Economic News: Separating Substance, Sensationalism

Mon June 01, 2009 - Midwest Edition
Giles Lambertson




(Editor’s note: This article is the second of an ongoing series on the nation’s and world’s current economic conditions. Over the next several weeks, Construction Equipment Guide (CEG) will interview experts in economics and business, and even psychology, and report on how the industry veterans are coping, and in some instances, succeeding in this downturn. CEG will explore past and present economic downturns in an attempt to provide some clarity on our current situation, while cutting through the hyperbole, often pervasively reported in the national media. And finally, CEG will examine what recovery will look like when it inevitably happens and the lessons learned along the way to it.)

A recession is both an economic event and a state of mind. Even veteran construction industry executives who consider themselves pragmatic businesspeople can get sucked into pessimistic maelstroms that deepen the downside of a normal economic cycle.

Who can blame them? There is no shortage of discouraging news to feed the pessimism.

“We all listen to it. It is all over the news. If you listen to the news and read anything at all, you’re going to hear all the doomsday comments,” said Dan Pochick, president and CEO of Rish Equipment Co. The West Virginia executive added, however, that decisions made in Rish corporate headquarters aren’t keyed to the news reports. “I don’t try to manage on the basis of what these people say.”

Separating chatter from substantive reporting during an economic slump is not an easy task for industry leaders.

Most members of the business media are grounded in the journalistic ethic of accuracy and their enterprising coverage of recessions reflects this grounding. But general news media tend to be more sensationalistic in their coverage of economic issues and frequently get caught up in bad news stampedes that trample the facts. Their readers’ perspectives can be seriously skewed by what they publish.

The other primary source of information for business leaders in anxious times — particularly statistical information — is the federal government. Various departments issue various bulletins, such as jobless reports (note: The negative is emphasized here, too; the releases are not labeled “job” reports.), gross domestic product numbers, retail sales figures, a consumer confidence index and so on.

These federal data are instructive and important. However, while numbers don’t lie, summaries of the numbers sometimes mislead, usually because of unresolved internal debates about what they mean, or from simple political calculation. Even the White House is not above such tactics.

In 2001, President George W. Bush and Vice President Dick Cheney were rebuked by media observers for “talking down the economy,” specifically, for saying that an economic downturn had been thrust upon the new administration by outgoing President Bill Clinton. A March 2001 Newsweek comment by Jonathan Alter was headlined, “Thanks Ever So Much, President Poor-Mouth.” Alter chided Bush for pointing out the downturn. “Even if Bush turns out to be right in his predictions of gloom, that doesn’t mean he was right to make them.”

Fast-forward to the administration of President Barack Obama. Before he took his oath and for several months afterward, Obama spoke only in the direst terms about the national economic outlook that he had inherited from the previous administration. While media reaction to Obama’s negative comments was far more sympathetic, the new president eventually was cautioned not to be so negative.

Wanted: Good Information

The point is, industry leaders listening to all the contradictory assertions about the state of a current and future economy can be excused for sometimes fumbling the chance to act decisively and independently on behalf of their companies. Solid information on which to base a decision is so hard to find. Even so, the wise executive will seek it.

“Panic in these situations can be controlled, at least somewhat, by good information,” said Joseph Golec, an associate professor in the business school at the University of Connecticut. “Even if it is bad news — any factual news is better than just imagining how bad it could be.”

Golec cited the Obama administration’s handling of failing banks, noting that the recently announced results of “stress tests” for banks seem to have quieted the market waters for the financial institutions, at least temporarily.

“Investors thought all the banks were in trouble and the administration resolved some of the uncertainty. It could have turned out a little bit better, however, if they had come out in the beginning and said, ’These banks are really in trouble, these are a little in trouble, these are OK.’”

While the stock market tends to whipsaw irrationally and influence business thinking in its rise and fall, Golec characterized most of the underlying decisions in boardrooms and executive suites as rational. Businesspeople are steered less by psychological impulse than they are by informed discussion, he said, and sometimes the most rational decision is not to decide.

“Where there is uncertainty,” said Golec, “it makes some sense to wait until the uncertainty resolves. Uncertainty is not an irrational thing in general. In some cases, it is going to be perfectly rational to wait.”

He cited the “option to delay” financial principle, wherein a project owner can calculate the bottom line value of holding off on an optional investment till conditions seem more favorable.

“The option to delay is worth more money when there is more volatility. If you are going to build a building, you can always delay that. When there is more uncertainty, the financial value of that option goes up.”

However, when a project owner exercises the delay option, it means on down the line that a general contractor — who has scheduled his crews and equipment around the delayed project — suddenly finds himself with idled capacity. The impact upon the contractor depends on how well he has formulated his business strategy and managed his resources. (More on this later.)

Keep Marketing

Good information is one key, then, to keeping a company on course in an economic storm. Another key is keeping the name of the company in front of project owners.

Marketing is considered essential for a general contractor or subcontractor in any economic cycle. Yet it is the hardest to continue during bad times. It almost seems irrational to spend tight money to win a larger share of a shrinking market. At such times, reducing outlay across the board seems the logical call and hunkering down seems like the essence of wisdom. Yet expert after expert says business owners should resist the temptation in tight times to scale back solicitation of new business.

Industry consultant Ron Roberts, who bills himself as The Contractor’s Business Coach, compiled a list of the 10 worst mistakes construction contractors make. Number 1 is not aggressively selling their services, regardless of what else is happening in the marketplace.

“Ceaseless prospecting is mandatory if you are interested in building a financially secure business,” Roberts wrote, adding that avoiding the other nine mistakes on his list won’t offset inconsistent marketing.

