Eli Lustgarten recalls giving speeches over the last few years and being asked, “Would the construction industry ever smile again?” He wasn’t so sure, but then Nov. 8, 2016 happened. When Donald Trump was elected President of the United States, it changed the status quo, he said.
Lustgarten, president of ESL Consulting, St. Louis, assists trade associations and their members and individual companies in understanding the North American and global outlook for their end markets. He expects modest economic growth in 2016 and calls it a transition year.
During C&D World, the annual meeting of the Milwaukee-based Construction & Demolition Recycling Association (CDRA), March 8 in Las Vegas, he said that while many people are optimistic and excited about what the new government will bring, the key for the new administration and Congress will be “execution.” He adds that patience is going to be tested.
Emerging markets are slow, central banks are doing quantitative easing and Gross Domestic Product is slow, he noted. “When I grew up, 2 percent growth was a recession, now we are happy with that,” he said.
Manufacturing has flatlined, he said. A big shipment of soybeans drove growth in Q4 2016, and business investment remained quite weak. Investment in equipment was down in 2015 and 2016 and labor participation is low, he said.
He said slack is in the labor force with the number of parttime jobs. “Everything points to slow growth and continuing slow growth,” he said.
Industrial production is expected to grow between 2 and 2.5 percent in 2017 and 2018, said Lustgarten. “Things are getting better but nothing is absolutely wonderful,” he remarked.
The manufacturing sector starting to show a rebound, he added. Inventories, went positive for the first time in 20 months thanks to something he called, the “Trump bump. “Manufacturers are starting to build their inventory.” He warned that this situation is “not sustainable because politics is getting in the way and not much is happening.” “Things are going to be better than they were but maybe not as good as you would like them to be,” he said.
Some of the items that he says will take precedence over infrastructure policy will be fiscal growth, health care, reduction and elimination of regulations and tax reform.
“We’re not going to see any effect of infrastructure spending in 2017,” Lustgarten said. “The priority is health care, regulation and taxes.”
Other items on the governments priority list are defense, energy policy, banking regulation reform and trade negotiations and immigration, he noted. New people in office don’t yet know how to “work the system well,” he said.
“Adding about 1.5 percent to economic growth over the next two years or more seems plausible,” he said, putting growth at the 3 percent range. “3.5 to 4 percent-plus growth, may be a dream.”
He says, the potential is there, but it is going to take time to get there. He said no one is putting Trump’s impact in the economic forecast currently.
He said the Federal Reserve “has been the worst forecaster in the country” and that interest rates are killing the retiree because there is no yield.
“Rates are going to go up but we don’t know how quickly,” Lustgarten said. “The key is productivity has to get up.”
Lustgarten spend some time talking about the commodity sector. “Anyone who thinks they can predict commodities is nuts,” he said.
He noted the Trump presidency places a new dimension on energy. “He can’t save coal but he can stabilize it. Things are much better for the energy markets,” he said.
He called 2017 “a transition year.”
He also talked about China shifting its domestic demand where mining was growing at double digits, the CEO of every mining company there was fired, he said.
“The Supercycle is over,” he told attendees, adding, “China is still the key user of everything and what they do matters.”
He also referenced a big change in copper demand. He said demand is expected to grow over the next few years, but so will supply. “There is no more $450 copper,” he said.
Iron ore, he said is on the same path.
He described coking coal as having experienced a true bubble. This gives way to higher benchmarking prices, he said.
Mining capital spending is down 5-10 percent. He said coal production had been discouraged through regulation, noting former President Barrack Obama’s promise to never build another coal plant. Coal production has continued to trend downward, but as natural gas prices creep back up, a shift back to coal could happen. “Trump policies may stabilize coal sector,” Lustgarten said.
Lustgarten also touched on renewables saying wind has “saved the farmer.” He expected minimal growth for wood biomass and waste biomass in 2017 and 2018.
He said the construction equipment sector is poised for a turnaround because of rising energy prices and that purchases between 2010 to 2015 were strong due to Interim Tier 4 and Final Tier 4 regulating emissions, which raised the price of equipment 15 to 20 percent. Purchasers had the advantage of tax incentives and bonus depreciation, section 179 would could be used on new or used equipment. It too expired. “It was this great incentive to replace equipment and modernize.”
Construction has to meet Tier 4 and has to be permitted, which forces change, according to Lustgarten. There is a decent replacement market for equipment, and housing is starting to come back, he added. He expected upper single digit growth for housing.
Nonresidential construction also is improving, he said, but most of that is coming from the private sector. He said the Fixing America's Surface Transportation or (FAST) Act will only help a little for 2016-2017.
He noted 47 percent of infrastructure spending goes toward equipment.
“Not much is happening in infrastructure. It will it just wait on politics,” he said. “The potential is there for improving growth.”
C&D World was March 8, 2017, at Bally’s Las Vegas.