So far we’ve had a relatively mild winter. Not so good for the snow plowers, but decent for those trying to get installations done. We’ll see how the next couple months play out.
Everywhere I go contractors are very optimistic about the 2017 season. Lots of commercial work is in the pipeline and more is on the design tables. Housing continues to do very well. Personal incomes are rising. The stock market is boosting peoples retirement savings. All-in-all a whole bunch of good news.
Here’s some reported economic news;
Oil Rigs
The U.S. has been adding new oil production rigs. In the last year the number of rigs increased 24.8%. The total count is still way below the height reached in 2014. What does this mean? The oil industry is seeing an increase in demand and oil prices will be going up.
We’ve enjoyed a couple years of lower oil prices, which has been favorable for individuals and companies because of low gas prices. Lower oil cost also help hold down pipe and wire costs. It appears as 2017 rolls on we may be seeing higher oil prices, which means gasoline, pipe, and wire may increase as well.
Driving higher oil demand is the rapidly increasing economic activity since last December. People are feeling freer with their money and businesses are benefiting from increased sales. That means more raw materials and energy will be needed to make and supply the products being purchased. Oil is a primary source for so much of what our economy needs.
Construction Spending
Construction spending is at the highest level in the last 10 years. All three sectors; housing, nonresidential, and governmental are all showing increases. The combined spending level is now higher than April of 2006. That was the top before the housing bubble burst.
Economists keep saying a strong job market and the recent increases in personal income will support even more construction growth in 2017. This trend is likely continuing until a slow down in 2018 or 2019. Housing starts will post a 5% plus increase in 2017.
Interest Rates
A growing economy eventually experiences inflation. The Fed often steps in to control inflation by increasing interest rates. The Fed has already stated they will be raising rates later this year, apparently in small increments. The stock market has already factored in a ½ point rate increase.
It’s time. We’ve had exceptionally low rates for 8 years. While nice for borrowers, super low rates cause pain for others. The Fed would like to get rates back up so they can drop them during the next slowdown in hopes of stimulating faster recovery. Right now they have nowhere to go.
Slowly increasing rates are not expected to slow down increasing housing starts. If you are a borrower, you will be paying higher rates. We don’t know when, but they’re coming. Maybe now is the time to lock in loans at the current lower rates.
Economic Growth
Our national GDP is projected to grow, but there is disagreement on how fast. We’ve experience rather anemic low growth the past 9 years. For example, 2016 is projected to have a 1.6% GDP. Prior to the recession, 4-6% was considered good.
Some economist say 2017 will be about the same. Others argue a more positive business atmosphere will drive growth higher. The blended forecast says we’ll see 3% growth. A recent forecast stated GDP will top 4%. Lets see what happens.
Remodeling Boom
Harvard’s Leading Indicator of Remodeling Activity (LIRA) is seeing large increases: 6.6% since September and projected to be up 8.3% by April. The LIRA is important for the Green Industry because landscaping services are often part of a remodeling project.
A remodeling boom indicates something else. House flipping, so common in the period before 2008, is not growing significantly. People appear to be more inclined to stay in their current home and improve it. Others are remodeling to increase the value of their home, even if they don’t intend to sell right now.
Material Costs
Because up escalating demand, expect construction material costs to increase this year and into 2018. Higher prices invite more production and that will level off the increases. However, there will be a period of growing costs. Watch your bidding on long term projects!
Labor Shortages
Labor is a perennial problem in the Green Industry. We have two issues; labor is in short supply and the landscaping trades are not attracting younger people. The same is true for all the construction trades.
State Landscape and Nursery Associations are trying to reach out to the high school age tech programs to gain more interest. Where you see opportunity please help them, you will be reaching out to your future employees.
Landscaping labor has always been a problem. Now too are the management level positions. Landscapers, construction, and manufacturing companies all are having difficulty finding good people to lead divisions, groups, etc. Sales positions are also a struggle.
Whenever something is in short supply the price goes up. Personal incomes went through an 7 year stagnation, now incomes are rising. This means companies will have an increasing labor cost. Watch this one too when bidding jobs.
Job Price Increases
So, if labor, materials, fuel, and most everything else you are paying for is going up, what do you do about it? The first option is to increase your prices. Scary I, know, but necessary. I can tell you the progressive well run landscape companies have already increased their rates and plan to increase them some more.
The other option (good companies do both) is to improve productivity. In other words, you are paying for a certain number of hours with each employee. How many of those hours are helping you increase revenue compared to increasing “general overhead.” Contractors are taking deep dives into their non-revenue hours.
Taxes
Talk of lower business taxes, whether for C-Corps or the pass throughs (like LLC and S-Chaps), has been on the table for years. Politicians on both sides have supported decreases, but Trump campaigned on it.
Will tax relief for U.S. businesses finally happen? If so, an economic flare-up could be released. A flood of investment would fuel a construction boom. Of course that also means increasing prices or inflation. I’d rather have the economic boom, given the Fed keeps reins on inflation.
In any case, cash is always king. Make sure during these good times to build your operating cash reserve. That will help you slide through the next slowdown.
We wish you the best for 2017!
