Construction industry convention focuses on energy conservation

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

A record 50,000 attendance at a February convention of the air conditioning, heating and refrigeration industry found a focus to overcome the doldrums of the lagging construction sector — energy conservation.

While previously considered a marginal aspect of the once-booming residential and commercial industry, the intrepid manufacturers, distributors, contractors and engineers comprising the ailing construction business have enthusiastically embraced energy conservation and the substantial business expansion it represents.

There are two major reasons that this commitment is bound to prove successful:

1. The technology of energy conservation has grown by leaps and bounds in the recent past, including the upgrading and modernization of air conditioning, refrigeration, heating and overall building construction. This will not only save hundreds of millions of dollars for industry and consumers alike but will lessen the dependence on such critical energy resources as oil and natural gas.

2) The federal government, and the few states that can afford it, are offering attractive tax offsets to entice cooperative involved producers and users. These have been bolstered recently by Congressional legislation and include attractive enough tax reductions to entice the fence sitters.

The mood of the convention’s massive attendance was decidedly upbeat, as most participants anticipate a comeback in such sub-sectors as rental apartments, assisted living, office and light industrial building. No such hope is seen, however, for a return of residential or condominium construction. Inventory in that arena continues at a depressing high, while prices are drifting lower.

Because of these factors, we expect the commercial sector to gather steam as the year progresses, culminating in a better than now expected year of 2011.

Rental shift adds to housing depression

As increasing sectors of America’s economy join the comeback trail, residential construction is increasingly left in the dust. January figures show further slippage from the already beaten down levels, with foreclosures in California alone reaching 40% of sales. Unsold inventories remain at close to all-time high levels, despite new construction nearing a multi-decade low ebb.

What has gotten minimal publicity in the darkening housing picture is a monumental shift to rentals, both in individual homes, as well as in multi-story apartment buildings.

Even yesteryear’s big city condominium craze is changing from individual ownership to increasing commitments to rental. This situation is even starting to precipitate an apartment shortage, with builders viewing the potential not only for conversion but also for the building of new rental high rises in major cities.

This abandonment of home ownership, which became the battle-cry of egalitarians fifty years ago, has reached flood-like proportions. It threatens to become a fixture of the American scene, even as the rest of the U.S. economy approaches normalcy. It’s consistent with the greater prudence of the average wage earner, who is more interested than ever in paying down debt and putting his or her savings on a positive course to retirement.

While individual home owners will continue to comprise the backbone of America’s surging population, increased down payments (up to 30% or more) will become the norm as oversized mortgage loans are destined to lose popularity. This may be further mitigated by tax changes now underfoot to curb the size of mortgage loan deductions.

What is likely for the immediate future is the termination of home ownership, which became the centerpiece of the “progressive” movement for the second half of the last century.

America’s entrepreneurial renaissance trumps unemployment scourge

While lingering unemployment continues to corrode the vitals of a slowly recovering economy, the age-old spirit of America’s entrepreneurial ingenuity is beginning to appear as a welcome counter-force.

With large corporations increasingly allied with Big Government to solve their problems and continuing production shifts overseas, growing numbers of unemployed workers are turning to indigenous skills and aspirations to go into business for themselves. This individualistic entrepreneurialism is uniquely American. Although born out of a spirit of necessity, this embryonic groundswell could become the harbinger of home-based Mom and Pop new business opportunities. These could eventually evolve into thousands of successful companies, increasingly spawned by a rapidly evolving post-industrial revolution in the 21st century.

A major byproduct of this new wave will not only provide independent job creations, but a revitalization of "Made in America," which is making a tangible comeback after years of farming out production to the rest of the world.

With a minimum of eight million jobs wiped out by a combination of the great recession and a rapidly-developed technological revolution, new businesses must be created to put people back to work. This is especially true in such devastated areas as residential real estate, marketing-related and media jobs and the automotive production arena, all of which have been devastated by layoffs numbering in the hundreds of thousands.

With the White House curbing large and small business flexibility through policies devised by the legislative or executive order process, entrepreneurial start-ups could present the best opportunity for thousands with the talent, ambition and opportunity to go into business for themselves.

Although not everyone has the impetus to become Apple, Google, Facebook or Amazon, a growing number of idea-oriented or despair-driven unemployed are giving up on entrenched businesses and coming up with their own concepts. The near-term future will tell whether this sense of individual revitalization will take hold firmly enough to make a difference.

Copper prices reach an all-time peak

Since time immemorial, the intensity of America’s domestic construction industry had as its tell-tale barometer the price of copper. In fact, a pre-recession all-time high of $4 a pound was reached in mid-2008, just before the ignominious economic implosion that still persists in the residential construction sector.

But after sinking to slightly over $1.20 a pound early in 2009, the red metal, which is used in everything from automobiles to communications equipment, has spiraled to a near four-times multiple, closing recently at $4.60 a pound. With the construction-oriented copper usage, the bulk of its domestic demand, still bumping along in the doldrums, the answer to this obvious disparity is sales to China and also, to a lesser extent, to India, Indonesia, Vietnam, Taiwan and South Korea.

Although the Chinese economic miracle has been written about ad nauseam, the pace of that society’s conversion to consumerism and its accompanying construction is legendary. To put this awesome metamorphosis in perspective, the pace of that nation’s building activity staggers the imagination.

Less than ten years ago, a visitation by Chinese city mayors, in which I had the privilege of participating, elicited the fact that a city the size of Indianapolis (population one million plus) was built every three months by the Beijing-controlled economic giant.

Today, this building frenzy has escalated to a new metropolis the size of New York City (eight million) under construction every month. Much of this frenzied internal activity is a reflection of China’s governing brain trust, which is heading off internal convulsions among its teeming 1.4 billion population by upgrading its middle class and bringing its agrarian peasantry into the 21st century construction mainstream. It’s an example that should be copied by the Middle East’s Islamic chieftains.

 

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