Mechanical contractors have it all together

By MORRIS R. BESCHLOSS,

economic analyst

Last month’s Mechanical Contractors Association convention in Palm Desert, Calif. was a fitting tribute to the golden era in which this commercial and industrial element of the phcp contracting fraternity has been embraced.

When attending this magnificent extravaganza, one has the impression that the mcaa has achieved the ultimate in presenting itself in a manner not even approached by any other segment of our highly diversified group of phcp manufacturers, distributors or end users.

It’s not only the fabulous talent of the speakers and varied professional presenters, but the organization of workshops and other week-long educational programs, which are superior to those I have witnessed in other facets of the industry.

The opportunities open to this plumbing-heating-cooling-piping contractors’ most significant business element have never been greater. It’s not only commercial, institutional and healthcare facilities which have generated a highly accelerated business pace, but the shortage of skilled workers that have opened the doors of involvement in turnkey construction, once exclusively dominated by the Fluors and Bechtels on a worldwide basis. This puts mechanical contractors into the red-hot development of power generation and oil refining capacity expansion.

In fact, Ferguson, the largest purveyors of plumbing, heating, cooling, piping products has now developed a separate marketing entity, exclusively devoted to developing relationships with this potent business group of mechanical contractors. These comprise only about three percent of the national plumbing contractor fraternity, but they generate a disproportionate percentage of revenues generated.

With infrastructural energy and power development comprising the centerpiece of America’s booming industrial growth, the members of the Mechanical Contractors Association are looking at the brightest future ever made available to this dynamic industry segment.

U.S. manufacturing stronger than perceived

The Economic Policy Institute has verified what I have often reiterated, that manufacturing still packs a significant punch in the national economy -- about 10% of total employment and over 12% of gross domestic product -- and even greater shares in the economies of many states. And manufacturing provided one of the few bright spots in the otherwise bleak fourth-quarter 2007 gross domestic product report.

Because of the major shift of jobs overseas, and the massive growth of imports in the last decade, it’s generally assumed that the United States has become a nation of “hamburger flippers” and “insurance salesmen.” But this is a misconception magnified by both a geographic and product job displacement that has accelerated in the United States since the early 1990s. Where once there were factories billowing smoke, there are now idle warehouses lining the countryside, especially in the Midwest.

Actually, almost as many jobs have been lost to productivity provided by modern technologies as were lost through foreign displacement. Also, employment in many labor intensive industrial sectors such as textiles, leather goods, automotive parts, appliances, television sets, etc. have been replaced by all aspects of energy development, construction machinery, aircraft, military equipment, and even Harley Davidson motorcycles.

It might surprise you to learn that the United States trails only Japan and Germany in industrial production, although China is coming along fast in fourth position. What tends to diminish the importance of America’s manufacturing sector is that the U.S. total gross domestic product of goods and services is three times greater than that of runner-up Japan. Consequently, even America’s prodigious industrial capabilities get lost among its huge consumer and service sector that makes up the bulk of its world-leading economy.

Manufacturing industries are also responsible for a significant share of overall U.S. economic production of goods and services, generating $1.6 trillion in gross domestic product in 2006 (12.2% of total U.S. GDP). Because manufacturing firms also use trillions of dollars worth of commodities and services as inputs, the sector is responsible for an even bigger share of total output. U.S. manufacturing generated gross revenues of $4.5 trillion in 2006, and is by far the most important sector of the U.S. economy in terms of total dollars (Bureau of Economic Analysis 2008).

Manufacturing plays a significant part in the economy of individual states, too, generating 28% of gross domestic product in Indiana in 2006 ($70 billion), and more than 20% in Iowa (21%, $26 billion), Louisiana (21%, $41 billion), and Wisconsin (20.8%, $47 billion). California (9.8%, $169 billion) and Texas (13.1%, $140 billion) continued to increase its $100 billion plus gross industrial product growth in 2007, according to latest estimates.

Also adding to the manufacturing arena’s total in the upcoming years is massive expansion of power generating facilities and oil refineries. Together these will add billions of dollars of new expenditures to the rebounding industrial sector.

U.S. manufacturing firms have also led the way on trade, exporting $923 billion in manufactured goods, 64% of all U.S. goods and services exported in 2006. Although export growth slowed in the fourth quarter of 2007, manufacturing provided one of the few bright spots for the economy in the otherwise bleak fourth-quarter GDP report. Even so, final numbers will show that exports and the industrial subsector amassed record revenues last year. While the U.S. housing sector is likely to exert a drag on the economy for some time to come, exports from the manufacturing sector should continue to add to the growth of the 2008 economy. Reinvestment in U.S. manufacturing could stimulate growth in a wide swath of states in the heartland that have been hardest hit by the manufacturing and housing crises.

A combination of the falling dollar and the buying power of emerging nations and sovereign wealth funds will assure that the wheels of America’s industrial engines will continue to turn effectively.

What is also not generally publicized is the stupendous growth of high technology in all its aspects, especially in the field of pharmacology, communications and back office equipment.

Coal industry impeded by ‘green’ pressure groups

Coal, which provides one/half of America’s power generating energy supply, is under extreme assault by “environment protection” pressure groups. But having failed to curb the use of coal by invoking fear of global warming, greenhouse gases and CO2 emissions such powerful organizations as “Rainforest Action Network” have successfully put pressure on the nation’s largest banks.

Although such attempts to throttle the use of coal for purposes of power generation have been attempted repeatedly in the past, the current assault may prove to be the most serious yet, since it entails the cut off of financing for current and future projects, three of Wall Street’s biggest investment banks announced early in February that they will make it increasingly difficult for companies to get financing to build coal fired power plants in the United States.

