This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Notes from Alex Carrick - Aug 30, 2012

Alex Carrick
Raucous Behavior in the Party Room Next Door

It’s going to be a tough choice.

While we here in Canada don’t have a say in the matter, we do have a stake.

A better assessment of the economy’s future is on hold until the Presidential election is decided.

The following sums up my assessment of the political situation south of the border and the possible economic outcomes depending on whether the Democrats or the Republicans win in November.

Keep in mind that for Canada, life beside America isn’t just about economics. There are many other matters that crop up between neighbors.

Interaction with other nations is also part of the mix. That’s why some of what follows also examines how our “friend” is getting along with the rest of the world.

But mostly it’s about the economy.

The Republicans, if they prevail, will be more ruthless when it comes to cutting government spending and promoting private sector job growth.

Mitt Romney, even in appearance, is the embodiment of corporate America. Dressed for success and perfectly turned out on all occasions, he’s the poster boy for entrepreneurial money.

In the previous Republican administration, fiscal restraint was hardly a priority. It was lacking every bit as much as in the early stages of the Obama Presidency. (The last year doesn’t count since there has been a budgetary gridlock over what measures are most appropriate to reduce the deficit.)

George W. Bush, faced with his own economic dilemma after the dotcom collapse, didn’t suffer agonies of self-doubt when he launched his still-in-place tax cuts while keeping no rein on spending.

This time around, though, if the Republicans take control, a stiffer backbone will be provided by the Tea Party faction in the House and the Senate.

The template has been provided by Scott Walker, the Republican Governor of Wisconsin. That state’s budget has been largely fixed by cutting public sector wages, benefits and employment levels.

Under the Republicans in Washington, expect more of the same. Measures favorable to business will be pumped up to bolster employment in the private sector. But if you have a government job, watch out.

To the Republicans, it’s more than a fair trade off. The vast bulk of work still remains on the corporate side.

The Democrats’ record on employment hasn’t been as bad as one might suppose. There have been 22 straight months of period-to-period increases. Employment in the services sector, which accounts for 70% of total jobs, has nearly returned to its previous high before the tumble in 2009.

The recession cost jobs, but two extraordinary circumstances worsened the effect.

The drop-off in housing starts beginning way back in 2006 took a huge bite out of employment. Housing starts are finally trending upward again as of this summer. 

Jobs in the manufacturing sector went into freefall in the early to mid-2000s coincident with the upsurge in the emerging world. Labor costs in North American and Europe couldn’t possibly compete with large pools of poor workers mostly in Asia. 

Only lately have manufacturing jobs – aided by major ownership changes and massive debt restructuring in the auto sector – been showing signs of stabilizing and picking up once again.

For Canadians, a Romney Presidency will be good for our energy sector. Approval for construction of the Keystone XL heavy oil pipeline to the Gulf Coast will be fast tracked.

The Democrats have been wishy-washy on energy projects, with environmental issues often taking precedence over capacity expansions. 

The Democrats’ success in promoting cleaner energy projects (e.g., solar, wind, geothermal) has proven spotty. Subsidies have gone to firms (e.g., Solyndra) that haven’t been able to deliver what was promised. Without large grants, such projects still aren’t cost effective.

There’s irony in the U.S. energy landscape, however. Under the Democrats, the U.S. has been moving quickly towards energy self-sufficiency. In fact, a booming energy sector has been one of the stars of the recovery.

North Dakota stands out for its strong energy-related investment, but many other regions have also benefited from greater extraction efforts. 

Much of this activity has come from a joyous embrace of new “fracking” technology to greatly expand recoverable reserves of natural gas and oil trapped in shale rock.

The potential danger to groundwater has been noted, but not allowed to stand in the way of rapid development.

In Canada and Europe, environmental activism has brought similar investment to a standstill.

The Republicans want a return to the “glory days” – to the America of old that was the shining beacon of freedom and free enterprise to the entire world.

It’s hard to argue with that.

For many people, though, the philosophical divide lies in the desire to move backwards on social issues.

The threat of abortion bans, religious intolerance and denied access to health care are all subjects that are worrying for many Americans.

For immigrant arrivals, there is uncertainty about legitimacy and whether or not their families will be allowed to fully integrate into the American fabric of life.

For foreign observers, the most disturbing manifestations of America’s inner struggles roar up in violence and crime and random shootings in cinemas, schools and at shopping malls.

The prevalence of guns casts a shadow over all the talk about American moral superiority.

We know the gun culture arises from a constitution that guarantees the right to bear arms, magnified by an enduring frontier mentality.

