ARTBA Economist forecasts 5.4% growth in highway construction market; higher construction costs could absorb much of the gain

Spurred by a combination of renewed economic growth, emergency repair work following Hurricane Katrina and a new law that increases federal investment in highways, the U.S. highway construction market should grow 5.4 percent in 2006, according to the chief economist for the American Road & Transportation Builders Association (ARTBA). The real question, however, ARTBA Vice President of Economics & Research William Buechner says, is how much of the growth will be absorbed by rising construction costs.

The value of construction work performed on highway and bridge projects is projected to be a record $70.3 billion in FY 2006, up from $66.9 billion in FY 2005, according to ARTBA.

Dr. Buechner, a Harvard-trained economist who served the Joint Economic Committee of the U.S. Congress for nearly two decades before joining ARTBA, says several factors should help support market growth next year:

Strong economic growth has boosted general state tax revenues and there is much less pressure to dip into highway funds to balance state government budgets. Continued economic growth should provide a solid base for more state and local government investment in highway construction in 2006 and beyond.

Signed into law last August, the Safe, Accountable, Flexible, Efficient Transportation Equity Act — A Legacy for Users (SAFETEA-LU) guarantees a record $286.5 billion transportation investment level from FY 2004-09 and provides predictability in federal funding for highway construction, according to Buechner. SAFETEA-LU’s innovative financing provisions, such as allowing $15 billion in private activity bonds for highway improvements, should also help support future market growth, ARTBA says.

The Bush Administration has requested $2.3 billion in general fund revenue to help repair and rebuild highways and bridges damaged during the hurricane, which should provide an additional one-time market boost in 2006.

Buechner cautions higher construction costs caused by dramatic increases in steel, cement and petroleum prices could impact the overall level of growth in 2006. Materials used in highway and bridge construction will cost about 13 percent more in 2005 than 2004 while total costs including labor and overhead will be up about 7.5 percent.

Even if prices stabilize at their current levels, the cost of highway construction in 2006 would be about 4.5 percent higher than in 2005. This could absorb much of the projected 5.4 percent increase, leaving little to finance additional projects, Buechner says.

If prices continue to rise, higher costs would consume all of the projected increase in the value of highway construction next year and could force states to postpone some planned projects.

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