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Mechanical contractors maintain strong momentum
By Morris Beschloss,
Economic analyst
Despite a general economy that is sinking into a near-recessionary mode, commercial, institutional, and industrial construction are experiencing one of its strongest cycles in years.
While residential construction is still contracting, and the backlog of housing inventories are hanging near all-time highs, the mechanical contractor finds himself busier than he has been in years. In fact, it is estimated that revenues generated in non-residential construction are matching the housing industry’s peak, reached early last year, before the bubble. However, the manpower utilized is much smaller.
With the proliferation of new jobs confronting the relatively small number of mechanical contracting businesses, the timing of the current commercial and industrial business surge could not be better.
With new projects and maintenance work piling up, the availability of skilled workers has been a blessing to mechanical contractors, who found it difficult to find sufficient help when the residential sector was generating at a record pace for most of this decade.
Despite the present pace, the overall U.S. economy may temper the momentum of the red-hot pace that has catapulted all aspects of non-residential contracting to maximum levels.
According to mid-January highlights from the American Institute of Architects’ (AIA) semi-annual consensus construction forecast, a survey of the nation’s leading construction forecasters states as follows: “After ending 2007 on a high note, we are anticipating a significant slowing of non-residential construction growth in 2008,” said AIA chief economist, Kermit Baker, PhD.
“A slight decrease in activity is actually expected in 2009, with 2008 and early 2009 projected to be the trough of the current construction cycle,” Baker added.
In breaking down the market segment, the forecasters made the following projections of increases and decreases:
Commercial/Industrial -- 2008-2009
Institutional -- 2008-2009
What concerns the architectural group the most is not only $100 per barrel of oil, but the meteoric rise of iron and steel scrap; and gravel, crushed stone, selected steel products, and fabricated structural metals that have increased more than five percent. Conversely, gypsum products are down more than 23% over the past year.
Be that as it may, the mechanical sector will continue to operate at full capacity, even as much of America’s consumer sector slows. The influx of monies from sovereign wealth funds and other investment inflows are financing the building of shopping centers, high rise apartment buildings and hotel complexes that may confound the AIA projections.
With former homeowners opting for rental units, as well as tourists and foreigners pouring into the United States in record numbers, I believe building activity may eclipse the levels that the conservative architects’ group has projected.
But the overwhelming construction activities will take place in power generation, biofuels, oil refining expansion and even initial development of coal liquefaction pilot plants.
Although no nuclear power generating facilities are on the drawing boards, increased capacity plans are already in the works. With the latest technology making power generation increases in place feasible, dozens of existing generation stations have such plans underway.
Like their electric power brethren, the existing oil refineries have expanded their in-place capacity. One such project is the Motiva refinery expansion in Port Arthur (Beaumont) Texas. This is a $7 billion project that is going to tie up a lot of contracting companies and people for sometime to come. They are going to have some severe problems in locating labor because there are several others going at the same time.
The controversial ethanol expedient has nevertheless been a boon for the construction industry. As ethanol plants have been sprouting throughout the Midwest and even in Texas, pvf manufacturers and distributors have experienced a new source of business that had not previously existed. This has only added to the demands of America’s overall construction projects. The previous use of corn for food had little requirement for industrial construction.
Although the U.S. government has not yet come to terms with the proven method of oil conversion from coal, diverting instead into biofuels, it would seem inevitable that the United States would eventually accept the coal alternative. With 300 million tons of coal, the world’s largest deposits underneath American soil, coal liquefaction should eventually become America’s primary source for the technological evolution to oil. It’s being done massively in Canada, which ships to the United States almost 2.5 million barrels daily. Clean coal may eventually become American’s No. 1 energy weapon of the future.
Corporate income tax cuts get little support
As the winds of populism sweep across the nation in this pivotal election year, little support can be expected for a cut in the corporate income tax.
As President George W. Bush and his advisors mull over a tax cut package to stimulate the lagging U.S. economy, it’s doubtful that a reduction in taxes paid by American corporations will engender much sympathy.
The U.S. rate of 35% (it’s 40% if the average impact of state corporate income taxes is included), is the second highest in the world, after Japan’s.
With exports at the heart of America’s industrial revival, U.S. corporate competition will play a critical role in keeping this momentum going. The average corporate tax bite in the 17 most developed countries was 31% in 2006, down from 38% in 1954, and 51% in 1982, according to the Organization of Economic Cooperation and Development. The last reduction in the U.S. federal corporate tax rate was the cut from 50% to 34% as part of the 1986 tax reform act.
Even China, which still claims an authoritarian Communist regime, has a corporate tax of 25%. Communist Vietnam and France’s new Conservative government have announced their intent to lower corporate taxes to the 25% level.
Western Europe, not known for its sympathies to the business community, has seen its major nations lowering their corporate taxes to make them more competitive in world markets.
Germany, which is heavily dependent on exports, has dropped its corporate taxes from 62% to 39% in the past 25 years. Britain has gone from 52% to 30%, Sweden 63% to 28%, and Austria 62% to 27%. But Ireland gets the golden crown by having the lowest corporate tax rate anywhere at 12%, which has made that little country the best economic performer in Western Europe.
Although each country defines its rates somewhat differently and provides loopholes for its favorite sectors, all those who have shown themselves to be export friendly have gained substantially in the past few years.
The United States is way overdue in creating a more export-friendly climate for the corporations that ship heavily abroad, as well as supplying opportunities to expand their business horizons in the world’s largest, by far, the U.S. home market. The United States ranks only fifth among the world’s top 17 nations recognized as particularly friendly, tax-wise and regulation savvy.
In the American Treasury’s quest for more dollars, the U.S. government has been stuck with policies that have caused many foreign companies to withhold setting up facilities in the United States to serve its indigenous customers. The United States is the only major industrial nation to disallow the return of value-added taxes from finished goods as components fabricated by foreign manufacturers to be shipped abroad, even though such a stratagem is allowed by the World Trade Organization.
This also applies to America’s soaring exports, which are not allowed to secure better tax treatment for our exports by substituting a value-added tax for the corporate income tax. Despite years of congressional hearings on this matter, little progress has been made to make our corporations more competitive, both here and abroad.
Since most members of congress are gun-shy because of the continued bad press the corporate world has received from the media, they are loath to support such initiatives. Part of the problem is lack of interest in America’s dynamic export growth in the last few years. Unlike almost all other major world powers, which depend heavily on their industrial sectors for exports and home consumption, the United States has never considered outward bound shipments as a major function of the growth economy.
Harboring more than 20% of world consumption, American business has historically concentrated on its huge home markets, with exports a supplement to overall revenues.
Unlike China, Japan, Germany and Southeast Asia, which depend on overseas revenues for maintaining their industrial infrastructure, there is no export lobby to plead America’s case.
With House, Ways and Means Committee chairman Charles Rangel (D-NY) now the kingpin of taxation initiatives, it’s doubtful that the corporations will fare better than they did when the republicans controlled both houses.
Rangel has offered a bone by calling for a corporate decrease from 35% to 30.5%. But in exchange, he demands a new top tax bracket of 44%, up from the present top rung of 35%. Since this will affect most corporate executives, as well as owners of small businesses, you know where that will wind up -- Dead on Arrival!
