Wait a minute . . .

Jeffrey A. Miron, a senior lecturer in economics at Harvard University, has written a commentary for CNN that examines government spending, and the effects of tax cuts. he notes: "If the new spending is for projects that are beneficial for society overall, and if the private sector cannot or will not undertake these projects, then the expenditure is worthwhile independent of what it does to fight the recession. A standard example might be repair of the interstate highway system."

So far so good, right? He continues:

"This justification for additional spending is far from compelling, however. No doubt some roads need repairs, but the U.S. already spends huge amounts on its highway system. The U.S. could address existing deficiencies by increasing the use of toll roads and charging drivers extra at rush hour, or by repealing prevailing wage laws that inflate construction costs."

Okay, did you catch that? No doubt some roads need repairs. Isn't that a rather cavalier way of dismissing what the Federal Highway Administration estimated in 2005 was a critical $375 billion need? Today, more than $400 billion is needed to repair our failing infrastructure. Mr. Miron is obviously a smart man, but he is woefully underestimating the importance of investment in roads and bridge construction. Your comment?

Production prediction: 2 billion tons

Here is some additional information on aggregates production from the third-quarter report just released by USGS. The estimated production-for-consumption of aggregates in the third quarter of 2008 decreased in all of the geographic divisions compared with that sold or used in the third quarter of 2007. The largest decreases in percentages were recorded in the South Atlantic (27 percent) and the Mountain (21 percent) divisions. Production-for-consumption of aggregates decreased in 39 of the 48 States that were estimated. The five leading States, in descending order of production-for-consumption, were Texas, California, Pennsylvania, Illinois, and Ohio. Their combined total production-for-consumption was 191 Mt and represented 28 percent of the U.S. total.

By my estimation, 2008 production of crushed stone is on pace to finish the year at at just over the 1 billion ton-per-year mark. Construction sand and gravel should finish the year at about the 900 million ton-per-year mark. If so, it would mean total construction aggregates in 2008 would be approximately 2-billion tons per year, a level so low it has not been seen since the 1992-1994 time frame. Your comment?

Analysts downplay infrastructure program impact

According to an Associated Press report, an investor note prepared by JP Morgan suggests that financial markets are overly optimistic about the effects the infrastructure spending program proposed by President-elect Barack Obama will have on companies that have links to public-works projects. "Still unanswered is how fast the stimulus program can be put in place and how much of it will be devoted to construction," JP Morgan analysts wrote. They are suggesting that the impact on companies such as construction firms, heavy machinery makers and building suppliers may not be as immediate as many investors expect. "While a large federal infrastructure program would be unambiguously positive for all construction-related stocks, we think investors are underestimating the obstacles to the rapid spending of large amounts of money," the analysts said.

While the report notes that much of infrastructure spending comes at the state level, not through direct federal spending, and initial projects such as improving freight and passenger transportation will not come with the initial economic jolt, the proposed infrastructure program brings with it the potential for a cycle of confidence that should positively impact construction and materials companies incrementally throughout the new year.

Obama said earlier this month that he wants to create a public works program that will rival the building of the federal highway system in the 1950s, spending that would focus on projects such as repairing roads and schools. The measure would be intended to provide jobs and new resources for businesses at a time when unemployment is rising and companies are making cutbacks. Your comment?

ARTBA versus FHA

It's ARTBA versus the Federal Highway Administration (FHA). A recent press release issued by FHA, commenting on the Traffic Volume Trends report for October, claimed that the 100-billion-mile decline in vehicle miles traveled on the nation’s highways during the past year was the reason why Highway Account revenues in FY 2008 were $3 billion less than in FY 2007. The release concluded that, “banking on the gas tax is no longer a sustainable option” to finance transportation investment in America.

According to ARTBA, the release seriously distorts the facts. The decline in Vehicle Miles Traveled (VMT) this year, while worrisome, was not why Highway Account revenues were $3 billion less in FY 2008 than in FY 2007, ARTBA said.

