As for 2011…

By Greg Sitek —

Let’s start with a quote from the editorial, 2011: Better, Worse Or More Of The Same?, that appears in our Blog: Digging For Dirt (below). “What will happen in 2011? Economic conditions will continue to improve, but not at a rapid rate. Unemployment will decrease as technology opens doors for new products or enhancements of existing ones; consumption will increase and along with this the need for employees. The extension of the tax cuts is a big plus and will help just as the passage of the highway bill will. Housing will start recovering in some markets but, in order for it to rebound noticeably, employment will have to improve. Manufacturing will start to improve as we become more competitive or introduce new products. A better transportation infrastructure will help by lowering transportation costs. Everything is tied together, each facet dependant on the other.”

Hodgepodge: according to the dictionary hodgepodge |ˈhäjˌpäj| (Brit. hotchpotch) noun [in sing.] is a confused mixture. Actually it is the economic conditions under which we are currently living. There is absolutely no basis on which predictions can be made. In fact, resorting to the devices of old — the Ouija Board, bones, goat entrails, crystal balls, cards, etc. – would probably be more reliable.

We face confluences of uncertainties. Our incoming congress is new, not only with the newly-elected personalities populating it but also the fact that it will be functioning under a shroud of obvious population dissatisfaction as expressed in the recent elections. The big question is, “Will reality set in and will congress start looking at what is best for the country?” Will we cut spending or will we start spending more wisely with an eye on getting a return on our investments. There are 300 million of us and we all know what we want for our families and ourselves. As a result there are 300 million opinions on what Congress should do and there will be 300 million watchdogs watching every move, waiting to pounce on any indication of a misstep.

Observations and opinions

Here are a few, and only a few, things that must happen if we are going to start growing economically.

On the top of the list are jobs, jobs in the private sector. Governmental jobs won’t help the economy grow because all governmental jobs are paid for by taxes and taxes come from the citizens. Government jobs don’t produce revenue-generating products. Included in this grouping would be unemployment. Unemployed citizens don’t produce revenue-generating products and people on unemployment are being paid by taxes and insurance that is paid for by companies in the private sector.

Without jobs the housing market will remain flat, at best. We are currently are at the 550,000 (+/-) units-per-year level. We were at the 2-million unit level when our world fell apart and to grow we need to be producing around 1 to 1.2 million units a year. Recent articles on the subject stated that this wouldn’t happen until 2013, if then. I remember sitting in an economic forecast meeting in 2006 listening to a speaker from the National Home Builders Association say that we would have problems in the housing market but would not recover until 2016. Of course everyone in the audience thought he was nuts. Well…

Housing is important because it stimulates the buying of new furniture, appliances, and decorator items on top of all the materials and products that go into building a house – windows, doors, furnaces, air conditioners, sinks, toilets, plumbing and lighting supplies, etc. The list is endless. All this must be manufactured and manufacturing it requires jobs. The obvious, without the need, there are no job requirements.

No jobs means people can’t buy houses.

Auto manufacturing had been a critical ingredient in our formula for economic success over the years. Other countries around the world saw and recognized this and have repli­cated. Countries that have gained global economic significance have also become major players in the auto industry – Japan, Korea, Germany are examples. The manufacture and production of cars is a very job intensive industry, until you ship most of the manufacturing production off shore and teach other countries how to build cars and build them “cheaper” and better. Then what do you do to 1) replace the lost jobs 2) improve the quality 3) re-establish market dominance?

No jobs means people can’t buy cars.

Infrastructure is critical to economic growth. Failing or deteriorating infrastructure in­hibits. When transportation bottlenecks choke production because raw goods can’t reach the production lines and finished goods can’t reach terminals or ports, there is a problem that needs to be resolved as quickly as possible. The problem will not go away or fix itself, unless you consider closing the plant, terminating production and laying off thousands of people an acceptable solution. This is how we’ve been addressing these problems. We let them exacerbate to the point that a bridge collapses, factories can’t function, and tons of freight sit in a terminal because it can be moved.

Once again we have let the highway bill expire and not renewed it because of politics. We have known about the expiration and endless efforts were exerted to get a new bill passed, one that was well researched and written with an eye and focus on both immediate and long term solutions. Congress extended it a couple of times but would not act on putting a new bill in place. The main sticking point is/was paying for it. Interestingly enough when we, the citizens of this country were polled about increasing the gas tax the results of the polls were that you and I favored increased gas taxes if they would be spent on much needed road repairs. Of course the congressional hearing aid doesn’t seem to be tuned into the citizen’s network.

