Construction Industry Forecasts

The Senate plan provides an eighteen month reprieve from the risk of an abrupt 40% slash in federal spending and possibly an accompanying bond default. If prolonged, a bond default could yield a credit freeze similar to September 2008. An immediate deep recession would likely occur if the debt limit were not raised within a few weeks.

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The plan is a brilliant political solution but a financial and economic disaster. The two year old economic recovery is proceeding at a subpar pace in part because of lack of buyer confidence about taxes and other mandated costs as well as sustainable level of public spending. Depressed confidence causes private spending to be delayed, especially for capital projects, including construction. The delay fails to remove the uncertainty. Everyone will continue to be concerned about another debt ceiling impasse and possible ensuing recession.  The half of the taxpayers that pay (net) the IRS every year and business managers will still be concerned about the deficit problem being resolved with a large, abrupt tax increase. The other half of taxpayers who pay (net) the IRS nothing or get a credit plus government contractors and entitlement recipients will still be concerned with the deficit problem being resolved with a large abrupt slash in their income.

Postponing the final resolution of the deficit problem will allow the problem to get worse. The accumulated debt continues to expand faster than GDP even though tax receipts are rising, the emergency stimulus spending is being phased out and Congress has stopped adding new spending programs. Eighteen months ahead it will be an uglier problem to solve.