Economic Outlook: Modest Growth With a ‘Wild Card’
State surface transportation program revenue sources are mostly funded through federal payments (26 percent) and gas taxes (26 percent). Other sources include motor vehicle fees/taxes (15 percent), bonds (14 percent), tolls (5 percent), local government (2 percent), and general funds as well as other imposts and miscellaneous funding (all at 4 percent).
Revenues reaching “pre-recession levels”
Although state and local tax revenues are reaching pre-recession levels, Black says, state level commitments have also increased since the recession. In 2005, real state and local total tax revenues were at $1.33 trillion and the 2012 level was estimated at $1.48 trillion for 2012 (when estimates were made in late November). Total state budget shortfalls were -$100 billion in FY 2009, -$191 billion in FY 2010; -$130 billion in FY 2011, -$17 billion in FY 2012, and are forecast to be -$55 billion in FY 2013 as reported in late November.
Black says that state and local government transportation bond issues are still down from 2009-2010. According to the Federal Reserve, the nominal state and local bond issues for transportation were, in 2009, $27 billion YTD through September and $7.6 billion for the rest of the year. In 2010, YTD through September was $30.8 billion and $17.8 billion for the rest of the year. In 2011, the numbers dropped to $10.4 billion and $6.3 billion, and in 2012, the YTD through September was $13.1 billion.
“Transportation construction market activity will vary from state to state in 2013,” Black says. This will largely depend on the financial situation of state and local governments, as well as regional economic activity. “In the longer run, demographic drives such as housing starts and population growth will help spur demand for additional transportation services, construction, and maintenance,” according to ARTBA’s State-by-State Outlook.
Contract awards will provide insight into the market for each state in 2013. Contracts are a leading indicator of market activity at the state level, based on contract awards data, according to the outlook report. The contract award data was provided by McGraw Hill and then weighted with the ARTBA Price Index. “Contract awards are a leading indicator of market activity at the state level,” according to the report. “If awards are increasing, it is likely that transportation construction in the state will also increase as work gets underway.”
However, ARTBA is quick to point out that it is important to realize that contract awards are simply a “snapshot” of the current market and that it is not uncommon for state and local contract awards to show “significant variations” from year to year.
Factors affecting the market outlook for 2013 include the following:
• Modest increases in federal obligation limit and policy changes in MAP-21 legislation;
• National economic outlook is still one of sluggish recovery;
• Project costs are expected to be around 3 percent during the next five years; and
• Additional factors could help boost each modal market for 2013.
“Over the long run, there are significant needs for the construction and maintenance of the U.S. transportation infrastructure network,” ARTBA says in its 2013 U.S. Transportation Construction Market Forecast. “Meeting this investment challenge will be critical to facilitating economic growth across the country.”
Rising consumer confidence
In a 2013 construction forecast released Dec. 4, ABC Chief Economist Anirban Basu predicted non-residential construction spending to expand 5.2 percent next year, with much of the expansion coming from privately financed projects.
“With the elections now behind us, the hope is the White House and Congress will be able to successfully navigate the nation past its fiscal cliff,” Basu said. “If that happens, the latter half of 2013 could be surprisingly good for non-residential activity, given the large volume of construction projects that were put on hold during the course of 2012. However, the baseline forecast calls for only moderate expansion in non-residential construction spending next year.”
According to Basu, rising consumer confidence will lead to a 10-percent expansion in total commercial construction. He also noted the fastest growing major U.S. industry during the last year in terms of absolute job creation was professional and business services, and, because many firms in this category use office space, office-related construction spending is expected to rise 10 percent. In addition, power is likely to increase 10 percent, lodging 8 percent, health care 5 percent, and manufacturing 5 percent.
In terms of jobs, Basu expects non-residential building construction employment to expand 2.1 percent in 2013 — only slightly better than the 1-percent performance estimated for 2012. Basu also expects construction materials prices to rise a bit more rapidly in 2013 than they did in 2012, with substantially more volatility to be experienced from month to month next year.
“Despite ongoing slowdown in many of the world’s largest economies, ABC anticipates many investors will opt to invest in hard assets as a way to avoid volatility in equity and bond markets,” Basu said.
As part of the overall economy, Basu said “whether or not the nation falls off its fiscal cliff — a collection of spending cuts and tax increases that kick in at the end of the year — certain taxes likely are headed higher.”
Specifically, Basu predicted increases in marginal income tax rates to pre-Bush levels, increases in tax rates on capital gains and dividend income, and expiration of the payroll tax credit in the first quarter of 2013.
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