We are nearing the end of 2019 and, as usual, it was an interesting and challenging year in the construction industry. Overall, the continuing favorable economic environment has led to another sound year for the industry. Whether you are a contractor, dealer, distributor or service provider, the prolonged expansion likely affected your business, presenting many business opportunities, as well as challenges.
The strong economy produced a skilled labor shortage, hampering most businesses. The heavy equipment industry depends on trained workers to maintain and operate equipment at its peak capacity. In addition to the skills gap, attracting workers to the industry has been more difficult than ever, which has resulted in increased costs to draw and retain viable labor. On top of that, a robust economy has spurred business growth for some companies that extends beyond their expectations and capacity. In some cases, companies have outstripped their cash flow. Despite the expansion continuing late into 2019, the slowing growth rate may signal that this trend is nearing its end.
Longest Economic Expansion
The U.S. economy has grown for 125 consecutive months following the Great Recession, which ended in June 2009, marking the longest economic expansion in U.S. history. However, the current economic growth has been slower than previous periods. Since 2009, the economy has expanded at an average rate of 2.3% per year. By comparison, the economy grew an average rate of 3.6% per year during the 1990s. Some economists believe that a skilled workers shortage combined with an aging population has contributed to the lower U.S. productivity growth rates. This has sparked discussions about whether slower economic growth may be the new normal. It also may contribute to extended economic expansion.
What is the economy going to be like next year? None of us knows exactly what to expect in 2020 and beyond, but my belief is that we should prepare for continued minimal or declining growth rates and possibly an economic contraction or recession late next year.
The following signs could point to a potential recession:
• Global economic uncertainty caused, in part by the U.S.-China trade war. Optimism regarding trade talks ebbs and flows with each news cycle.
• International growth rates have slowed in major developing economies, such as China.
• Manufacturing output has been decelerating with business confidence trending downward.
• The inverted yield curve − short-term rates as high or higher than long-term rates – remains a key factor.
• The fear factor is contributing to recession worries caused by historical economic performance.
At the same time, there are signs pointing to continued expansion:
• U.S. households continue to spend without increased borrowing. Overall conditions for U.S. consumers are positive, with stable income growth.
• The labor market remains strong with low layoff rates and strong wage growth, fueling higher household income. Unemployment is at a 50-year low.
• The Federal Reserve has been easing its monetary policy. The U.S. Central Bank cut interest rates this past October, its third-straight rate cut, despite the stock market (S&P 500 and Dow Jones Industrial Average) at all-time highs.
• The global economy could rebound, if trade tensions recede. U.S.-China trade talks can turn on a dime.
Policy Mistakes Cause Recessions
Economists often say policy mistakes cause recessions. Both domestic and global economic developments play an important role in driving domestic activity and financial markets. U.S. multinationals account for a large share of the output and labor productivity growth, and their presence in financial markets is substantial. In an indirect manner, even smaller U.S. businesses are positively affected by strong worldwide economic conditions.
Because of its size and interconnectedness, developments in the U.S. economy have the most significant impact on domestic and global businesses. The U.S. boasts the world’s single largest economy, accounting for more than 20% of global GDP (at market exchange rates), and more than a third of the stock market capitalization. The U.S. is the most important export destination for one-fifth of countries around the world. The U.S. dollar is the most widely used currency in global trade and financial transactions, and changes in our monetary policy and investor sentiment play a major role in driving global financing conditions.
At the same time, the global economy is important for the U.S. as well. Affiliates of domestic multinationals operating abroad and affiliates of foreign companies in the U.S. account for a large share of output, employment, cross-border trade, financial flows and stock market capitalization.
We are in the midst of tabulating the results of the 2020 Wells Fargo Construction Industry Forecast for release in February. Next year, marks the 44th year in which Wells Fargo Equipment Finance and its predecessors survey construction industry executives to gather insight into current business conditions and trends and to measure their sentiment towards construction activity in the coming year.
It is a given that the global and domestic economic conditions do and will continue to have an impact on your business. The Construction Industry Forecast findings may be useful to you as you navigate the year ahead.
