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Construction Trends to Watch – Did the Election Matter?

As far back as April of 2012 there began to be a self-imposed moratorium on development and construction that was attributed to the uncertainty of the November election. While owners were a bit fuzzy about the exact remedy that the election was going to bring, it was clear that private enterprise favored a changing of the guard and there was expectation that a Romney election would loosen the bonds on construction projects.

One month before the election, in fact, BuildZoom conducted a survey of 237 licensed contractors and found that 74 percent preferred Mitt Romney for his handling of the economy and believed he’d be better for construction. So, now that the Obama administration has been given another four years, how has this unfavorable result impacted construction and development?

“It is incredibly modest,” says Kermit Baker, chief economist for the American Institute of Architects. “Things look the same now as they did on November 5. There are no dramatic changes as to what we can expect.”

“The election doesn’t affect our forecast as much as you would think; it affects it as far as the impact on the economy but there is a lot that is baked in the pie already,” echoes Bernard Markstein, chief economist for Reed Construction Data.

Baker and Markstein were two of the panelists – along with Associated General Contractors chief economist Kenneth Simonson – in a November 8 webcast hosted by Reed on the outcome of the election. Dr. Baker was only partly joking when he stated that the biggest economic impact of the election was the $6 billion spent by the political parties on campaigning. “The second biggest impact is that the election is no longer an excuse for delaying decisions,” he says.

Once the smoked cleared after Election Day, the final results were remarkably unremarkable. Democrats slightly eroded the Republican majority in the House but remain nearly 20 Representatives shy of taking control. The Democratic gains in the Senate were also minor, with 53 Democratic senators (plus two Independents who caucus with the Democrats) creating a majority that cannot break a filibuster. While the biggest Democratic victory of the night was Pres. Obama’s re-election, the continued gridlock in Congress assures that his agenda for the next four years will not be easily implemented.

Here are some of the key initiatives for which the president has indicated support that will affect the construction industry:

Part of the president’s proposal for reducing the deficit was provision for increased spending on highways and bridges, both as economic stimulus and job creation.

His plan to increase taxes on high earners – and in particular to reset capital gains and dividend rates back to 30 percent – will negatively impact expansion plans and commercial real estate investment.

Pres. Obama has twice raised the fuel efficiency standards for auto manufacturers and has set a goal of one million electric cars on the road by 2025 (there were 30,000 in 2012). More measures to decrease the use of gas and diesel are likely.

The Affordable Healthcare Act is set to be more fully implemented – although it remains unfunded – adding costs to businesses and dampening demand for business expansion.

Having a divided Congress means that more political compromise will be needed for the president to push through his most urgent proposals. At minimum, the Republican majority in the House means that his proposals that are unfavorable to the Republicans – and business generally – are less likely to pass. These dynamics should limit the increases in taxes for business and keep legislated additional regulations on business less onerous. But it also means that increasing revenue sources that will be tied directly to infrastructure improvements are less likely and in general, the amount of federal funds available for construction will diminish in almost any deficit reduction deal.

For the most part, however, the election merely reinforced or ignored the conditions that are keeping construction and development sluggish. Tax issues aside, very little will change as a result of the election to increase federal spending on infrastructure or facility construction. Commodity prices will continue to be impacted by trade and energy policy as much as supply and demand. The distressed status of the government sponsored enterprises Fannie Mae and Freddie Mac continue to be ignored. And the regulatory morass that is Dodd Frank will continue to be implemented.

The regulatory environment has its biggest impact on construction finance. Businesses feared that a second Obama term would mean further regulations and more federal regulation in other industries. The AGC’s Simonson points out that much of the regulatory agenda comes from beyond the administration’s reach. “Environmental regulations, for example, are driven more by court decisions and mandates from the courts.”

Simonson – who is president of the National Association of Business Economists in 2013 – also notes that the slate of tax and funding measures that were on state and local ballots will be every bit as influential on construction as the national election was. He called out California’s Proposition 30, which allows school districts and other government agencies to raise $6 billion instead of cutting expenses, as one of the nation’s largest referendums.

“[Proposition 30] gives California the ability to raise taxes, which will allow construction spending to remain on track but there’s still the question of whether or not the overall California economy will be able to recover,” he says.

Those ballot measures being considered in November totaled over 500 bonding or revenue issues, worth roughly $35 billion to fund construction of education, infrastructure and environmental projects, according to The Bond Buyer. Voters approved 80 percent of the measures, adding up to $30 billion in funding. While the voters seem to be showing surprising tolerance for government spending at the local level, it’s worth noting that the volume of measures put forward were half of the $67 billion put on the ballot in 2008.

Among the big referendum items approved were Proposition 30 and a half-cent sales tax increase in Arkansas, which will raise $1.3 billion for construction and improvement of a four-lane highway system connecting the state. Voters rejected a proposition to extend a one cent-per-gallon sales tax for transportation projects in Arizona that expires in 2013, and voters rejected similar taxes for transportation improvements in Memphis, Los Angeles, Alameda County, CA and Alachua County. FL.

The main result of November’s federal elections is that the balance of power remains unchanged. This status quo should limit the growth of social programs or slashing of federal budgets but it will also mean making meaningful reforms very difficult.

Steering the nation away from the “fiscal cliff’ was the first test of the new government. The lessons learned from that difficult experience offer a guide to how productive or obstructive the government will be until the 2014 elections.

  • Bob Biehl
  • Director, Assurance & Business Advisory Services
  • (614) 947-5211