*This article was orginally published in the Portland Business Journal. http://www.bizjournals.com/portland/news/2016/12/23/washington-trust-bank-exec-we-are-to-the-end-of.html
Guest Column by Steve Scranton chief economist and investment officer for Washington Trust Bank.
After living through a campaign season that featured anger and distrust as the primary themes, we may well see hope and uncertainty as the new themes in 2017.
The reality is that the economic outlook over the next 12 months is far less certain than in previous 12-month windows due to the results of the U.S. elections and uncertainty about how critical upcoming elections in Europe, especially Germany and France, will shape global policy and global economies.
From a national perspective, the Republican sweep and President-elect Trump’s platform suggest prospects for tax cuts and tax reform; increased infrastructure, energy and defense spending; a reduction in the regulations affecting a number of industries; a more restrictive and potentially hostile trade policy; and sooner and faster increases in interest rates if policy changes result in either faster economic growth or faster inflationary growth.
If government remains gridlocked, however, it is unlikely that the economy will break out of the 1.5-2.5 percent growth pattern that has held since the recovery began.
From a construction industry perspective, the past few years have been close to being classified as boom times. Will this growth continue? Several components of President-elect Trump’s platform hold the potential to provide a boost to the construction industry:
▪Tax reform and repatriation of cash from overseas. Businesses have lacked the confidence to make long-term capital investments due to the uncertain regulatory and tax environment and the increased use of executive orders. If businesses feel more certain about the economic environment, this could stimulate spending on structures as well as plants and equipment.
▪Tax cuts, coupled with stronger economic growth. Improved finances for individuals would support residential construction, as more people are able to afford to buy homes.
▪Infrastructure spending. A one-time program – similar to the “shovel ready” program implemented during the recession – would provide a short-term economic benefit, as the activity boost would last only as long as the money is available. A sustained infrastructure reinvestment policy, in contrast, would have a smaller short-term economic benefit but provide a more consistent and sustainable benefit over the long term.
▪Energy and energy pipeline spending. The type of benefit that may accrue would depend on the types of programs or policies adopted.
The construction industry also faces a number of major challenges:
▪The greatest concern expressed by players in the construction industry is the fact that the industry has job openings but companies cannot find qualified workers. If construction firms cannot hire enough qualified help for existing projects, where will they find the help for new infrastructure projects?
▪Many construction firms are currently facing reduced profit margins as they raise wages to try to attract talent. If raw material prices begin to rise due to President-elect Trump’s trade policies, this could put these firms on (or over) the edge, unless the economy is strong enough to allow them to raise the prices on their residential and commercial projects.
▪A faster pace of interest rate increases could turn potential projects from being profitable to unprofitable. Higher interest rates would also negatively impact the residential housing market, as families and individuals find it more difficult to afford the monthly payments.
The Portland construction industry is clearly experiencing strong growth at this time, with both residential and commercial projects filling the skyline. The number of projects in the pipeline indicates that activity should remain solid for 2017, but life is unpredictable and the national and global political environment will play a role in shaping the actual economic environment that we will see in 2017.
Regardless of the political environment, there is one fundamental economic reality that we should not forget. Historically, the average business cycle has lasted 84 months. The current business cycle is into its 90th month. Even with the potential boost from a changed political environment, the reality is that we are closer to the end of this business cycle than the beginning.
Sound risk management practices call for advance preparation; it is best to plan for the next downturn when times are good. As the old Aesop’s fable counseled, it is better to be the ant and have a plan ready when hard times arise than the grasshopper and simply hope that the good times continue. On that note, the best advice I can give is the following:
▪Stay focused on your business and what makes you successful, and avoid the noise and distraction of the 24/7 news and information stream.
▪Develop your disaster recovery plan for when the business cycle ends and the next downturn comes, whenever that may be.
Steve is the chief economist and investment officer for Washington Trust Bank
Washington Trust Bank