The Leaderboard Magazine recently contacted three industry experts, Ken Simonson, Lawrence LeClair and Lenore Marema (bios below) on the future of the surety bond industry.
Part I: What does the outcome of the election mean for the surety bond industry?
Simonson said the election was important because it did end one element of uncertainty. Now, we know who will be in the White House for the next four years and which parties will control the houses of Congress for at least the next two years. Beyond that, elements of uncertainty still remain.
LeClair said that while who controls what remains unchanged, there are some different faces in Congress and that could alter the outlook for some pieces of legislation that are important to the surety industry.
Marema said there will be a boost in construction in the Northeast as the area rebuilds after the destruction caused by Hurricane Sandy. In contrast, she said, the current federal highway bill maintains current levels of spending until Sept. 30, 2014, and no additional spending beyond those levels is expected in that time frame.
The immediate economic question, Marema said, is solving the problem of the financial cliff. Unless the lame duck Congress and President Obama act, the Bush era tax cuts will expire on Dec. 31, Marema said, and most Americans will get a tax increase. Around $109 billion in across-the-board cuts in domestic and defense spending in 2013, including $55 billion from defense, also will kick in under sequestration, she added.
“If Congress fails to act and lets the fiscal cliff happen, construction in the federal budget may well take a haircut like anything else,” Marema said. “The Republicans want to cut spending and entitlement programs to avert the fiscal cliff, and the Democrats want to raise taxes and other revenues. Any compromise likely will have some cuts in spending, and where that comes from is anyone’s guess.”
“There is not going to be money in the federal budget for any significant increase in construction. In addition, any new construction likely will have to be paid for in increased revenues or reduced spending elsewhere in the budget,” Marema said.
In spite of the election, Simonson said, there appears to be just as much economic uncertainty in the country as there was before the election.
“Nevertheless,” Simonson said, “elections do make a difference.” With the re-election of President Obama and the continued division between the parties in Congress, Simonson predicts several developments:
- There is an increased likelihood of higher tax rates on high-income individuals, including contractors who operate as partnerships and S- corporations.
- It is also likely that spending cuts will not be as severe, sparing some of the blow to contractors working on projects for the U.S. Army Corps of Engineers, the Naval Facilities Engineering Command (NAVFAC) and the General Services Administration.
- Contractors tied to coal mining regions or suppliers, railroads and utilities linked to coal will have a faster-shrinking market than if Mitt Romney had been elected.
- Contractors who want to employ legal immigrants will have an easier time of doing so.
In general, Simonson expects that construction will continue a slow and uneven recovery in 2013.
“There should be strong activity related to oil and gas drilling, transportation and processing; other manufacturing; private higher education; and multifamily construction,” Simonson said.
He expects that “public spending categories, including most infrastructure, will be flat to slightly down.”
“Office, retail and health care spending are likely to remain weak,” Simonson added. “The big unknown is whether the recovery in single-family homebuilding will continue. I’m guessing it will for a few more months, but then will stall at a much lower level than last decade I think overall spending will rise by 7 to 10 percent, much like this year.”
Ken Simonson is the Chief Economist for The Associated General Contractors of America in Arlington, Va.
Lawrence LeClair is Director of Government Relations for the National Association of Surety Bond Producers in Washington, D.C.
Lenore Marema is Vice President of Government Affairs for the Surety & Fidelity Association of America in Washington, D.C.