Depending on who you ask, which publication you read, or which Trump tweet you choose to believe, the current trade issues are either the long-overdue recalibration of the playing field, or one of the four horsemen of the impending economic apocalypse. So, as I dove into the murky waters of economic journalism, it was quite difficult to find the truth concerning the impact of tariffs on the construction industry and whether those impacts would actually affect any of us. With headlines like, “Modest Tariff Impacts To Worsen If Trade War Continues,” or the particularly alliterative, “The Trump Tariff Twist That’s Cost U.S. Steel $5.5 Billion,” the political alarmists are set on defining whichever narrative fits their end goals.
So, where’s a simple-minded, southern boy like me to go to find out the truth?
It turns out there’s no easy answer. One, because of the politics, but two, and perhaps most importantly, there is no simple truth. These waters are a bit uncharted and the long-term ramifications of the tariffs lies in both the length of their implementation and the final outcomes of the trade negotiations.
Domestically, gross domestic product (GDP) was up 3.1 percent in the first quarter of 2019 and inflation numbers have remained stable throughout the first half of this year. Both are signs of an extremely healthy economy. However, not all of the economic signs are great, and some are particularly concerning for our industry. Specifically, the cost of goods used in construction jumped in April at the fastest year-over-year rate since 2011, according to the Producer Price Index, which spiked 6.4 percent over the past 12 months. Long-term, an upward trend in these costs could have a significant impact, especially in projects planned for the first quarter of 2020.
Fortunately, in June, the Trump administration agreed to end tariffs imposed last May on steel and aluminum coming from Canada and Mexico, which should eliminate some of these cost burden on builders. Moreover, these increases in supplier pricing have been absorbed pretty easily across the industry. In fact, most economists can’t seem to agree on whether the tariffs are even the culprit for the rising construction costs. With overall demand as high as it is, skilled labor shortages, higher land costs and escalating fees seem the more likely candidates.
Globally, there will continue to be world-wide shifts in supply chains as companies are recognizing the monopolistic reliance on China’s production and the United States buying power. Countries such as Vietnam and Mexico are actively jockeying to find opportunities to fill the production gaps left by the ongoing trade tensions between U.S. and China. Unfortunately, companies can’t easily move production as new factories must be built and new labor forces hired. In fact, one of the issues exposed by the U.S. push towards buying steel locally is that much of the U.S. steel industry can’t keep up with the new demand because of antiquated equipment and techniques. Regardless of how the U.S./China negotiations shake out, the companies who move the fastest will likely be the winners.
Now to bottom-line it. With all of the reshuffling of raw material production like steel, aluminum and lumber, there will continue to be some fluctuations in costs as the markets settle down to their new realities. However, it seems that the trade agreements between North American countries should eventually balance much of that out. Where we may likely see continued increases is in the price of manufactured goods like engineered flooring. Much of these products are manufactured in China, and until the tariffs get sorted out or the market corrects itself, these industries will be hardest hit. Both fluctuating and rising costs will continue to make longer-term estimating more difficult for both the GC and the owner, but for now, the actual damage being done by these trade negotiations seem to be absorbable. Let’s just hope that, regardless of the outcome, the trade war ends soon because the biggest threat to our long-term economic success is simply uncertainty. That I am certain of.