A recession-proof industry is one that is vital to society’s long-term viability, regardless of the crisis. This can manifest itself in a variety of ways, including:
- Industries that provide vital item and person maintenance and repair services. These industries include auto mechanics and healthcare services, for example.
- Industries that provide essential commodities. This category includes grocery stores, medicine stores, and gas stations.
- Industries that provide low-cost products. Fast food restaurants and huge box retailers are two examples.
- Industries involved in the provision of public works services. Electricity and gas firms are included in this category.
- Industries that are anti-cyclical. These are the businesses that prosper when the rest of the world is in a slump. This category includes debt collectors and bankruptcy attorneys.
Even during the worst recessions, construction continues, although it is not considered recession-proof. When the next recession hits, it will be critical for construction enterprises to strategize for success. Let’s look at how you may prepare your firm for a crisis so that you can stay in business for a long time.
What happens to the building industry during a downturn?
We might start by looking at the current outlook for new starts, backlog, and spending.
Construction starts increased by 4% in 2018, after increasing by 10% the year before. The number of new starts in 2019 is up 4%, including revisions. Starts are expected to fall by 4% in 2020. The current backlog has increased by 30% in the last four years, reaching an all-time high. Despite the fact that spending is expected to rise only 4% each year over the next two years, it is at an all-time high.
In 2018, the number of residential construction starts reached an all-time high. Starts in 2019 are flat year over year, but have been flat or declining since mid-2018. In 2020, spending is expected to increase by 5%, then decline by 1% in 2021.
For the four years 2017-2020, the starting backlog for nonresidential buildings climbed by 10% per year. Since mid-2018, starts have been flat or slightly declining. Starts in 2019 are down 9% from 2018. In 2020 and 2021, spending is expected to increase by 3%.
For the three years 2018-2020, the infrastructure starting backlog has grown at a rate of 15% per year. Spending is expected to increase by 6% in 2020 and 8% in 2021.
It’s crucial to know when spending from the backlog occurs. According to average cash flow curves for nonresidential projects, roughly 15% -20% of spending from new starts occurs in the first year, and about 40% -50 percent occurs the second year. Backlog accounts for 80% of all nonresidential spending in any given year. In the first year, a 10% reduction in new starts has just a 1.5 percent to 2% impact on total spending. Spending would fall by 4% to 5% the next year.
Residential spending is much more reliant on new construction than it is on backlog. Backlog accounts for just approximately 30% of residential spending, whereas new starts account for 70%. If new residential construction falls by 10%, total spending will fall by 7% in that year.
In the event of a recession, new construction starts would be drastically limited. Although some projects will be canceled or postponed in the middle of their construction, the majority of those that are already underway will be completed. The majority of the reduction is due to a decrease in new starters.
Residential starts fell 70% from $400 billion to $110 billion during the Great Recession, from 2005 to 2009.
Between 2008 and 2010, the number of nonresidential building starts fell by 35%. In 2009, non-building starts declined by only 6%. From $1.160 trillion in 2006 to $788 billion in 2011, total spending fell by 30%.
Whatever causes a building recession, in this case a global pandemic, the current enormous backlog of work will do everything it can to dampen its impact.
No analyst had predicted a significant drop in new construction starts in the coming years. Some predicted a slight slowdown at worst. Data up until today seemed to point to a mild slowdown.
Although Dodge predicts a 6% drop in the dollar value of home starts in 2020, the number of units recorded by the US Census in Q4 2019 is at a post-recession high, lowering the likelihood of such a drop.
It’s unclear how much current or new work will be canceled. This research cuts new construction starts by 20% in 2020 and 10% in 2021 from the baseline to gain a sense of how a recession would affect construction investment. That’s about normal for what happened during the Great Recession, but it was much higher in residential and much lower in non-building infrastructure at the time. Except for the Great Recession, only once in the last 20 years have new construction starts dropped more than 5% in any sector in a single year.
As a result, there would be 20% less work to bid on in 2020 and 10% less in 2021 compared to the baseline prediction. However, neither spending nor revenues would react in this way. The impact on spending, or revenues, is determined by the backlog and spending schedule curves.
Here’s how the spending graphs have changed as a result. The predicted spending to the right of the dateline is the only thing that varies.
