Associated General Contractors of America

Sandy, Election Results Likely to Keep Construction Spending Down

November 13 economic commentary from AGC Chief Economist Ken Simonson

Just when it seemed there couldn’t be any more sources of uncertainty for the economy and business, along came Sandy. The storm displaced a huge number of people and businesses, and has drastically reordered construction plans in New York and New Jersey.

Some contractors are busy 24/7 with emergency repairs and recovery work. The destruction of hundreds of houses, stores, boardwalks and other facilities has led some observers to believe the storm will bring a windfall—literally—of replacement work to the construction industry.

But the overall impact is likely to be negative. The funding to replace these structures in many cases will be taken from other construction budgets. Meanwhile, businesses that had planned to build, or to occupy new space that developers put up, will defer or cancel those projects. State and local governments will experience lower income, sales and property tax receipts, forcing further budget cuts.

For months, businesses were supposedly holding off on investments because of uncertainty over who would control the White House and Congress, and what that would imply for policy. Now that Election Day has passed, uncertainty remains about whether, and how, the nation will avoid huge tax increases and “across-the-board” spending cuts (which would actually fall harder on some construction accounts than on other types of spending) on January 1—the “fiscal cliff.” Even if the cliff is averted or postponed, there is a large risk that Congress will find it easier to postpone future construction than to cut current payments to individuals.

Meanwhile, uncertainty overhangs the euro and struggling European economies, both inside and outside the euro zone. China’s growth has slowed, and forecasters are divided as to whether it will slow further. Uncertainties regarding growth abroad may cause exporters, ports and transportation companies to delay investments, and may keep banks from lending as much to businesses that want to expand.

In the midst of so many impediments to investment, the Federal Reserve has maintained a very steady, predictable course. Last Friday, the board of the National Association for Business Economics, of which I am the 2012-13 president, spent an hour in the Fed’s board room, briefing Chairman Bernanke and four other governors. The chairman showed interest in a range of topics (including my prediction that the imminent expansion of the Panama Canal was stimulating a variety of construction projects and could significantly affect U.S. trade flows). None of the presentations suggested that the Fed needs to deviate from its promise to keep interest rates low and liquidity high for the near term.

Despite ongoing uncertainties in today’s economy, it appears likely the combination of the continued growth in the U.S. economy and the low-interest policy of the Fed will lead to more private investment in structures in 2013. But Sandy and the cliff are likely to hold down public construction spending.

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