The Associated Builders and Contractors’ (ABC) chief economist Anirban Basu recently released a mid-economic outlook predicting a stable remainder of the year for the nonresidential construction sector. But contractors should still proceed with caution as Basu warns that a potential economic downturn is on the horizon for 2020.
In order to get more insight into his outlook, we caught up with Basu to ask him a few questions about steel tariffs, rising material costs, and when contractor should worry about those effects on the nonresidential construction industry and the economy:
Considering the amount of domestic steel manufacturers who are immediately raising prices to take advantage of the tariffs, is it possible that the economic downturn could come sooner than 2020?
It is conceivable that a recession could begin at some point in 2019. It would require a major correction in financial markets, possibly because of a global debt crisis.
In your economic outlook, you state: “It’s important not to overestimate or underestimate the capacity of the U.S. economy to navigate turbulence.” Is there a tipping point to this turbulence? At one point should contractors start to really worry about the economy?
Contractors should worry when bidding opportunities begin to evaporate, which is certainly not the situation now. Many contractors have more opportunities to deliver services than they have capacity. However, the economy is steadily overheating, and evolving policies regarding trade and immigration are likely to accelerate the formation of supply chain bottlenecks and accompanying cost increases.
Your outlook also states: For now, the outlook for the U.S. nonresidential construction industry appears solid. Backlog remains elevated, with public construction finally joining the construction recovery, due in large measure to improving fiscal conditions at state and local government levels.” Can you forecast steel tariffs disrupting infrastructure construction in states?
While state and local government finances have improved, local governments understand the need to maximize the value of every available infrastructure-designated dollar. As construction costs increase, in part due to policies impacting the price of key inputs like steel, it is perfectly conceivable that some projects will be mothballed, thereby diminishing the amount of infrastructure put in place and further compromising U.S. productivity growth.
What is the best course of action contractors should take now to prepare for a spike of rising costs?
There is little reason to think that materials price increases will end anytime soon. Accordingly, it makes sense for contractors to pre-order materials more expeditiously than usual, in part because many materials suppliers are no longer guaranteeing material availability in future months. The problem, of course, is that purchasers of construction services often delay project start dates or cancel projects altogether. This can put contractors in a difficult position since payment for materials would be due in advance of receipt of project revenues. This is often the case, but the situation becomes more problematic when materials prices are elevated. Among the conceivable solutions is to either relegate one’s efforts to well-known customers (e.g. with which a contractor has a lengthy history) and/or to tighten up contractual language such that compensation is forthcoming if projects are delayed.