Recently, the economy has generated 200,000 jobs monthly, increased consumer and business confidence, and improved corporate profits. Banks are refocusing efforts from a defensive posture aimed at mitigating defaults to a more aggressive one aimed at loan expansion. Although it remains fragile, the economy appears to have entered a stage of self-sustaining growth. The pace of economic improvement from the Great Recession is expected to remain slow, and prerecession levels of employment are not expected until late 2013.
Although the economic recession is over and economic growth is strengthening, the construction recession may have another 18 months before it completely runs its course. The disconnect in timing between economic and construction recoveries is explained by the existence of structural wounds generated by the construction-focused recession. Despite improvement in economic growth, for example, the residential sector continues to be plagued by a large volume of foreclosures, tight lending standards, and weak new home prices. Aside from difficult access to credit markets, potential investors in commercial buildings are likely to wait until occupancy and leasing rates improve and asset prices appreciate. Finally, the impact of the stimulus is winding down and state fiscal conditions remain weak.
These wounds are deep and will take time to heal. Although the recovery process for the construction industry is expected to be long, its beginning is tied to general economic growth and job creation. Job creation will reduce, and eventually eliminate, the adverse impacts of foreclosures, tight lending standards, commercial occupancy, and leasing rates, as well as the severity of state fiscal conditions. Because the impediments to a construction recovery are so large, even if an acceleration in economic growth and job creation materializes on a sustained basis, the benefits will not materialize in increased construction activity until 2012—leaving 2011 construction activity relatively unaffected. As a result, the Portland Cement Association, Skokie, Ill., expects growth in construction activity will remain restrained during 2011 and 2012.
By the time the structural conditions specific to the construction industry begin to abate, it is likely that higher inflation, interest rates, and taxes will characterize the economic environment. These conditions are the consequence of necessary fiscal and monetary policy actions undertaken to prevent the Great Recession from becoming something much worse. There are no free lunches and the longer term consequences of these policy actions will shave some of the robustness off construction growth rates in the years to come.
Despite this, there is reason for longer term optimism. For each year of the construction recession that passes, pent-up demand is generated—in residential, nonresidential, and public construction sectors. With sustained improvement in the labor market, this pent-up demand will be released. Harsh fiscal conditions that dictated the sustained neglect of potholed roadways, for example, will eventually abate and be replaced by a renaissance in public construction afforded by healthier state and local fiscal conditions. Household formation will accelerate, and combined with reduced home prices, will translate into significantly improved new home selling rates and reduced inventories. Finally, rising occupancy and leasing rates will improve net operating income on commercial prices, raise asset prices, and send the signal to banks the risks in lending are low.
The construction recovery may be delayed, and placed into less favorable macroeconomic conditions, but when it arrives and all sectors (residential, nonresidential, and public) are beating positive, resulting growth rates are typically very impressive.