Construction Economics - Assignment Example

? Construction Economics Task Recession in Construction and associated Economic Concepts The construction industry is among the most essential industry in the global economy. The nature of the industry deals in both goods and services. It deals with goods such as apartments, houses, factories, schools, offices, roads and the building of other structures. The industry provides services such as maintenance, repairs and rehabilitation of existing structures. The industry comprises of three main sectors, which include building construction, heavy and civil engineering and specialty trade contractors. The building and construction sector includes contractors who build buildings for residential, industrial and commercial purposes. Heavy and civil contractors build roads, bridges, sewers and other major projects mostly relate to state infrastructure. Specialty deals with carpentry, painting and other works that relate to all types of construction. The industry teds to enter recessions first and often the last to recover. Most economic factors, which lead to recession, affect the construction industry. Inflation is one of the major causes of recession where consumer goods become expensive resulting to a drop in customer spending. In instances when the economy is expanding, there is increased consumer spending due to better wages and high disposable income. During the economic boom individuals have disposable income, which they use to buy durable goods and assets such as apartments and homes (Samuelson & Nordhaus, 2004 p. 56). In addition, the state acquires more tax revenue, which it utilizes by developing infrastructure. All three sectors of the construction industry indicate tremendous growth during this period. Financial institutions offer low interest rates loans and attractive mortgage that result to speculative buying. On the onset of recession, the main economic indicator is inflation due to an imbalance in money supply and spending. The Federal Reserve intervenes by controlling money supply. The controls in money supply lead to a decline in customer confidence due to uncertainty resulting to a reduction in customer spending. Individuals are unable to buy assets such as houses due to high cost of living even in the speculation of a recession. This happens in the initial stages of economic contraction. The Federal Reserve additionally, increases the lending interest rates and mortgage rates leading to reduced loans. The monetary control and inflation affect the construction industry even when they are in the early stages of inflation. The fluctuating interest rates results to an increase in the number of defaulters since they are unable to pay (Agapiou et al, 1998, p. 56). Federal Reserve increase in interest rates and reduced money supply result to weak housing market. The increase in lending affects the housing market, which comprises of the building sector of construction industry. Those already building houses are unable to continue due to escalating prices brought by rise in energy cost and fluctuation of currencies. Economic recession heavily affects the construction industry even in the early stages due to initial reduction in customer sending that result to a decrease in the demand of housing due to oversupply. Recession affects the industry more when compared to transport, education and financial industries. In addition, housing prices fall leading to a rise in foreclosures. Schmalensee (1987) says that the recession results to a rise in unemployment and thus a decline in the number of construction works (132). An imbalance in supply and demands slows the construction of residential building due to increase in interest rates. For example during 2007 recession total construction in United States declined by 28% (Department of labor). During recession, the government reduces its spending since its budget is normally under strain. This results to a decline in heavy and civil sector of the construction industry, which heavily relies with government projects such as roads and bridges. The economic recession results to a decline in the construction of industrial and commercial building since companies have to cut their costs (O'Sullivan & Sheffrin, 2003, p. 54). The recession does not spare the specialty sector, which depends on overall construction work. The construction industry finds difficulty in bouncing back from a recession. Due to the tightness in the credit market, banks are not willing to give out loans for construction and other related activities. This becomes difficult for potential homeowners to access financial assistance to construct houses. Companies have to prioritize their needs and objectives after a recession, which does not often, include construction project. This results to a slow recovery of the building sector of the construction industry. After a recession, the government has other priorities due to a slim budget, which results to a slow recovery in heavy and civil sector of the industry. These factors combined prove difficult for the industry to recover compared to other industries. The economy heavily relies with the construction industry. Most sectors of the economy depend on constructions of buildings and infrastructure. Financial institution such as banks heavily relies on the construction industry since it is a major borrower and banker. Banks offer financial assistance to individual who want to purchase houses but unable to raise the required amount (Batra, 2002p. 192). During the recession when the industry was declining in output financial institutions recorded poor growth due to defaulters and decline in borrowing and mortgages. The commercial industry heavily relies on the construction industry due to the construction of offices and industries. The commercial industry, which has assets and premises, relies on the construction industry. The manufacturing industry depends on the industry in order to carry out their manufacturing activities. In addition, the education and health sectors of the economy depend on the industry due to the construction of school and hospitals (Martin, 1993 p. 12). The government also depends on the construction industry to construct infrastructures such as bridges and roads to boost economic growth. The economy heavily depends on the construction industry since it forms an imperative part of the economy. Economic growth depends with the construction of housing units, industries and infrastructure to boost other industries such as banks and the manufacturing industry, which provides the required materials for construction. In addition, the construction industry offers employment opportunities to individuals contributing to the overall growth of the economy. The overall economic growth is slow or minimal when the construction industry is declining. The rise in prices within the national and local construction industry indicates that the economy heavily relies on the construction industry. Task 2: Business Cycles Economic cycle is the repetitive changes in economic activities over a particular period. This refers to variation in production and other economic activities. Moore (2008) explicates that the fluctuations usually occur after a relatively long time, which involves a shift in economic activities (29). The growth rate of gross domestic product (GDP), employment rates and household income are indication of the shift in economic cycle. The economy experiences a business cycle where income, spending and growth of production fluctuate over time. A short-term economic growth usually follows a short-term decline in economic activities. The economic boom occurs when