(Editor’s note: This article is the first 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 glance back from the current economic downturn shows five recessions scattered across 35 years — 1973-75, 1981-82, 1990-91, 2001-03 and the current one, the origin of which is traced to 2007. Some successful general contractors have been around long enough to have experienced all of the recessions — plus one in the 1950s and the Big One in the 1930s – and seem inclined to treat them as just another cost of doing business rather than full-blown crises.
“They are all a bit of a surprise when they happen,” Michael Bolen said with the aplomb of an executive who has helped his company ride out several recessions. Bolen is chief executive officer of 145-year-old McCarthy Building Companies Inc., a company with long institutional and family memories of building business through both good times and bad. Yet the downturns somehow always are a surprise, he added, even though their approach generally is foreseen.
Economists also seem surprised by them. Science or no, economics seems to better equip its practitioners to record downturns than to predict them. The start of the current one, for example, was only tracked to the last quarter of 2007, a full year after the slide had begun, at which time dust was flying from the implosion of high-profile banks.
Last summer, nearly 10 months after the downturn is believed to have begun, economists in a USA Today poll were evenly split on whether the country was in recession or would be by the end of the year — and the trend was against believing a downturn was imminent.
Such inexact expert opinion is not especially helpful to leaders of government or commerce. Nor is there much more unanimity among economists in hindsight as they compare and contrast downturns and assess their causes and effects. Demand-side and supply-side believers generally reach different conclusions.
Consequently, there is no definitive assessment of the current recession other than that the economy is in, as one economist describes it, “a relentlessly worsening pickle.”
The Obama administration — in the days leading up to its taking over the executive branch of government and since then — has characterized this downturn in near apocalyptic terms, which is to say, likening it to the Great Depression. While the final numbers on this one are far from being crunched, most economists seem unwilling to draw that parallel.
“In some ways it is a mistake to make that comparison,” said an economics professor in Pennsylvania, preferring to comment without attribution. “We actually had two recessions back then — 1929 to 1932 and then another in 1937 and ’38 — and never really recovered from the combination of them until the build-up for World War II.”
She went on to say that every recession is distinctive. “They’re all different. This one is different because it came on all of a sudden, though not really; a lot of things were deteriorating. But when it did hit us full strength, it was as if every credit card in America maxed out on the same day.”
Using the measurement of Gross Domestic Product, the current recession dropped the GDP 1.75 percent in the final quarter of 2008. According to University of Western Ontario online economist Mike Moffat, the first quarter report could show a drop of another 1 or 1.5 percent, “which would make this the second worst recession on record after only the 1957-58 recession.”
However, the recession of 1929-1933, by comparison, saw GDP plunge more than 26 percent. So, with most observers foreseeing at least some recovery in the American economy by the end of this year, the likelihood of commercial activity falling into the range of a depression seems remote. Nor is joblessness expected to come anywhere close to the 25 percent unemployment rate recorded during the Depression, though unemployment will likely remain a problem beyond the bottom of the recession.
Furthermore, the American economy is different today than in 1929. As California economist Mark Vargus wrote, the Great Depression hit “when the U.S. was a major manufacturing and export power. The current economy is based on services and financial exports, with manufacturing no longer a major element of growth for the economy in the U.S.”
Consequently, Vargus wondered if some solutions being enacted now will be effective inasmuch as “those solutions were created for another economy.” On the other hand, important economic underpinnings in place today, such as Social Security, weren’t around in 1929 and mitigate against disaster.
Long-time Barron’s financial writer Alan Abelson voiced the emerging, somewhat lessened gloom-and-doom consensus among economists. Wrote Abelson: “Something between a Recession and Depression might better serve to describe the relentlessly worsening pickle we are in, and perhaps convey its urgency without igniting widespread panic.”
Time will tell about all that. But recession or depression, by either name the economic rose now in full bloom isn’t sweet. General contractors will have to continue to marshal their best efforts to induce a steady stream of revenue until the flow of money returns to expansionist levels.
In Birmingham, Ala., Doster Construction Company is poised to fend off the downturn by continuing to focus on what it does best.
Thomas Doster III was 28 when he started the company in 1969, just a handful of years before the recession of the early 1970s reared its ugly head. His first jobs were renovating basements and contracting for similar work with a local hospital. Perhaps being a small company with little overhead at that economic juncture was an asset for the young Doster: His construction company began a growth spurt that, 40 years and several recessions later, continues pretty much unabated.
