Quite a number of people − and that includes investors in the stock market − have come “late to the wake” on the United States economy. The U.S. economy has been underperforming for more than a year now. The primary questions at this time are, “How bad will things get and how long will they last?”

Clearly, business activity levels in many areas – retail trade, auto sector demand, advertising sales, corporate profit levels, etc. − will be stressed through at least the mid-point of next year. One might speculate, however, that the hard times will not stretch out as long as many people seem to be anticipating.

Beginning in the late 1990s, Japan went through a long period of deflation and stagnation, first brought on by a crash in commercial property values. However, Japan’s economic downturn was made worse by an overriding system that was short on flexibility. Insolvent banks were neither restructured nor allowed to close up shop. Intercorporate ownership between the banks and the nation’s largest firms continued to flourish. Mergers and acquisitions are frowned upon to this day. And the economy is not open to immigration, import competition or foreign investment.

By way of contrast, the U.S. economy is about as open as it can get. This holds it in good stead when it comes to making the adjustments needed to kick start growth again. The residential sector may well be a starting point, with housing markets bouncing along the bottom and both home prices and starts at long-term lows.

One might also take comfort in knowing that the entrepreneurial spirit still thrives in America. This isn’t just an offshoot of hearing all the politicking tied to the Presidential election. It is deeply ingrained in the way people think. Many of the nation’s brightest minds are already trying to figure out ways to turn the current hard times into opportunities. Potential stock market bargains offer an easy starting place.

As for the credit crunch, governments around the world have taken steps to unlock funds. De-leveraging and stricter adherence to capitalization requirements have reduced the total stock of wealth in the world. But what happens when a product is in short supply and the price increases? New suppliers become eager to offer their services. The new suppliers of credit will be individuals, companies, foreign governments and foreign financial institutions that are flush with cash.

Having said all of the foregoing, there are two caveats. First, construction within the total economy is a lagging indicator. Once private investment slows down, it takes a while for it to turn around again. At first, firms try to produce more output with a reduced work force. Firms have to be adding staff for some time, to be taking up office space and to be experiencing profit increases before they commit to expansion plans.

Second, Canada is entering the slowdown phase a lot later than the United States. Therefore, it is likely to be embedded in thick economic murk even after the U.S. begins to recover. However, this too will eventually pass.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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