The Effect of a Recession on Construction

There has been a lot of talk about recession in these last few years. The pandemic was not exactly kind to the different industries and construction businesses have also seen some ups and downs.

Historical Impact

Recessions in the American economy have historically had a negative impact on the construction industry. During the recession between December 2007 and June 2009, approximately 2.5 million people were laid off from the U.S. construction industry, and nearly 150,000 construction firms went out of business.

Economic Uncertainty

At the end of 2022, economic experts started debating about the likelihood of another recession. Rising interest rates, often used to combat inflation, have created uncertainty about the future economic landscape.

Positioning for Survival

For construction companies, especially smaller contractors with limited financial resources, making the right decisions during uncertain economic times is critical. Positioning the business to survive in the worst-case scenario is a prudent approach.

Industries That Are Recession-Proof

Necessity-Based Industries 

Recession resistant industries are those that provide necessary goods and services that people cannot do without. These include things like;

• Grocery stores
• Pharmacies
• Gas stations
• Home heating oil deliveries
• Fast food businesses
• Discount stores
• Big box retailers
• Healthcare facilities and practitioners
• Vehicle maintenance and repair services
• Public utilities (e.g., power, water, gas)

Publicly Sponsored Projects

Publicly funded construction projects, such as schools and public healthcare institutions, are less susceptible to economic downturns because they serve essential community needs and continue to receive funding. There is no need to worry about securing funding to purchase used heavy equipment to carry out the project.

Counter-Cyclical Services

Certain privately owned businesses, like debt collectors and bankruptcy lawyers, tend to perform better during recessions when financial hardships increase.

Marketing Strategies for Contractors

Explore Infrastructure Opportunities Consider pursuing infrastructure construction projects made available by the Infrastructure Investment and Jobs Act (IIJA). Funds from IIJA are distributed to states and will be accessible for infrastructure projects starting in 2023. Public-private partnerships (P3) may be involved, making diversification into public sector projects important.

Diversification

Diversify your project portfolio across various industry sectors. This provides stability during economic fluctuations. The COVID-19 pandemic highlighted the value of diversification when certain sectors, like hotels and office buildings, experienced decreased construction activity.

Survival Strategies for Construction Companies During a Recession

Leverage Strengths

Maximize your advantages, control expenses, and foster employee loyalty. A strong financial position is crucial.

Demonstrate Financial Stability Contractors entering the public sector or P3 projects may need to prove their financial stability and creditworthiness to obtain necessary construction bonds. Public sector contracts often require surety bonds.

The construction Industry tends to be sensitive to economic recessions. Contractors should consider diversification into recession-resistant industries and explore opportunities in infrastructure construction. Also, maintaining financial stability and creditworthiness is just necessary for long-term survival, especially in the public sector.