Efficienty is the key to success in any industry, including the sharing economy.
From construction sites to retail stores, working in the most efficient manner is the best way to maximize productivity and profits while minimizing wasted effort and resources.
The current economic status of low and steady inflation has been attributed to the introduction of the sharing economy, allowing people to be more efficient with their current possessions. The Wall Street Journal recently published an article written by Todd Buchholz (former White House Director of Economic Policy) in which he explores the impact the supply shock has had on the economy, and argues that it will not be going away anytime soon.
In the past ten years thanks to the introduction of the “sharing economy”, companies like Airbnb, Uber, and DOZR have interrupted the traditional economic cycle by creating the opportunity for people to use their own products more efficiently. This is done through the creation of virtual (online) marketplaces.
The life cycles of products are extended by being repurposed as resources to once again feed the input side of the economy. Cars become taxis; Houses become hotels or B&Bs; Tractors go from being owned equipment to rental equipment. No matter the product, the existing capital is used more intensively. This maximization of product use is causing the supply shock in the economic cycle, all thanks to the power of the internet.
Greater supply helps to keep prices low during times of higher demand. Companies can’t necessarily raise prices because there are more (and cheaper) options out there. So prices remain steady, inflation remains low and the confidence to spend continues.
Buchholz relates this economic leveling back to the strong US dollar, increased wages, lower interest rates, and overall greater willingness of companies to invest. (Full article available here.)
But what does this mean for the construction industry?
Investors, corporations, and individuals are more likely to spend money on projects when the economy is stable. As Buchholz explained, the willingness to invest increases in times of economic stability. This spending is reflected in the construction industry and construction project numbers are on the rise.
Between 2008 and 2018, the value of U.S. construction projects increased 18.2%. That percentage represents over $215 billion USD. 2011 was the lowest valued year in that timeframe, and since then, the industry has seen an additional 88.2% – a mindblowing $792 billion USD.
This increased investment has primarily gone towards private projects, while public investment has remained steady.
Chart outlining private vs. public construction project values from 2008 and 2019.
Data taken from the United States Census Bureau.
When overlapping this data with the inflation rates of the past ten years, a pattern emerges. Public spend reacts in kind to inflation. Inflation peaked in both 2009 and 2011 which is reflected in the slope of the value of private projects. As inflation lowered, private spending starts going back up. During all of this, public project values have remained steady. Governments and public budgets aren’t reacting to inflation the same way public spending does.
Graph outlining the relationship between private and public construction project values in comparison to inflation rates. Graph shows data from 2008 – 2018.
Inflation rate data taken from Trading Economics historical data chart.
Residential buildings, air transport and electric power projects within the private sector have had the largest influx in the past 10 years compared to other project sectors. The growth within these three sectors are the result of increased demand, with the electric power sector being a high growth area in particular.
Last year, wind and solar accounted for 62% of electric power construction projects. The Renewable Energy Futures Study predicts that by 2050, 80% of power in the US will come from renewable resources. As renewable energy technology becomes more popular, it will become cheaper to produce, fueling more demand, and the cycle goes on. The prediction of continued low inflation and a steady economy will support the continued growth of green energy projects.
Public project values, however, may defy their current pattern.
The buzz on public spending is that a boom is coming. An article from Business Insider explores the deteriorating state of US infrastructure. The American Society of Civil Engineers’ 2017 “Infrastructure report card” gave the US a D+. A D grade means that “the infrastructure is in poor to fair condition and mostly below standards, with many elements approaching the end of their service life”. The grade was the same four years ago, as well.
The Trump Administration has talked a lot about the need to spend money on infrastructure projects during his campaign in 2016. It is not a one-party plan, either. In April 2019, both Democratic and Republican congressional leaders agreed to a $2 trillion infrastructure plan to upgrade highways, railroads, bridges, and broadband. Both sides of the political spectrum understand the need to invest in the nation’s infrastructure.
The demand for public projects is coming. It will be huge. A $2 trillion investment in public construction projects would be a 148% increase compared to the $301.5 billion spent last year.
Traditionally, this kind of spending of government money would indicate a jump in inflation. However, the sharing economy has already disrupted the inflation cycle for private spending. Could it do the same for public investment? Could the power of the sharing economy help keep inflation rates low and maintain a level economy while the government spends $2 trillion on public projects?
No matter the cause of increased spending in the industry or the predicted incoming public infrastructure investment, the cash flow in the construction industry is coming in strong. More money funds more projects. Additional projects demand workers. Unfortunately, construction is already facing a disappearing workforce. If the industry is to maximize productivity to take advantage of the incoming investments, it will be necessary to use existing resources – both people and equipment – in the most efficient way. If it cannot do this, then neither inflation rates nor dollars spent in project funding will matter.