The Obama administration is only a few months into its second term, and while the Great Recession is in the past, the economy is still a central concern. Looking ahead to his second term, President Obama proposed several new policies in his State of the Union address that would directly benefit four sectors in particular: healthcare, alternative energy, construction and education.
The President’s proposed policies could now be threatened by sequestration. On March 1, 2013, spending cuts outlined by the Budget Control Act of 2011 and aimed at avoiding the debt ceiling officially took effect; the exact timing and ramifications of the cuts are still being determined. In addition, more spending cuts could result from new debt ceiling negotiations expected to begin in late summer.
As a result, the Obama administration may be unable to implement the policies put forth in the State of the Union address. Budget cuts and a divided House and Senate may prevent funding from being approved. As a result, IBISWorld has individually examined each of the four sectors mentioned in President Obama’s address to see how his proposals may influence the sectors’ performance during the next three years.
The healthcare sector spans many industries, but President Obama has focused on a number of aspects of the sector. Specifically, in his State of the Union address, he pointed to prescription drug companies, saying “We’ll reduce taxpayer subsidies to prescription drug companies.” These subsidy declines have the potential to cut profit for pharmaceutical companies.
However, the negative effects will largely be offset by the 2010 Affordable Care Act’s benefits, which will expand the number of people covered by health insurance. With a greater number of people insured, more people will be better able to afford prescription drugs, increasing revenue for pharmaceutical companies.
Because some reforms in the Affordable Care Act are aimed at making generic drugs more affordable, the $44.7-billion Generic Pharmaceutical Manufacturing industry (IBISWorld report 32541b) is expected to particularly benefit, growing at an average annual rate of 5.0% in the three years to 2015 based on the already enacted healthcare reform. And as revenue grows, the industry will expand its workforce; the number of employees is expected to grow an annualized 5.3% over the next three years. The Brand Name Pharmaceutical Manufacturing industry (32541a), however, is expected to grow at a slower rate since there are no new reforms that will provide an extra boost to its performance (beyond expanded insurance coverage).
Funding probability: Because the Affordable Care Act has already been passed, funding for this sector is expected to remain steady.
Funding for alternative energy has been a central part of the Obama administration’s effort to achieve energy independence. “Four years ago, other countries dominated the clean-energy market and the jobs that came with it,” the President said. “Last year, wind energy added nearly half of all new power capacity in America. So let’s generate more. Solar energy gets cheaper by the year. Let’s drive down costs even further.”
The two industries President Obama points to, Wind Power and Solar Power, have grown rapidly due to government aid. The Wind Power industry (IBISWorld report 22111d) receives subsidies in the form of production tax credits (PTCs). Originally enacted in 1992, PTCs were expanded enormously with the American Recovery and Reinvestment Act of 2009 (ARRA). PTCs were extended once more with the American Taxpayer Relief Act of 2012, though this last extension is only effective through the end of 2013. IBISWorld projects that the Wind Power industry’s revenue will grow an annualized 9.5% in the three years to 2015 if subsidies are extended.
In recent years, the Solar Power industry (22111e) has grown due to Bureau of Land Management policies aimed at speeding up the development of solar energy projects on public land. To date, 10 large solar projects have been approved, with a combined potential to generate enough power for 1.2 million US households. As a result of construction and deployment of those projects, both revenue and employment for the Solar Power industry are expected to grow at an average annual rate of 7.9% in the three years to 2015.
Funding probability: moderate. Alternative energy is not a vital resource for the US economy, but forms of funding for alternative energy projects have been extended many times, creating a precedent for funding in the near future. Also, to prevent a jarring removal of government aid, the American Wind Energy Association has proposed a program to phase out PTCs entirely by 2019, a compromise that could preserve funding in the near term. Funding would remain over the next few years, albeit slightly lower, but the plan would also set an expectation for alternative energy industries to wean themselves from government aid in the next decade.
A significant portion of US transportation infrastructure is old and worn, a problem which the President touched on in his State of the Union address: “Tonight, I propose a ‘Fix-It-First’ program to put people to work as soon as possible on our most urgent repairs, like the nearly 70,000 structurally deficient bridges across the country. I’m also proposing a Partnership to Rebuild America that attracts private capital to upgrade what our businesses need most.”
The Bridge and Tunnel Construction industry (IBISWorld report 23412), which includes the most at-risk parts of the nation’s infrastructure, has already been receiving federal aid. The 2005 Safe, Accountable, Flexible, Efficient Transportation Equity Act – A Legacy for Users (SAFETEA-LU) allocated the bulk of its funding to highway programs, which include bridges and tunnels. In 2009, the ARRA stimulus package also kicked in, adding funding to the construction sector. And the current Moving Ahead for Progress in the 21st Century Act (MAP-21) guarantees funding through fiscal 2014. As such, IBISWorld expects Bridge and Tunnel Construction industry revenue to grow an annualized 5.2% in the three years to 2015 due in part to expected continued funding.