Doster Construction not only survived the 1970s and 1980s recessions, it grew in business volume by a million dollars or more each year through the period, reaching $32 million in 1980 and ratcheting on up from there. Today the company’s annual business volume is $300 million and it is ranked among the top 400 contractors in the United States.
“You can see there was no slowdown there for me,” Doster said of the ’70s and ’80s. “And that was typical for people I was competing with here in Birmingham. They all were growing through those years, but maybe not as rapidly as I was because we were considerably smaller. I had all the business I could handle. I was ready to build what anyone wanted built.”
Before too many years, the young entrepreneur trimmed his Have Hammer-Will Build mindset and began to concentrate on three and, eventually, four areas of expertise: hospitals, industrial facilities, schools and multi-family residential units.
“That is our strength, those four areas,” the company founder said. “We are pretty good in those areas and we can be more competitive in those areas.”
Through the years, Doster Construction played to its strength by emphasizing its experience in its select areas. The current recession has reaffirmed to Doster executives the importance of staying true to its chosen mission, even as it has adjusted its tactics to keep winning contracts.
“We probably are bidding more now,” said Doster, “bidding with less mark-up, and traveling farther from our offices in pursuit of jobs. Geographically we are spreading out a bit. Yet we are staying focused on the same four areas, which is our expertise.”
Besides its headquarters in Alabama, the company has offices in Atlanta, Ga., Nashville, Tenn., and Orlando, Fla. Thomas Doster remains chairman of the board. His son, Walton, is now CEO and presided over a record year in 2008 when the company broke ground on almost four-dozen projects.
Business growth has averaged almost 20 percent a year since 2005 and last year increased a full 30 percent, with its start-up Atlanta office winning $80 million in projects. As 2008 ended, the precipitous decline of marketplace activity was all the more dramatic for Doster Construction because it came immediately on the heels of such dramatic expansion.
“Business just dropped off the table,” Thomas Doster recalled. As an example, he cited a $100 million hospital contract in Louisiana that suddenly amounted to zero when the hospital board couldn’t sell the bonds to build it. He said the months since have seen increased competition for projects with contractors entering the field from weaker construction divisions. “We used to compete with two or three bidders on, say, a $50 million school project. Now there are 10 bidders and the contracted price is going down.”
But the company is still building, and its 176 employees are still doing the kinds of projects the company has mastered through the years. Ground was broken in March on an $11.8 million structure for the Capstone College of Nursing at the University of Alabama in Tuscaloosa.
The elder Doster said he has “no advice on anticipating” a recession, but he does believe that “the only chance you have is to do better than your competition.
“I think we have gotten a lot better in the areas of construction we concentrate on. Our people are better. Our systems are better. We have just gotten better at putting it all in place. We give our clients a much better building now than we did 10 years ago. Maybe I shouldn’t say that,” he added with a laugh.
While Doster has seen no evidence that the congressional stimulus package is helping his company, he suspects road-builders might be seeing an infusion of new dollars. “You would have to ask them.”
As regards an economic upturn, Doster said he does not as yet see “good times” on the horizon. “I don’t see the end of this yet, but it is going to end. The question is if the end of it is coming soon, or not so soon.”
West across the country from Birmingham in St. Louis, Mo., is the headquarters of a construction company that operates nationwide, McCarthy Building Companies. One of McCarthy’s slogans is, “Building America Since the Civil War.” The period since the company’s founding in 1864 obviously encompasses the storied 1929-39 depression era and every downturn since. How did McCarthy make it through those post-Civil War years and subsequent periods of economic disruption? By being tougher than the times.
Company founder Timothy McCarthy, an Irish immigrant, began by opening a lumberyard in Ann Arbor, Mich., and building farmhouses and barns around the state. Some 40 years later, McCarthy’s sons gravitated southwest to Missouri and transplanted the family-owned construction company there, eventually settling in St. Louis.
When the Great Depression came along, the company continued to grow, even moving into roomier facilities in the midst of the downturn. One of the sources the company tapped to keep going during those difficult years was public works money coming out of Washington, D.C. One notable example: McCarthy won and faithfully executed a federal contract to build a courthouse and post office building … in Anchorage, Alaska.
