ECONOMIC FORECASTING REVIEW - Parsons Brinckerhoff

Vol. 3 • Issue 2
Construction Economic Review & Highway Cost Escalation Forecast
Machinery and Equipment – U.S. is a net exporter of
construction machinery and equipment. Equipment costs
have remained relatively stable over last few years. Decrease
in global demand and weak dollar are two factors that are
expected to affect the cost of equipment in the near future.
Given that these two are countervailing forces, we expect
equipment costs to remain stable over the next few years.
Steel – after the steep run up in 2008 and market correction
thereafter, the cost of steel has slightly rebounded in the most
recent BLS Producer Price Index (PPI) data, a 5.7 percent
increase from 2009 Q2 to 2009 Q3. We expect steel prices to
moderately increase in the next few years.
Asphalt – asphalt prices are closely correlated with crude
oil and refined petroleum prices, but there can be a lag in
the effect. As forecasted by Moody’s Economy.com, crude oil
prices are expected to spike up in 2010, which may result in
an increase in asphalt prices in 2011. Recent BLS PPI shows a
six percent increase from 2009 Q2 to 2009 Q3.
Aggregate – aggregate is a highly localized commodity, and
as such prices would vary from region to region. Relative
to other commodities, aggregates have withstood the
downward price pressures of the recession. Recent BLS PPI
data shows a 0.3 percent decrease from 2009 Q2 to 2009 Q3.
We anticipate aggregate prices to remain flat for the next few
years.
Ready Mix Concrete – concrete prices, relative to other
commodities have withstood the downward price pressures
of the recession. In fact, BLS’s PPI recently showed a price
decrease of one percent in 2009 Q3 from 2009 Q2. Over the
next few years, we anticipate a moderate increase in concrete
prices primarily because of increases in global demand and
increased transportation costs (concrete prices are closely tied
to transportation costs and energy costs in general).
Market factors affecting construction costs
Stimulus funding
The previously anticipated inflationary impacts from
stimulus funding are not being fully felt in 2009. This is
driven by two key factors.
First, only a small percentage of stimulus funds have
actually been spent. Currently, only $5.29 billion of the $30.28
billion available to the Department of Transportation have
been paid out. 1 While the Department of Transportation
spending is not the only infrastructure spending in the
American Recovery and Reinvestment Act of 2009 (ARRA),
it represents approximately 80 percent of all transportation
and infrastructure spending. 2 Given that there is at least
some anticipated lag in stimulus effects on the economy from
government spending, it is consistent that there would be no
clear impact in 2009.
It is anticipated that stimulus spending on transportation
projects will continue through 2019, with approximately
20 percent of total stimulus spending in FY 2010 and
approximately 75 percent of all spending completed by the
end of FY 2013. 3
The second key factor is that while public spending on
construction projects has increased by approximately 27
percent in the past three years, private sector spending has
fallen 32 percent. As a result, total construction spending fell
Available
Paid Out
$5.29 B
$30.28 B
$0 $8 $16 $24 $32
Stimulus spending to date
source: www.recovery.gov
The following page shows PPI from the U.S. Bureau of
Labor Statistics for construction cost components, except
Construction Labor which is the average hourly earnings
of construction workers, also obtained from BLS. For ease
of use, they have been adjusted so that all share a common
base value of 100 in 1999. This allows a clearer comparison of
growth in each index. The first six components are included
in PB’s Highway Construction Cost Index, while the last two
components are tracked as additional information sources.
The graphics show annual data from 1999 to 2007 and then
quarterly data for the past seven quarters.
USD (billions)
$1,400
Private Public
$1,159 B
$1,200
$1,000
$800
$600
$400
$200
$0
$903B
$256B
2006-Q3
200 -Q4
2007-Q1
200 -Q2
2007-Q3
2007-Q4
2008-Q1
2008-Q2
2008-Q3
Public and private construction spending (2006 – 2009)
2008-Q4
2009-Q1
2009-Q2
$936 B
$611B $325B
2009-Q3
1
Figure current as of October 30th, 2009 and accessed via www.recovery.gov.
2
Total infrastructure spending of $38.16 billion based on data published by the House of Representatives Transportation and Infrastructure
Committee (http://transportation.house.gov/Media/file/Full%20Committee/Stimulus/Total%20Infrastructure%20Investment%20Funding_Single%20Table.pdf).
3
Congressional Budget Office, March 2, 2009. Fiscal years are U.S. government fiscal years which end September 30th.
11