Prizio Construction Inc

Once again the Associated General Contractors of America (AGC) have deluded themselves into thinking that more government spending means better outcomes for the construction industry regardless of what other economic impact that spending has. In a recent article Ken Simonson, chief economist of the AGC says that federal economic stimulus spending has helped the construction industry, this despite no solid evidence that there has been any measureable improvement in construction employment or gross sales figures for contractors.

            Beyond an obvious lack of improvement in the construction industry, the unseen costs of massive government spending are completely ignored, which again is typical for the AGC. Jobs allegedly created by government stimulus spending have cost over $250,000 each according to a recent study. Thus a quarter million dollars have been removed from the private economy for every new job created, making it that much more difficult to create the private jobs needed to produce a real recovery. To imply that there is some sort of net gain in this endeavor is ridiculous.

How much  better off would we all be, and how many more buildings would be needed, if we had allowed the private sector to create 20 new jobs for every million dollars spent instead of letting the government create four. The narrow self-serving focus of the AGC does a disservice to everyone in the construction industry. We all need a broad economic recovery to sustain our businesses, construction and otherwise, not some targeted spending that helps a few mega-contractors to the detriment of everyone else.

Concrete Construction magazine has just released an article outlining the 18 month interim results of their two year slab curling field test. The results were unexpected, somewhat disappointing, and a bit surprising in one case. The results were unexpected because early data suggested that there were significant differences in slab curling with different mix designs. High does fiber reinforced mixes especially held out early promise. Unfortunately the early differences have virtually disappeared at the 18 month interval. Thus the expected optimum mix design slab contractors sought has remained elusive.

                This leads to the disappointment previously mentioned. There was great hope that these tests would point slab contractors and designers towards a combination of mix designs and reinforcing that would appreciable minimize slab curling. This can be a very big problem for contractors, and we had desperately hoped for some answers. Sadly, none is forthcoming from these tests.

                The one surprise to come out of the testing is that very dense hard-troweled concrete surfaces resist the escape of moisture from their surfaces as well as or even better than applications chemical curing compounds, leading one to conclude that such additional curing measures may not be needed on hard-troweled slabs. No one really expected this, but it makes sense if you think about what hard-troweling does.

                The thing that seemed to ruin the tests for us is that the relative humidity in the building remained fairly high throughout the test period. We suspect that in a dryer climate where the relative humidity was lower, or at least fluctuated more, we might see greater differentiation between the various mixes and reinforcing schemes. What’s that they say, better luck next time.

A recent Business Week article  announced that a new British company has developed a cement product called Novacem that actually consumes carbon dioxide as it is being produced, locking up as much as 1763 pounds of CO₂ for every ton of cement made. This product joins similarly-targeted products produced by Calera in California and Sriya Green Materials in Georgia.

                All of these products are driven by the now hotly-contested theory that increased atmospheric carbon dioxide is causing global climate change. If that theory holds, these could indeed be important products for the future of the concrete industry, since producing conventional Portland cement produces huge amounts of CO₂. On the other hand, all of this may fizzle out if a more convincing case for manmade climate change cannot be made.

                In the short run these are interesting academic exercises. They have only been used in a very limited number of carefully controlled test cases and are not generally available to concrete contractors. In the long run they will either be our salvation or just mere silliness. Time will tell.

I think my Fed comments deserve a little clarification. While it is true that the Fed does lend money directly to banks, it is not true that the major source of money for most banks is the Federal Reserve. Thus, most of the money used by banks to buy government securities comes from depositors. Unfortunately, the Fed, by offering to lend to banks at near-zero interest does effectively set short term interest rates that others can earn.

                With that matter clarified, I think the subject of deflation is worth some more attention.  As I said before, just because the overall economy has managed to technically avoid deflation, it doesn’t mean that all segments of the economy have been so fortunate. The construction industry has clearly been hit be deflation with very negative consequences.  Deflation hurts so much because it means that contractors are getting lower prices for their work without a related decrease in their costs. Since many costs are fixed or tied to long term agreements, like union contracts, it is not possible to reduce costs at the same rate that priced go down.  The profit vice tightens with no way out. Even borrowing and liquidation becomes difficult or impossible, because the value of fixed assets declines, even as debts on these items do not.

                Unfortunately, contractors are fueling some of this deflation themselves by bidding work below cost. We have not seen a job go for above cost in over two years, and now many of the more aggressive contractors are in trouble, because they could not turn below-cost bids into jobs that broke even or made money.  With buy-out and change orders harder to get these days, it is no longer possible to “find” 10% or more after taking a job cheap.

                The spiral downward continues as demand declines, forcing prices even lower. The only salvation seems to be outlasting your competitors until supply and demand comes back into balance, but that is a pretty grim prospect. We can only hope that November will turn the tide and make it possible to stop this giant fiscal vacuum cleaner gone mad called government spending. Maybe then there will be some money left for people to invest in new buildings.

The great fear of the Federal Reserve Board (the Fed) is deflation. It killed us in the 1930s, and its specter still haunts those who manage the money supply. Inflation is bad, but deflation is worse. The Fed is proud of itself for so far avoiding deflation in the US economy, but has it really? Like inflation, deflation is not spread evenly over the entire economy. The Consumer Price Index creates such an illusion, but it is indeed an illusion.