Residential construction spending would fall by 14% in 2020 and subsequently by 13% in 2021, compared to the baseline scenario. Residential spending is significantly more reliant on fresh beginnings within the year than on backlog. As a result, residential spending falls faster than all other types of work.
Nonresidential Buildings spending is 4% lower in 2020 than it would have been in the baseline scenario, but then reduces 12% in 2021 and 10% in 2022. Because the backlog in this sector is substantial going into 2020, even though spending is 4 percent lower than the baseline, 2020 nevertheless sees a 1.5 percent increase in spending. 2021 sees an 8% drop, while 2022 sees a 1% increase.
Non-building infrastructure investment is 3% lower in 2020 than it would have been under the baseline scenario, but then reduces 9% in 2021 and 10% in 2022. Non-building infrastructure has so much work on the books that spending is expected to increase by 6% in 2020 and 1% in 2021. In 2022, it will decrease by 2%.
Most residential investment comes from new starts within the year, thus the largest declines in 2020 are in that sector; however, the strength of the backlog going into 2020 pushes most of the declines out to 2021 and 2022.
Total spending would fall from $1.365 trillion to $1.260 trillion in 2020, compared to the current expectation of $1.365 trillion. Instead of $1,370 trillion in baseline spending in 2021 and 2022, it would fall to $1.230 trillion, the same amount as in 2016. The Great Recession’s losses, which totaled about $400 billion, pushed construction investment growth back 12 years.
Boston was not alone in shutting down non-essential construction projects; New York and California followed suit. Construction spending in Boston is over $20 billion each year, whereas in New York and California, it is above $280 billion. Assume that all construction in California, New York, and Boston is halted for a month. Let’s say it accounts for 80% of all construction. In less than a month, $20 billion worth of work will be halted.
Temporary shutdowns differ from a reduction in fresh starts in that work shut down is postponed. In 2020, total spending will be reduced in that month, but the entire spending schedule will be shifted out by a number of months. Some of the work will resume in 2020, while others will most certainly be pushed to 2021 or later, but all of the delayed work will be completed eventually. If 20% of all building in the United States stopped for a month, $25 billion worth of work would be delayed for a month. If 20% of all new building starts in the United States in 2020 are canceled, the future workload will be reduced by $250 billion over the next three years.
The magnitude of spending cuts would have an impact on the labor market. Because employment losses of this level do not always coincide with volume losses, we are unlikely to see a staff decrease of this magnitude in 2020. However, spending cuts in 2021 and 2022 could result in the loss of 500,000 to 750,000 employment. We lost 2.3 million jobs over the duration of the Great Recession.
What makes a construction firm recession-proof?
6 Ways to Make Your Construction Company Recession-Proof
- Make sure you have cash on hand. It’s a good idea to save enough money to get your firm through a bad patch.
Which industry is immune to the downturn?
Healthcare, food, consumer staples, and basic transportation are examples of generally inelastic industries that can thrive during economic downturns. During a public health emergency, they may also benefit from being classified as critical industries.
What kind of occupations withstand a downturn?
8 industries with the best job security during a downturn
- Health-care services. People get sick and require medical care regardless of the state of the economy, thus the demand for health-care occupations is fairly stable, even during a downturn.
Is the construction industry experiencing a downturn?
Construction output is predicted to climb 14 percent in 2021 and 4.9 percent in 2022, according to the CPA’s newest Construction Industry Scenarios, which assumes a ‘W’-shaped economic crisis and recovery. This accounts for the new lockdown limitations in place over the winter of 2020/21, followed by a strong rebound beginning in 2021 Q2 as vaccines are implemented and the services-based sector reopens. While some segments of the building industry are reliant on consumer and corporate confidence, construction activity has recovered faster than the general economy.
Because the government made it clear that the construction and industrial sectors should continue to function despite the constraints imposed by Covid-19, output has been able to rise and recover very quickly. The 14.0 percent increase in 2021 follows a 14.3 percent total decrease in 2020, owing to the significant drop in the first half of the year. However, it should be highlighted that output will only rebound to pre-Covid levels in 2022. There’s also a chance that if the furlough and self-employment support programs expire in April, unemployment may skyrocket, putting a damper on the recovery.
