Construction Outlook 2011

It’s the time of the year to reflect on business and economy; the recent past and what lies ahead.  With the challenges of 2008, 2009 and 2010 in the history books, one wonders what 2011 is going to be like.

In trying to understand various indicators, I believe the US economy has morphed into a bull and bear dual-economy.  The bull is the overall US economy and the bear is the construction economy.

US ECONOMY

The overall US economy is growing.  The much-talked double dip recession has not happened.  After a robust third & fourth quarter of 2010, the economy is poised to continue growth into 2011.  I expect GDP will grow 2.4% in 2011.  Many companies were able to enhance their profits in 2010 through cost-cutting measures.  After curbing investment in equipment, hiring, M & A and expansion, many large companies are sitting on significant cash reserves.

The companies constituting the S&P 500 derive approximately 30% of their profits from outside USA according to Barron’s Magazine.  Global business allowed large US companies to create more demand for products and services from other countries.  This provided solid support and momentum for the US economy.  This will propel the stock market through a 10% gain in 2011 with a possible mid-year correction, in my opinion.

However, unemployment hovers above 9% and under-employment is around 17%.  What gives?  The reluctance of companies to invest and hire is one reason.  Smaller companies are generally not hiring, which normally is a job creation engine.  The U.S. created approximate 950,000 new jobs in 2010.  By comparison, Flextronics, a computer-technology company headquartered in Singapore, alone added 350,000 new workers in 2010.  These jobs were all outside USA.  You get the picture…

CONSTRUCTION ECONOMY

Two major construction industry segments are single-family homes and commercial structures.  Both are mired in a deep prolonged slump.  There is a huge inventory (and shadow inventory) of unsold houses and condominiums.  Many owners and builders have defaulted or are underwater.  This type of distress has extended to other commercial structures such as office building and hotels.  Rather than lending, many banks are focused on getting back to good health.

With high unemployment and a trend towards smaller spaces, the need for new office space/structures is almost non existent.  In 2003, roughly 5,700 new condominium units, mostly in high rise structures, were sold in Chicago area.  Last year only 600 condominiums were sold in the Chicago area – many at a deep discount.  This picture is no different in Atlanta, Miami, Las Vegas, Miami and other larger cities.

With a construction depression, it is no wonder that unemployment in construction in December stood at 20.8% (ENR Magazine, January 2011).  In March 2009, it was around 27%.  If discouraged workers who are not looking for work are also included, this figure would be higher.  With time, some construction workers will transfer to other industries.

A number of states are battling huge budget deficits.  Now Texas is facing a budget deficit.  Several states have turned down Federal funds for partially-funded infrastructure projects.  Accordingly, the cancellation of other city/state projects will help the construction industry and its employment problem.

It will take an “extended” period of time for the unsold inventory to be absorbed and builders and lenders working together to build new structures.  I believe a notable recovery in single-family homes and commercial structures will occur in mid-2013 and mid-2014, respectively.

POST-TENSIONING and AMSYSCO

Now I will address unbonded post tensioning – the industry that my company AMSYSCO operates in.  Accordingly to the word on the street, our industry metrics declined 70% from 2008 to 2010.  (Alarming.)  In our industry, it is not great recession…it is depression.

Adding to the challenging environment is escalating raw material prices, which are defying laws of economics – supply and demand.  However, commodities have gone global in pricing behavior (which explains some price increases).  This effect is damaging to company margins.

How did AMSYSCO do in 2010?  We were very fortunate to chalk out a small profit in 2010.  This was possible due to our key customers, suppliers and our great employees.  I cannot thank them enough.  As opposed to the temptation of cutting back, we have enhanced both product quality and service through additional investment.  Additionally, we have expanded our internet presence and entered new markets.

– Rattan Khosa, President
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Copyright © 2011 by AMSYSCO, Inc. All rights reserved.

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