Posted on Sep 06, 2022
Whether a recession hits the economy in the near term remains under debate, but industry experts suggest now is the time for construction firms to prepare to weather a slowdown.
That means contractors should know which sectors are expected to fare the best during a downturn and to make sure they have plenty of recession-resistant work on the books.
Construction leaders “ought to look at what are the segments of work that are more likely to be reliable in an economic downturn and are their firms well positioned to take advantage of that work,” said Brian Turmail, vice president of public affairs and strategic initiatives at the Associated General Contractors of America.
Publicly funded or subsidized construction projects will remain the safest bet for contractors in a downturn, said Turmail. Public buildings like schools and healthcare facilities should also be insulated from a downturn, said Richard Branch, chief economist for Dodge Data & Analytics.
For example, California is set to receive $9.2 billion from the Infrastructure Investment and Jobs Act, with 250 specific projects identified for funding. That includes $8 billion for investment in roads, bridges, public transit, ports and airports. Texas will receive $8 billion, with 260 specific projects identified for funding.
The White House released fact sheets earlier this month detailing the rest of the progress of the IIJA. By next year, those funds should be dispersed to contractors, said Nick Grandy, construction and real estate senior analyst at RSM US, a Chicago-based audit, tax and consulting firm.
“IIJA funds are slated to flow to the majority of programs by the end of 2022,” said Grandy. “Meaning the valve will open up to infrastructure contractors in 2023.”
Turmail added contractors could consider targeting areas of the country where electric vehicle plant construction is booming, especially off the back of the passage of the $52 billion CHIPS Act and the Inflation Reduction Act.
“It’s safe to assume that there will be a lot of economic activity around the places where electric vehicles and their components are being manufactured,” said Turmail. “Places like Tennessee, Kentucky, Georgia [and] Texas are places that have a lot of EV activity. Those markets are likely to still have strong demand for a range of related construction activities even in a downturn.”
On the flip side, non-infrastructure related work, particularly private construction, will sustain the brunt of any economic slowdown. Some sectors are already struggling due to lingering effects of the COVID-19 pandemic.
Spending on office and hotel projects, for instance, has gone down significantly since the start of the pandemic, according to the U.S. Census Bureau data. For example, Amazon paused construction in July on five office tower projects and will hold off on plans for a sixth in Bellevue, Washington.
Indeed, while the question of whether and when a recession will take place is still unanswered, if it does happen, “the pain point will come from the private sector,” said Turmail. Commercial contractors that work in the private sector will be at the mercy of their client’s budgets, added Grandy.
“The largest pain points for contractors, if we entered a sustained recession, would likely be dependent on how diversified their projects are across various sectors,” said Grandy. “Nonresidential, aside from infrastructure, will again be dependent on allocation of the contractor’s portfolio.”
Branch said most commercial segments could see an outright decline in construction.But one potential bright spot on the private side is manufacturing, which should continue its solid performance.
Branch said the manufacturing sector is “likely to not see significant deterioration” in its current growth trajectory. Since the start of the COVID-19 pandemic, manufacturing building has grown 21.6%, according to the U.S. Census Bureau data.
For this reason, he said construction firms should “find those spaces where you can ride out the storm.”
Original article: The most recession-proof sectors for construction