The association maintains:
* Revenues from the federal excise tax on gasoline in FY 2008 were, in fact, almost unchanged from FY 2007. While revenues did slip during the second half of the fiscal year with the decline in VMT, the federal gasoline tax actually generated $20.98 billion for the Highway Account in FY 2008, down only $70 million or 0.3 percent, from $21.05 billion in FY 2007. This accounted for just 2 percent of the $3 billion decline in Highway Account revenues.
* Total revenues from all federal excise taxes on motor fuel were actually $185 million higher in FY 2008 than in FY 2007. Although revenues from gasoline taxes were down $70 million, revenues from the tax on diesel fuel actually rose $256 million for a net increase of $185 million.
* The real reason for the $3 billion decline is that revenues from taxes on heavy trucks, mainly the 12 percent tax on retail sales of trucks and trailers, were down more than $2.4 billion in FY 2008. This accounted for 80 percent of the revenue decline and is consistent with reports that sales of new heavy trucks plummeted in 2008.
* The remaining 20 percent of the decline in revenues was a transfer of just over $700 million of taxes on kerosene to the Airport and Airways Trust Fund (AAFT) and the General Fund in FY 2008.

ARTBA said, in summary, that while revenues into the Highway Account were indeed $3 billion less in FY 2008 than in FY 2007, it was not due to the decline in VMT as U.S. DOT claims. The U.S. DOT misused that data to suggest the federal motor fuels tax can no longer finance federal investments in highway and mass transit improvements. The data in fact suggest that the federal motor fuels taxes can remain a viable source of revenues for highway investments for the foreseeable future. The trust fund’s real problem is not the decline in VMT, but rather the economic slowdown and the fact the federal motor fuel tax rates have not been changed since 1993. Your comment?

USGS: Production takes a dive

According to USGS, an estimated 687 Mt of total aggregates was produced shipped for consumption in the United States in the third quarter of 2008, a decrease of 18 percent compared with that of the same period of 2007. The estimated production for consumption in the first 9 months of 2008 was 1.80 Gt, a 17 percent decrease compared with that of the same period of 2007.

An estimated 386 million metric tons (Mt) of crushed stone was produced and shipped for consumption in the United States in the third quarter of 2008, a decrease of 17 percent compared with that of the same period of 2007. The estimated production for
consumption in the first 9 months of 2008 was 1.02 billion metric tons (Gt), a 17 percent decrease compared with that of the same period of 2007.

The estimated U.S. output of construction sand and gravel produced and shipped for consumption in the third quarter of 2008 was 304 Mt, a decrease of 18 percent compared with that of the same period of 2007. The estimated production for consumption in the first 9 months of 2008 was 773 Mt, a 18 percent decrease compared with that of the same period of 2007. Your comment?

LaHood to head transportation?

Retiring republican Rep. Ray LaHood of Illinois has reportedly been chosen as Barack Obama's secretary of transportation. LaHood represents Peoria, headquarters of Caterpillar, a good-karma move on Obama's part as he prepares to launch an ambitious public-works program, with an emphasis on road and bridge construction

Obama, in choosing a republican to head transportation, returns the favor of the Bush administration, which chose Norm Mineta, a democrat, for the same post eight years ago. LaHood is a former member of the House Transportation Committee, and more recently has been a member of the influential House Appropriations Committee. LaHood has a record of supporting funding for Amtrak and public transit.

Terence O'Sullivan, general president of the Laborers' International Union of North America, praised LaHood as "a friend to our union when it comes to construction and transportation issues." The buzz on LaHood from industry sources is that he is a stand-up guy who will bring a steady hand to the job, at a challenging time. Your comment?

Miles driven in U.S. decreases

Americans drove more than 100 billion fewer miles between November 2007 and October 2008 than the same period a year earlier, said U.S. Transportation Secretary Mary E. Peters (left), making it the largest continuous decline in American driving in history.

