Will Construction Industry Suffer From Trump's Tariffs?

The recent proposal of imposing 25% tariff on imported steel and 10% on imported aluminum sent jitters across stock markets. There is widespread fear that the outcome of the tariffs might be a trade war that can upset the global economy.

This proposal, which is in sync with President Trump’s America First policy, however, has seen mixed reactions from various sectors of the U.S. economy. While domestic steel and aluminum manufacturers were cheerful on hopes that this will support the industry’s revival which has been suffering for past few decades, other sectors such as manufacturing, automobiles and construction, which rely on steel and aluminum for their raw material are apprehensive of higher input costs and contracted margins.

Per data provider Statista, the construction industry accounted for 40% of U.S. steel demand in 2017. An increase in import tariff will escalate raw material cost for home builders, who are already grappling with increased cost thanks the recent imposition of lumber tariff. The National Association of Homebuilders was among several trade organizations that spoke out against the tariffs, saying that the increased cost could be passed on to home buyers.

Close on the heels of the announcement, shares of companies in the construction sector, namely EMCOR Group Inc. (NYSE:EME) , Dycom Industries, Inc. (NYSE:DY) , Primoris Services Corporation (NASDAQ:PRIM) , Granite Construction Incorporated (NYSE:GVA) slid before regaining some strength.

Lumber Tariff

Last year, tariff was imposed on lumber, another major input material in the construction industry. The tariff imposed in retaliation to Canada's restrictions on the import of U.S. dairy products, averaged 20.83% on Canadian lumber imports, which are used mostly for home building in the United States.

Already High Input Cost

The industry is grappling with already high cost from land, labor, materials and lumber.

A report by Oldcastle states that labor woes continue given the inability to recruit the younger generation, lack of skilled labor and stricter government policies around immigration. While companies are investing in training programs and supporting legislative reform, raising wages is the only solution to satisfy their current labor demands which would escalate overall cost. Apart from labor cost, material costs are forecast to increase 2-3% in 2018. Gypsum products will increase in price the most (6- 7%) this year, after a 7% expected increase in 2017. Cement, Aggregates, Concrete, and Lumber are expected to increase in the 3-4% range.

These high input costs should lead to a 2-3% rise in overall construction costs in 2018.

While the industry continues to grapple with on production side due to rising cost, sales front doesn’t appear attractive either.

New Home Sales Not Building Confidence

Most recent data showed that sales of new U.S. single-family homes dropped for the second straight month in January and in four of the past six months.

Sales of newly constructed homes, accounting of roughly 10% of all U.S. home sales, fell 7.8% in January from the prior month and 1% from the year-ago period to a seasonally adjusted annual rate of 593,000 units, as per data released on Feb 26, by the Commerce Department.

Rising Mortgage Interest Rates Pose Another Worry

Also, mortgage rates are surging in proportion with U.S. government bond yields in anticipation of higher rates of inflation and further monetary tightening by the Federal Reserve. This obviously does not bode well for the industry. The 30-year fixed mortgage rate rose to an average of 4.40% for the week ending Feb 22, the highest level since April 2014, from 4.38% in the prior week. It has increased for seven straight weeks.

Bottom Line

While the industry continues to grapple with the headwinds discussed above, all is not lost. Homebuilders remain confident about the upcoming spring selling period, which should see increased demand from a solid job market, low jobless claims, wage growth and overall economic growth.

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