If the Dirt Flies, the Recession is Actually Over

Karen Minich-Pourshadi, for HealthLeaders Media , November 30, 2009

Editor's note: To hear more of Jim's thoughts, listen to our audio interview.)

Q. How do the national construction trends stack up against hospital construction trends?

A. The weakest [economic] communities don't need more [hospital beds]; right now they may have too many. Since a good part of the hospital construction market is geared toward adding more capacity, new construction has gone down. However, another sizable part of hospital construction is improving capacity. So facilities may not be building new, but there are a great many hospital projects underway, just a whole lot of them are remodeling and replacement.

Q. How would you anticipate hospital construction to recover overall?

A. When the economy is booming and construction is growing 15%–16% a year, hospital construction still only expands 8%–9%. So, over the last couple of years, hospital construction didn't fall off as much as the rest of construction. It was up and down for a few months, and it slipped a few percentages, but it hasn't change too much, as opposed to an 80% drop in single-family home construction. So there's not a whole lot of recovery needed for the hospital construction market.

Q. What type of industry mix should CFOs look for in their communities to determine if their state or regional economy may recover swiftly or slowly?

A. The economy uptick over the last few months has been coming out of two markets: housing and manufacturing.

The [residential] housing market always recovers early, and that's true this time—although it's still in the depressed range now, it is going recover quickly. This is also true in parts of the country where there's population growth or where the inventory of unsold homes has been whittled down to somewhere near "normal". For example, in Buffalo, NY they still have too many houses and [home] prices have fallen, the recovery there will be slower there.

Also, areas that have heavy duty manufacturing—that industry is doing better now—will start to improve. We saw a big jump this summer in manufacturing, not as much in the fall, but the numbers are still creeping up.

Keep in mind some communities that have been doing reasonably well in the last few years when the economy has been troubled, such as university towns and small state capitals, may now see the recession catch up with them. Those areas are starting to see some layoffs, wage decreases, and cutbacks, so those communities will lag behind the rest of the economy [during the economic rebound].

Q. Should CFOs expect to see hospital construction lag in the areas that are still struggling with the recession?

A. Not necessarily. Even in areas like Arizona and Nevada, hospitals are largely self-funded with patient fees and capital gifts. So if they have the money and they have a plan, hospitals may go ahead and build anyway. But [it's more likely] in places like Texas and North Carolina that have been growing recently, that you'll see the expansion of suburban hospitals because they need the beds; whereas you aren't going to see that as much in Detroit and Buffalo, even though they may need the facilities desperately.

Q. Is there any correlation in growth between the national employment rates and the construction trends?

A. Not necessarily. So far, a lot of construction pick-up has been due to the FHA $8,000 down payment grants from Washington, D.C. In places where the economy is better you have a few more people who can take advantage of that. So, home sales went up and builders had to start replacing some of the housing stock. They still have too much inventory for sale in some regions, but the inventory got worked down a bit too, so home starts went up for several months and have stayed up. Now that this grant has been renewed through April, it will keep housing and manufacturing markets among the leading industries to watch during in the recovery.

Hopefully, you've found Dr. Haughey's thoughts to be as insightful as I do when I read all the news reports about the recession rebound. Certainly, every hospital CFO knows the importance of the big picture when creating their strategic plan. So, to get a true look at the larger economic picture, keep your eye on the national and regional construction trends. In doing so, you stand to fare much better when the time comes to budget for and build a new facility or retrofit/renovate an existing one.

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Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.

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