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A New Version of Cyclical Instability in Construction

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Alex Carrick

Positions:
Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

The construction industry has long been known for its cyclical instability. Construction activity has often had the widest amplitudes from peak to trough of any major sector in the economy. A new version of cyclical instability seems to be emerging. The old version was based on simultaneous boom and bust conditions in private and public sector investment spending. It was often the case that a cyclical decline in private sector work was met by a flurry of government projects to fill the gap. However, such government projects were never initiated quickly enough. They came on stream at the same time as private sector work was recovering. This compounded demands on labor and material. Where the new cyclical instability is coming from is the international scope of economic activity.

The construction industry has long been known for its cyclical instability. Construction activity has often had the widest amplitudes from peak to trough of any major sector in the economy. A new version of cyclical instability seems to be emerging. The old version was based on simultaneous boom and bust conditions in private and public sector investment spending. It was often the case that a cyclical decline in private sector work was met by a flurry of government projects to fill the gap. However, such government projects were never initiated quickly enough. They came on stream at the same time as private sector work was recovering. This compounded demands on labor and material.

Policy makers are now much more aware of this problem. That is why, during this most recent recession, the emphasis has been on getting public projects on-stream as fast as possible, often through assigning deadlines that, if not met, will mean no government money. The jury is still out on how effective this will prove to be over the next year.

Where the new cyclical instability is coming from is the international scope of economic activity. Many national governments are proceeding with massive infrastructure programs at the same time. This means the danger of a simultaneous increase in the need for steel, iron ore, concrete, cement and other inputs. This is likely to be an issue geared more to the material side than to labour. Labour is mostly, but not entirely, a local matter.

It will be based mainly in engineering/civil work. Chinese construction of roads, highways, railway systems, rapid transit projects and power plants will vacuum up raw materials. India, in its latest budget, placed a similar emphasis on improving physical capital. This is taking place at the same time as Canada and the United States are moving ahead with sewer and water treatment work, road building and a host of other projects.

Why has government stimulus been so necessary? In some forms, it has been a response to the collapse of the financial sector and the credit squeeze. In some important cases, it has bailed out too-big-to-fail banks. Beyond such immediate relief, however, it has also been a response to de-leveraging generally. Banks internationally are being called on to raise their capital reserves. This has meant, and will continue to imply, less lending.

At the same time, individuals are scaling back their spending, either voluntarily or under creditors’ orders, to restore their finances to better shape. The result, all else being equal, would be a protracted period of slow growth in the economy even when recovery does take hold. Consumer spending is a big part of gross domestic product (GDP) in both the U.S. (70%) and in Canada (55%). The percentage is lower in Canada due to foreign trade’s role in national output. The Bank of Canada, in its latest economic assessment, expects GDP change this year to be -2.3%, then +3.0% in 2010 and +3.5% in 2011.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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