the GDP rises at a faster rate than the usual long-term growth. The output of companies is high due to high demand of their products. The high output result to high profit margins and increase in operational costs that lead to employment opportunities. During this period, the level of aggregate demand for goods and service is high due to the fast growth of consumption (Moore, 2008, 73). The levels of inflation drive and determine economic cycles and boom since it affects the levels of customer spending. Inflation levels are low during this stage resulting to high customer spending, high profit margins for companies and rise in employment levels. He further says that the currency is stable during economic boom resulting to customer confidence (74). This records a rise in most economic activities. The energy costs and global financial environment are favorable during economic boom. The economic boom is followed by an economic slowdown, which records a relative decline in economic activities. The economic recession results to a fall in the GDP recording a negative economic growth. The inflation level rise resulting to reduced money supply and control measures by the government. The high levels of inflation result to reduced customer spending and low profit margin for companies. Companies cut operation cost by laying off workers resulting to unemployment. The currency fluctuate affecting customer confidence due to low wages from companies. In addition, the government has low spending due to strain budget resulting from a decline in revenue. The demand of output declines due to fall in business confidence, profits and capital investment spending. The low disposable income and high unemployment rates result to a negative economic growth. A rise in GDP from the lowest level in the economic cycle signifies an economic recovery. The recovery depends on the rise in aggregate demand and citizens’ confidence on spending and speculation. There are no good aspects of economic cycles due to recessions, which can be severe. A recession can be momentous leading to disastrous economic situations which a country or economy cannot recover in a long time. Some companies and businesses collapse during recession due to a sharp decline in sales (Moore, 2008, p.24). The rise in unemployment rates and less disposable income can result to huge losses in human recourses, which can be difficult to recover over a long time. The economic recession, which follows a boom, result to a high number of loan defaulters who lose their houses. In addition, companies incur heavy losses due to recession resulting to closure. The government does not invest in infrastructure due to decreased revenue resulting to minimal economic growth. The government ought to intervene to ease the effects of economic cycle stages such as recession. This is because each recession has a unique cause coupled with usual cause. For example, the main cause of the recent recession was the housing bubble. This was coupled with rise in energy cost, inflation and fluctuation of international currencies. The main cause of the great depression was a shake up in the stock markets. The government ought to intervene since recessions are unpredictable. The analysts cannot determine when or what will cause the next recession. If the government allows the economic cycles to take their own course, it can result to huge losses that would not occur (Moore, 2008, p.114). For example during the last recession, the United States had to bail out some of the companies to prevent job loss and closure. Some factors such as sharp increase in oil prices and other energy sources can plunge the economy into a recession (Eckstein & Sinai, 1990 p. 132). It is imperative for the government to intervene and control factors such as inflation, and drop in the currency. It is important to note that globalization has partly changed the nature of business cycle. Some factors such as instability and political tension can greatly affect the economic activities of a country. As Morgan (1991) articulates, the government should intervene and control some economic factors and indicators such as money supply to protect its economy (p. 34). In general, the government should intervene to control and ease the effects of business cycle since they have an unpredictable cause and pattern. It is imperative to reduce the effects of business cycle on the construction industry. The economic cycle greatly affect the construction industry, which is important in economic growth. The government should closely monitor and regulate economic indicators that affect the construction industry. It should protect the industry by providing assistance to the industry in times of recession. The government should reduce effects of economic cycle on building segment of the construction industry. This sector constructs houses, schools, hospitals and commercial buildings. The government should intervene and control inflation, high interest rate and demand of housing units, which account for most of the building sector (Moore, 2008, p.57). The construction industry falls into recession before other industries due to decline in spending. The government should ensure that it sensitively controls the lending rates in times of inflation and recession to protect the industry. The state is responsible for most of heavy and civil construction works. It should ensure that it invests more in the construction industry to offer job opportunities to construction workers. In general, the government should take necessary measures to reduce the effects of economic cycles on the construction industry. References Whaples, R. 2006. "The Costs of Critical Commentary in Economics Journals". Econ Journal Watch 3 (2): 275–282. Archived from the original on 2008-01-29. http://web.archive.org/web/20080129025046/http://ideas.repec.org/a/ejw/volone/2006275-282.html. Retrieved 2011-11-15 Schmalensee, R. 1987. "Industrial Organization", The New Palgrave: A Dictionary of Economics, v. 2, pp. 803–808. Samuelson, P& Nordhaus W. 2004. Economics, ch. 27, "The Process of Economic Growth" McGraw-Hill Agapiou, A., Clausen, L.E., Flanagan, R., Norman, D., & Notman, G. 1998. The role of logistics in the materials ow control process. Construction Management and Economics, 16, 131–7. Nordhaus, W., D. 2002. "The Economic Consequences of a War with Iraq", in War with Iraq: Costs, Consequences, and Alternatives, pp. 51–85. American Academy of Arts and Sciences. Cambridge, MA. Retrieved 2011-11-15 O'Sullivan, A, & Sheffrin, S. 2003. Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 57, 310. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4. Retrieved on: 2011-11-15 Kondratieff, N. D.& Stolper, W. F. 1935. "The Long Waves in Economic Life". Review of Economics and Statistics (The MIT Press) 17 (6): 105–115. Eckstein, O & Sinai, A. 1990. "1. The Mechanisms of the Business Cycle in the Postwar Period". In Robert J. Gordon. The American Business Cycle: Continuity and Change. Chicago: University of Chicago Press. Morgan, M., S., 1991.The History of Econometric Ideas, Massachusetts: Cambridge University Press Batra, R. 2002. "Economics in Crisis: Severe and Logical Contradictions of Classical, Keynesian, and Popular Trade Models". Martin, S. 1993. Industrial Economics: Economic Analysis and Public Policy, Prentice Hall, Englewood Cliffs, NJ. Moore, H., L.2008. Economic Cycles: Their Law and Cause reprint edition Washington DC: BiblioBazaar. Bureau of Labor Statistics, U.S. Department of Labor, Career Guide to Industries, 2010-11 Edition, Construction, on the Internet at http://www.bls.gov/oco/cg/cgs003.htm (visited November 15, 2011 ). Read More