Passage and implementation of a new highway bill will result in jobs. It affects not only the construction industry but also the industries that supply the materials, management and administration of these projects as well; the companies that build the equipment used on these jobs. And improves safety as well.

For every $100 invested in infrastructure $350 is returned to the economy. That’s a serious return on investment.

Jobs mean spending power and spending power means economic growth.

What do others think?

When the American Society of Civil Engineers (ASCE) released its Infrastructure Report Card for 2009 it gave America’s infrastructure a GPA: D and estimated that we needed a five year investment of $2.2 Trillion to get us to the level we needed to attain if we were going to remain a world leader.

A recent press release from ASCE reads: Gas Tax Increase Is Vital to U.S. Economy and Public Safety”

Kathy J. Caldwell, P.E., president of the American Society of Civil Engineers said: “President Obama’s Deficit Commission may not have been able to move forward a gas tax increase proposal that would have addressed the Highway Trust Fund’s insolvency issues, however, that doesn’t mean that Congress shouldn’t still focus on this critical issue.

“The public, and our economy, rely on the nation’s roads, bridges and transit systems everyday; despite this, for years we have consistently under-invested in their performance. The federal gas tax, which generates revenues reserved for highway and public transportation improvements, has lost one-third of its purchasing power since it was last adjusted 17 years ago. Now, as many of our roads, bridges and transit systems are sliding closer and closer to failure, it’s no longer a question of whether we can afford to increase our infrastructure investments; it’s now a question of how we can afford not to.

“It is understandable that in our current economic climate the American people may be wary of something that they perceive will cost them more money. However, as a nation, we need to realize and accept that a 15 cent increase in the gas tax will have far less of an impact on our checkbooks than the cost of failing infrastructure. Each year, traffic congestion alone costs the average motorist $750 in wasted time and fuel. How much of that might be saved by if we, as the users of these critical systems, were making the necessary levels of investment?

“That is why the American Society of Civil Engineers continues to urge Congress and the White House to take a leadership position in ensuring that the nation’s transportation infrastructure is able to meet the needs of the public and businesses by supporting an increase in the federal gas tax. Our prosperity depends on it.”

What can you do? Contact your representatives in Washington remind them that they do work for you (us). Numerous TRIP Reports  www.tripnet.org. TRIP reports are also available on www.site-kconstructionzone.com) have highlighted the problems on a state-by-state basis focusing on the transportation needs of major cities in the states as well as offering realistic solutions. The reports point out facts like: in Pennsylvania it is costing Pennsylvania $8.2 billion per year in auto repairs as a result of road conditions and in Texas the annual cost skyrockets to $22.6 billion per year.

American Road & Transportation Builders Association (ARTBA)

ARTBA forecasts expects 4.4% drop in 2011 highway & bridge construction market witih uneven growth among the states

Continuing budget challenges for state and local governments, uncertainty surrounding a new long-term federal surface transportation bill, and winding down of infrastructure investment under the stimulus law will drive a 4.4 percent contraction in the U.S. highway and bridge construction market in 2011.  That is the central finding in the annual forecast from American Road & Transportation Builders Association’s (ARTBA) Vice President of Policy & Senior Economist Alison Premo Black.

The real value of highway, street and bridge construction is expected to fall to $78.5 billion, compared to 2010’s estimated $82.2 billion level, according to Black.

One positive note: the amount of work completed on bridges is expected to increase to $25.4 billion in 2010, Black says.  The value of real work in the bridge market has nearly doubled in the last decade as state and local governments have increasingly addressed long-deteriorating conditions.

Black notes that the stimulus, known as the American Recovery & Reinvestment Act (ARRA), had positive impacts on the market in 2010.  According to October 31 Federal Highway Administration data, the value of ARRA-related transportation projects under construction was $18 billion.  Nearly $16 billion has been paid out for construction work performed, and the value of projects completed was $6 billion.

State and local governments continue to struggle with the current economic situation and in the aftermath of the recession.  “Although state and local investment typically accounts for 57 percent of the value of construction work, this percentage fluctuates and the state and local market share will often decline after a recession,” Black says.  “States also tend to hold back on larger projects and simply maintain their programs until they know the new transportation funding levels from the federal government.”

Nevertheless, individual state highway and bridge programs will show growth next year, although it will be uneven, she says.  There are 23 states that increased their contract awards during federal fiscal year 2010, which ended September 30, according to an ARTBA analysis of contract award data from McGraw Hill.  Although some of these states have seen program declines over the last few years, the increase in contract awards is one positive indicator of state level market activity in 2011.

