A tale of good and bad

Jan. 21, 2002
The year 2001 ended on a paradox

The year 2001 ended on a paradox.

The year 2001 ended on a paradox

The year 2001 ended on a paradox. Construction equipment sales stubbornly refused to pick up despite a healthy increase in highway construction and 11—that’s right, 11—cuts in interest rates by the Federal Reserve Board.

"I cannot figure out the disconnect between the increased highway funding and the fact that the equipment in the road industry doesn’t track that," admitted Nick Yaksich, vice president for government affairs at the Construction Industry Manufacturers Association (CIMA).

As for the Fed’s 11th rate cut on Dec. 11, Yaksich was not impressed. He told Roads & Bridges, "We haven’t seen a bump in the last 10 times they’ve cut it, so that doesn’t seem to be translating into any kind of confidence builder, at least in construction and the purchase of equipment."

CIMA’s annual survey of construction equipment manufacturers found double-digit declines in almost every category for 2001 and little or no growth expected for 2002. Overall for the U.S., equipment sales were expected to drop 12.8% in 2001, according to the manufacturers participating in the CIMA survey, and pick up only 0.5% in 2002.

The following are results of the survey in various categories:

  • Lifting equipment such as cranes and aerials—a 22.9% decline in 2001 and another 5.7% drop in 2002;
  • Earthmoving equipment—an 11.6% decline in 2001 and a 1.3% decline in 2002;
  • Light equipment such as breakers, saws and generators—a 13.3% decline in 2001 and a 2.4% increase in 2002;
  • Bituminous machinery such as cold planers, asphalt pavers and rollers—an 11.5% decline in 2001 and a 2% increase in 2002;
  • Concrete and aggregate equipment including crushers, screens, mixers and pavers—a 7.8% decline in 2001 and a 1.3% increase in 2002;
  • Components and attachments such as buckets and blades—a 4.1% decline in 2001 and an 8.5% increase in 2002; and
  • Miscellaneous equipment—a 10.8% decline in 2001 and a 10.1% increase in 2002.

"Construction equipment manufacturers have been affected by the general economic slowdown after enjoying record growth for eight straight years," commented Robert J. Fien, CIMA chairman. He said excess inventories at the manufacturers was a factor in the economic slowdown and said rental companies were "oversaturated" and had cut new equipment purchases and flooded the market with quality late-model used equipment.

The dismal situation has prompted some manufacturers to cut production and left at least one major equipment rental company on the verge of bankruptcy.

The roads must roll

The story in roadbuilding was quite different. The American Road & Transportation Builders Association (ARTBA) estimated that new contracts awarded for transportation construction would increase by 9% to more than $50 billion in 2001. Through the first nine months, new contracts for highway and bridge construction were up 6.5%, with bridge contracts up 12% and highway pavement contracts up 5%.

"Transportation continues to be the construction market sector least affected by an economic recession," Dr. William Buechner, vice president of economics and research at ARTBA, said in his 2002 forecast. "Most other segments of the construction market are expected to be down in 2002 as a result of the recession. However, the guaranteed increase in federal funding for highway, bridge and transit projects provides a solid—and growing—base for transportation investment next year."

Total transportation construction work performed in 2001 was set to hit $79 billion, according to ARTBA, $7 billion more than in 2000. Highway and bridge construction jumped 9% through September.

ARTBA foresaw a healthy increase in 2002 as well. The association predicted 3-6% growth in highway construction work and contracts for the year, 10-20% growth in airport runways and related air transportation construction and continued increases in construction work on subways and light rail lines after a spectacular 80% increase in 2001.

On the subject of the guaranteed federal funding for transportation construction, Buechner told Roads & Bridges he was happy that President George W. Bush requested the full amount of highway, transit and airport funding prescribed by TEA-21.

