The Keating Report: On the road to recovery
Back in January, the Government Product News forecast on government budgets and spending was delivered amid a backdrop of bailouts and proposed stimulus packages, and unprecedented pressure on the government to resuscitate the nation’s critically wounded economy.
Six months later, some of the problems remain, such as high unemployment, sluggish credit markets and a teetering domestic automotive industry. A surging stock market, modest gains in home sales and growing consumer confidence, however, are signs that the worst may be over.
The American Recovery and Reinvestment Act (ARRA), which President Obama signed into law on February 17, is giving a needed shot in the arm to the U.S. economy. According to the St. Louis-based consultants Macroeconomic Advisers (MA), the nation’s GDP could grow 1.4 percent this year and 0.8 percent in 2010 as a result of the economic stimulus of the $787 billion ARRA legislation.
Thanks in part to that stimulus, government purchases of goods and services for 2009 could reach $3.02 trillion, according to MA estimates. State and local governments will account for $1.82 trillion (about 60 percent) of those purchases. Total government purchases (consumption and gross investment) could grow 3.8 percent in 2009 over 2008 levels. For 2010, MA is forecasting a 2.5 percent annual growth rate in government purchases.
Tough economic times are affecting state government finances, according to Sujit CanagaRetna, senior fiscal analyst for the Council of State Governments (CSG) in Lexington, Ky. “State budgets continue to be under severe strain as the impacts of the worst economic crisis to hit the U.S. economy since the Great Depression filter through all segments of the country. Tax collection data for the first quarter of 2009 demonstrated a decline of 12.6 percent when compared with the same period last year with 45 of the 47 reporting states documenting a decline.
“Even more disturbing is the fact that between January 2009 and June 2011, a 30-month period, the estimated cumulative budget shortfall for all states is expected to be a mind-numbing $350 billion to $370 billion.”
State governments “are slashing spending, tapping rainy day funds, and expanding gaming [in their states] and hiking taxes to deal with their budget gap,” CanagaRetna told Government Product News.
The Council of State Governments expert sees a few “green shoots of growth” on the horizon. They include: some positive news from the housing sector indicating that the pace of contraction might be slowing, as well as proof that the frozen state and local government credit markets might be thawing.
Even so, CanagaRetna cautions “state government revenues will lag a national economic recovery by many months, indicating that states will continue to face difficult fiscal choices.”
Local governments, meanwhile, are facing huge challenges. The decline in auto dealerships around the U.S., coupled with the drop in car sales, is costing municipalities millions of dollars in lost sales taxes, reduced income and property taxes as well as drops in important fee revenue.
The National League of Cities’ latest “City Fiscal Conditions” report concludes that the financial health of U.S. municipalities is at its worst since before 1985. In response to the economic downturn, cities are implementing hiring freezes and layoffs, delaying capital expenditures and instituting service cuts.
Mayors of U.S. cities, however, are encouraged by the Obama administration’s fiscal year 2010 budget, and are pleased to see investments in the areas of community development and housing, education, community-oriented policing and high-speed intercity passenger rail — all key priorities for the Washington, D.C.-based U.S. Conference of Mayors.
Some growth in public construction
The public buildings construction category should remain steady for the remainder of 2009, with some 48 million square feet of construction under way, and the value of construction rising 12 percent over 2008 levels, predicts McGraw-Hill’s “Construction Outlook 2009-Spring Update.” The category includes detention facilities, courthouses, military and federal civilian buildings, transportation terminals and other public sector buildings. McGraw-Hill Construction is based in New York.
Another construction forecaster, Heather Jones, sees mixed signs for public sector construction in the remainder of 2009. “Year to date through March, state and local government put-in-place construction was up 1.3 percent over the same period last year,” says Jones, a construction economist for FMI’s Research Services Group. FMI, management consultants and investment bankers for the construction industry, is based in Raleigh, N.C. “Health care, amusement and recreation, transportation, power, highway and street, sewage and conservation, and development have all seen declines. Education has, surprisingly, remained fairly strong with an increase of 6 percent. For the second half of 2009, we expect transportation, highway and street, and conservation and development construction to begin picking up. We expect education to moderate somewhat.”
One recently completed public construction project is the new $8 million Police Facility in Lemont, Ill. (2007 population, 15,958). Village representatives, the Lemont Police Department and Wight & Company, the architect, engineer and construction manager for the project, dedicated the facility in May. “This facility begins a new era for policing in Lemont, and we are all excited and eager to begin the journey. The concept of community policing is present throughout our building and will be the cornerstone of future service,” said Kevin Shaughnessy, the village’s police chief.
In addition to updated infrastructure, the building design includes tools for managing storm water, such as permeable pavers for the visitor and secure parking lots, bioswales and rain gardens suited to the site.
Upgrades and replacements in local government fleets
Local government fleet managers will be shopping for new vehicles in the coming months, predicts Stephen Latin-Kasper, market data and research director for the National Truck Equipment Association, a trade group based in Farmington Hills, Mich.
“The anecdotal feedback that we are getting is that cities and counties will use federal stimulus dollars for things like hybrid upfits to existing trucks, where the conventional vehicle is converted to a hybrid vehicle. Local governments will also be replacing old equipment, like all the snowplows that they burned out in the northern half of the U.S. this past winter.” Highway and street construction contractors also will be adding to their fleets in the months ahead, Latin-Kasper says.
Technology in government
Governments continue to be major buyers of many products and services — and their appetites are growing for some products. Government demand for non-rechargeable batteries, for instance, is expected to increase 3.9 percent annually by 2012, with the value of government purchases of those batteries exceeding $520 million, estimates the Freedonia Group, a Cleveland, Ohio, market research firm. Nondefense-related applications in the government sector, such as police and fire, represents 65 percent of total demand.
Another federal stimulus package on its way?
“We are starting to hear some rumblings about the potential for another so-called federal stimulus package or bailout,” said Tad DeHaven, a budget analyst at the Cato Institute, a libertarian think tank based in the nation’s capital. “Although there is bailout fatigue in Washington, D.C., and across the U.S., I think revenues for state budgets and local budgets as well, are going to continue to underwhelm. So, I suspect there will be a move, probably with California taking the lead on this, to get Washington to put together another bailout package for the states, and of course, it’s all contingent on the economy.”