What Effect Does Recession Have On The

Construction Industry, Essay, Research Paper

?What Is this Affect, And How could a small Firm Survive During These Periods?A recession is a decline in overall business

activity.? During a nationwide

recession, a country suffers a drop in buying, selling, and production, and a

rise in unemployment.? A recession may

also hit an industry or a region.?

Historically, nationwide recessions have also brought an end to severe

inflation or even a fall in prices.? A

recession hurts countless people, especially the workers who lose jobs.? Most recessions occur

because the total amount of spending in the economy drops.? For example, if sales rise more slowly than

usual, businesses may reduce their orders for new goods.? The manufacturers that supply the goods cut

back on production.? They need fewer

workers, and so layoffs and unemployment increase.? Workers have less money to spend, which further decreases the

demand for goods.? As this pattern

spreads, a recession begins. Below is a diagram showing the business cycle:

(for business cycle dates see appendix 1) The collapse of some companies during a time of

recession is part of the customary business cycle, and some people reason that

this is the way capitalism works. By allowing some companies to falter, because

they are unable to compete in the world market, we ensure only the best

organisations survive. This survival of the fittest model of business

operations is what ensures that there are gaps in the market for new firms to

set themselves up when the upturn occurs. They are able to expand using the

unemployed resources that are then available. The problem with this theory of market forces is that

occasionally the downturn in the cycle is so severe that profitable and

efficient businesses become insolvent. This results in the economy not having

the capacity to thrive once it takes an upturn during a recovery.What I will now look at is how this business cycle

affects the construction industry in particular, and it?s workers. I will then

examine why this happens and how I feel businesses within the industry could

manage to survive during this time. The building industry is particularly renowned for

struggling during times of recession due to the fact that construction is

generally regarded as a luxury item. As recession takes a firm grip of the

economy we then see a fall in income in the economy as mentioned above. With

disposable income decreasing we see the demand for luxury items decreasing and

thus a fall in earnings in the construction sector. Price Basically,

this is why the construction industry is affected so badly by recession. What

I will now examine is what exactly is the effect of the recession on the firms

within the industry. To do this I questioned to people who work in the construction

business. The first has been in the industry for 45 years, and was affected

very badly by the recession, which peaked 5/90 when he worked for the

organisation Bovis. The second has been in the industry for 27 years and was

self employed during this same spell, and was also very badly hit. To begin with I will

examine worker 1 who was employed by Bovis at this time. When I asked him about

how the company responded to decreased demand during the recession he commented

on the redundancies made in great detail. This was the most major cut-back made

by the firm, and he was one of those that was made unemployed, which also

coincided with the closure of many of the companies sites. These two diagrams

above show the problems of unemployment such as that described by the Bovis

workers in the recession of 1992. As can be seen as the trough hits an all time

low, unemployment reaches a high of 3 million. Then as we head out of the

recession unemployment begins to decrease. This is exactly what happened in the

construction industry, which we can now see experiences what is known as

cyclical unemployment, which is directly associated to the period of time

relating to the trade cycle. This can be seen in appendix 5. Here we have the

accounts for 2 construction companies, Barratt Developments and Alfred

McAlpine. If we look at the periods dating back to 1992 then we can see that at

this stage both firms were experiencing times of negative growth of sales. For

Barratt we see ?19.6% in 1991, leading up to the depression, then ?5.9% in

1992, -7.5% in 1993, until we move back in to positive figures in 1994. This

links with the number of employees, where we see the trend of cyclical

unemployment taking place. In 1991 they have 3,000 employees reduced to 2,400

in 1992 and then 2,200 in 1993, until in 1994 the figures begin to rise again.

Much the same happens in the figures for Alfred McAlpine. So, those employed by

larger firms became unemployed, but what about those self-employed in this

industry? According

to the second person I interviewed they suffered an even worse fate. Being

self-employed they do not have the advantages of the financial economies of

scale such as being able to borrow huge amounts of money from the bank, as they

are seen as a liability (although loans for larger firms were made less

available as interest rates were increased to curb inflation in 1989). As we

can see from appendix3the

problems during the recession forced the owner to close down the business and

move to Germany, which at this period was experiencing a boom as seen in

appendix 1.This meant that he had to cut back

in terms of making people redundant. This leads to the question, so how can a

small firm survive during a recession? In my opinion there are a number of ways

that could combine to help a firm to survive this period without taking drastic

measures like those seen by the self employed construction worker I

interviewed.The

first of these ways is to think like a big firm. Large corporations have a good

understanding of what position we are within the trade cycle, which enables

them to hone their activities to the period they lie in. There are a number of

ways to detect a slump in the offing and once a recession sets in, it tends to gather its own

momentum. Consump?tion demand falls off first, and then investments that looked

profitable on the expectation of continually climbing sales and prices suddenly

become unprofitable. High interest pay?ments, which seemed easily tolerable

when sales and prices were rising steadily, now become a burden, and business

failures, which were infrequent in the boom period, now become more common.

These are all signs of an upcoming slump period, which should enable a small

business to prepare as best as they can. This preparation can also come in a

number of forms.Firstly, management

should be concerned with plans to con?vert fixed to variable costs, probably by

transferring previously full-time staff either to part-time or on sub?contract.