Private housing was one of the quickest sectors to recover in 2020, according to the CPA’s Scenarios, with mortgage lending and property transactions at pre-Covid levels by the end of the year. The recovery in this sector was mostly driven by pent-up demand, as well as the government’s stamp duty holiday and the completion of the first phase of Help to Buy. After these policies expire on March 31, 2021, demand for private housing is likely to dip before picking up again in late 2021 and 2022, in accordance with the economic recovery.
The commercial sector has recovered more slowly, with store closures and low rent collections in retail and leisure, as well as the trend to working from home, producing uncertainty in the office sector. The long-term move to e-commerce in retail, which is likely to have been exacerbated by consumers moving to online purchase during the pandemic, would further limit recovery in 2021 and 2022. The unresolved question of whether the move to homeworking will continue when the vaccines are implemented will be critical in determining office space demand.
Homeworking, on the other hand, has had a positive impact on the private housing RM&I sector, with households reinvesting savings from fewer daily expenditures in their homes. Although the future demand trajectory is contingent on labor market conditions, as job support schemes expire in April, the government’s Green Homes Grant renewal could help to boost activity. As the Building Safety Programme proceeds beyond the removal of Aluminium Composite Material, a backlog of cladding work is likely to boost activity in RM&I in 2021 and 2022 for public housing.
Noble Francis, the CPA’s Economics Director, commented on the Winter Scenarios: “The threat of a no-deal Brexit, which would have had a negative impact on the UK economy and construction in the short term, has been averted, but questions about Covid-19’s long-term impact on the economy’s structure remain. This raises concerns about the future of some construction industries. This is especially true in the business sector, where the future of retail and office space is still up in the air. As the vaccine is rolled out in the coming months, it will be critical to monitor how businesses adapt their operations and how much of a’return to the office’ occurs.
“While the fortunes of some industries have been linked to Covid limitations and the resulting loss of business and consumer confidence in the overall economy, infrastructure has mostly spared such uncertainty. Given the sector’s vast building sites with fewer diverse trades combining than most industries, projects have been able to efficiently implement safe operating procedures. As a result, infrastructure has been spared the brunt of Covid limits, and output is predicted to rise across the board in 2021 and 2022. The primary drivers of activity are projected to be HS2, Europe’s largest construction project, as well as offshore wind and nuclear projects.”
The Construction Products Association is the primary organization that supports and advocates for makers and suppliers of construction products.
Pursue projects that effectively use available manpower and equipment
Making the most of your available resources will help you maintain project profit margins high, which is exactly what you need when the flow of work stops.
If your construction company decides to take on a project that is too big, it may face equipment and staff shortages. A project that is too small, on the other hand, would not be an efficient use of the same resources, resulting in reduced profit margins.
Examining jobs you’ve completed over the last few years and noting which ones were the most successful is one way to determine the most efficient use of your resources. Pay attention to their scope, timeline, and budget, and then use this information to define (and pursue) ideal projects for your company.
Focus on attracting jobs that meet this “ideal project” criteria during a recession. These are the initiatives with the highest profit potential.
Do construction firms fare well during a downturn?
There are a number of industries that can readily weather a downturn. During challenging circumstances, some people even prosper. The building business is not normally one of them, according to history. Construction is, in fact, one of the industries that suffers the most during economic downturns. The construction industry lost roughly 2.5 million jobs during the last recession. During that time, nearly 150,000 construction enterprises went out of business.
While other businesses recovered fast following the last recession, the building industry took longer to recover. Companies in this field cannot afford to be unprepared for the next downturn, as they may not be able to endure it.
What are two items that are recession-proof?
At least one of two main concepts governs recession-resistant enterprises. Both are used by some of the most stable and profitable industries.
- The given product or service is a less expensive alternative to another product or service.
- The product or service given is a necessity that cannot be avoided.
Let’s take a closer look at the two elements that make certain sectors recession-resistant.
Low-Cost Alternatives
In a circumstance when consumers must spend less moneyeither because it is difficult to obtain work, their income is stagnant, or other prices are risingconsumers will seek out low-cost alternatives to save money. This is why organizations and sectors that have a low-cost competitive edge fare better during a downturn.