"As driving decreases and vehicle fuel efficiency continues to improve, the long term viability of the Highway Trust Fund grows weaker. The fact that the trend persists even as gas prices are dropping confirms that America's travel habits are fundamentally changing. The way we finance America's transportation network must also change to address this new reality, because banking on the gas tax is no longer a sustainable option," said Peters.

The secretary noted that Americans drove 3.5 percent less, or 8.9 billion fewer vehicle miles traveled, in October 2008 than October 2007, making it the sharpest decline of any October since 1971.

For the second month in a row, the data show the South Atlantic region—a bloc of eight states and Washington, D.C. — experienced the biggest decline of any region, 5.0 percent fewer VMT compared to the previous October. At 8.4 percent fewer VMT, Montana led the nation with the largest single-state decline that month. Utah and South Carolina followed with declines of 7.4 percent and 6.7 percent, respectively.

The Highway Trust Fund, the federal government's primary source for financing highway, bridge and transit projects, took in substantially less in fiscal year 2008 than in the previous year. As a result of the continued decline in VMT and the use of more fuel efficient cars, the HTF, which is primarily funded through federal gas tax receipts, collected $31 billion in revenue between October 2007 and September 2008 — $3 billion less than it collected in Fiscal Year 2007, while federal transportation spending increased by $2 billion.

"This underscores the need to change our policy so American infrastructure is less dependent on the amount of gas American drivers consume," said Federal Highway Administrator Tom Madison.

Infrastructure investment: A conservative view

Emil W. Henry Jr., assistant secretary of the Treasury from 2005 to 2007, has written a very compelling article on why Reagan Conservatives should get behind an infrastructure investment initiative such as the one being proposed by President-elect Barack Obama. He writes . . .

"In the wake of the recent electoral rout, we conservatives must redefine ourselves in a world that has changed since the birth of the Reagan Doctrine. One new reality is the imperative that our government modernize America's aging energy, water and transportation infrastructure.

"Many conservatives are uneasy with such talk -- clinging to the notion that government investment or oversight is anathema to Reagan orthodoxy and other core conservative beliefs. They fear the creation of another permanent bureaucracy, foresee a strain on the budget at a time of extreme economic distress and argue that such spending is an ineffective economic stimulus. These are all legitimate worries, but they miss the bigger point: Our infrastructure needs are at a critical juncture.

"Like the maintenance of a strong military -- investment that protects prosperity -- investment in key infrastructure is consistent with Reagan principles. Moreover, such "expansion" would promote several conservative ideals: economic growth, energy independence, national security and U.S. competitiveness. Your comment?

5,148

America's roads and bridges need critical repairs that total $64 billion, and construction could begin within six months if the federal government makes the funds available, according to a report by the American Association of State Highway and Transportation Officials. The association noted that it has identified 5,148 road and bridge projects are considered ready to go. States that need the most money for road and bridge construction:

Utah: $10.8 billion
Florida: $6.9 billion
Texas: $6 billion
North Carolina: $5.1 billion
California: $5 billion

Your comment?

A green answer to the building bust

According to an article on the CoStar web site, despite a slowdown affecting nearly all segments of the commercial property industry, green building is positioned to withstand the deepening economic recession and possibly emerge as a more influential force than before, sustainability advocates say. The optimism stems from a groundswell of popularity that carried green building to the forefront of the industry heading into the downturn, as well as the idea that sustainability can help building stakeholders cut costs.

Lately, the financial case for green buildings -- that they are cheaper to operate and display better fundamentals than conventional buildings -- has become the chief rallying cry for the movement. “There’s been a focus shift from just ‘green, green, green’ to actual feasibility,” said Shannon Sentman, a real estate attorney at Holland & Knight in Washington, DC, who specializes in green building. “People are realistic. Most realize that this is a bottom line issue and it’s not only economical to do it, it’s bad for the bottom line if you don’t.” Your comment?

