Storming the Capitol: Bringing Focus onto the Components Industry

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Component manufacturers (CMs) and their suppliers went to Capitol Hill this May to help their Congressional lawmakers understand how the structural component manufacturing industry can be a valuable bellwether for our nation’s economic health. Indeed, the improving economy was evident in the increase over last year’s conference attendance. This year, 59 lawmakers were visited, but more importantly, 19 states were represented by 31 attendees.

Why is the component industry a good litmus test of our nation’s economy? Simply put, the unique make-up of this industry touches many of the drivers of our country’s economic growth. First, CMs are primarily small business manufacturers whose products are purchased and used domestically in almost every community in the United States. Second, their customers are usually residential (single- and multi-family) and light-commercial builders, as well as agricultural builders. Finally, their highly engineered products are designed through cutting-edge software, manufactured using state-of-the-art production equipment in a quality-controlled environment, and shipped just-in-time to a jobsite for installation.

As a consequence, the component industry’s success is  inextricably tied to our nation’s construction market, is sensitive to shortages in the skilled and unskilled labor markets and weaknesses in the transportation infrastructure, and struggles under the current tax and regulatory burden placed upon it by the federal government.

Road to Recovery

The primary message conference attendees brought to their lawmakers was that there are a few key issues Congress can influence that will have a profound impact on whether the economic recovery our nation is witnessing continues to gain momentum, or instead, stagnates or falters. In making this argument, CMs and suppliers first turned to the recent past.

From 2006 to the present, residential construction experienced the sharpest fall-off and prolonged depression in its history. The structural component industry saw a significant downturn as a result. At the beginning of the downturn, our industry had 1,956 manufacturing locations across the country employing 123,228 individuals with almost $12.8 billion in sales. As of 2012, there are only 1,189 locations employing 49,938 individuals with $5.2 billion in sales. Most lawmaker offices agreed it was unlikely there was another industry that experienced as significant a drop off as the residential construction sector during the recent prolonged recession.

However, according to David Crowe, Chief Economist for the National Association of Homebuilders (NAHB), all of the fundamentals are present to support a return to “normal” in single-family residential construction over the next two years. Crowe recently unveiled a chart (see Figure 1 below) of seasonally-adjusted single-family housing starts to illustrate the significant drop-off between the peak in 2006 and trough in 2009, the significant lull from 2009 to 2013, and then the projected increase past the red line going into 2015.

Crowe has significant amounts of data backing up his projected sharp increase, but there are a number of assumptions built into it that Congress could help or hinder, and those were the primary issues attendees chose to bring to Washington, D.C., to talk about: labor availability and related immigration reform, and housing finance.

Labor

Conference attendees discussed how housing could not return to “normal” construction levels (Crowe argues sustainable, or “normal,” single-family housing starts should be in the 1.3 million range), unless there were enough workers to build those homes. Both CMs and their builder customers are finding it difficult to meet current demand, much less prepare for a sharp uptick. CMs and suppliers argued many of the skilled and unskilled workers who once were part of our industry, and the overall construction industry, have left and taken jobs in other sectors of the economy.

The real problem is that young workers are not attracted to and entering these types of manufacturing and construction jobs as a valuable career choice. There is much more our nation needs to do with regard to promoting Science, Technology, Engineering and Mathematics (STEM) careers in our education system. Congress has taken some initial steps to incentivize the creation of STEM-focused high schools and community college programs, but much more needs to be done to dissipate the social stigma of these kinds of careers.

Immigration

Alternatively, conference attendees argued, immigrant populations are generally eager to fill manufacturing and technical jobs like those in the components industry, perform them well, and have found that the career opportunities are valuable to them. Many of the lawmakers visited were quick to agree that our nation’s immigration system is broken. They also admitted recent serious Congressional efforts at reform have failed to be realized, mostly due to the politics surrounding what to do with undocumented immigrants who entered the country illegally.

Be that as it may, it was pointed out that, as the economy continues to grow and construction activity returns to a more solid footing, immigration reform will play a significant role in determining whether growth continues, stalls, or falters. Unfortunately, while many lawmakers accepted and agreed with that assessment, there was general consensus that little would be done prior to the mid-term elections.