“The company was set up to operate in rugged times,” CEO Michael Bolen said, looking back a hundred-plus years. In 2002, he became the first person not named McCarthy to be board chairman and CEO. “The company’s founders asked themselves, how do we function when times are tough? If we can organize ourselves so we can function in the toughest of times, when the tough times come, we are ready.”
Bolen said that approach to running the business translates into a culture of managing risk, of managing a company’s balance sheet with a conservative perspective. “And never underestimate the value of luck,” he added with a smile in his voice.
“We have been through three of these things,” Bolen said of his tenure with the company. “They are all a bit of a surprise when they happen, but we have the luxury of having been through them before. We have a roadmap of how McCarthy operates in difficult times.”
So how are things going this time around? “So far so good,” he responded from a McCarthy office in Newport Beach, Calif.
Bolen is well suited to run a company too tough to buckle. He joined the company in 1978 after an Air Force career that began with graduation from the Air Force Academy with an engineering degree. That was a time of gas lines and the lead-up to the 1980s recession.
“Starting out in a very tough time is an advantage. You develop good, solid habits right out of the chute,” he said. Bolen worked his way through the organization “spending time in just about every place we do things.”
He has come to understand that the downturns seem to follow “big expansions” at McCarthy Building, which makes the sag in business all the more painful. In each case, he said, “by the time you really were in one [recession], you were at the bottom and already starting to claw your way out.
Moving to the 2008-09 downturn, Bolen said it is especially painful because the expansion went on for so long. “We have an update for everyone in the company every year on how we see the world. For the last several years we kept saying, ’It can’t go on forever. Maybe not this year or next, but we know there is going to be a downturn. We know there is one coming.’ The expansion since 9/11 has been unprecedented in my career.
“By 2008, we were at the top of the mountain and when the business dropped off, it was like falling off a cliff. This time, the recession clearly is global. When someone flushes a toilet in China, the water gets warmer in Arizona. That’s what’s different about this one. This one has been across the board, certainly in our industry.”
McCarthy Building Companies is a multi-billion-dollar diversified construction company. It is the second-biggest builder in the nation of healthcare structures, has a $4 billion portfolio of heavy/civil/ transportation projects, ranks in the top 10 of hospitality/entertainment builders, is in the top five builders of education facilities ranging from K-12 to universities and maintains a large component of commercial and industrial construction as well.
Its nine offices are situated across the southern flank of the United States, from California to Dallas, St. Louis to Atlanta. Its markets are, Bolen said, divided by geography and market type. While the commercial side all across its market has taken a frontal blow in this recession, “the total volume of everything has fallen off dramatically.”
“It has fallen so far in our markets in Nevada and Arizona, I have never seen either of those markets so low,” the chairman said. “But we think we are at, or close to, the bottom. The real question is, what does it look like going forward? Will it end fast, or is it going to last a while? We are building contingency plans around two of the alternatives.
“We want to do everything we can to hold on to our market. We worked hard to build it and we want to keep it, but we have to respond to the marketplace. The good news is a lot of our market is built around what people need, not what they want — schools, hospitals and so on.”
Bolen said the congressional stimulus package funding has begun to show up. “We are seeing a few jobs we weren’t expecting. They are starting to work their way through the process.”
During the same time Bolen assumed the top executive positions, McCarthy completed a transition to complete employee ownership. The CEO was asked if this is an asset during down times.
“It’s a huge advantage,” he said. “It is much easier to communicate all the way down the line. When everyone is an owner and we have to look closely at all the costs of operating, the message gets out much quicker. And we tend to take care of each other better when we all are owners.”
The McCarthy chief executive sees a silver lining in recessions. “If people in the industry will be patient and disciplined, what will happen at the end of it is that new opportunities will show up — right at the end, when the worst is over and things are headed back in a new direction. At that point, people need to be willing to invest in new opportunities. That’s our experience.”
Bolen then reiterated the need for patience. “I think we all need to resist the temptation to panic. One of the first things some companies do is try to do things they are not any good at. Our focus is the opposite. You should just focus on what you are good at and be patient.
“These things do end,” he said confidently. “We’ve learned that all the way back to 1864. They’ve all ended.” CEG
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