Kirk Landers, Editor Emeritus

What’s YOUR Recovery Strategy?

Write this down and put it somewhere prominent: The Great Recession will end.

By Kirk Landers

Here’s the rest of it: The recovery in the construction industry begins this year or next, depending on where you are and what you do, but hold the champagne — the industry will recover by hard-fought inches, it will take a long time to be felt (especially on the East and West Coasts), and you will manage your resources better in these lean years than you did when the economy was peaking and we all thought we were brilliant managers and business people.

That’s the executive summary of this month’s Special Report, a unique construction market analysis created by the editors of Randall-Reilly Publishing and the analysts of Equipment Data Associates, a division of Randall-Reilly that captures data from the financed purchases of capital equipment.

Perhaps the most fascinating part of the special report is its revelation that even in this wreck of a construction market, there are shortages of some kinds of equipment and those shortages will become more nettlesome as the market begins to recover.

It seems counter-intuitive, but it’s true. As awful as things have been for the past few years, the United States is a huge economy and, even operating at a low level, it still produces demand for construction work and construction machinery. Contractors taking advantage of work opportunities want to limit their risk, so they buy low-hour used machines instead of new ones to limit debt. At the same time, equipment buyers from developing countries like China and India, where the global recovery is already under way, have been picking over bargains in the U.S. used equipment market to meet the demands of their growing economies.

After several years of this, there are relatively few low-hour used machines available because few new machines have been purchased, and the good used machines have been snapped up and worked hard.

Manufacturers have reduced production and are cautious about inventories of unsold goods, so lead times for new machines increased sharply last year, as demand started to increase, albeit at miniscule levels.

This is not a condition to panic over, but it’s an incentive to plan strategies for the recovery. For example, steel prices are likely to rise in accordance with the global economic recovery. Economic growth in China, India and other developing countries is already creating price pressures; as economies in Europe, Japan and North America enter growth cycles over the next few years, prices for steel and other commodities will go up more sharply.

Knowing that these trends are developing can help you plan for them. In the Special Report, we talk about equipment buyers favoring new or low-hour equipment in replacement purchases now, despite bargains available for other used iron, because operating hours bought today are going to be cheaper than hours you buy in 2013 or 2014.

For road agencies, knowing that hauling and materials costs are going to rise in the coming years, an obvious short-term strategy is to see how technologies that reduce the need for virgin materials can be incorporated in your menu of options. Another is to project commodity price increases on future project cost estimates — it’s not only smart management, it also produces seminal data for elected officials when they do battle with state and local budgets.

We are entering into a recovery that will be much different than the recoveries of previous decades, for it will be shaped by global, rather than local, forces. As with all changes, this one presents opportunities for the alert just as surely as it presents threats to the unaware.