By Jim Haughey, Reed Construction Data

Currently, several hundred billion dollars of additional spending for public programs is stalled in Congress.  This includes more funds for extended unemployment insurance, K-12 education, highway and transit projects, general purpose subsidies for state governments and mortgage subsidies. Expect less than a quarter of the requests to be approved. But combined with a slowly improving private economy, this will be enough to get GDP growth back to the 3% range sometime next year and initiate a slow resumption in construction spending growth late this year.

During the twenty eight year Reagan-Bush-Clinton-Bush era, recession were met with a compromise that comprised modest spending increases or tax credits mostly sent directly to the private sector and small spending cuts.  Spenders got a quick surge of money into the economy in exchange for not directing how the money would be spent and accepting small cuts in public programs.  Budget cutters got a small amount of budget cuts and no government mandates on how the extra spending would be spent.  In exchange, they had to accept a sizable, but by 2009-10 standards, modest and brief rise in the deficit.

The 2008 election gave spenders the upper hand which they used to ignore the opposition of budget cutters. Their arrogance has had a price. They have already lost to power to govern without some comprising and political polls suggests that the next election will force them compromise on every issue and may put them in a minority position. The Reed Construction Data construction spending forecast will rise and ebb depending on how we read the current balance of power between spending advocates and budget cutters.

The debate between spending advocates and budget cutters has become more bitter   because of two changes in the environment. The heightened bitterness could cause abrupt swings in economic policies as it did after the 2008 election.

In the past, most spending advocates accepted that recession fighting stimulus funds were temporary and would end when there was a consensus that the private economy had recovered enough to expand without the stimulus.  And spending advocates accepted a stimulus format focused on economy wide tax cuts or rebates that sent the money to the private sector with no restrictions on its use. Now, spending advocates insist on earmarking most of the stimulus money for specific public programs which benefits public aid recipients and public employees directly and bypasses most of the private sector. Budget cutters oppose this change in focus because they believe that stimulus funding is no longer intended to be temporary but instead is intended to establish new entitlements with an endless demand for more taxpayer money.

The second change in the environment is our concern about how close we are getting to the public debt threshold where additional taxes and spending are no longer an option leaving sharp budget cuts as the only option.  For decades we knew that a rising public debt was a problem but we believed that we still had a sizable margin before we reached the maximum debt that could be carried. We also believed that if we focused stimulus spending on general support for private investment and consumption that people who got stimulus funded jobs would keep them when the stimulus ended because they produced goods or services that others would voluntarily buy.

Increasingly, we do not believe this any more.  We have seen what happened in Iceland, Ireland, Greece, Latvia and may soon happen in Eastern Europe, Portugal, Spain and Italy as well as New Jersey, California, New York and Illinois.  Spending on public programs that generated no new value added to tax reached its limit in each of these places. As ugly as 7-9% unemployment is in most of the country,  it is not as ugly as 12-15% in states with the most severe budget problem or the 20% unemployment in many parts of Europe.

Hence, contractors and their suppliers are now operating in a new environment.  Public support for construction and subsidies for homeownership and home buying could be very volatile.  A better reading on the next few years – more stimulus or more budget cuts – will be available the morning after the November election.