Alex Carrick, chief economist at ConstructConnect, shared many valuable insights concerning the construction market during VMA’s 2019 Market Outlook event and during an interview with VALVE Magazine.
While Carrick said there was much to love about the economy at this time, he also has concerns about several matters applicable not just to the construction industry, but also to valve manufacturers and the industries they serve.
The labor market is a serious concern in most sectors right now. The unemployment rate is just 3.9 % and the volume of job openings in the economy at 6.8 million is higher than the number of people who are unemployed. “This almost never happens,” said Carrick. “So, because the labor market is so tight, many employers worry about finding workers.”
Even for those who do have enough people, if one manufacturer can’t make enough widgets, every other plant down the line suffers production losses or slowdowns.
“Also, pay attention to the news,” Carrick warned. “If there are indications that labor is getting crotchety, there could easily be bottlenecks if certain elements of labor go out on strike. That is traditional in a tight market. Often in the past, it has been dockworkers who have seen an opportunity to slow down delivery of goods because they are asking for better working conditions or they have other demands.”
For Carrick, another big concern is inflation. “We haven’t been thinking about that at all for a long time,” he said. “But it is starting to re-appear because commodities prices are rising with tariffs.”
Carrick is against tariffs because they contribute to inflation. “You have no clue how the other side will react,” he warned. “Tariffs contribute to inefficiencies. If you’re operating inside a tariff wall, you’re more concerned about saving jobs than innovating.”
For valve manufacturers selling into the construction market, tariffs could have serious repercussions. “Because valve manufacturers use lots of steel, where large tariffs have been imposed, costs are increased. In fact, the whole construction sector is impacted because of higher costs and material availability questions,” he said. Carrick wondered if the domestic suppliers will be able to meet the demand.
Another issue is whether owners of projects, including pipelines, chemical projects and the like will delay capital spending because they are concerned about the trade situation. “It is hard to plan when you don’t know the environment that you’re going to be working in,” said Carrick. “One of the most basic themes of capital investments is that the sector hates uncertainty. The standard response is to stand pat and not take the risk.”
Carrick noted that all manufacturers need to be very aware of how technology is going to affect their businesses. “Cyber security, 3D printing, all of that are going to have an impact on your business. An example is if you’re dealing with HVAC; you must understand the technology. There are many valves used in those big systems, and owners are striving to get the cleanest possible air, to recycle water and use closed-loop water conditioning,” he emphasized. “Valve manufacturers have a huge role in that. It is all about saving money on energy costs, plus health concerns.”
Areas of Concern
There's another sector where energy saving and efficiencies are top-of-mind are the new airports and expansions. “People are traveling more; it’s one of the side benefits of developing countries becoming wealthier. There is more wealth being spread around, more people are traveling and spending money in the airports that are so much like retail shopping malls these days,” he observed. “So, airports must expand.”
Certainly, there are valves used in the terminals and associated retail operations, but many are also used in the new de-icing facilities that are being built in cold climates. There are also stormwater collection facilities at most airports. All of these utilize numerous valves.
Construction of industrial facilities is one area that could benefit from the administration’s tax cuts and efforts to stimulate manufacturing. “There is a lot to be said for it,” mused Carrick, “but the money these companies are getting is likely to be diverted into other things like share buy-backs. Some of that will also go towards automation and robotics, which is labor saving. But these cuts may not result in new buildings, especially since capacity utilization rates are still too low, mostly less than 80%.”
However, this stimulus could help in development of petrochemical plants. “There is a lot of activity there, which is positive for the valve industry,” noted Carrick. “Polyethylene facilities have a lot of pipes and valves.”
Additionally, the administration has given positive signals to that sector that it is more amenable to energy projects, and pipeline projects, which are huge construction projects requiring vast quantities of valves.
According to Carrick, the changes that are now occurring in society, thanks in large part to the millennials, will have a huge impact on where construction will go in the next few years.
He gave the example of water projects. “Millennials are starting to get their first real jobs and forming families. In the next 10 or 15 years, they will determine much of what happens in the economy. Will they decide to stay in rental accommodations and high-tech hubs in downtown city areas because they don’t want to drive as much and want to be closer to entertainment activities? Or will they decide they want to live in the suburbs?”
If they return to the suburbs, there will be many building projects which means new schools and water systems. But if they decide to stay downtown, there will not be as much construction of new infrastructure.
While employment growth is strong and consumer confidence is up, there is much to worry about regarding construction and the economy generally. Commodity prices are edging up, cutting into profit margins. Because the unemployment rate is so low, it’s hard to find workers and immigration is being discouraged, which hurts the high-tech sector and university and college enrollments. Much of the outlook depends on how far the trade disputes will go.