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A Black Swan event for sure

By Pierre G. Villere

I hope you read my column last month; I worried about the events surrounding the unfolding coronavirus epidemic in Milan and northern Italy, and feared what might happen if it struck an American city. I described the epidemic as a Black Swan, a theory that refers to unexpected events of large magnitude and consequence and their dominant role in history. I had no idea we would witness what has occurred since I wrote that column.

Pandemics of biblical proportions go back to the Old Testament, and are well-documented throughout history. The Black Death in 14th century Europe killed half the population, and the Great Plague of London killed millions in 1665. But modern pandemics are not uncommon: The Spanish Flu of 1918, right after World War I, killed as many as 100 million people. More recently, the Asian Flu in 1957 struck first in the coastal cities of America, and by the time it was over, 116,000 people in the U.S. had died.

There is no telling when this will all be over, but even conservative estimates expect significant relief by summer, if the reduction in new cases in China, Italy, and Spain are any indicator of the life of this most recent scourge. But response to the epidemic has brought our global economy to its knees, spiked our own unemployment to levels never seen in history, and given rise to the key question: What does the eventual recovery hold for the construction materials industry?

First, consider that unlike the Asian Flu in 1957, the instantaneous global communication that has arisen through the internet, cellphones, and satellite television brought a sudden and painful halt to every economy in the world. But unlike the 1957 pandemic, both Congress and the Fed have moved rapidly to provide stimulus, and there is more to come. The first package, the now-famous CARES Act, will direct $2.2 trillion in a wide-ranging series of economic remedies, from job retention incentives to individual checks for the average American hourly worker who has been hit so hard by this pandemic. And the Fed has stepped in as well, and rapidly, dropping the discount rate to near zero. It also has provided liquidity to the mortgage market that has helped steady home interest rates at below 3.5 percent, a level that will surely prevail for many months ahead.

But clearly a second round of stimulus is being planned, and as Congress and the White House contemplate the next phase of the government response to the coronavirus pandemic and its economic toll, Democrats and President Trump are increasingly raising the prospect of enacting a multitrillion-dollar infrastructure plan that could create thousands of jobs. The President and congressional Democrats had clashed for three years over how to structure such a plan, and striking a deal to do so would be an exceedingly steep challenge in an election year. But as coronavirus response measures ravage the economy, both parties appear to be coalescing behind the idea of something akin to a New Deal-style jobs program to help the nation cope with what is expected to be a deep recession.

Whether or not a compromise can be reached, the infrastructure issue is likely to become a centerpiece of both Trump’s re-election campaign, and the Democratic fight to retain control of the House and win the Senate, as the two parties compete to position themselves as more responsive to voters’ needs. The Democrats have outlined the contours of their proposal, building off a five-year, $760 billion framework the House majority members introduced earlier this year. But Trump wants more, tweeting recently that such a plan “should be very big and bold, Two Trillion Dollars, and be focused solely on jobs and rebuilding the once great infrastructure of our Country!”

Of course, a compromise will be reached by both parties, and when we couple the rebound that will occur in the housing market, we can expect construction will be on the leading edge of the economic recovery. While the hospitality industry may be slow to come back in full force, and this pandemic may have put another very big nail in the coffin of bricks-and-mortar retail, I am betting that residential, commercial, and public works will be carrying the battle standard in our march toward a recovery.


PGV headshot 2016Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter - @allenvillere.