Spending confidence gets boost from election results

11/03/2010 by Jim Haughey


Corporations are holding $1 Trillion in cash above their normal operating needs.  Banks are holding $1 Trillion in excess reserves at their Federal Reserve Bank.  Consumers have boosted their saving rate from nearly zero to 5-6% of income.  They have recouped about half of the drop in household net worth caused by the plunge in home and equity prices and the deep recession. Neither liquidity nor credit rates are a restraint on spending. Even a small improvement in confidence will send some of the cash hoard to the cash register.

The new Congress will almost certainty extend the current tax rates for several years.  This will remove the huge jump in tax withholding now scheduled for January 1st although the vote to do this may not come until early 2011. The Obama plans to raise energy costs for environmental and income redistribution reasons will not now be enacted in the next two years.  Similarly, Congress will not now act to liberalize immigration rules or to force more union contracts into the private economy. And implementation of the already enacted financial reform and healthcare laws will slow as Congress demands more realistic budget and economics information and threatens to not appropriate implementation funds to get what it wants.

These actions lower the marginal cost of future spending or investment.  Most major private spending decisions are made after a “can I afford it” calculation.  President Obama and his congressional allies have been so focused on income redistribution and asserting government control over major spending decisions that they ignored the thought process that buyer use to make a spend/no spend decision. This is why the stimulus plan is widely considered to have failed.  They did not include permanent reductions in the marginal cost of major purchases.

The consequences for construction spending will be gradual but progressively positive. Each spending or investment action enabled by improved spending confidence will add to the demand for building space or facility capacity and quicken the absorption of excess space and capacity.


Recent Comments

CMD Group- construction industry news-imageā€ title=