The Real Market To Watch

[Brian Potter]

Last recession time, in the early 90's, it was the double whammy of interest rates coupled with a very severe recession where many jobs were lost. The resulting carnage left house prices at the peak of a trough in mid 95.

Construction is the key industry to watch for signs of an economic downturn.

Construction is very often used as a barometer for the economy as a whole. This is because of the sheer number of people it employs either directly or indirectly. 5000 people at a car plant is significant, but in the early 90's over 400,000 lost jobs in construction or related sectors.

It's source of income comes from :

A: Public sector - roads, bridges, hospitals, schools, etc.

B: Private sector - Manufacturing facilities, offices, residential etc.

When the tenders stop rolling in then you know something is amiss. Due to the time scales involved in getting a project from the page to site, you can see how things will pan out in the next couple of years.

At the moment there is no sign of a slow down for at least 18 months to 2 years. I know of major contractors who are dubious of taking on more work because they cannot resource it.

However, the work I have been seeing in the past 2-3 years has all been Apartments, PFI hospitals and Schools. I can remember very few manufacturing contracts in comparison. Herein lies the problem.

If interest rates increase developers will be reluctant to build a £25m residential scheme just at the moment, couple this with a downturn in public spending on hospitals and schools and... there you go, a void which could cause an early 90's scenario.

Construction activity is probably the single biggest indicator of a country's economic health - not IT, not how many Police we have and not how many McJobs are created.

The Olympics will help boost the industry for the next 5 years as it will suck resource from the rest of the country.

Keep your eye on the Tower cranes because when they start to disappear things are on the way down.

[Last Hun Standing]

"Keep your eye on the Tower cranes because when they start to disappear things are on the way down."

I thought hubris and irrational exuberance tended to result in the tower cranes still being there when the crash happens. Bangkok being a case in point where there was so much unsupported speculative building, that thousands of sites were abandoned half way through... Of course if we are discussing the actual plant then that might be a different story.

I believe I read that a city building the tallest building on the continent / world was a fairly reliable way of spotting where a stock market crash was going to occur. Kuala Lumpur? China?

http://www.investmentu.com/IUEL/2004/20040210.html

I understand that Dubai may be in this phase...

[Zaranna]

My father works in construction and his opinion is that construction is the very LAST sector to use as a barometer for impending recession. That's because contracts lag behind things in general by about 18 months/2 years. He is still seeing a boom in construction contracts coming through from money that was filtered into the public sector (in particular) in 2003 onwards. He does, however, work mainly in PFI initiatives so his work is very dependent on schools, hospitals, arts funding coming ultimately from Gordon B. But the way the construction sector is skewed by public money and the lag times for public money to come through ATM makes it a difficult sector to use as a predictor of recession/economic activity. As Last Hun Standing says, the cranes can still be at work even if the rest of the economy has ground to a halt. The flipside of this is that construction takes a long time to get going after a recession finishes. It didn't really pick up in the 90s until well into 98/99ish.

Edited May 25, 2006 by Zaranna

[look to the past]

I do work for the architects

Last time I felt it first hard and fast

Things are good at the moment – and getting better from the beginning of the year – no problems here in my opinion

[Brian Potter]

My father works in construction (architecture) and his opinion is that construction is the very LAST sector to use as a barometer for impending recession. That's because contracts lag behind things in general by about 18 months/2 years. He is still seeing a boom in construction contracts coming through from money that was filtered into the public sector (in particular) in 2003 onwards. He does, however, work mainly in PFI initiatives so his work is very dependent on schools, hospitals, arts funding coming ultimately from Gordon B. But the way the construction sector is skewed by public money and the lag times for public money to come through ATM makes it a difficult sector to use as a predictor of recession/economic activity. As Last Hun Standing says, the cranes can still be at work even if the rest of the economy has ground to a halt. The flipside of this is that construction takes a long time to get going after a recession finishes. It didn't really pick up in the 90s until well into 98/99ish.

Well I felt the 90's jolt very very hard in 91 and the market did not kick start again until 97 in my opinion.

The people who invest the cash will be wary and put schemes on ice. I saw this in 1990 when my firm at the time had not won a contract for over a year.

I agree that is is like an oil tanker, however, I point to the stuff on the drawing board. When the economy starts to stall the tenders dry up. My point is this is not happening at the moment. When tenders dry up then very quicklythe work runs out.

Construction is always a good indicator of economic health. It represents investment. I am not saying it is the sole indicator but I bet I can tell you whether I will be working in 18 months time which is more than you can in most sectors.