The model in the ARTBA forecast takes into account current economic conditions, state and local funding and federal investment.  It assumes that there is no major increase in federal investment over the next five years.  This is not to rule out an increase in the federal-aid program, but we simply do not have any indication of what that investment level would look like without passage of a new highway/transit bill, Black cautions.

The model also uses the projected Highway Trust Fund outlays from the Congressional Budget Office for future federal investment.  It assumes that the U.S. will return to modest economic growth between 1.8 and 1.9 percent for 2011 through 2015.  Increases in material prices and project costs are expected to be in line with general inflation at about two percent.

According to ARTBA, the market outlook would change if either federal, state or local governments provided significant increases in their investment levels.

The outlook for other modes in the ARTBA forecast:

Airports: The real value of work done on airport runways is expected to fall 10 percent to $5.3 billion.  Flat funding for the Airport Improvement Program and continued failure by Congress to pass a new aviation reauthorization program are key reasons for the reduction.  The airport runway market also benefited from increased ARRA-related spending in 2009 and 2010.

Rail & Transit: The real value of transit and rail work is forecasted to drop slightly from $15.3 billion in 2010 to $14.9 billion in 2011.  The longer term outlook for this sector will depend on federal investment through the New Starts program, private rail investment and the general state of the U.S. economy, Black says.

States Face More Financial Stress

Legislatures around the country may have to make more spending cuts over the next couple of years because of dwindling help from the federal government and a slow recovery in tax revenue, according to a new report.

States will spend about $43 billion in economic stimulus funds during the current fiscal year, which ends June 30. After that, they’ll probably have to get by with less federal funding.

The report from the National Governors Association and the National Association of State Budget Officers warned of “extremely tight fiscal conditions for states” as federal support winds down.

Critics of the economic stimulus legislation note that it failed to prevent a large jump in the unemployment rate. But the report credited the money with helping states avoid cuts to Medicaid, education and other programs.

Before Congress passed the stimulus, states relied on the federal government to cover a little more than a quarter of their spending. That share has increased to nearly 35 percent, said the report based on a survey of state budget officials.

Spending by states declined in fiscal years 2009 and 2010, the first time in the survey’s history that states reduced spending in consecutive years. That streak probably won’t continue this fiscal year, which began July 1. States have enacted budgets that on average called for a 5.3 percent increase in spending, even if most now expect to spend less than they did before the economy went into recession.

The vast majority of states must maintain balanced budgets. Faced with a sharp decline in tax revenue, most relied on program cuts and tax increases in recent years. The cuts frequently took place in education.

Of the states that made midyear budget cuts in 2010, 35 reduced spending on elementary and secondary education, and 32 lowered spending on higher education. Transportation faced the fewest cuts, the report said. Not all state budget offices have completed their forecasts. But at least 23 states anticipate budget deficits totaling $40.5 billion in 2012.

U.S. Chamber of Commerce recently released the following statement:

“The performance of the nation’s transportation system is not keeping pace with the rate of growth of the demands on that system,” said Thomas J. Donohue, president and CEO of the U.S. Chamber of Commerce. “As our economy recovers, the nation’s transportation infrastructure must be prepared to meet the projected growth in freight and population. In fact, a 10-point improvement in the new national transportation index could generate 3% more growth in the nation’s Gross Domestic Product. However, our index shows that from now through 2015 there will be a rapid decline in the performance of the system if we continue business as usual. Right now we’re on an unsustainable path.”

The Huffington Post recently published the following statements:

Investing in transportation infrastructure creates middle class jobs. Our analysis suggests that 61 percent of the jobs directly created by investing in infrastructure would be in the construction sector, 12 percent would be in the manufacturing sector, and 7 percent would be in retail trade, for a total of 80 percent in these three sectors. Nearly 90 percent of the jobs in the three sectors most affected by infrastructure spending would be middle class jobs, defined as those paying between the 25th and 75th percentile of the national distribution of wages.

There are a variety of ways the government could quickly boost infrastructure spending, explains Ethan Pollack, a policy analyst at the Economic Policy Institute. There could be a one-year hike in appropriations. There could be an even bigger hike, achieved by front-loading a five-year appropriation. Or there could be some sort of infrastructure bank (either on or off the annual budget.)

However you do it, Pollack tells HuffPost the rule of thumb is this: “Spending $200 billion on the current mix would create about 2.7 million jobs. If you do a mix that focuses more on transit and maintenance/repair (rather than new highways), you get another 100,000, for a total of 2.8 million jobs.”