In the early part of the last decade we in construction saw rampant inflation while the CPI only hinted at what we were dealing with. Steel, oil, cement, and copper all shot up, sometimes at astronomical rates. We were getting rebar quotes with one week price guarantees and ready mix quotes that were only good for 30 days. All the while we were being asked to sign lump sum contracts with no price escalations in them. But was the Fed worried?  Apparently not. They were blissfully ignorant, or at least indifferent, to out plight because the CPI was only inching upward.

Now we are dealing with major deflation in the construction industry. In other words prices are going down due to reduced demand without regard to the costs of production involved. Everyone is bidding work below cost, and everyone who produces a construction-related product is trying to figure out if they can keep their doors open long enough for things to turn around. But is the Fed worried?  Not so you’d notice. Comfortable in their embrace of the CPI, an imaginary number with only a tenuous link to the real world, they think things are under control.

The Fed is loaning money to banks for free (0.15%) on a short term basis so they can buy 10-year Treasuries at 3%. The banks make money and take no risk, which they like far better than loaning money to fools who want to build buildings in this economy.  And the US Treasury loves it because they have someone to finance their insatiable appetite for new money, which has increased by about $1.5 trillion this year alone. But it is all smoke and mirrors, as is their delusion that there is no deflation. In the mean time those of us who live in the real world are getting killed.

In a Business Week article yesterday by Vivien Lou Chen, she noted that, “Researchers at the U.S. Federal Reserve and International Monetary Fund say it will take time before the 2.3 million construction, finance and insurance workers looking for jobs to replace those lost in the recession are able to find new work.”  It is heartening to know that the Fed, after two years of recession in the construction industry, has finally realized that it will take some time for those displaced workers to find new work. Of course, what good will come from that stunning realization remains to be seen. The 50 guys who used to work for us, but have been unemployed for most of the last two years, could have told them that a long time ago.

From what we can tell, “time” will likely extend well into next year, with no clear end in sight for the troubles we have been enduring.  Every statistical blip in the right direction seems to spur several optimistic articles about the coming end of the recession, but no clear trends seem to ever develop into anything more enduring than the lifespan of a summertime mosquito.

The fundamentals are still unfavorable. Private work is in very short supply, primarily due to the lack of available financing, but also because of the high level of uncertainty that has been created by the federal government in the last 18 months. The upcoming elections may help to reduce this uncertainty, but whether or not that will lead to more lending is anyone’s guess. State and local public works projects continue to be hampered by the dire financial condition of many states, California being a prime example.  Federal public works spending, despite all the hype about the stimulus, has not produced as much new construction as all of us had hoped, especially new buildings, our primary interest. All in all, construction is mired in a deep recession with little immediate relief in sight. That the Fed took two years to figure this out is beyond appalling.

Jim Haughey  of Reed Construction Data has a new article out, today cited in the AGC SmartBrief, in which he makes the point I have long been making myself.  Many states, like California, are running out of money, and they are going to have to cut construction spending next year and into the future until they get their budget problems sorted out.

Construction spending often gets funded by special bonds that are not dependent on the general fund, but many other projects do need general fund money to get built. Furthermore, many local and school projects use a combination of bond money and state general fund matching money to get financed. This money is drying up quickly here and in a number of other states.

Our own experience is reflecting this. Public works bidding is slowing down quite a bit. To be sure it is not entirely gone, but there is clearly less work to bid here in southern California, and I suspect in other out-of-money states.

The bottom line is that projections for a recovery next year in construction are going to be very dependent on a return of private work. If that does not come back, we will more likely see a downturn in construction next year, not a recovery.

Proposed revisions in the EPA’s National Emissions Standards for Hazardous Air Pollutants (NESHAP) will likely reduce domestic cement production, increase the cost of cement in the US, and lead to more air pollution worldwide as foreign cement producers step in to meet US demand.  Cement producers lose, cement consumers lose, and the environment loses – what more could you ask for from one regulation.

                The Portland Cement Association (PCA) has been working with the EPA for over 25 years to help craft sensible regulations of air pollution coming from US cement plants. The proposed regulations reflect that involvement to some extent, but the EPA continues to embrace the adversarial relationship so often seen among federal regulators. The new rules do not take into account the extreme variability of the raw material of cement – limestone, and they are not based on real world achievable results from technology currently available. Lastly they do not recognize that cement is available worldwide, which means that the greater the burdens placed on US producers, the more likely cement consumers are to simply buy from a foreign supplier.

                What does this means in practical terms?  These regulations will add about $21 per ton to the price of US cement. Foreign suppliers – most likely China and India –  who produce between them almost ¾ of the world’s cement do not have to bear these costs. The two major pollutants of concern in the cement-making process are mercury and hydrocarbons. Both of these go into the atmosphere and circulate worldwide. Thus a ton of atmospheric mercury saved in southern California is a ton saved for the whole world, and a ton produced in Shanghai or Mumbai is a ton released upon the whole world.  Forcing US producers out of business because they cannot comply with unrealistic emission regulations does not result in less pollution; it results in more and merely displaces the source to some other country.

                The PCA has a webinar available here, or a summary of their presentations in slide form here. Please take some time to become better informed about this admittedly rather dry but nonetheless important topic.