Aug 11 2006 12:13PM | Permalink | Email this | Comments (0) |
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The news about the foiled plot to blow up airplanes and the partial shutdown of the Alaska oil pipeline to replace corroded pipes is an appropriate occasion to review how shocks to the economy — and hence construction demand — typically play out if they turn out to be significant enough to measure. A review could also keep you from panicking if you find yourself watching weather charts showing approaching hurricanes in the next few weeks.

The experience with OPEC oil embargoes, September 11th and Katina is that the net economic impact is briefly negative but is then largely offset by the following rebound when postponed purchases are made. The net national impact is never as large as the initial headlines suggest although the impacted regions and industries have an extended crisis.

The principal cause of an economic slowdown following a shock is reduced spending by suddenly more cautious consumers. This may be briefly aggravated by layoffs caused by transportation or production disruptions as happened after Katrina. Business demand is derived from consumer demand so business buyers take their cue from what consumers do or are believed likely to do.

Unfortunately, there are too many pessimists among us. So any sizable shock will cause national spending to be less than expected and this will persist for 1-2 months for a small shock and longer for a large shock. Unless the shock hits you directly, this is a timing problem for construction market managers. Be ready to slim down quickly. This will require materials and production reductions, layoffs, postponed capacity investments, disposing of surplus inventory and possibly expediting to deal with delivery delays or finding cheaper substitute materials, services or equipment. Then be ready to reverse and handle a surge in business.

During the first Gulf War in 1991, consumers did not turn significantly more cautious for several months until they saw the scale of the military buildup in Saudi Arabia. But the turn to caution was nearly instant after Katrina when the scale of the shock was immediately obvious to everyone. Indeed, the scale of death and destruction was much overestimated in initial news reports. Remember this: if you see incessant reports of rubble and distraught victims, get ready to act quickly. If you only see talking heads you have a month or two to get ready.