then, the stock market slump hammered their endowments and hopes for capital campaigns, while bond market turmoil blocked their access to private activity bonds.

By late 2010 endowments had strengthened, the bond market offered extremely attractive rates, and new owners had taken over some hospitals. Hospital construction is now on an upswing. But there are fewer facilities in business than before.

Higher education is another promising market. Colleges were also on a building binge in 2008 and were slammed by the same financial woes as hospitals. Universities that depend on funding from legislatures or local governments are still under budget pressure, but schools with endowments—including some of the biggest public systems—are unrolling the multi-year campus plans they had shelved or are starting fresh.

Many HVAC contractors may have the impression that the federal stimulus legislation that was enacted in early 2009 put all of its construction money into highways, rail, and power-grid projects that have little or no HVAC content. In fact, $5.55 billion was designated for renovating federal offices and courthouses, and some states are also spending stimulus dollars on making buildings more energy-efficient. However, the last of these dollars are likely to be obligated in 2011.

Another source of federal funds that will largely dry up by the end of 2011 are military base realignment projects dictated by the 2005 Base Realignment and Closure Commission recommendations. On the plus side, completion of a realignment means an influx of new military and civilian residents, often to rural areas that will suddenly need a lot more commercial facilities.

In general, commercial projects will begin to turn up in 2011 but the pace will vary and none of the categories will approach the heights of 2007-08. Warehouse construction should snap back first, followed by hotel updates, with limited numbers of new hotels later in the year. Manufacturing construction will also gain momentum as the year goes on and more factories need modernizing, expansion or replacement. In contrast, retail and office projects are likely to be limited to tenant improvements and remodeling, with few new starts.

The bleakest outlook is for public schools. Their funding stems heavily from property tax receipts, which have been battered by the drop in house prices, a rise in delinquencies, and a lack of new properties being added to tax rolls. School districts that were adding facilities every month to handle an influx of new students now have classrooms to spare as migration has stopped or even reversed direction.

Thus, nonresidential HVAC contractors that have relied on public work in the past few years are likely to see their markets ebb. But there should be a big enough pickup in private categories to make 2011 a positive year, on balance, for nonresidential building construction.

Ken Simonson is chief economist, Associated General Contractors of America. He can be reached at 703/387-5313 or by e-mail at [email protected].