Swarming with uncertainty

Features - Construction Industry Analysis

The Associated General Contractors of America’s chief economist points to several categories of uncertainty under a new president and Congress.

February 27, 2017
Kristin Smith

A new administration and Congress could echo in a new era for the U.S. construction industry. But no one is certain the what implications new labor, trade and fiscal policy, among other factors, will be for the construction industry.

Ken Simonson, chief economist, the Associated General Contractors of America (AGC), Arlington, Virginia, addressed this topic during the National Demolition Association’s (NDA’s) Demolition 2017 Convention & Expo, held in late January in Las Vegas.

Simonson noted construction spending reached its peak 11 years ago in February 2006. It has been climbing steadily since 2011, according to U.S. Census Bureau data, but even now, it is 2 percent below the peak without taking inflation into consideration.

Construction employment figures show employment topped out two months after spending did in April 2006 and bottomed out at the same time at the beginning of 2011. It has a much more gradual climb up so that even as of December 2016, employment was still 13 percent below its peak.

“You might think there are plenty of workers left, but as I think all of you know, that isn’t necessarily true for most of the industry and most of the country,” he told attendees.

2016 was a flat year for construction employment, according to Simonson. He said the industry added 102,000 workers for the year, which was a 1.5 percent growth rate—the same growth rate as the overall economy but only a third of the workers it added the previous year.

In late 2016, Simonson said, media was reporting that companies were holding off on investment and hiring because of uncertainty of the election outcome. He was not convinced.

“Now I feel like there is more uncertainty than there was before,” he said. “Every morning we wake up and hear about some new Tweet or proclamations that are overturning what has been going on. Some of this is positive for construction, but other things, I think, either are big negatives or at least adding a lot of uncertainties.”

Simonson said he sees at least six different types of uncertainties affecting construction, and discussed the following seven.

#1 Infrastructure

The first is regarding huge investment in infrastructure—as much as $1 trillion over 10 years.

“Obviously that would mean a lot of work for the demolition industry as well as the construction industry,” remarked Simonson. “But we haven’t seen any specifics on how that would actually be paid for, who would decide what types of infrastructure projects and what specific projects would be done. And we are also hearing a lot of skepticism in Congress about whether it should be done at a time when the economy is at close to full employment. Do we really need this kind of stimulus?”

Simonson said there is agreement that much infrastructure in the country is worn out, functionally obsolete or unsafe and should be replaced, but Congress and some states are not willing to increase taxes or shift funds to pay for these projects.

#2 Immigration

“This has both direct and indirect consequences for construction,” said Simonson. “Historically the construction industry and probably the demolition industry also has relied heavily on immigrant workers.”

If the borders are shut down or tightened up, it could reduce the pool of workers for these types of jobs, notes Simonson. Even if construction and demolition companies are not disproportionately employing immigrants, we’ve reached a point where the number of Americans retiring is just about equal to the number coming into the work force, he said. A border tightening could threaten the U.S. growth rate.

“If we are going to achieve higher economic growth rate, we are either going to need more workers or more productivity,” said Simonson.

#3 Trade policy

Simonson said the initial moves may look favorable for construction if companies decide to retain or increase their productive capacities here in the U.S. He warned, however, that other countries could begin taking counter measures. He added that if the U.S. is trying to put on new taxes or tariffs to force companies to produce here, all of the industries that rely on exports and imported goods, including construction, could be losers.

“The net impact on the U.S. economy and on the construction firms that rely on all of those segments could also be negative,” Simonson says.

#4 Regulatory relief

“We’ve seen some bold moves by President Trump starting within hours of his taking office,” said Simonson, referencing the freeze on regulations that were not yet final. He said Trump also announced that agencies would have to repeal two regulations for every one they adopted.

Simonson said the AGC sent the Trump transition team a 55-page document listing regulations it would like to see rolled back or modified, though he noted, “The reality is that for building contractors, a lot of regulation is at the local or state level.”

He told attendees not to hold their breath that some of the regulations that have already been finalized would be rolled back, as it would be a lengthy process to rewrite them.

#5 Fiscal policy

“Both President Trump and House republicans seem determined to go forward with a major tax reduction,” Simonson said. “As yet, they don’t appear to be talking about the same type of tax reduction in terms of the categories that would be affected.”

Which tax rates are cut will make a difference in what kind of tax bill contractors are facing. If individual tax rates are cut, but they are paid for by scaling back deductions on property taxes or depreciation in structures, that could impact property developers.

#6 monetary policy

Monetary policy is clearly being affected by the new uncertainty under how much the deficit is going to expand, according to Simonson.

“We’ve seen interest rates have recently moved up a percentage point, and are much more in flux than they have been,” he said. “This, too will have implications for construction costs.”

#7 health care reform

A seventh area of uncertainty having an effect on construction and employers is the expected repeal and possible replacement of the Affordable Care Act, said Simonson.

“Until hospitals know what kind of utilization and reimbursement rates they are going to receive under whatever replaces the Affordable Care Act, they may hold off on doing construction,” he said.

He added that hospital construction usually involves demolition first because it usually consists of expanding or modernizing an existing hospital or two older hospitals being replaced by a new one.

Demolition 2017 Convention & Expo, hosted by the NDA, was Jan. 29-31, at The Mirage, Las Vegas.

The author is editor of Construction & Demolition Recycling and can be reached at ksmith@gie.net.