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Second-Quarter Tax Data Suggests Pain on the Way for Public Sector Construction

The US and global economy found itself thrown into the abyss in March and April, navigating shutdowns, shelter-in-place orders, and overall economic devastation. Now, the US and other economies have moved into recovery (on a GDP basis), and businesses are starting to heal from the wounds suffered this spring.

Unfortunately, there are some lagging sectors and businesses that have not yet faced the worst of the decline.

Public sector construction would fall into that bucket. Second-quarter tax income data was just released, and it shows a significant hit to tax coffers around the US. This will affect state and municipal spending in the years ahead.

US State and Local Tax Revenue averaged $1.851 trillion during the second quarter of 2020, down from $1.905 trillion during the first quarter, which was a record high. The quarter-to-quarter decrease of 2.8% may sound paltry, but it is the most severe first-to-second-quarter Tax Revenue decline on record (back to 1947) by a significant margin.

Typically, State and Local Tax Revenue leads US Total Public Construction through the business cycle by 19 months, meaning that mid-2020 tax income issues would typically start to manifest as declining public-sector spending in late 2021 and early 2022. However, given the sudden-onset nature of this recession and tax revenue woes, we anticipate it will show up sooner than that. We expect Total Public Construction will move into Phase D, Recession, by early 2021.

This is reminiscent to the Great Recession experience, when US Total Public Construction moved into recession in March 2010, just as the US economy at large was taking off in rebound and recovery mode. Public construction then languished in year-over-year decline for multiple years thereafter.

Clearly, public-sector spending exhibits a delayed response to business cycle decline at the macroeconomic level, which means you have time to prepare for it. Some questions you need to be asking yourself:

  • Does my business derive a significant portion of total revenue from public-sector projects? This could be public construction specifically or just general public sector spending.
  • If yes, do you operate nationally or in specific states? Examine how severely each state that you operate in has been affected by COVID-19 shutdowns. It is probable that there will be a correlation between severity/duration of shutdowns and tax revenue decline and associated belt-tightening.
  • How can you offset decline in this portion of the business? Does your product or service serve private-sector applications as well? The macroeconomy, as measured by GDP, will be getting back on track just as public woes are worsening.
  • How do you relate to US Public Sector Construction and associated predictive data points? Use that insight to generate actionable intelligence to build your 2021 forecast. If you don’t know how to do that, we can help!

The lagged nature of this particular portion of the economy gives you time to prepare for what is coming – do not waste it. Evaluate your business for exposure, make a plan, and execute it.

 

Connor Lokar
Economist