Be like Ike

The aggregates and construction industries continue to follow every word that President-elect Barack Obama says about an economic recovery strategy based on making the biggest investment in the nation’s infrastructure since President Dwight D. Eisenhower created the interstate highway system a half-century ago. Speaking over the weekend at a Chicago news conference and on NBC’s “Meet the Press,” Obama said state governors have many projects that are “shovel ready,” meaning they could be undertaken swiftly and have an immediate impact on jobs. He also said the states would face a "use-it-or-lose it" ultimatum regarding the funds they would receive from the federal government. "If a state doesn't act quickly to invest in roads and bridges in its communities, they'll lose the money," Obama said. He declined to specify a price tag for his economic stimulus plan, saying his advisers are “busy working, crunching the numbers, looking at the macroeconomic data to make a determination as to what the size and the scope of the economic recovery plan needs to be. But it is going to be substantial.” Your comment?

ARTBA Forecast: Mixed

After three years of steady nominal growth, the U.S. highway and bridge construction market is expected to flatten in 2009, as recent increases in federal highway investment will likely be offset by weakened state and local highway budgets, according to a forecast issued by the American Road & Transportation Builders Association’s (ARTBA) top economist.

Dr. William Buechner, ARTBA vice president of economics and research, projects the value of construction work put in place on highways and bridges will be $80.2 billion in 2009, a bare 1.5 percent increase over 2008’s $79 billion.

If construction material costs level off next year, as seems likely following the recent collapse of oil prices and the nation’s economic slowdown, the real volume of construction work should stabilize, and may even improve, after declining about six percent in 2008.

One factor that could considerably brighten the forecast, Buechner said, is for Congress and the president to enact an economic stimulus bill in early 2009 that includes transportation investment. Every $1 billion invested in quick-start highway and bridge projects would add about one percentage point to the 2009 forecast.

The federal highway program should provide a cushion for highway construction next year even without a stimulus bill. The $41.2 billion of highway investment enacted by Congress for FY 2008—a 5.5 percent increase over FY 2007—will have its biggest impact during the 2009 construction season as projects started in 2008 ramp up. Another $41.2 billion in the federal highway budget for FY 2009 helps maintain market stability.

“The most critical problem for the highway construction market in 2009 is that state and local governments are facing serious fiscal problems, and some may tap transportation funds or defer transportation investments to meet budgets,” Buechner said. “High gas prices this past summer, combined with a slowing economy, have resulted in a 3.3 percent decline in highway miles driven so far this year—thus reducing state gas tax revenue collections.”

The ARTBA economist noted that depressed new car and truck sales have also reduced vehicle registration fee revenues. Both will impact highway investment. At the same time, foreclosures and a decline in home values in many areas of the country are cutting into the property tax revenues that many local governments apply to their highway construction activities.

Construction materials prices decline

According to Reed Construction Data, the construction materials price index fell 2.8 percent in October matching the decline in the overall Producer Price Index. October prices were still 10.0 percent above a year earlier but further, although smaller, declines in the index are expected in November and possibly December. Energy and metal prices fell further from mid-October to mid-November when the survey for the next PPI report was taken.

The most significant declines last month were 18 percent for asphalt (at the refinery), 18 percent for diesel fuel (at the pump), 8 percent for structural steel and nonferrous pipe and tube, 7 percent for lumber and 6 percent for plywood. The drop in raw commodity prices has yet to flow through fully to processed and manufactured construction materials. Steel scrap fell 38 percent and copper scrap dropped 29 percent in October. The decline in metals, energy and freight costs in the pipeline will push down the prices of manufactured products in the next few months.

The only significant prices increases in October were asphalt roofing (+7.3 percent) and gypsum products (+2.2 percent). Roofing prices do yet reflect the sharp drop in asphalt last month. Gypsum producers had announced a series on 11 percent monthly price increases but have been able to raise prices only about 6 percent in the last few months.

Heavy contractors benefit the most from the recent price cuts. The index for the mix of materials used in highway projects declined 5.8 percent in October to 15.2 percent above a year ago. The year will finish with several more large declines. Strained DOT and public works budgets will now be able to award more work than appeared likely a few months ago. Your comment?