What it truly represents in the modern era, however, is the lobbying success of firearms firms and a pervading sense of fear at the individual level about what some “others” might do and what the future holds in terms of personal security. 

A society in which it’s taken as a matter of course to drive around with a rifle in the trunk, a pistol in one’s waistband and a spare gun at the office seems nothing short of a noxious Hollywood trip into some alternative universe.

This can’t be a good way to live. It’s certainly not the way citizens in most civilized societies want to conduct their lives.

On the international scene, the desire to keep America at the top of the weapons heap runs up against economic forces.

It costs a great deal of money to maintain a strong military presence around the world – especially when flare-ups require actual intervention in foreign skirmishes.

The Republicans, nominally the greater hawks on the subject of America’s armed forces, are the ones who want to cut spending the most.

Spending by the services may largely get a “by” under either administration, but it’s an argument with no end in sight nonetheless. 

Also consider that one candidate for the Republican leadership, Ron Paul, received 10% of total delegate backing based partly on a platform advocating U.S. pull-outs from foreign military installations.

Of course, Mr. Paul also believes there should be a return to the gold standard and a dismantling of the Federal Reserve.

What would we do if we didn’t have the likes of Alan Greenspan and Ben Bernanke to variously demonize or turn into deities depending on the stage of the cycle?

As for the gold standard, it fell short and was abandoned nearly 80 years ago (1933) during the Great Depression.

Caught in the grip of the present difficult economic circumstances, it’s easy to forget the many decades of prosperity since the mid-1900s that were accommodated by a set of monetary practices that have evolved over centuries. 

These have included central banks which are independent of government influence and free to set interest rates on their own.

On the subject of international affairs, the coming leaders’ debates will be provide an interesting contrast between the relatively inexperienced Mr. Romney and an incumbent who can point to at least one powerful achievement, the demise of Osama Bin Laden under his watch.

Analysts who surmise that President Obama may readily succumb to the single-term syndrome that brought down Jimmy Carter aren’t paying enough attention to the differences between the two men.

Mr. Obama’s successful Pakistan compound raid was the opposite of Mr. Carter’s failed rescue mission in Iran.

Mr. Obama is a more visceral politician. He can bob and weave with the best of them. He’s a natural-born presenter and his relaxed style is in sharp contrast to the ever-upright Mr. Romney.

He won’t fail to score points in what are sure to be interesting “spats”.

There’s also the matter of how old-time America can achieve a comfortable fit in a new world order that includes rising oriental dragons, Mexican drug cartels, a possibly nuclear-provisioned Iran and a Europe that is setting out on a new but unclear path.

Observing the U.S. with some perspective reveals the complexity and difficulty in making the right choice in the polling booth.

In the view of many Americans, however, the options are crystal clear. Their positions with respect to one party or another have become set in concrete.

That alone is the source of another major difficulty.

Abetted by the media, the line in the sand between the two political parties has become too wide

The noise-level has become too loud. Seeing and respecting the other side’s position has become too hard to be worth the effort.

From the sidelines, one’s tempted to say that no matter who wins, life will go on. Some will make gains while others will fall behind. At some future date the pendulum will swing back again.

But in America, sometimes the politics – with its implications for war, for crime fighting and for health care – really does take on a life or death dimension.

Here are some final thoughts on the overall economic environment.

One factor often cited to show the failure of Washington’s current economic policies is the credit rating downgrade that was imposed in the summer of last year.

The reason for the drop from Triple A status is often forgotten. It wasn’t because anyone believed the U.S. wouldn’t be able to meet its debt obligations at the time. The interest rate on 10-year U.S. Treasury Bills is still the lowest in the world. They are the standard for sovereign-state debt instruments.

It resulted from a concern that the game of politics was leading to a paralysis in decision making. Neither side was prepared to budge an inch. 

The concern over the $16 trillion national debt likewise isn’t based on its traditional relationship with gross domestic product (GDP). The U.S. has been able to extricate itself from similar financial binds in the past, most notably after two world wars. 

What make the present situation special – and it’s a phenomenon that’s occurring around the world – is the existence of an aging population.

The demands put on many nations over the next 20 years for pension funds and health care costs will put a strain on government wallets and purses everywhere. 

Washington has seen the symptoms break out into the full-scale disease in Europe and is running scared.

Canada’s relationship with the U.S. has often been compared to a mouse playing next to an elephant.

I’d rather use an analogy from residential construction. We’re the bungalow lying in the shade of a 20-story condo building.

Raucous behavior in the party room next door can easily spill over onto our property.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.


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