On the other hand, Buechner and others in the industry were disappointed that the economic stimulus package being considered by the Congress in early December did not contain additional funding for transportation investment. The industry had proposed spending another $5 billion—money that is already in the Highway Trust Fund Account but not appropriated by Congress.

According to CIMA’s Yaksich, the only provision that would benefit the highway construction industry in the economic stimulus bill that had passed the House and was stalled in the Senate was a measure for accelerated depreciation. The measure would provide a direct incentive for the purchase of capital equipment by allowing a 30% write-off in the first year after purchase.

The 2002 appropriations bill, however, did contain increased funding for transportation. On Nov. 29, 2001, a House-Senate conference committee approved a transportation spending bill that included $32.9 billion for highway spending, an increase of $1.2 billion, or 4%, over the 2001 enacted level and $100 million more than the TEA-21 guaranteed level. The highway spending includes about $27 billion from the primary obligation and about $4.5 billion from revenue adjusted budget authority (RABA). RABA is the difference between gasoline taxes actually received and those predicted in 1998.

The bill provides $10 million for the Federal Highway Administration’s Superpave and Long Term Pavement Performance research programs and an additional $13.75 million for pavement research on subjects such as alkali-silica reactivity and portland cement and aggregate technology.

The aggregate industry is one that benefits from increased highway spending. Highway construction represents about 40% of the market for aggregate, according to Charles Hawkins, executive vice president of the National Stone, Sand and Gravel Association. Hawkins told Roads & Bridges that aggregate production was up about 2% in 2001, and he expected another 4% increase in production in 2002, primarily because of the highway program.

Hawkins said the main challenge in the industry was the increasing need for tight tolerances on the size of the aggregate specified in today’s engineered mix designs.

Another provision of the bill provides $3.3 billion for the airport improvement program, an increase of $100 million over the 2001 enacted level.

Transit program spending totals $6.7 billion, an increase of $493 million over 2001.

The other side

But RABA is a double-edged sword, according to Bill Fay, president and CEO of the American Highway Users Alliance, who told Roads & Bridges, "Because VMT [vehicle miles traveled] is declining somewhat, the expectations of revenues may actually exceed the reality of revenues next year, and we may actually lose as much as $6 billion in highway funding next year simply for this adjustment. Because the adjustment can go both ways."

Fay was concerned that because of recent events there would be pressure to divert federal money from highway construction to security measures, especially now that the nation is once again running budget deficits. He also expressed a concern that the push to increase the use of ethanol might hurt the collection of highway funds. "As a result of that, we are currently losing about a billion dollars a year in highway funds because ethanol gets a subsidized tax rate."

But Fay’s biggest concern was environmental streamlining. The Highway Users Alliance and other industry groups will be working in 2002 toward reducing the length of time it takes to get a highway project off the ground. Currently, it takes up to five years to navigate the environmental review process. (See Fay’s article Caught in the act, Roads & Bridges, November 2001, p 20.)

"Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate," wrote the Federal Reserve Board’s Federal Open Market Committee in announcing the latest cut in short-term interest rates, as reported by Ken Simonson, chief economist for the Associated General Contractors of America.

Simonson was guardedly optimistic in his report on the Fed’s action, saying, "There is growing evidence that the economy has already touched bottom and that an expansion has either begun or will do so shortly." He added that minimal inventories, which manufacturers have been whittling down, should make the recovery quicker once demand picks up.

Late in 2001, a group of economics scholars made official what many people already felt: the current recession actually started in March. The National Bureau of Economic Research’s business-cycle dating committee pinpointed the start of the downturn long before the terrorist attacks of Sept. 11 and the sharp rise in unemployment.

Most economists expected the downturn to end by the middle of 2002, but President Bush announced that he thought the new budget deficits would last several years.

When asked whether he was surprised to hear that the recession had started as long ago as March 2001, CIMA’s Yaksich replied, "No. I think we’d seen it. We started to see some erosion and a reversal of the good times that people were used to in the ’90s back in the fall of 2000."

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