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What Is the Impact of Recession on Construction?
The construction industry always is adversely affected during recessionary periods in the U.S. economy. During the Great Recession (December 2007 – June 2009), the U.S. construction industry saw nearly 2.5 million layoffs and the demise of nearly 150,000 construction companies.
In fact, the financial pundits are divided in late 2022 about the likelihood of a recession during the coming months, as interest rates are increased to combat high inflation. There’s no sense in gambling one way or the other, as making the wrong judgment call can be ruinous for a construction company, especially for smaller contractors with limited financial resources. It does make sense, however, for contractors to position themselves to have the best chance of survival in the worst case scenario. The primary strategy for recession-proofing your construction business is to seek building projects in the industries generally considered to be recession proof sectors.
What Are Recession Proof Sectors?
The industries that fare best during a recession are the ones that provide essential goods and services—things we can’t do without. The following kinds of businesses are critical to sustaining society and are recession proof sectors.
- Suppliers of commodities such as food, medications, and fuel are essential, making grocery stores, drug stores, gas stations, and home heating oil delivery businesses fairly recession proof. Fast food chains, discount outlets, and big box stores tend to do well in a tough economy.
- Health care providers are always in demand, so there usually is some kind of construction work going on for hospitals, medical centers, dialysis centers, medical office buildings, and so on.
- Providers of essential maintenance and repair keep the nation’s vehicles and other important equipment running.
- Public work services providing utilities such as electricity, water, and natural gas are the very definition of essential businesses. Publicly funded construction projects involving buildings such as schools and public health care facilities should also be relatively unaffected by economic downturns.
Also, some private businesses are counter-cyclical and actually do better during recessions, such as debt collectors and bankruptcy attorneys. However, many private industries pulled back on building projects, particularly projects involving the construction of hotels and office buildings early in the Covid-19 pandemic and are not likely to rebound until recession fears are laid to rest.
Where Contractors Should Focus Their Marketing
In addition to expanding your marketing efforts and client list into recession-proof industries, there are two other marketing strategies that can position construction firms to survive and even thrive during a recession.
First, consider pursuing opportunities that open up in infrastructure construction as a result of the recent Infrastructure Investment and Jobs Act (IIJA). IIJA funds are being allocated to states and should be available for infrastructure construction projects to kick off in 2023. Many of those projects will involve public/private partnerships (P3s), with a combination of public funds and private investments financing the work. If a recession does materialize, contractors working exclusively in the private sector will likely be at greater risk than those working in the public sector.
Second, when recession is a strong possibility, and even when it’s not, diversification can provide a large measure of protection for contractors. Having projects in different industry sectors helps ensure that a sudden downturn in one won’t take your construction business down with it. Contractors working exclusively in the hospitality industry discovered the importance of diversification when work in that sector largely dried up during the pandemic. So did the contractors working on the five office tower projects that Amazon put on hold when millions of people started working from home.
How to Thrive During a Recession
Construction companies not only survive, but may also thrive, under even difficult economic conditions when they leverage their strengths, control costs, cultivate worker loyalty and build financial strength. Contractors working in the public sector are accustomed to having to prove their financial strength in order to get approved for the necessary contractor bonds. Contractors lacking public works experience may not have had to furnish their private sector clients with surety bonds. To expand into public sector contracting or P3 projects, they now may need to concentrate on building and documenting financial stability and creditworthiness to qualify for the construction bonds they will need.
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