Overall economy, PVF sector anticipate cautious recovery, government intervention
By Morris R. Beschloss
While the general economy is taking its initial steps into the unknown factors comprising the post-recovery 2010 year, what is primarily worrying all facets of business, as well as consumers, is the ultimate direction of U.S. Government action.
Business is worried primarily that taxes will increase significantly. Of major concern is that both business and consumer sectors will be called on to carry the burden of a runaway deficit gap caused by a multi-trillion dollar annual shortfall. The resultant ballooning debt will crowd out investment funds needed for future expansion in high and bio-technology, a multitude of research sectors, and other traditional sectors of government responsibility.
Billions previously committed to research for the National Aeronautic Space Agencies, as well as monies needed for coming to grips with major diseases will no longer be available. There is still hope that most, if not all, Obama initiatives will cease becoming law under present economic circumstances.
In spite of the increasing burden of government bureaucracy, business in general believes that 2010 will feature a positive rebound in the gross domestic product of goods and services. The vast majority of those heard from believe exports, residential and industrial construction, and energy development will be positive factors. Even solar power is looked on with favor, due to the substantial investor tax credit and the mandate, forcing utilities to use up to 20% solar power as a resource for electrical power development by 2020.
However, oil and natural gas drilling activity will be limited to existing sites, with drilling rigs being reinstalled after being pulled earlier in the year.
Mild recovery under way
To put the major factors of 2010 into context, the following six categories sum up what can be expected from 2010’s recovery year:
1) The year 2010 is headed for a modest recovery, but one that will not have a demand dynamic empowering it, as did the previous comebacks in an inflationary environment. Both consumer and producer will be extremely conservative in expending the funds needed to generate business growth.
2) Double digit unemployment will continue to stick around for most of next year. Unlike previous recovery periods, few companies will hire extra personnel, relying instead on upgrading, mechanization, and automation to get more bang for their buck. With close to 20 million lost jobs, part-time workers and additional applicants available, it’s doubtful that much of a dent in job losses will be felt in the foreseeable future.
Also, the core of personnel-heavy industrial sectors like steel, automotive, metalworking and machinery manufacturing is continuing to shrink.
3) Although consumers will begin to be somewhat more aggressive by mid-year 2010, there will be no return to the go-go days of the past decade when unrestrained borrowing allowed tens of millions of Americans to live a lifestyle well beyond their means.
4) Although the lethal credit squeeze of 2008-09 has largely abated, financial institutions are leery of lending to less than creditworthy applicants. Since both business and consumer sectors are engendering less credit demand, the pressure on overall liquidity has largely been unfrozen.
5) The dollar will continue to weaken as the yawning chasm of a $2 trillion budget deficit for fiscal 2010 (ending Sept. 30) beckons. This will continue to increase prices for such global commodities as oil, gold, copper, rare industrial metals and agricultural products.
However, partially offsetting this increase in the trade deficit, greatly reduced in 2009, will be a new surge of exports, abetted by the cheaper U.S. currency. Also benefiting will be the thousands of U.S. companies that do a large share of their business overseas.
6) The overriding imponderable will be the increasingly quixotic machinations of the U.S. Government. Piling huge new deficits on an already bloated $12 trillion debt, which costs $500 million a day to service, means that taxes are sure to go up. This already unsustainable debt, plus planned universal healthcare, cap-and-trade, renewable energy experiments, and card check are hanging over a deficit-unconscious Congress like a black cloud.
The deferment, or cancellation of these ill-timed expenditures would go a long way to stabilize the negative effect these legislative initiatives would have on the U.S. recovery.
Although the Federal Reserve Board has promised to keep interest rates at rock bottom for now, the Fed cannot keep pumping cheap money into this economic bottomless pit forever. Such limitless action would be sure to usher in a period of monetary hyperinflation from which the economy would be dragged down interminably.
PVF sector views opportunities, setbacks
The direction of 2010’s business opportunities is best exemplified by Charles Dickens’ The Tale of Two Cities’ opening paragraph, “It was the best of times, it was the worst of times.” Not in many years have pvf manufacturers faced such divergent paths.
Looking good for 2010 are power generation development, natural gas availability through fracking (extracting that energy from shale), renewable energy expansion, such as solar energy subsidized by federal tax credits, and utility discounts; and domestic oil production in the Bakken belt as the price of oil again approaches the $80 range.
As exports are expected to recover significantly in 2010, PVF products will comprise a substantial portion of the billions of dollars of industrial and mill supplies, construction machinery and transportation equipment that will make up a major portion of this worldwide activity.
Penetration into areas as diverse as the Middle East and the Alberta/Canadian oil sands projects are already utilizing the excellent domestic pvf products made by some of the best-known pvf companies in the U.S.
According to reports from the pvf sectors, both manufacturers, distributors, mechanical contractors and end users are expecting business levels approaching those that were reached in 2005 and 2006.
The biggest downside question marks are upscale commercial activity, such as multi-story apartment buildings, shopping centers, large office buildings, and hotels. Although occupancy has lately improved, there is fear that the major banks which made large loans available to developers, will call in the indebtedness, which individual developers will not be able to meet.
Although government supported solutions are now being discussed, equitable resolution is still up in the air. If this problem is not resolved by mid-year, the commercial construction market will be in jeopardy.
Only health care construction and assisted living development are on the upswing, but will not be sufficient to keep the large commercial construction segment out of crisis mode. Also, maintenance work will continue actively, but that is not enough to keep this pvf-heavy component from shrinking drastically.
Also worrisome is the Environmental Protection Agency crackdown on coal use by electric utilities. Coal comprises 50% of all natural powering elements used by electric power generating stations. This has put a large part of this market in a quandary and halted badly-needed power generating development.
Even with this mixed picture, domestic manufacturers and their distributors are expected to experience a much improved result over the 18 months trough developed between September 2008 and the end of 2009.
Although no nuclear power stations or oil refineries are expected to start up in 2010, increased capacity in place will help the industry muddle through and provide substantial business for the pvf sector. As always, maintenance will continue to play a role in pvf-related activities.
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Morris R. Beschloss, a 54-year veteran of the pipe, valve and fitting industry, is pvf and economic analyst for Phc News and The Wholesaler.