A look at where we’ve been, where we are and where we’re going.
By Mark S. Kuhar
The U.S. aggregates industry spent most of 2010 hunkered down, waiting out the tail end of the great recession and hoping in vain for congress to pass, or even seriously consider, federal infrastructure reauthorization legislation. As 2011 begins, there is much hope and everyone is indeed looking ahead. What people see, however, depends upon whether the glass is half full or half empty.
Indiana University (IU) economists, presenting their annual national economic forecast, predicted that the current weak recovery will continue into 2011. “The past year has been one of disappointingly weak recovery, and, sadly, we expect that 2011 will bring more of the same," concluded Bill Witte, associate professor emeritus of economics at IU and a member of the Kelley School of Business' annual Business Outlook Panel.
The Kelley School panel said the economy overall will expand at about a 3 percent rate in 2011, between the fourth quarters of this year and the next. "This will be a little better than 2010, but not enough to make much progress against the damage done during the recession," Witte said.
Other highlights of the IU forecast include:
- 2011 will be marked by very low inflation nationally, below 1 percent, which will continue through the coming year, as consumer spending is expected to rise very slowly.
- The housing sector has hit bottom nationally, but the large overhang of homes facing foreclosure will prevent any significant rebound in construction during most of 2011.
- Energy prices are expected to rise moderately in 2011 in the absence of any major supply or security disruptions.
Just after the first of the year, energy once again rose to the forefront, as crude oil rose to a 27-month high on speculation the U.S. will sustain an economic recovery this year. Industry analysts speculated at $100-per-barrel oil will once again be the norm, and diesel prices would rise as a result.
“The U.S. economy is in the second year of economic expansion," said Kathleen Camilli, president of Camilli Economics. "While the growth rate is currently modest, momentum is likely to grow as the economy responds to ongoing monetary and fiscal stimulus in the pipeline. Notwithstanding the financial crisis' impact on residential and nonresidential construction, growth in this sector of the economy will continue to be driven by innovation in building technologies.”
NSSGA Looks Ahead
According to Joy Wilson, president and CEO of the National Stone, Sand & Gravel Association (NSSGA), the organization doesn’t employ a statistician or economist, so they don’t issue association forecasts, per se. “However, we try to keep a close ear to the ground courtesy of inputs from members, government sources, allied associations, construction industry and business forecasters as well as published information,” she said.
“As you know, aggregates markets have changed dramatically in the past four years.” Wilson continued. “At 3 billion metric tons peak production in 2006 – the combined markets using aggregates by residential, commercial and non-road public construction projects – we estimate formed something around 60 percent or so of our industry’s markets. Highways/surface transportation projects continued to be the largest single focus market for aggregates at roughly 40 percent.
“From the dramatic shifts brought about by the recession, we believe the roads, highways and surface transportation market is now by far the dominant, majority market for aggregates products nationwide, but it’s a higher percentage of a considerably reduced total tonnage produced.” she said. “This puts a tremendous amount of pressure on our companies and our association to what already has long been a top legislative aim: to secure a well-funded, long-term surface transportation law.
You know well the uncertainties to state DOTs and the transportation construction industries caused by Congress in their recent Lame Duck session extension of SAFETEA-LU until only March 4, 2011. Those uncertainties combined with the current competitive climate will continue to create difficult market conditions,” Wilson said.
NSSGA is not the leader of the national coalitions formed to fight for the care and improvement of this multi-trillion dollar investment known as our national highway system, but “we are active contributors and participants,” Wilson said. “Our members are dynamic in their local state associations and coalitions, as well as with their local Congressional leaders and governors.
“Conditions in the industry will continue to be challenging and will remain so until the economy in general and construction in particular recover,” Wilson said. “In recent economic reports, many analysts are predicting that the economy will grow at a 3.5 percent to 4 percent annual pace next year. That would be up from an expected 2.8 percent pace this year. Employers are laying off fewer workers, consumers are spending more confidently and according to the National Association of Manufacturers, ‘manufacturing recovery may be starting to accelerate.’ In addition, reports from both the National Association of Home Builders and the National Association of Realtors indicate that the housing market may be a mild positive in 2011.”
Stability in federal infrastructure funding will be a critical issue in 2011, said Ward Nye, Martin Marietta Materials’ president and CEO, responding to the company’s third-quarter report. “At present, we continue to operate under a Congressional continuing resolution that extended SAFETEA-LU. However, it is possible for some form of reauthorized infrastructure legislation to be passed during the year. The impetus for any new legislation would be primarily twofold: One, its effectiveness at creating new jobs, a major focus of the Obama administration; and two, the current state of infrastructure disrepair from years of underinvestment.
