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Editor's Report

Welcome to the Midwest Contractor 2007 Construction Forecast issue. In the pages that follow, we'll tell you how we believe the area's highway and heavy construction markets are going to stack up this year. As in past years, our forecast is highly subjective and decidedly unscientific, based very much on our "feel" for the markets in Iowa, Kansas, Missouri, and Nebraska.

January 08, 2007

Welcome to the Midwest Contractor 2007 Construction Forecast issue. In the pages that follow, we'll tell you how we believe the area's highway and heavy construction markets are going to stack up this year.

As in past years, our forecast is highly subjective and decidedly unscientific, based very much on our "feel" for the markets in Iowa, Kansas, Missouri, and Nebraska. That does not mean, however, that we think our predictions won't be accurate. To the contrary, we have been very accurate in our previous forecasts through the years and expect this year to be no different in that regard.

To arrive at our forecast, we sift through information and data provided by many sources including area departments of transportation, industry associations, and economic experts inside and outside the industry to end up with a sort of composite picture of the year ahead.

In years past, we had to make our best guess on some of the numbers, i.e., the expenditures and estimated expenditures in construction categories including transportation, building, water/sewer, power/utility, military, and civil. This year, we turned to Reed Construction Data for more up-to-date and accurate numbers and we combined our categories to just two basic areas — transportation and building — for the area forecast that begins on page 10.

Before you turn to the local construction forecast, I thought you may be interested in what two experts have to say about 2006 and the prospects for highway and heavy construction nationwide. As of this writing, though not all of the year's numbers were in, last year was a much better year for highway and heavy construction than 2005.

According to Dr. William Buechner, vice president of Economics and Research for the American Road and Transportation Builders Association, the 2006 construction market was "the most robust in more than 20 years," with the value of work on highways, bridges, airports, and transit systems up 15 percent over 2005 levels.

Fueled by increased federal, state and local highway investments, a $2.3-billion congressional appropriation for repair work on highways damaged by Hurricane Katrina and greater investments in freight rail, the total value of construction performed on transportation projects was expected to hit a record $106 billion in 2006, up from $92 billion in 2005, Buechner said.

Highway and bridge construction provided much of the driving force for the 2006 growth, he noted, as the value of construction work on highways and bridges grew about 16 percent from about $66 billion to $76.3 billion, the largest increase since 1984, when Congress was funding extra highway construction to help end a severe recession. Though some of the increased spending reflected higher construction costs, particularly for asphalt, cement and aggregates, Buechner said, the real increase in highway and bridge construction was at least 8 percent even after accounting for higher costs.

Unlike 2005 and 2006, when rising construction costs ate up part of the dollar increase in highway construction spending, Buechner said he expects that the purchasing power of construction budgets in 2007 may get an unexpected boost from declining construction material costs. The 2005-06 inflation in highway construction costs appears to be slowing and may be ending. Falling petroleum prices are bringing down asphalt costs while the growth of worldwide cement capacity may help stabilize the cost of ready-mix concrete. The Producer Price Index for highway construction materials actually fell in August and September. If costs stay down, he said, construction dollars in 2007 will buy more construction than in 2006.

Buechner forecast modest growth in the range of 1 percent to 2 percent for the U.S. highway and bridge construction market in 2007.

Last year also brought good news in heavy construction nationwide.

"Nonresidential construction spending climbed to its 13th consecutive record in September, showing that the homebuilding slide hadn't carried other segments downhill with it," said Ken Simonson, chief economist for The Associated General Contractors of America.

In the first nine months of 2006 combined, overall construction spending was up 6.6 percent from the same period of 2005, Simonson noted. Private nonresidential construction was up 17 percent and public construction rose 10 percent. The major private-sector growth categories for the year to date through September included: lodging (hotels and resorts), up 48 percent compared to 2005; multi-retail (general merchandise stores, shopping centers and malls), up 37 percent; hospitals, up 25 percent; and manufacturing, up 23 percent.

"Of the two big public construction categories, highway and street construction was up 16 percent year to date and educational had a 7-percent pickup," Simonson pointed out. "Other large components with gains included sewage and waste disposal, up 20 percent, and transportation facilities, up 7.5 percent.

"Nearly all of these categories should continue growing over the next year," Simonson concluded. "I believe the economy is still fundamentally strong, and the housing slide will have limited impacts on other segments. A bigger concern is that fast-rising materials costs have forced the delay or cancellation of many projects. Cost increases should moderate in the next few months, but materials costs will still outrun overall inflation."

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