The Road Ahead: Construction Continues to Face Challenges in 2012

With the American Recovery & Reinvestment Act (ARRA) stimulus package coming to a close, the mid-September extension of SAFETEA-LU and the early-November approval of the MAP-21 two-year highway reauthorization, rental professionals are wondering - what's coming down the road for construction in 2012?

As an equipment rental business, it’s your job to serve contractors involved in many trades, including residential and commercial construction, not to mention concrete and road building. In order to do it effectively, you need to have your finger on the pulse of the various sectors your customers work within, and it’s vital to have a solid understanding of the factors effecting change.

With the American Recovery & Reinvestment Act (ARRA) stimulus package coming to a close, the mid-September extension of SAFETEA-LU and the early-November approval of the MAP-21 two-year highway reauthorization, many of you are wondering - what's coming down the road for construction in 2012? What will my customers face in the coming year and how will it affect my business?

Rental: What are the biggest hurdles impacting construction’s recovery as we move into 2012?

Ken Simonson, chief economist, Associated General Contractors of America (AGC): The overall construction industry should show slow improvement in 2012, as apartment construction and several private nonresidential categories gather steam. But public construction will be squeezed by tight budgets, office and retail will remain sluggish, and homebuilding is still a huge question mark. The economy is likely to grow at 3% or less, with stubbornly high unemployment. These factors will hold down government revenues of all types and will make consumers and businesses wary of long-term commitments such as construction.

The biggest growth [in construction spending] will be in apartments, manufacturing, distribution (warehouses, truck, rail and port facilities) and energy (especially around shale formations). Public spending will shrink in most categories, led by school construction, which depends heavily on still-fading property tax collections.

Anirban Basu, chief economist, Associated Builders and Contractors (ABC): As federal stimulus projects wind toward a close, 2012 could represent a year of decline, particularly in the latter half of the year. Overall nonresidential construction activity will be flat, as a handful of segments such as power, health care and manufacturing experience rising construction spending volumes, while a number of other segments remain in retrenchment. Shrinking state and local capital budgets remain a headwind for the nation’s construction industry.

Ed Sullivan, Chief Economist, Portland Cement Association (PCA): We will avoid a recession. Although the private sector is weak, it is being boosted by payroll tax holidays and the extension of unemployment benefits. If those go away at the end of 2011, it puts us in jeopardy of slower performance in the first quarter of 2012. This could generate adverse momentum.

The construction industry has been hit hard, but the incremental downturn that additional weaknesses in the economy would apply won’t affect much. It will simply delay recovery. At best for 2012, we can expect the overall industry to be flat.

ET: What will 2012 look like for highway contractors?

Alison Premo Black, senior economist, American Road & Transportation Builders Association (ARTBA): We are forecasting market decline of about 6% for both highway pavement and bridge work in 2012, down to $72.6 billion. The key reasons for the projected downturn: continued weak growth in the overall U.S. economy, the end of transportation-related stimulus funding, persistent state and local budget challenges and a static federal-aid highway program.

The bridge market, which has experienced several years of growth, is expected to drop from $26.3 billion to $23.6 billion. Pavement work is expected to continue to decline slightly from an estimated $45 billion in 2011 to $44.1 billion in 2012. Other work, which includes smaller projects that are highway related, but not specifically bridge or pavement work, is forecasted to decline from $5.6 billion in 2011 to $4.8 billion in 2012.

We are cautiously optimistic about the future. We don’t believe it is a foregone conclusion there will be fewer funds for highway construction. The fact is the transportation network at the federal, state and local levels is deteriorating because of age and because it was not built to carry the current volume of traffic. We need a 21st century transportation system to meet the demands of the motoring public and business community, and to help facilitate economic growth and job creation. The public gets it. We just need to bring the politicians along until they do the right thing.

Jack Basso, director of program Finance & Management, American Association of State Highway and Transportation Officials (AASHTO): We continue to need long-term, well-funded legislation. Until we get it, we face the very real problem of deterioration of our highways and bridges. We are already experiencing this and are already underfunded.

The reauthorizing of federal programs should bring stability and clear up policy concerns. This will also energize state and local governments. Reauthorizations allow states to know they have a stable capital funding source going forward, which puts them in a better position to act on long-term projects.

Sullivan: Several factors will impact recovery in 2012 including:

State governments: State budget deficiencies are unlikely to improve because the economy isn’t generating jobs fast enough. For every person you hire, you hire a taxpayer. State revenues then improve and provide states breathing room for other priorities. Clearly, when states go through tough financial times, they have to shift priorities.

Federal spending: The best we can hope for in 2012 is a continuation of existing nominal funding. Every year funding remains the same, it generates less activity because inflation takes a bite. Keeping funding flat, we have a gradual decline.

ARRA continues to decline as a contributor: The stimulus money is winding down. However, $9 billion will be spent this year, adding some strength to an otherwise weak public sector.

Basu: The most substantial obstacles take the form of the accumulated national debt and ongoing federal budget deficits. Beleaguered state and local government budgets add to industry uncertainty, with spending on state highways and local roads now in decline in much of the nation. With federal stimulus monies steadily being spent down, road resurfacing and similarly situated investment may decline materially over the next two years.

Rental: Proposals for the next highway bill do not contemplate an increase in fuel taxes. Where will financing for constructing and preserving highways come from?

Beth McGinn, director of public affairs, ARTBA: There is no lack of available transportation financing choices; rather, there is a lack of political will. An increase in the federal motor fuels excise is the quickest and most efficient way to generate the revenue necessary to support expanded transportation improvements. Tolling, congestion pricing, a freight-related user fee, public-private partnerships, innovative financing and bonding on mega-projects that add capacity are all options that should be in the table.

Basu: The electorate seems to have expressed a preference for user fees relative to taxes. This implies significant use of tolling to promote infrastructure investment going forward. Higher vehicle fees, including higher gas guzzler taxes, are also possible.

Basso: There are a matrix of different revenue options on the floor including custom fees and tapping into utilities. Fuel taxes are not on the list. We will have to wait to see what our politicians come up with... whatever it is; they can’t go back to the General Funds for additional transfers.

Simonson: The Senate Finance Committee may be able to cobble together enough revenue raisers and “loophole closers” to pay for a two-year extension, but a six-year bill seems out of reach without an increase in fuel taxes or new sources of revenue — both of which seem impossible before 2013.

Congress could help by recognizing that not all spending is created equal. Investments in infrastructure add to jobs and income now, and also create or maintain assets of lasting value that improve productivity, health and safety and quality of life. These investments must be paid for, and Congress should not rule out appropriate tax and user-fee increases.