Economic Outlook: Modest Growth With a ‘Wild Card’
Modest growth is expected in the U.S. transportation construction market, but uncertainty from the ‘fiscal cliff’ and the 33-month delay in passing MAP-21 will be felt in 2013. A special report based on the American Road and Transportation Builder’s economic forecast.
by Tina Grady Barbaccia, News and Digital Editor
The U.S. transportation construction infrastructure market is expected to show modest growth in 2013, increasing 3 percent from $126.5 billion to $130.3 billion, according to the American Road and Transportation Builders Association’s (ARTBA) annual forecast. The association’s chief economist, Dr. Alison Premo Black, released her findings during a Nov. 30 webinar for Wall Street analysts and construction industry executives.
Growth is expected in highway and street pavements, private work for driveways and parking lots, airport terminal and runway work, railroads, and port and waterway construction. According to the forecast, ARTBA also predicts the bridge market — which the association says has shown substantial growth throughout the last 10 years — to remain flat next year.
The federal surface transportation program, combined with state and local government transportation investments, are the most significant drivers of the national transportation infrastructure construction market. The new surface transportation law, “Moving Ahead for Progress in the 21st Century (MAP-21),” passed in July 2012, was a “solution — a two-year patch,” says Black, for the 1,000+ days of short-term extensions from the previous transportation law — Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (SAFETEA-LU) — which expired Sept. 30, 2009. The dilemma was that Highway Trust Fund (HTF) revenues were inadequate to “preserve the current investment,” Black says.
Not just another extension
However, it’s important to note that MAP-21 is not “just another extension,” Black points out. The $106 billion, two-year bill has been scoffed at by transportation industry pundits, especially because the legislation was not a multi-year bill at preferred funding levels. The American Association of Safety and Highway Traffic Officials (AASHTO) was calling for a $500 billion funding level.
With no new real federal money in the surface transportation law, still-recovering state and local tax collections, and modest new housing starts, the pavement market will be uneven across the nation, Black says. She says pavement work is anticipated to be down in 25 states, and growth above a 5-percent range is expected in 19 states.
However, there are at least two developments related to MAP-21 that could lead to additional market activity in the short term and strengthen the market in 2013 and 2014, Black says.
First, the law’s restructuring of the federal highway program offers state transportation departments more flexibility in their use of federal funds. “This could lead to slightly increased investment in highway, bridge, and pavement work above the forecast in some states,” Black notes. Additionally, MAP-21’s expanded federal Transportation Infrastructure Finance & Innovation Act (TIFIA) loan program should also increase construction activity in some states, she adds.
A “restructured and reformed program”
Dave Bauer, senior vice president of government relations for ARTBA, says MAP-21 institutes numerous major policy reforms that address past concerns about the focus and effectiveness of the highway and transit programs. Resulting is a “restructured and reformed program with a renewed federal role that targets limited resources towards national priorities and maximizes the potential of those investments to deliver transportation improvements.”
Bauer notes that MAP-21 is a “compromise” between a Democratic-controlled Senate and a Republican-controlled House to improve the structure and outcome of federal surface transportation investments. However, the job is not done. This transportation bill is only what ARTBA is calling “a partial victory” because MAP-21 expires on Sept. 30, 2014, and the revenue stream into the HTF “will be inadequate to even maintain existing highway and transit investment levels.” The next step, notes ARTBA, is for Congress to approve a long-term HTF revenue solution to complement MAP-21’s policy reforms before the law expires. “This long-overdue combination would maximize the ability of federal resources to build and maintain a national surface transportation network that boosts economic competitiveness and job creation,” ARTBA explains.
The choices in the HTF insolvency crisis that looms for 2014-2015, Black says, are drastic investment cuts — which would threaten hundreds of thousands of jobs — or more general fund infusions and new revenues. These new revenues are still to be determined. There are currently three sources of funding for highway construction: federal highway program and state and local governments.
In the past 30 years, all HTF revenue enhancements have been part of a broad tax/budget deal, Black explains. The sources of highway capital spending are 44 percent federal; 32 percent state; and 24 percent local, according to the Federal Highway Administration Highway statistics.
Black says that state and local government finance challenges continue, but there are several positive signs, including recovery in overall tax revenues and state and local governments beginning to have dialogues about transportation funding. There have been moves to increase user-fee revenues. In the Nov. 6 election, voters also approved 68 percent of transportation-funding ballot measures. A few states are also trying to cap gasoline sales taxes, Black points out.
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.
Basu’s prediction for Gross Domestic Product (GDP) growth for 2013 is between 1 and 2 percent, unless the nation falls off the fiscal cliff, which Basu would expect to cause GDP to fall between 2 and 3 percent.
“The U.S. economy is presently expanding at a 2-percent rate,” said Basu. “Even in the absence of a dive off the federal precipice, the nation will struggle to achieve 2-percent growth next year as certain tax rates rise and as federal spending growth slows and perhaps turns sharply negative.”
The Economics of Super Storm Sandy
Major reconstruction work along the East Coast in states that were affected by Hurricane Sandy could also be a market factor in 2013 across all modes, according to the American Road and Transportation Builders Association (ARTBA). Additional federal, state, and local emergency funds for rebuilding this infrastructure could be a boost as projects get underway.
For more from the ARTBA report, check the Aggregates Manager blog, “Aggregates Insider.” We will be featuring some of the state-by-state data, as well as the Water Resources Development Act and the outlook for ports and waterways construction work.