An old joke: Why did God create economists? Answer: To make weather forecasters look good.
The major news agencies have been abuzz lately with talk of Federal Reserve Chairwoman Janet Yellen’s hearing with the U.S. House of Representatives’ Financial Services Committee last week. The big news was her confirmation of rumors that the Fed is planning on raising interest rates “at some point this year.” Although her speech was sprinkled with what a good friend once termed “wiggle words” (“should”, “possibly”, and “likely”) it can be safely surmised that the cost of borrowing money for the private, government, and commercial sectors is likely to increase- and if rumors are to be believed, it could be as early as September.
So what, if anything, does an increased interest rate mean to contractors, architects and engineers? A few things. First we’ll examine the lemons, then we’ll drink some lemonade.
At its most basic- an increase in rates means that borrowing money becomes more expensive- for everyone. The cost of doing business goes up as material prices and the cost of small business loans (and the many things they pay for) also increase. That increased cost is typically passed on to the customer.
Traditionally, higher interest rates have also tightened credit and contributed to a decrease in consumer spending, which eventually results in lowered prices for goods.
But I did promise an upside, and here it is:
Silver lining number 1: a higher interest rate means that any cash reserves that have been sitting idly by waiting for a better economic forecast will be earning higher returns now (interest rates work both ways!)
And silver lining number 2: rumors of interest rate increases are often accompanied by a surge of business as people hurry to lock in the lower rates for everything from mortgages and car loans to goods and services. That surge can also benefit our industry, and not just for projects with private funding. Federal, state, and grant funding will be affected by interest rate hikes as well.
How’s that? Because of government debt. Currently, the United States Government pays about 200 billion dollars annually in interest on our national debt (through bonds and the like.) A rise in interest rates will increase that payment which will then affect the scope of work on projects already in the pipeline, as well as the amount of money available for grants and spending on future projects. And that doesn’t just apply to the federal government– ditto for state and municipal spending. Those projects that clients have had on the back burner are now more likely to be moved towards the front. Another added benefit? The forecasted rate hike also presents a great opportunity for a bit of creative marketing to current and potential clients.