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Public Sector Construction Issues in a Post COVID-19 Economy

July 31, 2020

What can we expect in a post COVID-19 economy? There may be a few issues in store for the public sector - catch our newest TrendsTalk episode with ITR Economist and Speaker Connor Lokar to learn more.



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Transcript by Rev

Welcome to this latest and greatest ITR TrendsTalk. I am Connor Lokar. Today, we're going to be looking at public sector constructions. We certainly have current issues in the economy as it relates to really, the macro economy itself, the health and viability of the consumer and everything else relating to COVID-19. But we also need to look ahead to future issues that aren't necessarily here right now, but are going to become a more defined and a delayed onset aspects of this COVID-19 downturn. And what market that is very likely to have a difficult time in 2021? Well, most of the economy in 2021, that's next year and its participants are going to be bouncing back is the public sector. The public sector is going to have a bit of a delayed onset set of issues and its own resistance specifically on the construction side of things, but some public sector, we generally think of public sector segments like defense for example, has actually been a welcome market of growth for our clients here in 2020 and one that should hold up in 2021.

And very similar to defense spending, public sector construction is faring well right now. The most recent data available indicates that US public sector construction is actually up 7.4% through the most recent 12 months and it really weathered the best or fairly well in the instantaneous COVID-19 storm. It seemed to sustain that most intense month of destruction that was April quite well, actually, increasing up about one and a half percent even in the month of April, relative to April 2019. That's one of very few metrics, trust me, that was able to eat out a month over month gain in the month of April. Most folks were dealing with double digit declines for the month. So it's held up well recently. Unfortunately, this is not something that we expect to be sustainable.

Now, looking back at 2008, 2009, in the great recession precedent, which we happen to think is going to be relevant for public sector construction markets. The recent plus side performance really is not surprising. US total public sector construction actually maintained, believe it or not, maintained month over month growth. When we look back to the great recession, it maintained that month over month growth posture into late 2009. If you can remember back late 2009 is actually when the US economy itself was bottoming out. Those were actually the deepest and darkest days of the great recession was right around that timeframe.

Now what occurred thereafter is very concerning. US public sector construction went into recession immediately moving into early 2010 and stayed in recession, annualized year over year decline in public sector construction levels all the way into late 2013, limping into recovery through the rest of that year and actually not achieving sustained year over year growth, what we call it ITR Phase B accelerating growth until 2014. I'll repeat that, it didn't actually get back to accelerating growth again until 2014, almost four years removed. After the US economy was itself, as measured by US GDP or US industrial production was well into full recovery and rebound posture for multiple years at that point.

So what we know is there is a delayed onset of decline, and it tends to linger, the ripples of these macroeconomic disruptions. It tends to hit the public sector much more swiftly, where it's a much more delayed phenomenon in the public sector. So as we look at and fast forward to apply some of that precedent and lessons learned as we look at 2021 and 2022, we are concerned. We expect severe strains on tax coffers from these state and local levels is going to lead to, as history has showed us, constrained investment and spend out of state local municipalities for an extended period of time. We have to think about all of the damage and disruption. Obviously, the hits to state that have state level income tax. Obviously, the complete deterioration. For private sector payrolls, it's going to have a negative impact there.

We also know that they're paying out more unemployment benefits. That's going to be an outbound expenditure at the state level that is exceedingly high, record high, generally across the country. And then, we also just think about the little thing. You look at states that derive a big chunk of revenue from state tolls or gas taxes when folks haven't been driving. They haven't been going through tolls. They haven't been filling up their cars as much. They're working from home. They're staying from home. We're quarantining. We're all doing the things that we're told to do. And that's going to have some major tax hit implications, which is going to limit the ability of these states to go out and spend money next year, the year after very likely as well. So our forecast for US total [inaudible] construction, assumes you're over your contraction throughout 2021, after a pretty good year here, a mild growth here in 2020, when it's all said and done, it's going to assume contraction 2021, and at least the first half of 2022.

So if your business is a participant in these markets, do not expect the good times to last. And when the bad times do come, I would expect them to linger on for a little while. Even as much of the macro economy around you, your neighbors, your friends, your family, you're going to be hearing and reading about a robust rebound next year, incomes are going to be picking up, employment's going to be picking up, consumer spending, US GDP. We're going to be hearing and feeling a lot better next year and hearing a lot of good things. But if you're operating these markets, they're going to be a bit out of sync as much as they are right now in a more advantageous way for your business. So it really could, as we look at what can we do. It could pay dividends to sacrifice some margin right now in your bid, that if these are project based opportunities for you. Try to secure these projects as volume because the bid competition is going to become quite intense next year, as both private and public sector, project opportunities start to dry up.

So this is going to include most markets as we look in public health sector, healthcare, education investment, both parts of the public sector they're taking cashflow hits, mostly the former on the healthcare side due to deferred services at the height of the COVID-19 fears for folks going in. And then uncertainty as we look at the ladder on the education side, uncertainty regarding future campus, investment needs or K-12 as we see more kids transitioning to remote learning through at least the near term, it would seem in a lot of cases. So those are a couple of major, major concerns that we have. Now there's a couple of variables in what I'll call upside risks here, that we're going to be monitoring and mostly from a legislative standpoint, we could see. I'm not saying we will, but we could see a major federal bailout, which should help alleviate some of the state level financing issues or we could also see an infrastructure bill to boost public sector work, public sector public works investment because we wanted the other or both.

And these concerns could be alleviated, but there's a lot of ifs in there. So we're going to be keeping an eye on those for you here at ITR moving forward. And if those developments change, we're going to let you know. But for now, I would assume in your internal capacity planning, your budgeting, that these difficulties in this sector are going to start to creep in here as we progress into this fall, I'd expect them to stick around for a while when they get here. So we want to make sure you're prepared for that and have that factored in for your planning. So thank you for joining me here. And this is Connor Lokar signing off. I'll see you on the next one.


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