Twenty-four months after the official start of the Great Recession, the country is finally showing some signs of recovery.
It is a jobless recovery, so it doesn’t feel like a recovery to most Americans. In the past, people would comfort themselves by saying that the hiring surge was inevitable. As businesses start making more sales, they have to hire more employees. The difference with this economy, in which productivity is king, is that businesses have become experts at doing more with fewer employees.
The American Road & Transportation Builders Association (ARTBA) said the highway construction market should grow 8% in 2010, according to the association’s annual economic forecast.
ARTBA Vice President of Policy and Economist Alison Premo Black said the value of highway, street and bridge construction (from all sources) put in place should reach $90.5 billion in 2010, up from about $83.9 billion this year, but after a big drop in 2008, the country has a big hole to climb out of to get back to what used to be ground level.
Working in the industry’s favor is increased spending through the American Recovery and Reinvestment Act (ARRA) and continued easing in material prices.
Highway spending is actually running a little ahead of last year. It was up 3% for the first 10 months of 2009 over 2008, according to Census Bureau figures.
“I think that does show some influence of stimulus money coming through,” Ken Simonson, chief economist for the Associated General Contractors of America, told Roads & Bridges.
Simonson said he thought the overall economy was starting to improve.
“I think we’re going to see a slow, steady upward movement of gross domestic product, the broadest measure of goods and services produced in this country, but that’s not going to be enough to pull construction spending into positive territory.”
Despite the rough economy, Americans continued to drive. Travel on all roads and streets increased 2.5% (5.8 billion vehicle-miles) in September 2009, compared with September 2008. Travel for September, the latest month for which data was available, was estimated to be 240.7 billion vehicle-miles. For the first nine months of the year, travel was estimated at 2,208.5 billion vehicle-miles, an increase of a scant 0.3% (6.7 billion vehicle-miles) over the first nine months of 2008.
As for jobs, construction has been hard hit by the recession.
“The category called heavy and civil engineering employment actually added 5,200 jobs on a seasonally adjusted basis from October to November,” said Simonson. “That was the first gain for any construction segment in a year, but I’m not ready to say it’s the beginning of an uptrend. As you know, highway activity is affected more than other kinds of construction by weather conditions, and it’s my impression that several areas of the country where highway construction normally shuts down in November were able to keep going because of unusually mild temperatures.”
Simonson said he would wait for the December report to see if those jobs last more than a month. Comparing years, employment in October 2009 was down 11.6% from October 2008 in the heavy and civil engineering category.
Hit the new year limping
ARTBA expects the $41.2 billion in 2009 federal highway obligations, as well as the additional $26.7 billion available through the ARRA, will provide the foundation for growth in 2010. ARTBA also expects the states to be able to continue to provide matching funds to get their share of the federal-aid program.
“Despite the current economic environment and budget challenges, 38 states have increased the real value of their contract awards between January and October 2009 compared to the same time period in 2008,” Black noted. “The real value of contract awards for highways and bridges is nearly $50 billion so far, an increase of $5 billion and an important leading indicator for the 2010 construction season.”
Another indicator of work to come, she said, is the high level of obligations for ARRA funding: More than 77% of stimulus funds have been obligated, but only $4 billion, or 16% of the total funding available, has been paid to contractors.
“When you add it all up, there is a lot of work to be completed in the coming year,” Black said.
An 8% gain is good, but not as comforting when you begin to wonder what will happen to the industry when the last of the funds from ARRA have been spent.
“Although the market is expected to grow modestly in 2010, the stimulus investment is a temporary boost to the marketplace,” said Black. “The outlook for the reauthorization of the federal-aid program and the general economy will determine if we have a ‘soft landing’ in 2011 or a more significant downturn.”
A peculiar phenomenon of the ARRA stimulus has been that project bids have come in an average of 25% below the engineering estimates. The good news is that more projects can be constructed. The bad news is that the contractors have a harder time staying in business.
“All over the country I hear contractors say margins have dropped to zero or even less,” said Simonson. “The contractor that gets the job isn’t even going to be able to cover their labor costs let alone make any profit.”
Although a variety of sources are predicting growth this year, the economic obstacles seem overwhelming.
“There are 25 states that have cut FY 2010 General Fund expenditures for transportation, according to a recent survey by the National Association of Budget Officers,” said ARTBA’s forecast. “Contractors are facing continued challenges with access to credit, fierce competition and the general economy. Contractors and state DOTs are also expected to be cautious in hiring and spending decisions while waiting for Congress to pass a new federal surface transportation bill.”
The market weakness has overshadowed all other issues. The availability of credit was too loose before and contributed to the economic crash. Now credit is tight, which would inhibit a recovery if it were a big issue.
“I think in a limited way, the stimulus package helped,” Dennis Slater, president of the Association of Equipment Manufacturers, told Roads & Bridges, but most of the stimulus funds didn’t go to infrastructure work, and most of the jobs it funded were short-term, so they didn’t really spur contractors to buy new equipment.
Material prices were an issue a year or two ago, but now, said Slater, equipment manufacturers and buyers are talking about sales, not construction costs.
Desperately seeking certainty
“The thing that’s going to help the equipment manufacturers is if we got a long-term market certainty, which would be a highway bill. That would really be something that would make this market move again. Probably the U.S. market won’t get better until that does happen.”
In past U.S. recessions, AEM’s member companies could turn to foreign markets for sales. They derive about 50% of their income from exports. Not this time.
“It’s been a worldwide recession,” Slater said, “so you really didn’t have stellar markets anywhere else this year.”
Some people in the road and bridge industry are hoping for a second round of federal economic stimulus spending, but what they really want is a transportation authorization bill they can count on for years to come instead of short-term extensions of the bill that expired on Sept. 30, 2009, the bill with the revenue-generation mechanism that doesn’t work anymore. The next authorization bill will need to include a solution to the broken Highway Trust Fund.
Pasting together a recovery
The Portland Cement Association believes there is pent-up demand in the market for cement. In his Cement Outlook web conference, President and CEO Brian McCarthy said the industry would need to spend $2.2 trillion in the next five years to keep current highways in acceptable condition.
PCA’s projection is for 5.2% growth in cement consumption in 2010 over 2009, 16.5% growth in 2011 and another 14.5% growth in 2012.
This sustained growth comes after several years of sustained decline. Cement consumption peaked in 2005, PCA said, and has dropped 45% since then, the biggest volume decline in the industry’s history.
The turnaround is being driven by increased infrastructure investment, said PCA, increased interest in sustainable construction and the shift in pavement costs. Concrete is now not only a more durable solution for building roads, PCA said, but it also is less costly both in initial investment and over the long term.
McCarthy also was optimistic about concrete’s ability to compete with asphalt as a pavement material. He said because of recent increases in the cost of asphalt, concrete was now on better competitive footing, and the gap would grow as refiners wring more profitable products from crude oil and leave less behind as liquid asphalt.
The future of road and bridge construction in 2010 is very uncertain. It will depend dramatically on whether the Congress acts on a multiyear highway authorization bill and whether the Congress acts on a second economic stimulus bill that would encourage job creation. Without one of those kicks, and maybe another transfer of funds into the Highway Trust Fund, the industry might have a very tough time gaining any momentum.
“We have had nothing but solid and supportive things to say for the ARRA, the stimulus bill,” Jeff Solsby, director of public affairs at ARTBA, told Roads & Bridges, “because it has indeed been a lifeline for the transportation construction industry, but that being said, it is still not a substitute for a robust, multiyear authorization bill.”