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By Jeff Liguori


Is Washington, D.C. broken?

The global rating agency, Fitch, certainly believes so. On Aug. 1, the company downgraded the credit of the United States one notch, from AAA to AA+. It is only the second time in history that our nation’s credit has been downgraded, the first in August 2011 by S&P. In its explanation, Fitch stated that the downgrade “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to AA- and AAA-rated peers over the last two decades that has manifested in repeated debt-limit standoffs and last-minute resolutions.”

The move came as a surprise despite the agency hinting in May that the inability of Congress to effectively deal with the debt ceiling could lead to a downgrade. Once legislation was passed to raise the U.S. government debt limit, Fitch Ratings said the United States’ AAA credit rating would remain on negative watch. President Biden, Treasury Secretary Janet Yellen, and others in the administration have criticized the move as bizarre and arbitrary, careful to point out that the timing made no sense given the bipartisan effort to avoid a default in June.

The reaction by financial markets was somewhat mild considering the nearly unprecedented — and alarming — nature of the downgrade by Fitch. Bond prices went lower as yields continued higher, and the S&P 500 sold off about 1.3% — overall, a negative response. But 2023 has been a healthy year for investors thus far, with stocks up nearly 20% prior to the Fitch downgrade and a bond market about flat on the year, a stark contrast to 2022, when both markets were down double digits, an historical anomaly. So, what is the impact of a AA+ versus AAA rating for our government’s debt?

When S&P downgraded the U.S. government debt rating in 2011, global stock markets plunged and bonds rallied, driving interest rates lower. Typically, a downgrade in credit equates to higher — not lower — interest rates. But the uncertainty surrounding that downgrade pushed investors into safe-haven assets, namely U.S. treasuries, which illustrates that the move by S&P had no real implications for buyers of U.S. debt. It was a slap on the wrist, a consequence of massive accommodative fiscal measures intended to shore up a weak economy as the nation emerged from the greatest financial crisis since the Great Depression.

The rating agency was signaling that the U.S. had to get its fiscal house in order and Congress needed to come together to address the burgeoning debt. Like today, S&P had signaled to the Obama administration and U.S. Treasury that there was a risk of a downgrade about a month prior to the move. Stock markets lost roughly 10% of their value in the 30 days preceding the downgrade.

Fitch’s recent actions are consistent with its close competitor, S&P, in 2011. The U.S. debt, as a percent of gross domestic product (GDP), rose from 65% at the end of 2007 to 92% prior to the downgrade then. Before COVID locked down the economy, debt to GDP was just above 100%, ballooning to 135% by the middle of 2020. Currently, our debt is running at nearly 120% of GDP. And as interest rates rise, the situation worsens. (Growth in GDP can ameliorate this ratio, but the economy is not keeping pace with inflation presently.)

Similarities from the first downgrade to today are limited. Yes, the nation was emerging from crisis in 2011, the economy was flooded with stimulus spending, and Washington, D.C. was also unable to address our long-term fiscal issues. But the similarities end there.

Economically, global bond yields were falling prior to the downgrade in 2011, and central banks were still easing, dealing with the aftermath of the Great Recession. The unemployment rate was around 9%, high from a historical standpoint, but trending lower as the number of job openings were on the upswing. Debt to GDP was still under 100%, with most economists optimistic that further economic growth would remedy that dynamic. U.S. household debt had decreased about 8% and was also trending lower. The interest rate on a 30-year mortgage was about 4.5% and, again, trending lower.

Today, central bankers continue to fight persistent inflation, aggressively raising interest rates and tightening monetary conditions. The job picture remains sanguine, with the unemployment rate at 3.5%. Job openings, however, are now on the decline after sharply increasing from COVID lows. Household debt is on the rise, with total credit-card debt projected to hit $1 trillion for the first time ever. And housing affordability is at its worst level since the late 1980, according to the National Assoc. of Realtors, as the rate on a 30-year mortgage bumps up against 7%, an increase of 114% since the beginning of 2022.

There may be no economic adjustment to the rating downgrade by financial markets. Stocks have been incredibly resilient this year. The message by the Fitch agency is more about the United States having the willingness to pass legislation to deal with our debt burden, and less about the ability to pay our borrowers.

It is not an issue solely for the U.S.; after the Federal Reserve and U.S. government accounts, the largest holders of our debt are Japan, China, and the UK (in that order). The snowball effect of a default would be catastrophic. Almost every analyst and economist voicing an opinion on the downgrade, however, knows that an actual default is such a remote possibility for the largest economy in the world that it isn’t worth mentioning. And there’s no new information that brought on the downgrade.

It is a warning, nonetheless, and emblematic of our long-term political issues, which continue to hamper constructive fiscal progress.


Jeff Liguori is the co-founder and chief Investment officer of Napatree Capital, an investment boutique with offices in Longmeadow as well as Providence and Westerly, R.I.; (401) 437-4730.