I am currently working on over £100m of contracts in the north west as a consultant and have both PFI and procure 21 experience. I am sure that the construction market will be strong for at least 2 years - Unless the money pulls out suddenly. PFI's and local LIFT schemes are done in Tranches over several years.

My point being that things can change quicker than you think in construction due to lack of funds.

[Zaranna]

Well I felt the 90's jolt very very hard in 91 and the market did not kick start again until 97 in my opinion.

The people who invest the cash will be wary and put schemes on ice. I saw this in 1990 when my firm at the time had not won a contract for over a year.

I agree that is is like an oil tanker, however, I point to the stuff on the drawing board. When the economy starts to stall the tenders dry up. My point is this is not happening at the moment. When tenders dry up then very quicklythe work runs out.

Construction is always a good indicator of economic health. It represents investment. I am not saying it is the sole indicator but I bet I can tell you whether I will be working in 18 months time which is more than you can in most sectors.

I am currently working on over £100m of contracts in the north west as a consultant and have both PFI and procure 21 experience. I am sure that the construction market will be strong for at least 2 years - Unless the money pulls out suddenly. PFI's and local LIFT schemes are done in Tranches over several years.

My point being that things can change quicker than you think in construction due to lack of funds.

No, that's true - my father says, like you do, that work for him is still very strong indeed and that he sees no signs of a pullback yet. But he also says he's working more in PFI and the public sector than he was in the early 90s and so not as exposed to private construction. IMO govt-related projects still carry on churning for a longer time than private, as you've said - in the early 90s there was much less publicly-funded constrution happening - MT not being as hot on building schools etc. as GB is!

[Brian Potter]

When the apartment tenders stop arriving then I will prepare my crash position. I thought they would dry up 12-18 months ago, but currently I am working on a £50m scheme to start in late 2006. If this gets binned, then worry.

[goldmercury]

B&Q,

does this have any significance in the "real market" data?

Just wondering as they are reporting losses and have all that cheap tat from China which is not helping.

[Brian Potter]

B&Q,

does this have any significance in the "real market" data?

Just wondering as they are reporting losses and have all that cheap tat from China which is not helping.

I believe it does. Debt is kicking in and people are spending less. B&Q will suffer, so will their suppliers and so they will re-think that distribution centre they were going to build.

A-la 1989-1990.

[curious1]

I think this is indeed a key difference between now and the early 90s. Back then, most construction work must have been privately financed (?). This time, we have an unprecedented amountof public money going into construction. Knowing some of the local architectural firms round, the majority of the work is PFI schools and hospitals (bought 'on tick' by the government.... and payed off at interest rates higher than a dodgey store card for the next 20-30 years). Once these projects have been completed, I dont think we are going to see any more public building for some time.... 30+ years... especially as the public finances will be cripled with the monthly rental paid to the developers who now own all the schools and hospitals.

I do wonder what amount of the economy is supported off the back of these developments at the moment?

Once these projects are completed, I do think we are right-royally screwed for the next few decades. Add in the pressures of commodity and fuel inflation, it looks grimmer still.

On the bright side... keeping the inflation figures fiddled to the minimum ensures than inflation-linked pfi repayments are kept down..... (if thats how it works? )

For those not quite aware of how badly we are getting fleaced.... read up on the Skye Bridge fiasco. The first ever PFI. http://www.monbiot.com/archives/2004/12/29...-and-collusion/

Edited May 25, 2006 by curious1

[Killer Bunny]

The resulting carnage left house prices at the peak of a trough in mid 95.

...which is probably similar to a nadir.

I believe I read that a city building the tallest building on the continent / world was a fairly reliable way of spotting where a stock market crash was going to occur. Kuala Lumpur? China?

Or locally ie Central London

[Brian Potter]

...which is probably similar to a nadir.

Or locally ie Central London

Northern slang, mate.

As in 'we are riding the peak of a trough'.

[Rigsby]

Construction is the key industry to watch for signs of an economic downturn.

Couple of weeks ago I asked the site manager on our estate if he was seeing any signs of a slowdown.

He said recently he had more workmen turning up on spec asking for work than over the last few years.

Is that because there are more workmen or less work about ?

[Brian Potter]

Couple of weeks ago I asked the site manager on our estate if he was seeing any signs of a slowdown.

He said recently he had more workmen turning up on spec asking for work than over the last few years.

Is that because there are more workmen or less work about ?

Hard to tell because there are so many eastern block workers on uk sites that uk guys could find themselves under cut.