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As we ring in 2012 in a few weeks, we will begin our sixth year of the downturn in the construction materials industry, despite a recession that was supposed to be over a long time ago.

Officially, at least, the recession began in December 2007 and ended in June 2009. I wish someone had told us that because by all appearances, we are still deeply mired in it. Looking at put-in-place construction numbers, we are down fully one-third since the 2006 peak of more than $1.2 trillion, as we are experiencing a current run rate of around $800 billion.

But the numbers in the ready-mixed concrete industry look worse, with peak-to-trough declines of 45%. Production totaled 458 million cubic yards in 2005 compared to about 258 million cubic yards in each of the last three years.

As I travel, many people ask me why things have been so bad for so long. Yes, if you have been in the industry for a few decades, this is no doubt the longest and most difficult recession we have experienced. For construction, it is the worst since the Great Depression of the 1930s. So here is why this painful construction slump is lasting so long.

According to one U.S. Federal Reserve member, we are now experiencing a long-term structural problem in our economy known as a balance sheet adjustment. We experienced this during the Depression, as Japan has over the last 20 years. Many global economies have experienced this, which is the accumulation of debt over 10 to 30 years that resulted in a massive asset boom. This was followed by an associated financial crisis when the bubble burst.

The response is to nationalize private debt, and what follows is a decade-long period of low growth and high unemployment. This is punctuated by sovereign debt crises as a result of the increased debt that was accumulated during the initial crisis to smooth out the problem.

The recession of the 1980s was a good example of the unemployment challenge. Unemployment climbed to more than 6% in December 1979, and did not fall back below that number until September 1987, almost eight years of higher-than-normal unemployment.

Remember, there are four key structural problems that converged to create this balance sheet recession:

  • Public sector debt, which is growing and exacerbating the problem
  • Debt in the household sector
  • The housing bubble hangover
  • Very high unemployment

Those key drivers have resulted in considerably muted consumer spending, which accounts for 70% of the U.S. economy.

Fixing the problem

So what is the solution? We have to tackle each of those four problems, but it will take time and hard work. And Washington needs to get its own fiscal house in order, along the lines of the Simpson-Bowles plan that spells out at least $4 trillion in debt reductions. This will bring the primary debt in balance, while reducing our overall national debt over time.

Make no mistake, it will take a lot of hard thought, hard work, and courage to muscle through these problems and bring the economy to anything resembling health. And it will start with our political parties, who must work together, rather than trying to score political points.

I agree with many of my colleagues that 2012 will be better than the last two years, and we will steadily climb from there. The good news is that the industry is leaner and meaner. A recovering economy will bode well for future profitability.

Pierre Villere is president and managing partner of Allen-Villere Partners. Contact him at pvillere@allenvillere.com or telephone 985-727-4310. Visit www.allenvillere.com.