South Central Forecast

Belt tightening should keep region on track

While the South Central region is feeling the effects of the global economic crisis and the national recession, contractors here won’t go hungry.

But they may have to do a little belt tightening.

“If you get used to driving 90 mph and you slow to 65, you think you are crawling along, but you still are going pretty good,” says Henry Hagood, president of the Alabama Associated General Contractors.

Industry representatives in other states in the South Central region agree that the healthy market leading into the national downturn will help buffer the fall for this region.

AGC’s chief economist, Ken Simonson, forecasts a potentially long slide in construction spending nationwide. U.S. Census Bureau figures show that private, nonresidential spending was down nearly 1% from June, and public spending fell 1.3% in September alone, Simonson says.

“Contractors have been reporting that developers put lots of projects on hold because of the credit freeze and weakening demand for stores, offices and other facilities,” Simonson says.

Fear, uncertainty and perception have indeed affected construction starts.

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“I had a contractor sitting across my desk the other day, and he’s had four projects in Alabama and Florida postponed,” Hagood says. “They were theaters, and I would imagine it was because of the general economy and the perception that people aren’t going to the movies.”

Hagood adds that he has heard of other projects that were “held up,” not canceled, and he attributes most of the delays to economic uncertainty. That uncertainty is also translating into contractors working to get a comfortable backlog of work, in anticipation of future project shortages and heftier competition.

For example, the Jefferson County Board of Education and the city of Birmingham were previously having a hard time getting enough contractors to participate in biddings that are now limited as to the number of bidders, Hagood says.

“In Alabama, the economy has been so good for so long,” he says. “I think that people are concerned there will be fewer jobs to bid down the road so they are trying to get that backlog extended as long as they can.”

Billy Norrell, executive director of the Alabama Road Builders Association agrees. He says that although he hasn’t seen any stoppages of projects yet, contractors are “eating into their backlog and using a lot of those projects they rely on in slower winter months.” The ARBA, like highway departments across the country, is hopeful it will get a piece of the economic stimulus pie, as well as a healthy transportation reauthorization program.

“If it doesn’t happen before the end of the year, I’m hoping it will be a priority in the New Year,” Norrell said in November.

The problem for highway departments is that the rising cost of materials and flat funding levels translate into fewer projects.

“In 2002, Alabama did 441 projects for $631 million,” Norrell says. “In 2008, we completed 311 for $604 million.”

ARBA, AGC and the American Association of State Highway and Transportation Officials are all pushing for a “pretty ambitious” reauthorization, but unless transportation funding is indexed, road builders will be forced to “come back and have this fight every year,” Norrell says. “Roads aren’t real sexy until there is an accident, or until you’re stuck in traffic. People don’t think about the sun and rain and the wear and tear on roads.”

Hagood says that if history is a good predictor of future action, things look pretty bright for infrastructure and construction with a new Democratic administration.

“The Democrats have always liked to spend money on federal projects when they’ve been in control,” he adds.

With more money comes more strings in the form of taxes and regulations, fears Don Weaver, vice president of Weaver Bailey Contractors Inc. of El Paso, Ark.

“The new Congress and president have indicated they will pass the highway bill pretty quickly, and they were talking a stimulus bill in the next month or two,” says Weaver, who is also vice chair of the Highway and Transportation Division of AGC. “I think we will have a bigger program for the remainder of 2009 because of the stimulus, and I think they are going to throw a lot of money at new construction.”

If that’s true, then South Central contractors need only tighten up, operate a little more conservatively and weather the next few months.

“Alabama is not a boom or bust market, so we won’t see great falls like the rest of the country,” says John Sorrell, president of Alabama Concrete Industries Association. “Because of the tight credit markets, people are scared of investing in big projects now.”

Some big construction starts in 2008 have helped offset the almost 40% slowdown in residential construction, and Alabama concrete affiliations with multinational companies have helped ready-mix contractors survive.

Portland cement shipments to Alabama were down 15-20% in 2008, with a predicted additional drop of 10-12% in cement usage nationwide in 2009, and 2.1% in 2010, Sorrell says.

“It’s tough times for the ready-mix industry,” he says. “We are down to the amount of concrete that we used eight or 10 years ago.”

Contractors are shutting down some plants, running smaller operations from key locations and using fewer trucks in their efforts to reduce costs and ride out the bad times, Sorrell says.

