prepare now for what many experts predict will happen in 2020 By: rich higgins, cpa, mccarthy & company
Warning Signs
U.S. spending growth in 2019 will be led by public investment across both nonresidential buildings and nonresidential structures per FMI’s Second Quarter North American Forecast. The 2019 forecasted top-performing industry segments are: conservation and development (+9%), transportation (+8%), water supply (+8%), public safety (+7%), office (+6%), and highway and street (+6%). Sewage and waste disposal are categorized by FMI as growing while educational and manufacturing have both been downgraded from growth to stable.
Anirban Basu, chairman and CEO of Sage Policy Group, claims that the leading cause of concern for contractors is the emerging weakness in business investment. Basu points out in his article entitled “2019 Mid-Year Economy Outlook: Somehow it Endures” (Construction Executive, August 1, 2019) that there was a 10.6% decline in private investment in nonresidential structures on an annualized basis. Investment in residential structures is down 1.5%. Yet spending by state and local governments on infrastructure and various other projects increased by 3%.
Even though the above statistics indicate that the construction industry is continuing to expand, experts are expressing concern about the economy in 2020. A leading indicator of economic health in the construction industry is the level of housing starts to the level of permits. As reported in Monthly New Residential Construction, June 2019 by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development,
Engineering News Record reported that many construction executives are worried about the market climate in 2020. Drops in business confidence scores are red flags that we may be heading toward a downturn in the economy and some experts agree that there could be a decline in 2020. The National Association of Business Economics thinks there is a 60% chance that we will experience a downturn by mid-year 2020.
Macro-economic factors are in play that could cause a change in the economy next year. These include the ever-increasing U.S. debt, uncertain monetary policies, labor shortages, political instability, tariffs, and trade wars.
Accounting Corner
E
conomists forecast 4.4% growth in the construction industry in 2019. Construction spending has been holding up reasonably well at a moderate growth pace, according to the American Institute of Architects (AIA). Spending on nonresidential building is expected to increase almost 4% this year and an additional 2.4% next year.
Be Proactive It is important to plan now for a possible downturn in the economy. Talk to your banker and make certain you have an adequate line of credit. Expand your bonding capacity, if appropriate. Assess the need for new long-term debt carefully so that your company is not highly leveraged. Talk to your insurance broker and look to make sure you do not have unnecessary coverages. Review pending projects and bids. Decide which projects will produce the highest return on investment and carefully assess all others to maximize profits on projects with tighter margins. Avoid taking unnecessary risks and focus on projects that are feasible and you have the capacity to complete. privately-owned building permits in June were at a seasonally adjustment annual rate of 1,220,000. This is 6.6% below the revised May rate and 6% below June 2018. Privately-owned housing starts in June were at a seasonally adjusted rate of 1,253,000 which is 0.9% below the revised May estimate but 6.2% above the June 2018 rate.
Perform a cash flow analysis to determine when and how money moves into and out of your business, Tighten your credit policies, enforce late fees, and start collection efforts 30 days after an invoice is sent. Examine every contract you have with vendors and try to renegotiate the terms. Take advantage of discounts for paying early. Analyze leasing equipment instead of buying.
Utility & Transportation Contractor | october| 2019 15