Much of the funding for bridge infrastructure construction will be directed toward renovating and replacing structurally deficient (SD) and functionally obsolete (FO) bridges. The Federal Highway Authority monitors the numbers of SD and FO bridges and prioritizes funds for these projects. In 2012, more than 10.0% were SD bridges and almost 25.0% were FO bridges, figures that federal and state governments are working to reduce.
Funding probability: high. Transportation programs paid for by the Highway Trust Fund are exempt from sequester cuts, and implementing a nationwide private-public partnership that the President proposed would put no additional strain on federal budgets. Another funding package is likely to be passed once MAP-21 expires.
The last sector that President Obama called out was education: “Tonight, I propose working with states to make high-quality preschool available to every single child in America.” Preschool instructional programs make up about 27.9% of the Day Care industry’s revenue (IBISWorld report 62441). Additional federal or state funding to preschools would be a large boon to the segment.
As for higher education, the President restated his goal to make colleges and universities more affordable. “Through tax credits, grants and better loans, we’ve made college more affordable for millions of students,” he said. “But colleges must do their part to keep costs down. So tonight, I ask Congress to change the Higher Education Act so that affordability and value are included in determining which colleges receive certain types of federal aid.” Lower-cost universities will likely benefit as they become eligible for more federal grants, but schools with higher tuition will likely experience a decrease in federal aid, forcing them to cut costs or hike tuition even further. In addition, subsidized loan repayment options like “Pay as You Earn” have already made the cost of a college education less of a burden for many students. As a result, the overall impact of any reforms on higher education will be neutral. The Colleges and Universities industry’s (61131a) revenue is expected to increase an annualized 2.6% in the next three years.
Funding probability: low. With regard to preschool, the segment is already seeing cuts and is unlikely to receive new funding. Sequestration-related cuts to Title I funding will result in an estimated 70,000 students losing funding to Head Start, a program aimed at three- to five-year-olds.
And revenue for the College and Universities industry will face additional headwinds. College access programs, including TRIO and GEAR UP, are examples of programs expected to face cuts due to the sequester. TRIO and GEAR UP are college-prep and financial-aid programs to help disadvantaged students, including first-generation college students, individuals from low-income families and individuals with disabilities, prepare for college. Funding will also be cut for federal Pell grants, and the sequester also mandates an increase in the interest rate for federal Stafford and PLUS loans, increasing the cost of college education for the disadvantaged.
Although no specific programs were mentioned in the State of the Union address, President Obama stressed the importance of bringing manufacturing back to the United States. “Our first priority is making America a magnet for new jobs and manufacturing,” he said. “After shedding jobs for more than 10 years, our manufacturers have added about 500,000 jobs over the past three. Caterpillar is bringing jobs back from Japan. Ford is bringing back jobs from Mexico. And this year, Apple will start making Macs in America again.”
The Car and Automobile Manufacturing industry (IBISWorld report 33611a) rebounded after almost folding during the recession. Growth in the market for hybrid and fuel-efficient cars will help industry revenue grow an estimated 6.3% per year on average in the three years to 2015. Tax credits for fuel efficiency will further contribute to growth. As a result, employment in this manufacturing industry is expected to increase an annualized 3.3% over the next three years.
In addition to advancements in the automotive industries, President Obama mentioned 3D printing as another innovation that he would like to see flourish in the United States. He pointed to a manufacturing innovation institute in Youngstown, OH, where “a once-shuttered warehouse is now a state-of-the-art lab where new workers are mastering 3D printing that has the potential to revolutionize the way we make almost everything,” he said. “There’s no reason this can’t happen in other towns.”
In fact, 3D printing industries are brand new and growing rapidly. The 3D Printer Manufacturing industry’s (OD4428) revenue is set to increase at an average annual rate of 15.4% in the three years to 2015, while 3D Printing and Rapid Prototyping Services industry (OD4581) revenue is expected to increase an annualized 15.6%. Demand for mass customization will be a key driver for the growth of 3D printing and the related industries. Product changes are all done with software, meaning manufacturers have the ability to create custom products for each customer. With any success, this new model for manufacturing could even bring about a change in manufacturer’s business models, product lines and marketing strategies.
Funding probability: N/A
With regard to improving the US economy, President Obama proposed policy changes and new spending programs in his State of the Union address that stand to benefit four particular sectors if implemented: healthcare, alternative energy, construction and education. The President maintained that increasing spending in these areas will contribute to building a stronger economy.
Still, the effects of the sequester that officially began on March 1 might sidetrack these proposals. Some of the President’s proposals might require additional funding that could be difficult to pass; others still are threatened by cuts that may kick in, removing not only future funding but current funding as well. Over the course of the next few months, specific impacts of the sequester cuts will begin to emerge, revealing with more clarity the extent to which the President’s State of the Union proposals will be affected.