Citigroup, Inc., J.P. Morgan Chase & Co. have announced their conclusion that the Environmental Protection Agency will cap greenhouse gas emissions from power plants in the foreseeable future. The banks will require utilities seeking financing for plants in the interim to prove their economic viability under potentially stringent federal caps on carbon dioxide. The main man-made greenhouse gas.

This action punctuates the latest fear by the U.S. business community that a government inspired emission capping is the immediacy of such a move, and what could be the ultimate consequences.

This move to restrict financing is the latest obstacle to the utilization of coal, America’s most prevalent power generating commodity. Although providing an enormous component of powering U.S. electric power, it emits large amounts of CO2. In response to such financial pressure, the U.S. government recently pulled support for Project Future Gen, that many utilities saw as a step toward burning coal cleanly. The current restrictive standards, which will apply to all but the smallest plants, result from months of negotiations among the three previously listed major banks and some of the biggest U.S. utilities and environmental groups. These standards will put a severe crimp into coal dependent utilities that have not yet factored the future price of CO2 emissions into their planning.

The banks are between a rock and a hard place. Already hard-pressed by the current credit crunch, they don’t want to be saddled with debt that implodes because of the imposition of government emission caps. These would require power plants to buy large numbers of extra pollution allowances. Congress is already considering legislation that would force companies whose emissions exceed allowances to buy more from companies that already have more than needed.

Although the big banks deny that environmental groups have pressured them to forego financing to coal fired plants, it’s a practical certainty that government agencies, in collusion with “Green Group” are attempting to promote the utilization of renewable energy, when building new power plants.

Two environmental groups -- Environmental Defense and Natural Resources Defense Council -- worked with the banks to develop extremely strict standards.

As would be expected, such major utilities as American Electric Power are protecting the confiscating costs that will have to be factored into their overall expenses. And this is coming at a time when future demand is outstripping supply by two to one. Such a turn of events could foretell brownouts and blackouts later in the decade. Whatever new power is made available will be impacted by inflationary price increases. This is especially true as nuclear power and natural gas availability are not prepared to fill the gap.

With coal in the cross hairs of antagonistic environmental groups, the possibility of coal-to-oil conversions, so prevalent in Canada’s Alberta Province, is not destined to get off the ground. This consigns America’s energy industry to the mercy of biofuels, increasingly proven to be an impotent replacement for crude oil derivatives.

China, which does not have environmental restrictions placed on their coal use, is experiencing severe shortages of that energy source. This could be a major source of income for U.S. exporters if the “Greenies” would be deterred from their attempts to consign 500 million tons of U.S. coal to the trash heap.

Coal’s use and prices have skyrocketed to previously unforeseen levels. Not only China, which builds a new power generating station every four days, but Russia, which exports an increasing amount of its oil, is relying on coal for power generation. The same is true of most other emerging nations that still find coal the most cost-effective and available source for expanding their power generating capability.

International recession would impact U.S. severely

Although the jury is still out regarding even a shallow recession impacting America’s economy during the first half of 2008, little has been written about a global recession gripping the world as a whole.

While America is shielded from a deep recessionary trough by its magnificent diversity, a worldwide slowdown could increase the possibility of a global chain reaction, propelled by the U.S. consumer sector, substantially lowering its demand from the world’s emerging manufacturing powers.

A main reason for this potential global shift is the magnetic drawing power of a bloated U.S. consumer sector greatly reducing its demands from all over the world. This makes the world particularly vulnerable since America’s population, while making up only five percent of the global population, absorbs almost a quarter of the world’s resources, whether in raw material or converted form. This is true of commodities, components, as well as finished products.

Such a global recession possibility may seem far-fetched at this point. But it’s still real enough, so that the International Monetary Fund is asking its worldwide membership of leading nations to relax its budgetary restrictions. This would allow greater domestic production, as well as opening the doors to increased imports.

One danger sign flashing orange is the International Monetary Fund’s lowering its 2008 global growth projection from 4.9% to 4.1%. But the world’s richest countries, including the United States, are expected to squeeze out only a 1.8% growth rate. However, even these numbers could prove optimistic, since the slowdown is emanating from a credit crunch that is spreading its tentacles throughout the four corners of the earth.

Consequently, fiscal stimulus, even on a global scale, may not be enough to rev up greater worldwide demand. While Europe and Japan seem stuck in the proverbial economic mud, such powerhouses as China, India, Russia and Brazil are concerned about overheating. This expedient may cause these economic emerging powerhouses to deliberately cool off, which could bring down the world’s total growth index in 2008. These emerging nations seem more concerned about inflation, thereby forcing both exports and imports down substantially.

With U.S. exports providing such a critical key to keeping America from slipping into recession, a slippage in the popularity of American products could prove counterproductive to the U.S. industrial sector as a whole.

Even though the credit crunch started out as a primary American phenomenon, the consolidated debt obligations, infecting financial institutions everywhere, have made monetary issues a worry for banks worldwide.

Although lowered interest rates may help repair tattered global bank balance sheets as in the United States, they are not expected to play an overwhelming role in increasing consumer demand, especially in countries with large agricultural populations evolving into urban buyers.

The early signs for increased or lessened demand will likely come from Southeast Asia. If big ticket items like Boeing commercial airliners, heavy construction machinery, defense orders and high technology continue to maintain a fast pace, the world economy should maintain its ongoing momentum. Also to be watched are the Mideast oil powers, such as Saudi Arabia, Dubai, Kuwait, and the rest of the United Arab Emirates, which could add new thrust to American export potential.

How all this jells should become apparent by the time the first quarter is history. Keep a special eye peeled on the intensity of sovereign wealth funds, scouring America’s domestic infrastructure for special bargains.