It’s been just over two years since Donald Trump was elected president of the United States.
Right out of the gate, his election had a pronounced impact on the economy, with the Dow breaking 26,000 points for the first time on Jan. 16, 2017, the day before inauguration ceremonies.
More recently, U.S. gross domestic product grew at a hearty 3.5% rate during the third quarter of 2018, on the heels of 4.2% economic growth in the second quarter — the highest rate reached since the third quarter of 2014. And September's 3.7% jobless rate was the lowest in almost 50 years.
Americans are optimistic that this job growth and economic expansion will continue, with the Conference Board’s U.S. consumer confidence index at its highest level since September 2000. And with this optimism among business sectors and consumers comes “robust” demand for construction, according to Associated General Contractors of America Chief Economist Ken Simonson.
But a number of signs are emerging to suggest that an economic slowdown is in the cards. The S&P 500’s 6.9% loss in October — typically the most volatile month of the year for the stock market — represented its largest one-month slide since September 2011. The nearly $2 trillion in losses across U.S. markets were prompted by concerns about impending interest rate hikes by the Federal Reserve and U.S.-China trade tensions, among other factors, and several forecasts anticipate recession in 2020.
How is the construction industry weighing economic expansion against a growing number of risks? As the president nears the halfway mark of his term, we take a look at some of the policies impacting the industry the most, as well as risks that could add to current business and labor challenges.
Tax cuts and deregulation
The recent economic expansion has in part been fueled by President Trump’s Tax Cuts and Jobs Act, which, among other provisions, included a decrease in the federal corporate income tax rate from 35% to 21%. It’s been particularly impactful for small companies, according to Associated Builders and Contractors President and CEO Mike Bellaman, who noted that 98% of construction companies employ less than 100 people.
That extra dollar that flows to the bottom line that doesn’t go to tax is another dollar [companies] can invest in hiring someone, giving them more rewards, buying a a new piece of equipment — all in the interest of investing in the growth of their business.
Mike Bellaman
ABC president and CEO
This tax legislation and deregulatory agenda — which includes a push to speed up permitting times for infrastructure projects and which saw the repeal of the Department of Labor’s Fair Pay and Safe Workplaces Act and other so-called bureaucratic red tape — amounts to a business-friendly government culture, according to Bellaman. The administration, he says, has struck “the right balance of regulation,” thanks to cabinet appointments of individuals who understand business management.
“When I talk to our members, they feel like they’ve gone from being assaulted as business owners and not appreciated as job creators, to entering into a culture that is welcoming to business,” said Bellaman.
Infrastructure
Rhetoric following the midterm elections earlier this month has suggested the impossible — that Democrats and Republicans in Congress might actually find common ground on infrastructure.
The day after the election, House Minority leader Nancy Pelosi (D-Calif.), Senate Majority Leader Mitch McConnell (R-Ky.) and the president each separately expressed optimism that bipartisan agreement could be reached.
“It appears that infrastructure is going to be something that everybody wants to get done together,” Bellaman said. “The question is going to be, where are we going to find the trillion dollars and who chooses how to spend it?”
That will be the main point of contention, Simonson told Construction Dive. “Nobody wants to see other programs that they care about cut in order to fund something else, and there hasn’t been enough sentiment for a new revenue source” to back Trump’s proposed $1.5 trillion in infrastructure improvements, he said.
The president’s plan suggests $200 billion in direct federal investment, with state and local governments partnering with the private sector to make up the rest of the balance. Some lawmakers have suggested a federal gas tax, but as yet, there has been no consensus on a funding source.
Spending and trade
Federal stimulus in the form of infrastructure investment may become critical as other forms of fiscal stimulus fizzle out, according to Moody’s Analytics Senior Director Cristian deRitis.
There are a lot of risks out there and the longer you do expand, the more exposed you get to those risks.
Cristian deRitis
Senior director, Moody's Analytics
The $1.3 trillion omnibus spending bill passed in March still has a tailwind that may be enough to push the economy another eight months, breaking the record for the longest expansion in the post World War II period, he said at Dodge Data & Analytics’ Construction Outlook Conference last month. “That said, there are a lot of risks out there and the longer you do expand, the more exposed you get to those risks,” he added.
A top risk involves the trade tensions between the U.S. and China. Contractors have been feeling the pain of tariffs with higher material costs — the most recent producer price index has the cost of inputs to construction industries up 6.6% over the last year. The cost of materials that contractors put into projects and goods that they consume, like diesel fuel, is up 7.9% over the last near, nearly triple the rate of the overall producer price index.
Even if tariffs remain at the same levels, Simonson said this pain will only worsen. “Many things were protected initially because there were already supplies in the U.S. or contractors had locked in the prices of items,” he said, “but those supplies … will pretty much be depleted by 2019,” at which point the full brunt of tariffs will come down on product buyers.
Another risk is the growing federal deficit, which swelled to $779 billion at the end of the fiscal year. The government is expected to borrow about $1 trillion next year to make up for the decrease in tax revenue that came with tax cuts. The rising deficit and debt, now up to $21.8 trillion dollars, will inevitably lead to higher interest rates, according to Simonson.
The AGC “hope[s] that both parties will pay attention to holding down the deficit,” he said, and would like to see “a combination of monetary and fiscal policy that keeps interest rates on course.”
Labor
U.S. employers have added an average of 210,000 jobs a month during the past year, but even with unemployment at a 3.7% low, labor shortages in the construction industry are not letting up.
In a recent survey of 2,500 construction professionals conducted by AGC and Autodesk, 80% of respondents said they are struggling to fill hourly craft positions while 56% reported difficulty filling salaried positions. In addition, 81% of firms said it will continue to be challenging or even become more challenging to find craft workers in the short term — especially as construction spending and demand for workers increases.
But the administration has underscored career and technical education in a way that the country has not seen in some time, according to Bellaman. The construction and manufacturing industry have been working with the president to “rebrand” these careers, he said, “making it attractive, telling the story, getting [people] in, then getting them educated so that they can build competencies that are stackable and portable.”
The president signed the Strengthening Career and Technical Education for the 21st Century Act in July, providing $1.2 billion to states to promote secondary and post-secondary training for jobs that doesn’t require a four-year degree.
“We’re hopeful that the administration will move in the direction of supporting more publicity and more funding for alternatives to pushing everybody on to college,” Simonson said, as well as back the message that construction is a rewarding career.
Given that the vast majority of construction firms employ less than 100, and that those same firms build 67% of construction, according to Bellaman, individuals entering the trades could be looking at a pathway to business ownership.
“We have so many stories where individuals come into our industry, learn a skilled trade … get some soft skills, manage a crew, learn how to lead," he said. "Then, they go start their own business and they’re employing people and buying equipment and they’re job creators."