Arkansas tends to feel the bumps in the road a little less and a little later than the rest of the country, says Rob Hileman, director of communication for that state’s AGC. But just because that has been the case in the past doesn’t mean contractors can exhale a sigh.

“I don’t think it is as dramatic as in other parts of the country, but there are certainly people hurting,” he adds. “Every single person in this industry is walking with caution at this time.”

Road building has slowed and materials prices continue to increase. However, Arkansas has a healthy amount of elementary education construction due to a Supreme Court ruling for school funding and industrial construction garnered by the governor’s economic development team, Hileman says. Additionally, at the beginning of 2008, the Arkansas general assembly increased the natural gas severance tax, which will add to transportation funding, he says.

Tennessee isn’t experiencing the full force of the economic downturn yet either.

“No one is going bankrupt,” says Bill Young, spokesman for AGC of Tennessee.

“In the 1980s, I saw several bankruptcies, especially with subs, but we’re still seeing condos go up, a Volkswagen plant in Chattanooga, a $350 million hospital addition in Chattanooga and a $580 million convention center in Nashville.”

Tennessee saw two years of housing construction declines, but still suffered no immediate job losses, says Dr. David Penn, director of the Business and Economic Research Center of Middle Tennessee State University, Murfreesboro, Tenn.

“We are just now seeing job losses in construction, which I attribute to office and retail construction losses,” Penn adds. “While housing was declining, office and retail filled in the gap.”

Penn says he expects more construction job losses in the first half of 2009, but depending on the effect of the national stimulus and world market, there is no way to predict whether the bottom will be in the first or fourth quarter of 2009.

Mississippi is also chugging along behind the national trend.

“Mississippi’s economy is expected to experience at least a brief recession,” says Dr. Marianne T. Hill, senor economist at the Institutes for Higher Learning and editor of the Mississippi Economic Review and Outlook.

“Given the greater momentum in the state going into the downturn, the recession here is not forecast to be as severe as in the rest of the country.”

Post-Katrina reconstruction continues to boost economic activity in Mississippi, as well as several major investment projects, including the $1.3 billion Toyota plant, a $1 billion Spectra Energy and CenterPoint Energy natural gas pipeline, a $950 million expansion at Keesler Air Force Base and $500 million at both SeverCorr and Chevron, Hill says.

“Construction employment in the first eight months of 2008 was slightly higher than for the same period in 2007,” adds Hill, contrasting the national drop of 5.2%.

Although some private construction projects have been put on the shelves while owners tiptoe through the national credit situation, public work – especially education and medical – continues to be strong in post-Katrina Mississippi, says Perry Nations of AGC Mississippi.

“I think there will still be plenty of public work in the form of infrastructure – water, sewer and transportation, bridges and that type of thing,” Nations says. “The public sector will be the only work going unless credit is turned loose in the next quarter so private lenders and funding can move other work forward.”

Louisiana continues to buck the national trend thanks to Hurricane Katrina rebuilding projects and a petrochemical market that “is still blowing and going,” says Ken Naquin, chief executive officer of the Louisiana AGC.

The discovery of the Haynesville Shale in northwest Louisiana and the anticipated $1 billion in construction just for drilling operations will help offset the losses at Shreveport’s GM plant, says Loren Scott, a professor emeritus at Louisiana State University. “Normally, when there is a national recession, the Shreveport area gets hit harder than the rest of the state.”

Leucadia National Corp. this year will kick off construction of a $1.5 billion synthetic gas manufacturing plant in Lake Charles. A Massachusetts-based investment firm announced its intent to partner with a major utility to build a $3.5 billion refinery in Louisiana. The official project location and scope will be announced in the first quarter 2009.

There is still a “huge amount” of GoZone funded construction ongoing in the hurricane-affected parts of the state, Scott says. Scott says total ongoing construction is 10 times the norm, with $20.3 billion in the New Orleans area and $6.5 billion in Baton Rouge.

While highway departments are hurting nationwide, Louisiana continues to advance transportation programs thanks to the state’s budget surplus and forward-thinking programs like the Transportation Infrastructure Model for Economic Development, Naquin says.

And if owners are getting their money from Louisiana banks, they are in good shape, Scott says.

“Louisiana banks didn’t get involved in the subprime market at all, and historically have been banks that have very high ratings and have been lenders to other banks,” he says. “And we’re certainly not forecasting any job loss. Even though the residential housing side is going to be off, there is still quite a bit of industrial, infrastructure work out there that will certainly keep the southern part of the state busy.”