The 2019 Economic Outlook and Its Impact on Portable Sanitation – By Karleen Kos, PSAI Executive Director.
*The following blog was featured in the PSAI Weekly Newsletter January 16, 2019, Association Insights.
We are two weeks into the New Year and the effects of our holiday eggnog have worn off. It is time to take a serious look at what the economic indicators that may affect the portable sanitation industry in 2019 are telling us.
Despite the weak market in the last months of 2018, multiple sources believe the odds are against the U.S. economy entering a recession in 2019. A recession is defined as a contraction of the gross domestic product (GDP) for two or more quarters, and while economic indicators are not likely to be robust there is a consensus that things will not settle into such a protracted decline. More likely we will continue to see volatility and slower growth overall, both in the United States and globally.
In many respects, 2018 posted very strong economic growth, with the U.S. GDP rising at an annual rate of 3.5% in the third quarter and at 4.2% in the second quarter, according to the Bureau of Economic Statistics. During the early and middle part of the year, consumers spent more, companies invested in inventories, and local governments maintained their spending, the BEA said. However, things began to slow in the third quarter. The market began to lose significant ground, and by the fourth quarter market volatility and the outcome of the November midterm election resulted in the more cautious outlooks throughout the economy. Consequently, experts tempered their forecasts for Q4 of 2018 and business leaders are now looking at 2019 with more caution. A survey of economists by Reuters in mid-December shows that most expect the chance of recession in the U.S. is still low, at 35%, although the survey also showed that the median probability of a recession has inched up from 30% in the past month. Last week, Larry Summers, a Harvard economist, and former treasury secretary during the Clinton Administration, said there’s a nearly 50% chance of a recession by 2020.
Factor Impacting the 2019 Economy
The U.S. economy grew the GDP at an annualized rate of 2.7% in 2017, and it got a boost in early 2018 with the tax reform act. Most sources believe the positive impact of these tax cuts will fade as 2019 progresses and the general financial conditions become less buoyant. Several factors are contributing to the slowing 2019 economic environment.
- interest rates are likely to keep rising, making borrowing costs more expensive for consumers and businesses
- Tariffs are increasing which will impact sectors that drive construction and consumer spending
- Wall Street analysts worry that earnings growth has peaked as the bull market enters it’s tenth year, especially in the tech sector
- An anticipated slowdown in the global economy. In mid-November, the ORganization for Economic Cooperation and Development lowered its forecast for global economic growth to 3.5% from its previous forecast of 3.7% growth
While it is early to begin predicting what all this will mean beyond 2019, or what the impact of policy changes that are made in the coming year might be, some experts are predicting the slowdown with continuing in 2020.
Portable Sanitation Outlook
Portable Sanitation will certainly be impacted by what is happening in the broader economy, particularly as it relates to interest rates and the impact of tariffs. More directly, the demand for portable sanitation is dependent upon three major economic sectors: construction, events, and agriculture. A fourth, emergency and disaster response is situational and not easily forecast.
Construction presents a mixed bag for 2019. Depending upon the sort of construction contracts your company relies upon for business, the news may be good, sobering, or somewhere in between.
- As of November 20, 2018, Dodge Data and Analytics reported that new commercial construction starts were at their second-highest seasonally adjusted rates ever, second only to June 2018. Most spending from these new starts will occur in 2020. In 2019, nonresidential building construction spending is forecast to remain essentially flat as compared to 2018 levels, then climb 8.9% in 2020 as the result of the contracts being inked in late 2018.
- On the other hand, the U.S. Census reported that construction spending for residential building shows significant reductions. Although residential spending is still increasing, growth and real volume are now slower than inflation. In 2020, residential building may grow slightly at around 2.2% according to Dodge Data. Single-family dwellings appear to account for the greatest part of the slowdown. IBISWorld reports that building in the multifamily arena will not cool as much. So if your company typically contracts with firms building apartment complexes, particularly the less saturated non-luxury segment, you should see continued opportunities to provide sanitation in most major markets.
- Non-building infrastructure construction is expected to grow at about 5.5% in 2019 and 9.9% in 2020. Transportation spending – especially highways – and public works will drive this area of construction.
Events are a function of both long-lead planning cycles and shorter-term disposable income availability. For 2019 there is no indication that fewer events are being planned than in past years, though it is as yet hard to determine whether attendance – and thus the need for portable sanitation services – will continue to grow.
The White House Council of Economic Advisors reported on January 15th that the ongoing impact of the four-week-old government shutdown could be significant, with an estimated negative .13% impact on GDP each week the shut down continues. Apart from the impact on GDPS, one of the most likely ways portable sanitation companies will feel the effects of the shut down is through the lack of disposable income that those affected will have. Government employees are likely to get back pay once the shut down is over, but government contractors are not. This means a substantial number of people will have less disposable income in 2019 and are thus less likely to spend as much time – and money – at the events this year. Lower attendance will negatively affect the amount of equipment and service required for the events already planned, reducing the size of portable sanitation contracts in many cases.
2019 Economic Outlook Continued
Prior to the shutdown, IBISWorld had been predicting modest growth in special events this year. The effects of the shutdown will probably – at a minimum – eliminate that growth. Watch reports coming out in the next several weeks regarding the economic impact on disposable income to gauge what is likely to happen to attendance at events in your area.
Agriculture is expected to remain a steady customer for portable sanitation establishments. While agro-business overall has been declining in the past couple of years due to lower commodity prices and trade wars, portable sanitation is most often used when food crops are being harvested by hand. This demand tracks more closely to population growth and demand for fresh foods.
The fruit and vegetable industry generally experiences a low level of volatility because fresh produce consumption does not fluctuate much on an annual basis. Over the past five years, household disposable income has increased, causing people to increase purchases of fresh produce from grocery stores and to eat out more often. Both of these factors have driven increased for human harvesting in the coming year, so the amount of portable sanitation required will not change on that basis. If demand portable sanitation in agriculture changes at all, it will more likely be due to fewer workers being available as the result of immigration pressures.
Other Trends to Watch
In addition to the forces impacting the economy and portable sanitation’s major customer groups, there are several other factors to watch in the coming year. These include:
- Consolidation. The largest players in the industry will likely continue to consolidate regional market leaders into their companies whenever possible to increase market share and profitability. The metrics of the industry are such that profitability increases with economies of scale, and when consolidation happens it can force other companies to substantially lower prices or exit the industry. The consolidation will preclude new, smaller firms from entering the industry in the markets, so the overall impact on the number of firms in the industry could be minimal, but it will affect larger markets in the short term.
- Environmental regulations. Although the current administration in the White House has promised to reduce environmental regulations, it remains to be seen whether these will have an effect on portable sanitation operations. The EPA does not regulate portable sanitation companies directly. The environmental guidelines that affect the industry are set by the state and local authorities whose willingness to reduce requirements may not be as robust. The PSAI is not aware of any significant easing of regulations within the US to date.
- The impact of end-user opinions. Globally the opinions of end users are beginning to have an impact on the sanitation provided to them. End users don’t want to experience odor, mess, lack of privacy, or contact with the waste of others. With PSAI’s multi-year campaign to raise awareness about what users should be able to expect from a portable restroom experience, the demands of end users will continue to grow. Watch for opportunities to provide more units and service as well as higher-end options such as luxury units and trailers. Suppliers should be attuned to these end-user preferences and look for ways to offer products that align with them.
The PSAI organization is always a good source of information on the sanitation industry. Be sure to visit their website: psai.org
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