THE ECONOMY

Walking a Tightrope

The Academy Award-winning documentary Man on Wire follows tightrope artist Phillippe Petit’s 1974 quest to string a wire between the World Trade Center Towers and walk the wire 110 stories above ground. It is generally conceded by most economists that the stimulus plan helped us avoid a much deeper recession, but we’re now on that tightrope.

One tower is jobs, the other is debt. How the federal government walks the wire in the coming months will determine a lot about how the economy in general, the construction industry, and more specifically the precast sector will fare in the coming years.
Job loss has slowed, but it is still at a level where unemployment will likely remain at 9 percent or higher (and closer to 20 percent in the construction sector) through 2010 and into 2011.

A second stimulus program focused on rebuilding infrastructure would help the precast industry and chip away at unemployment, but in the long term the increasing buildup from trillion dollar annual deficits could crush the economy again. When Phillippe Petit walked the wire, he was headed simply from one side to the other. In the 2010 economic version of the tightrope act, we’re in the middle trying to decide which direction to turn, with a 1,300 foot drop on either side.

Sound precarious? Factor in health care, climate change, EPA, OSHA, tight credit and increasing downward pressure on pricing, and you’ve got a scenario that only gets more complicated for anybody trying to run a precast plant. Welcome to precasting, 21st century-style.

So what’s in store for the precast sector in 2010? The entire construction industry lost about 25 percent in 2009, according to Robert Murray, vice president of economic affairs for McGraw-Hill Construction. NPCA’s upcoming Benchmarking Survey, which will measure the precast sector’s 2009 performance, will likely find that the precast sector lost somewhere in the 20 percent range, which will put annual sales at $20 billion in North America. In 2010, we’ll likely recover about 8 percent of that decline, which will put sales roughly at the level of the early 2000s, and nowhere near the high water mark of 2007, when total sales volume came in at approximately $29.8 billion.

“We won’t likely see that level of activity for several years, even if the economy rebounds,” said Ty E. Gable, NPCA president. “The good news is that many precasters have learned how to operate more efficiently, and when the recovery takes hold in the precast sector, the efficiencies gained during the recession should help those companies become more profitable.”

Most economists expect an agonizingly slow recovery, as the high-wire economic balancing act continues to impact credit availability and the commercial building sector suffers through the same default problems that triggered the freefall in the housing market.
“An 8-point increase in the precast sector sounds pretty good, until you consider that we are starting from a very low point,” Gable said. “Still, we’re headed in the right direction and there are opportunities on the horizon.” Here are five key things that will affect the precast industry as we head into 2010:

A second stimulus package. There’s a great debate on whether the $787 billion American Reinvestment and Recovery Act was large enough. Congress may consider a second stimulus package in the spring that could focus on jobs creation and infrastructure rebuilding, but will be challenged by the effects of expanding the deficit even further.

The highway bill. Every time Congress extends the current transportation bill, it stalls major highway projects across the country because of the uncertainty of future funding. The precast industry will benefit when the next reauthorization passes with a five- or six-year funding package that will enable major projects to proceed.

Your own state’s budget. States that are facing big budget deficits could have trouble coming up with matching funds for transportation and environmental public works projects.

Ongoing effect of the first stimulus package. While much of the $49.3 billion in transportation funding has already been obligated on more than 6,000 highway and transit projects, the full effect of the stimulus has not yet been felt. Environmental public works, clean water state revolving funds and drinking water state revolving funds - which fund sewer and water projects that can potentially use a lot of precast - received more than $26 billion in the stimulus package. In addition, the U.S. Army Corps of Engineers, which requires NPCA certification for all precast drainage structures on all military projects, received $4.5 billion in stimulus funding. Much of that work will come online in 2010 and 2011.

Lending and delinquencies. Lending institutions are expected to remain tight-fisted through 2010, with local and regional banks concerned about commercial real estate loans. The commercial sector is facing the same problem with loan resets and delinquencies that derailed the housing industry. High vacancy rates and the uncertain economy also make commercial building less attractive than at any time since 1993.

So while your 401k may be climbing back and the buzz on the street is that the recession is over, we’re not going back to business as usual.

“It’s going to be a long, hard winter for lots of construction-related companies,” Gable said, “but it’s going to get better. I have heard from some precasters who are just hanging on, but I’ve also heard from others who are doing reasonably well. Whatever the situation, it’s important to use this downtime wisely and get ready for the next upswing.”

Here are five ways to survive and get ready to thrive in 2010 and beyond:

• Continue to get lean. With many precasters experiencing downward pressure on the prices they charge, it is vital to run a lean shop and to know your costs.
• Train your team. Now is the ideal time to train production personnel, managers, executives and office staff. The Precast Show offers an outstanding series of courses, with something for everyone. Find out more at www.ThePrecastShow.org.
• Explore new technologies. Stay up to date on the latest in production, financial and inventory management technology, through The Precast Show, Precast Inc. magazine, your suppliers and your industry contacts.
• Expand your offerings. Search for opportunities in your market area to expand your product line and consider diversifying.
• Get close to your customers, specifiers, vendors and bankers. Stay in touch, keep your name out there, and continue your marketing and promotion activities.