Housing Finance

Our nation’s housing finance system is also in serious need of repair. According to the Congressional Budget Office, about half of the total volume of residential mortgages originated before the financial crisis were guaranteed by the Federal Housing Administration, Fannie Mae and Freddie Mac. That share is currently above 90 percent. Private investors are staying out of the mortgage industry, creating an unsustainable market.

Most of the current Congressional plans to reform this system propose dismantling Fannie Mae and Freddie Mac, making them scapegoats for the housing bubble created before the recession. CMs and suppliers cautioned that the transition away from these government-sponsored entities (GSE) be done in a careful and deliberate manner, to avoid further disruptions to an already fragile housing finance system.

Of all the housing finance reform bills currently introduced, one (Housing Finance Reform and Taxpayer Protection Act of 2013, see sidebar below) appears to rise above the rest, particularly given its bipartisan support. The Johnson-Crapo bill establishes the Federal Mortgage Insurance Corporation (FMIC), which will act a lot like the FDIC for banks. Essentially, it creates a federal disaster insurance plan for the mortgage industry. Having the government in a limited role of supporting the mortgage market will strengthen the private financing sector and ensure liquidity and stability for homeownership and rental housing.

The Senate Banking Committee reviewed this bill the week before the conference, but it is currently unclear when, or if, this bill will be passed out of committee for the Senate to consider.

Tax Reform

Many conference attendees also spoke with their lawmakers about our nation’s tax policy. They pointed out that one of the greatest obstacles to increased economic growth and higher standards of living in this country is its complex and constantly changing tax code. It disproportionately affects small businesses, the primary engine of job creation, which are forced to expend significant time and resources to comply.

One noteworthy problem is that our current system has excessively high levels of taxation on work income, savings and investment; this impedes business growth by discouraging long-term investment (due to high capital gains taxes), and hinders job creation (due to a heavy reliance on payroll taxes).

Over the past seven years, the businesses in our industry have been forced to retract and find ways to operate leaner. Yet, during that time, the government has only grown larger, collecting perpetually higher taxes. CMs and suppliers argued for comprehensive tax reform that restores balance to this equation and allows America’s businesses to remain competitive and viable, which will grow the overall tax base.

Stephen Rykard (Trussway) met with his Representative, Jack Kingston (R-GA), who indicated he felt that comprehensive tax reform legislation was moving along swiftly behind the scenes. Further, Kingston said that the House and Senate would likely take up this issue sooner rather than later, though probably not before the mid-term elections.

Energy Efficiency

Finally, conference attendees spoke with their lawmakers about Congressional efforts to decrease the energy consumption of our nation’s homes and office buildings. They pointed out the component industry’s products can be an effective part of our national goal to increase energy efficiency through enabling the use of more effective insulative materials in the building envelope.

However, they were quick to point out that code changes should reflect sound science and industry best practices, and any legislation passed at the federal level should allow for standards to be developed in the marketplace through a consensus-based process. To that end, they argued, states are best situated to adopt and enforce building codes that address the construction practices and geographic features (wind, seismic, snow, etc.) of their region of the country.

Our industry’s timing on this issue could not have been better. The day before CMs and suppliers visited with their lawmakers, the Senate took up a cloture vote to limit debate on the Energy Savings and Industrial Competitiveness Act of 2013 (see sidebar below), a bill that returns the focus of energy code development back to the local level. The cloture vote was a necessary procedural vote in the Senate to eliminate the possibility of filibusters. The vote needed a super-majority (60 votes), but passed with ease on a 79-20 vote.

As a result, the next day, Senators debated the merits of the bill and proposed amendments, while our industry advocated its passage with those very same Senators.

Conclusion

The issues CMs and suppliers raised to their lawmakers during the SBC Legislative Conference were not unique to this industry alone. Several lawmaker offices remarked on how many of these issues, such as labor or taxation, had been raised by many other lobbying groups. Disturbingly, some were surprised by how pervasive the problems were. This reaction underscored our message that the components industry is a good bellwether for the nation’s economic health.

If this industry continues to grow and thrive, so too will our country. If Congress continues to pass the buck on systemic problems with burdensome regulations on small businesses, a broken immigration system or an unsustainable housing finance system, then our nation may quickly revert to another recession-like period of economic stagnation.