Construction Industry Forecasts

Why have people become more cautious about spending?  It is because they are more uncertain than usual about the financial, regulatory and legal environment. Lots of changes are in the wind – both those already enacted but with no final rules yet for implementation as well as changes still in the proposal phase. The uncertainty comes from a clash between the presidents’ call for more taxes, more spending and more complex regulation and the Republicans’ pledge to do exactly the opposite.

Some of the more significant uncertainties include: Will the new healthcare law be implemented or abandoned? Will the Dodd-Frank financial reform law be implemented and what will the rules be? Will taxes be raised substantially on business and high income consumers? How much will federal defense and construction spending be cut? Will there be large cutbacks in social spending?

There are always at least a few changes of this scale being proposed in Washington.  But the pending changes now are causing more caution than usual.  Without a dominant political party in Washington, radical proposals for change can not be readily classified as either nearly certain or improbable.

How negative can a turn to caution be for spending and hiring?  The most illustrative example is the mild recession set off by turn to caution during the buildup before the first Gulf war in the early 1990’s.  The six month buildup was accompanies by fears of high casualties, soaring energy prices and gasoline rationing. These fears reduced spending confidence and set off a short, mild second dip in the recession that had just ended. The spending decline before the war and the spending surge immediately after the very short war are very clear in the historical economic data.

Momentum in the economy turns very slowly. Already, there is evidence of production cuts, unwanted inventory buildup and deferred spending for consumer durables and business equipment. If this persists into the summer it will take at least several more months to stop the slide and return to expanding economic growth. The Reed Construction Data economic and construction outlook still assumes that the recent economic problems are a speed bump, a really big speed bump.

 

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