Insulation Economics: Economic Signals Are Confusing and Contradictory

Anirban Basu

Anirban Basu is Chairman and CEO of Sage Policy Group, Inc., an economic and policy consulting firm headquartered in Baltimore, Maryland. He serves as the Chief Economist to Associated Builders and Contractors and as Chief Economic Adviser to the Construction Financial Management Association. In 2007 and then again in 2016, Mr. Basu was selected by the Daily Record newspaper as one of Maryland’s 50 most influential people. The Baltimore Business Journal named him one of the region’s 20 most powerful business leaders in 2010. Learn more by reading his newsletter Sage Economics at

September 1, 2022

The Data Make One’s Head Spin

If you want an economist to supply you with data indicating that the U.S. economy is in excellent shape, you can find one. Undoubtedly, that economist would launch into a lengthy discourse regarding labor market dynamics. They would point out that in June, the United States was home to 1.8 job openings for every unemployed person. This has much to do with consumer spending, which remains strong, even in the context of high prices. The economist would note that unemployment dipped to 3.5% in July, matching the rate that prevailed before COVID-19 undid the economy. To find an unemployment rate less than the one prevailing then, one would have to go back to the late-1960s, when the Baltimore Orioles ruled baseball.

The economist would complete the soliloquy by indicating that employers collectively added 528,000 employees in July, the best performance in 5 months and hardly an indication of a shrinking economy. Sit back, relax, and enjoy, insulation industry professional!

Now, if you want an economist to tell you that the economy is in terrible shape and likely to deteriorate further, you can find one of those as well. Without question, they would initiate their critique with a rant regarding inflation. True, they would point out, inflation as measured by the Consumer Price Index declined to 8.5% on a year-over-year basis in July, but that remains incredibly elevated. Underlying causes include lingering supply chain disruptions, war, pandemic lockdowns in China, domestic regulation, and a lack of truck drivers and other workers ranging from hotel maids and bartenders to carpenters and teachers.

It would not end there. The second economist would point out that pressures imposed on the U.S. economy have already produced two negative quarters of gross domestic product (GDP) growth, satisfying a technical definition of recession. During 2022’s initial quarter, the U.S. economy shrank 1.6% in real terms and on an annualized basis. During the second quarter, GDP dipped by another 0.9%. Given pervasive pessimism among consumers and small business operators, and the Federal Reserve’s ongoing hiking of interest rates, the claim would be made that an already weak economy will only get weaker. Beware, insulation industry professional!

As is often the case, the truth is somewhere in the middle. While the economy continues to exhibit recovery from early pandemic stages, it has also become overheated, which threatens the durability of economic momentum. It is perfectly appropriate to focus on the decline in real GDP, but the economy managed to generate meaningful nominal growth during the year’s initial half. During 2022’s first quarter, nominal GDP expanded 6.6%. It then accelerated to 7.8% during the second. In other words, transactional volume has continued to rise. It is only when one adjusts for inflation that a different picture emerges.

To the extent that insulation contractors have performed in conjunction with the broader economy, this translates into a situation in which revenues continue to expand, but unit volume may be stagnant or declining. If they have not done so already, contractors may want to conduct a financial analysis to determine what fraction of their revenue growth has been attributable to increasing price per unit of service, and what fraction is attributable to more opportunities to supply service.

That is an important assessment because it helps one plan for the future. While the debate regarding whether or not the United States has been in recession will rage on, the bigger issue is the economy’s forward-looking trajectory. If a company finds that much or all of its recent revenue growth has been attributable to expanding price, as opposed to volume of service delivered, that could spell trouble.

Here is why. To date, many contractors report that they have been able to successfully pass along their cost increases to purchasers. Between monetary expansion and fiscal stimulus, dollars flooded the economy for approximately 2 years as policymakers attempted to countervail the negative impacts of the pandemic. While this helped trigger an ongoing and durable bout of inflation, it also stimulated demand for goods and services. That created a situation in which costs rose but also could be passed along to purchasers to support profit margins.

But that stimulus is ending. The federal government is no longer sending checks directly to American consumers and businesses. Borrowing costs are on the rise. The global economy is steadily moving toward recession, as Europe swoons from elevated energy prices and prospective natural gas shortages, and China continues to implement zero-COVID policies. Despite a recent rally in U.S. financial markets, largely the result of evidence that inflation has peaked, risk of recession remains elevated. Contractors may find that their ability to pass along cost increases to consumers will become increasingly constrained when and if the economy slips into recession.

Looking Ahead

The debate regarding whether or not the U.S. economy will tip into official recession also rages. The question of whether the Federal Reserve can engineer a soft landing remains unanswered. The Federal Reserve primarily deals with inflation by raising interest rates. Through July, the Federal Reserve had raised its benchmark interest rate by 2.25%. Further rate hikes are on the way, as America’s central bank strives to restore 2% inflation. Since the early 1980s, there have been eight other rate-tightening cycles. Six have ended in recession.

But this does not necessarily portend doom for the insulation industry. There are factors that shape the industry’s outlook beyond business cycles. Insulation is, after all, critical to improving the environmental efficiency of buildings. In early June, President Biden released a statement announcing a new initiative to “Modernize Building Codes, Improve Climate Resilience, and Reduce Energy Costs.”1 The press release notes that every dollar spent on adopting new, environmentally friendly building codes could save up to $11 in reducing damages caused by climate change. It specifically points out that “insulation keeps heating and cooling costs low.”2 The administration went even further by using the Defense Production Act to accelerate the production of clean energy technologies. One of the five critical technologies mentioned in the press release was building insulation.

So while the present state of the U.S. economy may be confusing, it is clear that the insulation industry has a bright future.

2. Ibid