"We were pleased in September 2010, when President Obama proposed a six-year plan to rebuild infrastructure with an initial $50 billion investment,” Nye said. “We continue to expect modest improvement in state infrastructure spending and approximately 30 percent in ARRA infrastructure funds spent in 2011. This continued Stimulus spend, coupled with funding from either an extended federal highway bill or continuing resolutions, will maintain spending at constant funding levels. We also expect to see improvement in the residential construction market and anticipate the commercial component of our nonresidential end-use market to trough in 2010, with modest 2011 volume recovery. The price of natural gas and timing of lease commitments for oil and natural gas companies will be significant factors in the continuation of the energy sector activity into 2011.”
McGraw-Hill Weighs In
McGraw-Hill Construction, part of The McGraw-Hill Companies, reported in its 2011 Construction Outlook that there would be an increase in overall U.S. construction starts in 2011. The level of construction starts is expected to advance 8 percent to $445.5 billion, following the 2 percent decline predicted for 2010.
"While the economy is still facing headwinds, the stage is being set for construction to see modest improvement in 2011 from this year's very weak activity," said Robert A. Murray, vice president of economic affairs at McGraw-Hill Construction. "We're turning the corner, slowly. 2011 will be the first year of renewed growth for overall construction activity, and 2010 becomes the final year of a very lengthy and unusual construction cycle."
Based on significant research and in-depth analysis of macro-trends, McGraw-Hill’s 2011 Construction Outlook predicts:
- Public works construction will drop 1 percent, given the fading benefits of the federal stimulus act for highway and bridge construction.
- Single-family housing in 2011 will climb 27 percent in dollars, corresponding to a 25 percent increase in the number of units to 565,000 (Construction basis).
- Multifamily housing will rise 24 percent in dollars and 23 percent in units, continuing to move gradually upward.
- Commercial buildings will increase 16 percent, following a three-year decline, which dropped contracting 62 percent in dollar terms. The levels of activity expected for stores, warehouses, offices and hotels in 2011 will still be quite weak by historical standards.
- The institutional building market will slip an additional 1 percent in 2011, retreating for the third straight year. The difficult fiscal climate for states and localities will continue to dampen school construction, although the healthcare facilities category should see moderate growth.
- Manufacturing buildings will increase 9 percent in dollars and 11 percent in square feet.
- Electric utilities will slide 10 percent, falling for the third year in a row.
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 said. 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 said. “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 cautioned.
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 and 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 said.
ABC: Slow Progress in 2011
Associated Builders and Contractors (ABC) reported in its 2011 economic forecast for the U.S. commercial and industrial construction industry that “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 2011 suggests that total spending will be 0.1 percent less than 2010 levels,” said ABC Chief Economist Anirban Basu. “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,” said Basu.
“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,” Basu said. “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 said.
Viewed from another perspective, 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. This 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.
In the construction equipment “business outlook” survey of the Association of Equipment Manufacturers (AEM), construction machinery manufacturers predict overall business in the United States to close out 2010 with 6.4-percent growth, then gain 12.7 percent in 2011 and 14.8 percent in 2012, followed by 2013 growth of 13.0 percent.
Canadian business overall is expected to be 8.2 percent higher in 2010 than the previous year, and record gains of 12.0 percent in 2011, 14.8 percent in 2012 and 12.7 percent in 2013.
Industry business to the rest of the world is anticipated to be strongest in 2010, up by 14.7 percent, and then grow 11.8 percent in 2011, 12.5 percent in 2012 and 11.2 percent in 2013.
“While this rebound is welcome, you have to remember our industry was down 30 to 50 percent in the recession, so there is a long way to go,” said AEM President Dennis Slater. “Although business is improving, it will take years to recover the sales losses of 2008-2009. This hopeful outlook will be difficult to achieve without action now on transportation infrastructure legislation and export-promotion policies. Infrastructure investment and export agreements are proven ways to create and maintain jobs for U.S. workers, for a sustainable recovery and meaningful uptick in equipment demand.”
The survey asked respondents to rank how several factors would influence sales. Not surprisingly, a key impediment to growth in the construction equipment industry is the stagnant housing market. The general economy, including credit availability, also continues to be a major factor, as is highway funding. The brightest spot is increased export demand.
“The housing market is still very weak, stimulus-funded projects are nearing an end, and state and local budgets continue to shrink. Unemployment in the manufacturing sector remains stubbornly high. In construction, unemployment is still about double the national average; for example, construction unemployment was 18.8 percent for November 2010,” Slater said.
"Congress and the Administration need to put partisan differences aside and finally pass a long-term federal transportation funding bill,” Slater said. “Repairing the infrastructure will improve U.S. competitiveness globally by providing a more efficient, safer and reliable system to move U.S. goods to market.”