And that’s just the direct and indirect jobs in the construction and supplier industries; it doesn’t include the jobs created when those folks spend their incomes. So the total job impact would be even higher. “In other words, a sustained $200 billion could support an additional up to 4 million jobs relative to the current baseline funding levels.”

That would actually put a decent dent in the 11.5 million jobs we need to get back to a pre-recession unemployment rate.

ABC Construction Forecast Predicts “Slow ProgressIn 2011

In its 2011 economic forecast for the U.S. commercial and industrial construction industry, Associated Builders & Contractors’ (ABC) Chief Economist Anirban Basu said,

“The period of rapid improvement in spending levels did not begin in 2010, and will not happen in 2011.”

“ABC’s forecast of nonresidential construction spending for next year suggests that total spending will be 0.1 percent less than 2010 levels. Privately financed construction levels are projected to decline 0.2 percent while publicly financed construction levels are projected to be virtually flat. The bottom line is the nonresidential construction recession is largely over, but 2011 will be associated with grudgingly slow progress,” Basu noted.

“To the extent that there has been recovery in nonresidential construction, it has been concentrated in segments closely tied to federal funding and the stimulus package passed in February 2009 in the midst of the recession,” he continued. “For example, five nonresidential construction categories monitored by the U.S. Census Bureau have experienced rising spending levels from the same time last year, including conservation and development, water supply, sewage and waste disposal, and highway and street, and transportation.

“In contrast, 11 nonresidential construction sectors have experienced year-over-year declines in spending, a reflection of the lack of available capital to finance growth and investment,” said Basu. “The deepest downturns registered in construction were related to lodging, manufacturing, office and commercial. ABC expects that the lack of access to capital will continue to deter economic progress in 2011, and is forecasting 1.7 percent GDP growth next year despite ongoing federal stimulus funding and the expectation of a more expansive monetary policy.

“The roughly flat expectations for spending are reflected in ABC’s nonresidential construction employment forecast. After losing about 50,000 jobs in 2010, ABC does not see nonresidential building employment rebounding until 2012. However, ABC predicts that residential construction employment will grow substantially as the number of housing starts will expand by roughly 25 percent,” Basu added.

ABC’s 2011 Outlook

The national recession that began in December 2007 ended in June 2009. Nonresidential construction typically lags the overall performance of the U.S. economy by 12 to 24 months. Even as the broader U.S. economy entered a period of substantial decline in

2008, nonresidential construction volumes continued to expand and grew 9 percent that year. Eventually, the weakness of the overall U.S. economy, coupled with a deep financial crisis and accompanying credit crunch, wreaked havoc on all sectors of nonresidential construction. According to U.S. Census Bureau data, nonresidential construction spending declined 9 percent in 2009 and ABC projects that spending will fall 14.7 percent this year.

The good news is the period of deep decline in U.S. nonresidential construction spending is over. The bad news is this appears to represent stagnation, with overall construction volumes mired at or near bottom-of-the-cycle levels. In other words, by remaining near 2010 levels, 2011 construction spending is positioned to be nearly a quarter less than 2008 totals.

Viewed from another perspective, the expectations for 2011 represent a stark contrast from what occurred in 2010. As a year, 2010 was a period of widely variable performance between construction segments as sectors powered by the availability of federal stimulus funds experienced growth, and privately financed activities buckled under the weight of depleted capital availability and excess supply. Next year, the variable in performance between segments will be far diminished, at least in terms of percentage changes in spending volumes.

In terms of segments poised to experience construction spending growth in 2011, ABC projects that power will lead the way, with spending rising by an anticipated 5.5 percent.

Segments positioned for decline include those that are closely linked to state and local government spending. With many states and localities trimming both operating and capital budgets, the expectation is that construction volumes in the education category will slip next year.

ABC expects that 2012 will be better for privately financed construction. Credit conditions will improve by that point as large, well-capitalized banks become more aggressive in their pursuit of industry market share. Finally, certain leading indicators have turned the proverbial corner, including ABC’s Construction Backlog Indicator, which has been indicating a steady improvement in the commercial and industrial construction outlook.

What 2011 bring? Answers. Let’s hope some of them are the ones we want to hear. We need a transportation bill. It will make a difference but even if passed in the first quarter we won’t start benefiting from the bill until 2012. CONEXPO-CON/AGG opens the end of March in Los Vegas and traditionally gives the industry a good look at how you, the contractors, are doing. It will also give a better projection of what we can expect. It won‘t be an easy year but it will be better then the recent ones we’ve survived.

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