Discount Stores
Only 25 equities in the S&P 500 achieved positive returns during the Great Recession of 2008, with Dollar General at the top. While there are other factors at play, Dollar General did well during this period in large part because these stores offer low-cost alternatives to core commodities like food, detergent, and basic apparel.
Low-Cost Products
Few products are as well-known as Campbell’s Soup when it comes to the ability to weather a recession on an individual level. Campbell’s Soup did well during the 2008 recession, as it has done in the previous 28 recessions in its 139-year history. Campbell’s Soup, like Dollar General, benefits from both recession-proof principles: food is a staple, and a can of soup is about as cheap as it gets.
Repair Shops and Consignment Stores
Buying new is generally not an option during a recession. Repairing an existing item or replacing it with a used one is a low-cost option to this. As a result, thrift stores, pawn shops, and repair shops are recession-resistant enterprises that typically do better during downturns. When money is tight, auto repair firms thrive because mending a big-ticket item like a car is far more realistic than buying a new one. Large resale marketplaces like Ebay offer a diverse range of things at low rates, which might satisfy a specific need or provide some relief and pleasure when circumstances are rough.
Needs
It’s simple to see why necessities create recession-proof industries. There are some things and services that are hard, or nearly impossible, to live without, even when times are tough. Businesses that meet a demand remain steady or perform better during recessions.
Food, water, and shelter are typically the first things that come to mind. Medical treatment and pharmaceuticals, hygiene goods such as soap and toothpaste, and basic services such as power and garbage pickup are all examples of necessities. Some businesses, as previously indicated, combine needs with low-cost alternatives, resulting in low-cost items that meet needs.
Medical Services
Medical services were three of the top ten best-performing equities during the 2008 crisis. This includes, for example, hospitals, pharmaceutical companies, and medical equipment makers. The necessity for medical services during a recession is obvious, as recessions increase stress and make maintaining a healthy lifestyle more difficult.
Logistics
Trucking is certainly not the first thing that springs to mind when you think of a need, but it is an important service that takes place behind the scenes. Whether it’s trucks, railcars, ships, or planes, every product that makes its way into stores or between production facilities passes via logistics. Despite the fact that demand for commodities is declining as the economy slows, logistics services remain stable.
Packaged Food and Bottled Water
Food and water are important even in the most desperate of circumstances. Consumers stock up on nonperishable food and clean water during recessions because they are worried about the future. Affordable commodities having a lengthy shelf life, such as Campbell’s Soup, and bottled water, encounter spikes in demand, especially during unpredictably occurring events. In reaction to COVID-19, bottled water sales jumped 52 percent during the initial lockdown period, while ice and water vending sales increased 10 and 30 percent, respectively, over the same period last year.
There are a few other issues to consider during the COVID-19 pandemic-induced recession. Soap and sanitizer sales have surged more than would be expected in prior recessions due to the demand for cleaning and sanitation. In reaction to health difficulties, medical services are anticipated to increase much more than usual. As a result of the closure of many public places such as restaurants and bars, sales in grocery shops and liquor stores have skyrocketed. Despite this, all of these enterprises are based on the concepts that make a sector recession-proof.
Who profited from the financial crisis of 2008?
Warren Buffett declared in an op-ed piece in the New York Times in October 2008 that he was buying American stocks during the equity downturn brought on by the credit crisis. “Be scared when others are greedy, and greedy when others are fearful,” he says, explaining why he buys when there is blood on the streets.
During the credit crisis, Mr. Buffett was particularly adept. His purchases included $5 billion in perpetual preferred shares in Goldman Sachs (NYSE:GS), which earned him a 10% interest rate and contained warrants to buy more Goldman shares. Goldman also had the option of repurchasing the securities at a 10% premium, which it recently revealed. He did the same with General Electric (NYSE:GE), purchasing $3 billion in perpetual preferred stock with a 10% interest rate and a three-year redemption option at a 10% premium. He also bought billions of dollars in convertible preferred stock in Swiss Re and Dow Chemical (NYSE:DOW), which all needed financing to get through the credit crisis. As a result, he has amassed billions of dollars while guiding these and other American businesses through a challenging moment. (Learn how he moved from selling soft drinks to acquiring businesses and amassing billions of dollars.) Warren Buffett: The Road to Riches is a good place to start.)