Heavy Construction Spending Still Steady

11/17/2010 by Jim Haughey

The only positive market drivers for heavy construction are airline traffic and heavy equipment sales, but neither will lead to a quick upturn in heavy construction spending. Airport construction always lags traffic gains by several years. Airline traffic and profit gains are substantial, but are not putting pressure on airport capacity, because carriers have raised their load factor to 85% plus and are operating fewer flights than several years ago. The 59% jump in equipment sales in the last twelve months did not result from increased contractor equipment use; instead, it is the result of the rebuilding of rental fleets after three years of neglect, much higher exports, and increased purchases for non-construction use, such as mining, utilities, distribution and manufacturing.

Heavy construction spending slipped 4.1% in the last year and is projected to take two years to recover the lost ground. Jobsite spending rose 0.2% in September, but spending has essentially been stalled for almost three years. The stall is the result of the recession, the credit collapse and, more recently, the collapse of highway trust funds and state and local government budgets. Emergency federal funding moderated the decline, but it is also fading, with Congress unwilling to maintain the emergency funding level of early 2009. The deficit reduction commission has recommended an additional $0.15/ gal. fuel tax, but this tax is for a few years ahead and has a low probability of being adopted.

State tax receipts are rising in the aggregate, but not yet in about half of the states. For most states, it will take several years to restore budget reserves sufficiently to allow facility spending to return to near normal. Local tax receipts, as always, did not fall as much as state tax receipts, but local tax receipts still have not yet begun to recover. The scale of the government cash problem can be seen in the layoffs in the last three months — the most serious job cutting in many years. More job cuts are ahead later this year.

The outlook is for little change in heavy construction activity for two years. Construction funding from tax, budget reserve and standard bonding sources will slip lower over the next year. Some regions will experience a small pickup in federal stimulus funds, but most will not. These funding losses should be offset with a small number of tax rate increases, more funds for private facility investment in a still expanding economy, more use of federally subsidized “Build America” bonds and increased reliance on privately funded public facilities, especially highways.

Key Indicators of the U.S. Market Environment — November 2010
Heavy/Engineering Construction
(Driven by demographics and government finances, as well as cyclical factors)

or Qtr.
Latest Level Recent
on Const.
Electric power capacity utilization rate,
% level (FRB)
79 81 Sep 79 Low Steady
Airline revenue passenger miles,
billions (RCD) (ann. % change)
0.6 3.1 Aug 7.0 High Rising
State & local govt. capital spending,
$ billions (U.S. Commerce Dept.)
353 337 Q3 343 Low Falling
State and local government tax receipts,
$ billions (U.S. Commerce Dept.)
1270 1317 Q3 1337 Low Rising
Heavy contractor employment,
000s (U.S. Labor Dept.)
805 828 Oct 833 Low Rising
Construction equipment shipments,
$M (U.S. Census Bureau)
1676.0 2571.0 Sep 2506.0 Average Rising

Abbreviations: y/y = year over year; FRB = Federal Reserve Board; RCD = Reed Construction Data
Table: Reed Construction Data and Reed Construction Data - CanaData