ARTBA releases economic forecast

Modest real growth in highway construction market indicated

News ARTBA November 27, 2007
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Highway and bridge construction should continue to be among the most stable of U.S. construction markets during 2008, showing modest year-on-year growth, according to a forecast released Nov. 27 by the American Road & Transportation Builders Association’s (ARTBA) top economist.

The value of construction work performed on highway and bridge projects will grow to just under $78 billion in 2008, representing a 3-4% increase over the estimated $75.5 billion during 2007. Equally important, recent signs that rapid inflation in the cost of highway construction materials is easing may allow the projected federal, state and local highway investment to support more projects in 2008, says Dr. William Buechner, ARTBA vice president of economics and research.

The most important factor driving the outlook for highway and bridge construction in 2008 will be the federal highway program.

SAFETEA-LU, the highway and transit law, provided a $3.4 billion increase in federal highway investment in FY 2007 over the 2006 level. At least 80% of that money will eventually go directly into construction work. Of the remaining 20%, about 9% goes to design work and 5% to right-of-way acquisition with the remainder spent on environmental mitigation, administration, research and related activities.

As these funds move into the pipeline, Buechner says, the biggest impact will occur in the 2008 construction season because of the time needed to design and start projects. This increase, plus other federal highway funds already in the pipeline, will support almost $30 billion of highway and bridge construction work in 2008, up from just under $27 billion in 2007.

The annual transportation appropriations bill currently working its way through Congress for FY 2008, with another potential increase in federal highway investment, should also help contribute to federal-aid highway construction during 2008. Historically, federal funds finance approximately
40-45% of all highway capital investments, including construction.

Buechner cautions state and local budgets, however, will, at best, finance about the same amount of highway and bridge construction work in 2008 as they did in 2007—around $49 billion. There are several reasons this is the case, according to Buechner.

During the past three years, state and local governments increased their own highway investment substantially in an effort to accomplish as much construction as possible while facing a 40% increase in the cost of highway and bridge construction materials. Between 2004 and 2007, state and local funds financed about $15 billion of the total $17 billion increase in highway construction work. The rapid increase in state and local spending left little in their treasuries to finance more growth in 2008.

Slower than expected growth in highway user fee revenues, and the housing downturn with fewer home sales and lower appraised housing values will also impact tax collections and local highway construction spending.

Some states, like California, are trying to fill the funding gap with bond revenues or other borrowing. Others, like Indiana, have revenues from toll-road monetization or are expanding the use of public-private ventures to construct roads. This may help support growth of highway construction in 2008, but the largest impact is likely to be in future years.

According to the ARTBA economist, another factor supporting a forecast for modest growth of highway and bridge construction next year is a 3-4% increase in the value of new contracts awarded for highway and bridge projects so far in 2007.

The 2008 ARTBA forecast is also based on the continued easing in construction material costs. In 2005, prices for highway and bridge construction materials rose more than 12.5%, followed by another 10.8% increase in 2006. These cost increases absorbed almost all of the increased highway construction spending those years—with the market implication of fewer, yet more expensive projects being let by state and local governments.

By contrast, during 2007, material costs are up only about 5%, impacted to a large degree by the downturn in housing construction. ARTBA expects this trend to continue in 2008. The cost of oil, which impacts the cost of highway construction materials and equipment operation, is always a wild card.

ARTBA projects little growth in subway and light rail construction for 2008—funding for the federal “New Starts Program” is up about $100 million, but most of the available funding is already dedicated to ongoing projects.

Airport construction will also be modest, despite growing needs, until Congress completes action on a new aviation authorization measure with additional investment for the Airport Improvement Program.

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