Business gurus inside and outside the construction industry seem to agree on this point: market a company through thick and thin. While all kinds of budget choices must be made in different seasons in the life of a company, promoting the company brand seems to be the choice for every season.

“This is no time to cut back on marketing,” Grey Hoyle wrote in February in a McGraw Hill Construction column. The Colorado management consultant recalled a study last decade that bore out the wisdom of constant marketing.

“In 1990, I did a study for the Associated General Contractors of Colorado in which I interviewed 65 percent of local AGC members to see how the recession of 1985 to 1990 had affected their volume. What I found was startlingly simple,” wrote Hoyle. “Companies that were sales and marketing intensive grew in those terrible times.”

Whether these are terrible times or merely tough ones, they are a challenge for executives trying to see into the future. Eli Lustgarten, senior research analyst for the Ohio firm Longbow Research, said he still doesn’t have a good feel for the status of the economy, though he said it is probably bottoming out.

“We probably are approaching an economic trough,” said the analyst, a featured speaker in May at the Associated Equipment Distributors CEO conference in Chicago, “but quite a hole has been dug to climb out of. We’re still trying to figure out if the hole is quicksand or we have some stable footing down there.”

Lustgarten conceded it is “an exceptionally competitive market. Contracts are coming in 15 to 30 percent below budget sets, state and highway contracts down 28 to 30 percent. The market is taking a pencil and dotting every I and crossing every T.”

Waiting for Stimulation

Lustgarten is not without advice on how to compete in a trying time, however.

“There still are a lot of local projects. If we are lucky, and the stock market continues to cooperate, there will be work. The lender of last resort will come from the stimulus package. You just know there is going to be money flowing from that, a lot of money for construction-related projects — green projects, energy-related projects, water, highways, transit, a lot of building remodeling and upgrading projects.”

The question is, when will the stimulus money arrive?

Most of it has yet to reach the project level. According to a New York Times report, less than 6 percent of the $787 billion economic stimulus package has been paid out, and that mostly in social service payments to individual states. Through the first week of May, just $11 million of stimulus money had been spent by the U.S. Department of Transportation, though another $10.5 billion has been committed for specific projects.

“The money hasn’t gotten out there yet,” agreed professor Golec at the University of Connecticut. “The only real effect of it right now is to settle down the economy, to raise expectations.”

Though the business professor expressed reservations about the billions of dollars spent on the stimulus package and on bailouts for banks and auto companies, he believes any set of political leaders in Washington would have felt compelled to do something similar. Doing nothing didn’t seem to be a viable political option.

“Whatever the construction industry was looking for, things are better now than what they were,” he said. “If they do spend all that money, I think it will have a good, positive effect on construction. But in the long term, we are going to have slow growth for a long time. They are going to have to raise taxes to pay for this and it is going to cost us in terms of future growth.”

In the midst of this mix of good news and bad, it is instructive to remember that things have been worse. Just a year ago, the industry was being hammered with a meteoric rise in the cost of materials. At this time in 2008, the producer price index for highway construction materials had jumped almost 19 percent from the previous spring. By summer, asphalt prices jumped 40 percent and the cost of rebar was at a record high.

Contractors haven’t forgotten any of that, of course, but Lustgarten nevertheless reminds them to take it into account in their bidding. Project price tags are shrinking because “the market has factored in that these input costs have dropped dramatically. So contractors shouldn’t use last year’s costs for this year’s projects.”

A Lesson in Coping

Rish Equipment Company traces its roots to 1934, not an especially propitious time to start a business. The company has weathered a recession or two since then. Fifty years after starting life as a supply company in Bluefield, W. Va., Rish became a distributor for Komatsu heavy machinery and today has a dozen locations in West Virginia, Virginia and Maryland.

Dan Pochick has been a part of the Rish story for 40 years, long enough to experience both economic boom and bust. The company CEO said today’s downturn resembles the one back in the early 1980s, except that it’s worse.

“The market in Virginia has been miserable for the last two years or so. It’s down about 70 percent. On the other side of the border here in West Virginia, the mining market was good up until a year ago. But as the recession spread, it also was impacted.”

The price of coal has dropped markedly in the last six months in tandem with decreased demand for steel. West Virginia is a big producer of coking coal used at steel foundries.

“That market has pretty well dried up,” Pochick observed. “Add to that the political problems with the new administration, such as the impending carbon tax, and the attack by environmental activists on mountaintop mining — I don’t know that I have ever seen a time when the production and use of coal has been under such attack.”

As chairman of the Associate Members organization of the West Virginia Coal Association, Pochick initiated a meeting in May between his group and the White House Council on Environmental Quality. The meeting addressed the issue of what the association sees as invasive directives by the Interior Department and the Environmental Protection Agency.

When asked if, in the face of all these economic and political obstacles, he is planning to just close up shop, Pochick chuckled. It is not the reaction of a despairing executive.

“Most of our guys have been through this before, particularly upper management staff,” the Rish president said matter-of-factly. The company employs 300. “We try to take that mentality out to our employees: ’Don’t panic. We’re a good strong company.’”

The projected business volume this year for the “good strong company” is about $120 million. Here’s the rest of the story: Business volume last year was about $200 million. That is a pretty significant decline, yet Pochick seems neither panicked nor nonplussed by it.

“When you have been through it before, you know the experience,” he said. “In a capital intensive business, you have to really learn how to manage your assets and, in tough times, manage your cash. That’s what we are trying to do.”

The CEO said his management team has learned to rely on “common sense responses” when the economic cycle hits a down slope, beginning with managing risk and the company’s assets.

“We try to adjust to markets, to a current economic situation. You cut the cloth to fit the pattern.”

So far, the new fit is flattering.

“If the current situation doesn’t get any worse, we will be in pretty good shape.” CEG