I had the privilege of attending the 2019 Construction Industry Economic Trends Seminar, hosted by BMSS, LLC, in Birmingham, AL. The seminar was attended by industry leaders across the state and discussions trended around; how the economic conditions of the United States may affect the commercial construction market, how to prepare for a possible downturn, and how new construction technology can help.
Attending events like construction seminars is key for the Flashtract team to continue understanding the industry’s needs in an ever-changing market. After listening and gathering information from these industry leaders, including the Managing Director of Oakworth Capital, John Norris, I learned the current condition of the economy is healthy overall and continuing to trend in an upward direction. However, construction owners should always keep in mind how to prepare for a potential slowdown in the market.
Why the Construction Market Is Not Slowing Anytime Soon
Unless you are living under a rock, you have heard the US economy is trending in an upward. For example, the American real gross domestic product (GDP) increased by 2% in the second quarter of 2019, which is largely due to personal income levels continuing to rise. Personal income has risen because wages and salaries have increased due to the lowest unemployment rate of the last 50 years. The current unemployment rate in the United States is just under 3.5%, which was a drop from 3.7% back in September, adding over 136,000 jobs in just one month.
The US banking system also appears extremely healthy with excess liquidity which can be seen by their loan to deposit ratio which is significantly lower than where it was in 2007 before the 2008 Housing Crash. Right before the Housing Crisis of 2008, the loan to deposit ratio by the major central banks was over 107%, but this ratio is currently under 75% showing that more money is coming in than going out of the major financial institutions.
If you are worried about foreign influences halting our economy, such as the Chinese trade war, think again. Imports are up and exports are staying relatively flat reflecting a healthy trade relationship. The next biggest threat would be Brexit, but that will be a long process that will most likely take years to fully develop. Parliament has already denied the bill three separate times with no indication of it passing in the future.
The biggest threat is our economic policies in America. Some economists speculate our policy is not conducive to growth because a large portion of our money is held by very few in the banking sector. However, the US economy has continued to not only grow this year but at a much higher rate than most predicted.
Yes, most of the time we realize we are in a recession two or three years in, so we may be in one now. The American economy and the construction market by its very nature is cyclical, so a slowdown is coming. Although, we can rest easier knowing economists are projecting nothing close to the 2008 housing crisis.
A survey conducted by the National Association of Business Economics showed with all this success, 38% of economists still suggest a recession is right around the corner. For contractors, this brings back nightmares from 2008.
What if the Market Does Slow?
A cool-off will inevitably come to the US economy, but a slight slow could be conducive to the construction market. Here is why.
A major complaint by any contractor is the skilled labor market is too tight. Lots of jobs, not enough workers. Although, if the economy slows, the unemployment rate will rise pushing more individuals to look for work. With the proper preparation and training in place, construction companies could take advantage of this flood of workers.
Another concern shared amongst the construction industry is if the economy were to slow, would the housing market dry up with it? The answer is, probably not. If you read The Wall Street Journal, The New York Times, or any paper, you have probably heard it is increasingly hard for young adults to find entry-level homes. Prices are too high because there are just not enough homes being built for this growing demographic. This means even if the market were to slow the demand for starter homes would most likely remain.
Right now the average interest rate on a construction loan is just above 3%. At this rate of return, financial institutions are not writing as many construction loans, but rather they are finding alternative markets to invest their capital that have much higher returns. Although, if the market was to slow, this could make interest rates on loans go up, causing banks to increase construction loan volume, ultimately giving more individuals access to capital to build with.
The Time to Prepare is Now
No matter how healthy the economy looks, it is always wise to store grain away for winter. Preparing for an unexpected slowdown while you are doing well is necessary for the longevity of your company.
One way you can prepare for a dip in the market is by increasing your net working capital (NWC). If you are a general contractor you should shoot for 5% NWC. Although, If you are a subcontractor you require more capital on hand to pay for workmen’s salary, materials, and equipment, so you should strive for around 7-10% NWC. Having a higher NWC allows your company to expand and be more flexible. You never know what new technologies you may need to adopt or markets you need to move into to survive, and having a higher NWC gives you much-needed flexibility.
As mentioned before, if the market slows there will be an influx of new talent looking for work. To capitalize on this opportunity, you need to have training programs put into place before the influx rather than scrambling last minute like your competition. While you have the capital, you should also begin setting your company up with marketing tactics and outreach directed at attracting new talent.
Lastly, with an influx of new laborers in the market, it is extremely important to have robust quality assurance and quality control procedures in place to catch issues upfront before they cost you large sums of money.
While your company has the capital it is important to separate yourself from the competition. Looking into different sectors of the industry, investing in new construction technology, and improving your processes to set your company apart is a good place to start. It may not seem worth your time to slow down and adopt new technologies and processes, but the worst thing a company can do is remain stagnant. The decision to invest in construction process improvement now could be crucial for the longevity of your company through an economic slowdown.
How Flashtract Can Help
Investing in new construction technology can improve the overall efficiency of your company now before you need it. Flashtract is a construction billing software that can help. Flashtract streamlines your billing and payment process mitigating calculation errors and time lost during your subcontractor payment process.
Flashtract is a great tool your company can adopt to get ahead of competitors before a cool-down in the market. A lot of small inefficiencies such as collecting trailing lien waivers, updating your accounting systems, and checking paperwork or calculations by hand add up to an inefficient billing process. Flashtract can cut out inefficiency giving your company back valuable time and money.
The American economy overall is in a healthy state. Due to the cyclical nature of the economy, it is still important to accept a slowdown can happen anytime. Get ahead of your competitors and set your company up for long-term success now. If you would like to learn more about how Flashtract can set your company up for success please visit our website or get into contact with us.