Where Is Construction Heading?

The outlook for the future is positive, but there are potential pitfalls ahead.

As I may have mentioned before, I am the vice president of Finance for the Associated Equipment Distributors (AED) and CFO for a Midwest equipment rental company and other companies working or related to the construction industry. The AED is the association representing construction equipment dealers that purchase 80% to 85% of the equipment sold to dealer organizations, and who in turn rent and sell that equipment to you.

The AED produces an Executive Forum each September in Chicago to discuss the state of the industry from both the equipment and the contracting side. This year’s program concentrated on the risks associated with being in business, and specifically the industry you represent: equipment, rental and construction. As the program rolled on, I started thinking that every contractor interested in improving his/her business would have found the AED’s program worthwhile.

When you stop to think about it, AED members, rental company owners and contractors are all joined at the hip. Not only are we all in the same industry, we share the same risks in some shape or form, with the need to act in concert to direct the course of construction in this country.

Positive Outlook

The Executive Forum agenda covered the Highway Trust Fund, water projects, energy and pipeline projects, residential and non-residential projections, public vs. private spending and so forth. We spent a lot of time on highway funding, which is scheduled to be half of what it should be for 2014; and in case you are interested, there is zero funding available for the Highway Trust Fund in 2015. As it turns out, this is a very complicated situation with many different options (public and private funding) being considered to find a resolution to fund road building.

Report: Highway Trust Fund Could Go Broke by 2015

The AED also has one of its quarterly board meetings the week of the Forum and we usually start out with each of the 20 or so board members talking about their markets and the business climate for the first seven months of 2013. We do this because with 20+ representatives, we are sure to cover every region in the U.S. and Canada.

While some reported slow growth (which is at least still growth), the balance reported positive news, especially in terms of equipment rental. Some reported better results than others primarily because they are located in one of the hot energy spots around the country. If there was any down side, it was once again a lack of technicians to perform service work, which seems to be an ongoing problem.

Eli Lustgarten, AED’s market analyst, reported that private nonresidential construction should rise 10% to 15% in 2013, with very little attributed to office or retail. Public nonresidential will be down because of a lack of state and federal funds. Residential will be up 10% to 15% in 2013 with multi-family strong and single family and remodeling up a bit.

Residential Construction Spending Hits Highest Level Since August 2008

Lustgarten expects total construction spending to be up 5% to 10% for 2013 and 6% to 10% each year from 2014-18 because of shale-based oil and gas and the Panama Canal widening. In addition, with the U.S. becoming a net energy exporter, there is sure to be a re-shoring of our manufacturing industry, which will increase economic activity and jobs and thus consumer spending, helping retail and housing construction.

Construction Recovery Expected to Accelerate through 2015

Reform Could Get in the Way

Congress, and what they are reviewing in terms of tax reform, may roll back any gains we have made, as well as hamper the anticipated growth. As I was told by a member of the Ways and Means Committee, every tax deduction or deferral method is on the table. This will likely increase the cost of doing business because of higher tax bills.

As an example, the committee is thinking of extending deprecation lives while eliminating any form of Bonus or Accelerated Deprecation. Sec 179 write-offs are in the same boat, as is Like-Kind Exchange, which some of you may use to defer taxes on the sale of equipment.

I don’t know what they plan in terms of a transition period, but there is no doubt most equipment you own is probably fully depreciated. It would thus be 100% taxable upon sale if they change regulations, with very little available to offset those taxable gains because of a lack of tax depreciation.

Equipment Leasing New Business Volume Down in September

Just so you know, a white paper was prepared by the Tax Foundation that concluded that a reduction in Bonus Depreciation or 179 would in fact produce a net negative of tax revenues received by the Feds after the change. Their stats estimate that the elimination of Accelerated Depreciation would reduce equipment purchases and reduce jobs and hence offset any gains in tax revenue as a result of eliminating the tax deductions. Very interesting report.

Some Keys to Success

One of the last topics discussed described how successful members or want-to-be successful members learn how to improve their business operations. Joining groups of your peers to learn how to improve your business was high on the list, along with communicating with federal, state and local government about topics of interest to you.

Your business, the way to do business, the outside influences on your business and the methods for finding ways to reduce costs are changing every day. It is almost impossible to track all of this information and know how to use it unless you are a member of a group that can help direct your attention to solutions that matter most.

I suggest you find a group to join to share ideas and benchmarking data. Also consider national groups that have the ability to communicate your feelings to Washington, D.C. The AED recently sent letters to all of its members to forward to their members of the U.S. House and Senate, dealing with a variety of tax issues that will negatively impact profits and cash flow without generating any benefit for the Fed cash flow. You should consider ways to do the same.

Maybe I will see you at the next AED Executive Forum — or at one of your national or local meetings.