Lagging economy is troubling

I’m troubled by the lackluster performance of the economy this year. On this page last year, I repeated all of the forecasts that I had heard about what a great year 2015 would be. Instead, this year is, to put it mildly, underperforming.

Before I go on, I want to thank Viega LLC for sponsoring this year’s Book of Giants, just as they did last year.

First quarter GDP increased only 0.2%.

“Up until six months ago, the U.S. economy was manifesting surging momentum, but the last six months have been disappointing,” says Anirban Basu, chairman and CEO of Sage Policy Group Inc., Baltimore, and chief economist of Associated Builders & Contractors. “The recovery's momentum has slowed to a crawl. Lower energy prices and their impact on investment spending, a stronger U.S. dollar, weather, and the West Coast port slowdown have all conspired to undo the economic momentum apparent during mid-year 2014.”

Last year, EMCOR Group President and CEO Anthony J. Guzzi said that, although a 3%-5% increase was the number most commonly cited for 2014, he thought that 3%-4% was more accurate because the year got off to such a slow start. Remember that? If you think that this past winter was bad, the winter of 2013-2014 was horrible. That’s when the term “polar vortex” made it into common parlance.

In March 2014, economist Brian Beaulieu, ITR Economics, told contractors at the Mechanical Contractors Association of America convention that all of the leading indicators were good. Interest rates would remain low through 2015, housing starts will increase 3.4% in 2014 and 7.1% this year, household debt and consumer loan delinquencies are way down, inflation is only 1.2%, and 2014 retail sales would be up.

This year, however, Guzzi notes, “The economy is growing only 2%-3% a year and it should be 3-4% a year.”

Fortunately, we’re beginning to see private money come back to the marketplace, especially for commercial construction. Interest rates have stayed low and banks, finally, are lending. “Money has been cheap for the last five years, but nobody had access to it because the lending rate almost nothing and you couldn’t obtain financing,” says Tim Moormeier, president of U.S. Engineering, Kansas City, Missouri.

There are some markets that have been mainstays of mechanical contracting that will not be productive now or in the near future. Education is one. Colleges have been hit by grumbling about soaring tuition levels and the amount of student loan debt that students are incurring. Colleges have reacted by trying to reduce expenses. We’ll probably also see a slowdown in the K-12 market. Many of those buildings were built to house Gen X and Gen Y students who have graduated and moved on.

Congress is in no mood to spend money on anything, so don’t expect them to stimulate the construction economy. Moreover, a number of states are in financial trouble.

The government has not played a favorable role in direction of the economy, says John E. “Tripp” Ahern III, president and CEO of J.F. Ahern Co., Fond du Lac, Wisconsin.

“We have significant infrastructure needs in this country, not the least of which is clean water,” Ahern says. “The federal government has always played a role in water and wastewater treatment plants, along with municipal funding, and it’s a shame that elected leaders aren’t addressing needs of this country.”

Basu notes that Republican governors were elected this past November in three blue states, Massachusetts, Maryland and Illinois.

“I think that in these elections the taxpayers spoke,” Basu says. “That the taxpayer is saying to policy makers, ‘we can’t take any more increases in taxes and fees’. This will be a challenge for infrastructure. The U.S. has $18 trillion in debt and growing Social Security and Medicare liabilities, so the task of infrastructure falls to the states. But if taxpayers say ‘enough is enough,’ where does the revenue come from? Local governments almost never have money and they don’t often take the lead in infrastructure projects other than airports, and public-private partnerships are hard to put together. We might be in for years of infrastructure under investment.”

That’s not good news.

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