Prognostication 09 (updated January 5)

Jim Kunstler's forecasts are very pessimistic (www.kunstler.com). Unfortunately they tend to be accurate. Of all the major bloggers who prognosticate on energy, economy and environment Jim has the best track record for elucidating the basics and for drawing conclusions about what they mean. I have been reading Jim's material for several years. At first I found it mostly entertaining, but I was not a believer. Jim writes with outrageous bluster and hypebole. While it makes for an interesting read, his style tends to undercut his credibility. His forecasts have been so outrageous that they make it difficult to believe him when he predicts  that the status quo will move so far, so quickly. 

I read a lot about energy, environment and economics - this is a natural result of practicing landscape architecture and environmental planning for the last 35 years. Landscape architecture and architecture are perennial bellwethers of the economy. They are the first to take a dive when the economy goes south and the first to recover when the economy comes back. So, being flexible and being able to forecast and move from one market to another, as markets rise and fall, becomes a survival tactic. 

The design professions for the built environment are driven by market conditions and react swiftly to upturns and down ticks in the economy. If you want to know when the economy will truly come back, you would do well to monitor the employment ads for these professions. When you notice a trend in increased hiring you can safely start to move back into the market because the money is starting to flow again and the landscape architects, architects and engineers are the first ones to begin the work of ramping up for new capital projects. 

So, Jim Kunstler has been on my radar for the reason than that he understands the issues, has good information, he can synthesize, and he writes well. At the beginning of each of the last few years he has made a forecast for the coming year. At the beginning of last year, he predicted pretty much what happened, as it happened, but so outrageously that it was hard to believe. By mid year, as things unrolled as he said they would, I started to pay serious attention to  his weekly blog. 

Jim has just published his forecast for 2009 and it does not include much hope for recovery, or even leveling out the broader economy. If his forecasts remain as accurate as they have been in the past, we are in for a rough ride. There will be a quick uptick from the influx of public money for public works but the underlying forces which have shaped the current downturn have not abated, nor will they abate in the near and intermediate term. 

Things will  be better in the design and construction sectors in the near term as the public money kicks in but the broader economy is in for a great deal of volatility as demand for commodities continues to skate along its convergence with peaking supply capacity. Many crucial natural resources such as free flowing oil, steel, copper, et.al. have fallen in price because of  over supply, but the capacity for supply to exceed demand is not far away and as the economy begins to recover, scarcities will return and drive prices back up, thereby once again weakening the fundamentals. Acknowledging that there are sectors and places where the economy is contra cyclical to conditions in most of the rest of the world, I will leave it to you to read his material yourself and draw your own conclusions. 

Mikes Forecast for the Design Professions

Except for federal, and some institutional work, everything in the development world pretty much shuts down early in a major recession. If real money has been dedicated to construction and the construction is underway, the work will probably be finished. However, the first sector to go down is the private development sector. This is followed a year or so later by the state and municipal sectors as their coffers dry up due to declining tax revenue. In a mild recession the private sector comes back first as money starts to come back into the system and then the municipal and state sectors come back as the tax money from the new employment and properties comes on line. The story is different in major recessions and in a depression because the money does not come back into the system quickly, or on its own. 

Within the design fields, the first to feel the pinch are those firms and individuals who work primarily for private developers. When these firms start to suffer they switch their marketing to focus more on municipal, state and federal work. It is difficult and time consuming to break into federal work so, unless they already have diversified into that market, or unless they can team with firms established in federal work, inexperienced firms probably will not succeed in the near term. 

The design firms which have already established themselves in the municipal and state arena now begin to feel the pinch as they find their competition has increased exponentially. For example, it is not uncommon to see thirty firms bidding on municipal projects that might have attracted fewer than ten bidders during good times. Not only that, but the firms inexperienced in municipal work drive fees down in that they tend to under bid the work because they do not understand the full ramifications of working within the world of the bureaucracy. And then the supply of work begins to dry up as tax revenues fall. So, unless a firm is ensconced in federal work or is somehow immune to economic fluctuations, they will have a tough row to hoe. The same, of course, goes for the individual landscape architects and allied professionals who are laid off or who hang in with their jobs under reduced circumstances. 

Where We Are and Where We are Headed

In terms of the design professions, and development in general, we are near the bottom of this cycle regardless off  what happens in the commodities markets. The feds are going to pour massive amounts of money into infrastructure projects and the first (or second) group to begin to reap the rewards of this influx of money will be the engineers, architects, planners and landscape architects who work in the arena of infrastructure and public works. As the work is designed, and it will be fast tracked, the design firms will ramp up quickly and begin to hire. As the designs move into construction the construction industries will also ramp up and begin to absorb the excess capacity within the commodities supply markets. All this work will generate income taxes. People will buy new houses and start to pay property taxes. The new tax money will help to repay the investment in kick starting the economy. The design professions should see an early upturn within three to six months. 

Update  1-5-09 >>>I did note above that the design  and engineering professions might be the second group to see the uptick. My sources tell me that the immediate kick start will likely go directly to construction, bypassing design. There is a backlog of designed and permitted, but unbuilt, projects virtually everywhere. Many see the quickest way to  get the most out of  the re-employment efforts is to  go directly to construction on those projects, as the lag time for design and permitting in the public arena can be very long. However, at the same time I believe that stimulus will be added at the research, development and design levels for new types of infrastructure projects to offset dependence on over demanded and under supplied commodities.

The danger lies in the possibility of inflation and volatility. As mentioned in my earlier post titled "How Do You Pay for a War?", inflation is good for debtor nations. Inflation results from a  loss of value of currency. As debts are tied to currency, the declining value of the currency effectively wipes out a corresponding amount of debt. Once heavy spending overcomes the deflationary pressures of economic decline, as it will, the spending becomes excessive and forces the currency being spent to decline in real value relative to commodities, products and real estate. Prices rise, salaries rise and a cycle is created. 

In order to avoid inflation, the stimulus will have to be reigned in, perhaps sharply and quickly. I am hearing that the stimulus package will be monitored to  avoid over inflating the money supply and that it may last no longer than 18 months. If true, this means that the duration of direct stimulus projects will be quite short. R&D projects for larger new technology projects will have to make a shift from stimulus to long term sustainability projects meant to keep things running. This process is very difficult to manage and it can easily result in economic volatility. 

At the same time, the world's supply lines reached peak yield in 2008 - this resulted in the surges in prices of commodities which helped spark the downturn. Because of the economic collapse, those supply lines are not being expanded and ceilings are not being raised. Very little new capacity is being added to the supply infrastructure because the profit has evaporated due to falling prices and few can obtain the money to make it happen. Despite the recent fall in commodity prices, supply has not increased. Only demand has gone down and it really has not gone down much, just enough to leave surpluses in the system's 'just in time' supply line, which has no room for storage. As the economy comes back on line we will quickly take up the slack and prices will begin to go up as demand quickly exceeds supply.  All of the major global economies are on the same track as we are, and the result will be volatility of supply and demand. 

The effect is that there are two separate forces acting to create volatility; the supply of currency and the supply of commodities. The design professions will be busy for the near term but the ability of the larger economy to ride out the volatility remains in question. If you believe Jim Kunstler, we will see much change in our world before stability returns.