Managers should also start to shorten purchase contracts, pay off debt, reduce

inventories, tighten working capital and review forthcoming budgets. This would

also be the opportunity to review the pattern of sales and distribution in

preparation for differentiating products and seeking niches. As the construction industry provides capital goods in

many cases then they are likely to be hit badly. This may make firms postpone

expansion plans, as they do not need to increase capacity with a falling

demand. However, if the finance is available (and this finance would have to

come from somewhere other than banks for a small firm like this) then the firm

may react to the recession by investing in labour-saving equipment, because in

the construction industry especially labour is the major business cost. The reason

why this is an unusual reaction though is because expected profits are making the decision to invest more unlikely. Another method of raising finances enough to stay in

business could be destocking inputs As firms cease to trade, as is the case

here, then the stocks of inputs will build up. This will cost more money as the

stocks firstly have to be paid for, and secondly they have to be stored

somewhere, which also costs more money. So to cut borrowing needs the company

can run these stocks down. One way that could help a small firm stay in business

during a depression via the use of pricing policies. With poor trading

conditions firms may be able to develop better marketing strategies in order to

boost sales to their maximum during this time These pricing policies could

include bargaining towards a lower price for the customer to ensure the sale

and striking a deal that best suits the current market prospects. Basically any

offer that can keep the business making a normal profit for the time being, until

they can proceed in to the recovery to make a super normal profit. In a more radical approach the small firm could

diversify during the depression. By substituting to a different product they

could avoid the cutbacks of a recession. Obviously the product would have to be

related to the construction industry, because otherwise it would become too

much of an upheaval for the firm. The product could take the form of either a

niche market or by finding another product for which demand is not reduced

during the recession. Looking at Appendix 6 I have come up with an idea of what

this product change could be. First, if we look at the company sales chart for

the Aggregate Industries, which is a supplier of raw materials to construction

companies. From the sales figures we can see that their sales are not affected

as badly as the construction companies themselves. There is a drop in sales

growth, but it does not turn negative until 1993, which was nothing to do with

the recession therefore, and must have been company based problems. This

suggests that there is a sector of the industry that still needs a steady

supply of materials during the depression (note: I am not suggesting that a

small company should enter this industry themselves, as this is too much of an

up heave for the firm). Then looking at the Birse group sales analysis we can

see that there is an unusually small drop in sales over the recession. Birse

are a company that construct retirement homes. What makes them a niche is the

fact that despite the recession demand for private elderly homes stays fairly

neutral as they are almost a necessity. It must be noted however that it is

important that the firm would specialise in private construction because ,

obviously, public retirement construction is going to take a downturn, like the

conomy in the depression as government spending is decreased. Looking at the

sales figures we can see that leading up to and during the depression the sales

growth remains positive, and only in 1993 does it turn negative. Overall,

however sales figures have remained fairly steady throughout the years echoing

the fact that they are not affected cyclically. This is also shown in the

fairly stable rates of employment around the 1,500 mark. Another possibility is to stay in residential

construction, but not by new builds i.e. to undertake renovation,

refurbishment, and extension work. If people want to move but? do not?

have the money, then the next best option is to make the best of what

you have. This is why we can see the survival, and increased sales growth even

through the depression of companies such as Anglian Group PLC. Although this is

a relatively large company, the theory of building extensions as

diversification off of the construction path could also work for a small firm.

The sales analysis for Anglian can be seen in appendix 6. We can see from this

that employment levels in this company actually rise during the depression from

60,026 in 1991 to 71,216 by 1993. This is a complete comparison to those

construction firms who base sales only in completely new builds. This new area

could also include the idea of painting and decorating, which tends to go hand

in hand with the idea of extension work, and could prove to be just as

profitable during times of recession for the same reasons as extension work are

advantageous for the consumer. In conclusion, the construction industry is always going

to be very badly hit during a recession, due to the nature of the market it

operates within. This will mean there will be no end to the cyclical

unemployment problems we can see currently. Large organisations though do not

suffer as much as the smaller firms as can be seen from the two examples which

I have included, due to the fact that larger firms have the ability to spread

risks and have financial assets beyond that of any small firm. There are

however ways that smaller firms can avoid going bankrupt. These include

replacing fixed with variable costs (in terms of employment), investing in

labour saving equipment, destocking, adopting pricing policies, and

diversifying sales, all of which could have helped the self employed

constructor or any other firm stay afloat.

HOW LONG HAVE YOU WORKED IN THE BUILDING INDUSTRY? WHAT

IS YOUR CURRENT JOB TITLE?WERE

ANY OF THE COMPANIES YOU WORKED FOR AFFECTED BY RECESSION?WHEN

WAS IT THAT THE COMPANY WAS AFFECTED BY RECESSION?HOW

DID THEY RESPOND TO THE RECESSION IN TERMS OF COMPANY DECISIONS? I.E. DID YOU

MAKE ANY EMPLOYEES REDUNDANT?HOW

WAS THE COMPANY AFFECTED BY BOOM PERIODS AND WHEN WERE THESE BOOM PERIODS?Nb.

I wonder if it could be possible if you could help me by attaining some

accounts of your current company for both a boom and slump period. Your help

would be greatly appreciated Source Number Source

1 The

Sun Newspaper 19/10/00 2 Nuffield

Economics And Business- Longman 3 Through

The Whirlwind- William Houston 4 Positive

Economics Edition 4- Richard G. Lipsey 5 Phillip

Jones- for interview 1 6 Mr

Brown- for interview 2 7 Advanced

Economics- Oxford Revision Guides