Survey Says

Construction’s skilled-labor shortage is a well-known and serious concern for the U.S. construction sector, but the extent of the problem shows issues that need to be resolved right away if the country is to satisfy rising construction demand.

Associated General Contractors of America (AGC) and Autodesk conducted a workforce survey, and the results show that 93% of construction companies report having positions available they are trying to fill, and 91% of those firms are having trouble trying to fill at least some of those positions, especially among the craft workforce that accomplishes the majority of on-site construction activities.

According to Ken Simonson, chief economist at AGC, the most common rationale for problems filling positions, mentioned by 77% of employers, is that available individuals lack the skills required to work in construction or cannot take a drug test.

According to the national employment figures, the construction sector’s unemployment rate as of July was actually slightly lower than that of other sectors, he added. That’s remarkable in a sector where workers aren’t always kept on the payroll once a project is completed. With a 3.5% rate, virtually no one with prior construction expertise is actively seeking employment in the industry.

However, a panel of construction professionals in a webinar hosted by AGC said the industry needs to attack the issue from every perspective, which includes education and training, public relations, and things as simple as employers improving wages, perks, and labor standards. The survey results highlight the need for public officials to invest in new workforce-development programs focused on the construction industry.

According to Simonson, federal, state, and local officials must invest in the kinds of professional and technical education programs that will introduce more current and future employees to the myriad job possibilities that exist in construction. Additionally, these programs offer the kind of fundamental capabilities employers are looking for.

On a completely separate note, Simonson proposed that, in order to help cover demand gaps, federal officials could also take action to permit more workers to legally enter the nation. Later in the online conversation, the panelists discussed how to spread the word about the advantages of a career in construction to other undiscovered labor pools, including those in the retail and hospitality industries.

The panelists also talked about considering those who have served time in prison as job seekers because many of them are trying to better their lives but haven’t had much luck finding work.

Regardless of potential remedies, the existing shortages will undoubtedly hinder the completion of projects.

Construction enterprises of all shapes, sizes, and labor arrangements are suffering from a serious scarcity of laborers, according to Simonson. These labour shortages are making it harder for businesses to deal with supply-chain risks that are driving up building material costs and causing uncertainty in delivery times and product availability.

Indeed, 82% of businesses claim that projects they are working on have been delayed due to supply-chain issues, and six in ten state that projects have been delayed due to manpower shortages. The federal government’s new infrastructure spending and more recent expenditures on semiconductor manufacturers and energy-infrastructure projects won’t deliver as much as promised if there aren’t enough people to keep up with demand, Simonson cautioned.

The findings indicate that all kinds of businesses are facing the same difficulties. Contractors working on building projects, highway and transportation initiatives, federal and heavy work, or utility infrastructure reported results that have been remarkably similar, whether they used only union craft labor or open-shop employers, contractors with annual revenues of $50 million or less, or those with more than $500 million.

Construction is becoming more expensive as a result of labor shortages and supply-chain issues. In the past year, 86% of businesses increased the basic pay rates for their employees, while 70% passed on higher material costs to project owners.

Some project owners have canceled or delayed projects due to cost and supply-chain issues; according to 58% of respondents, owners have done so due to rising costs, while one-third of enterprises say projects have been affected by extended or unknown completion deadlines.

Many construction companies claim to be taking action to address the labor shortage. Along with the fact that most companies have increased pay rates, 45% of them are now offering incentives and bonuses, and 24% of them have also upgraded their benefit packages.

Technology is a key factor in how well businesses are able to deal with difficulties like labor shortages. In fact, 87% of businesses agree that, in order to enable new technologies to succeed, staff must be proficient in digital technology. Even if few candidates have the necessary construction abilities, at least half of the responding businesses claim that the individuals they are employing have the necessary technology skills.

While the majority of construction companies are now having trouble filling vacant positions with qualified candidates, Allison Scott, director of Customer Experience and Industry Advocacy at Autodesk, noted that, as more workers retire, the labor crisis will only worsen. What’s promising is that construction companies understand this and are proactively training young people for careers in the industry.

She added that the industry is committed to taking action to build the next generation of the workforce, as seen by the increased efforts in career development and training programs, as well as an emphasis on digital skills.

The AGC is urging officials at the federal, state, and local levels to support career and technical education initiatives that will introduce more current and future workers to the diverse career options in the construction industry. In order to help bridge demand gaps until the domestic channel for training personnel is established, the group is also pleading with federal officials to permit additional workers to legally enter the country.

There is a lot of work for the business to undertake, but there aren’t enough workers or resources to finish the projects, according to Simonson. The construction industry will be able to rebuild America’s infrastructure, modernize its manufacturing sector, and contribute to the delivery of a more dependable and cleaner energy grid by addressing labor shortages and supply-chain issues. u


This article first appeared in World Construction Today.