Construction's 2009 Forecast

Sept. 28, 2010

As I write this year's forecast for 2009, the National Bureau of Economic Research has officially declared that the U.S. economy has been in a recession for a year. Surprise! Many economists feel that this will be the worst recession since 1981–1982 and will continue well into 2009. States throughout the country have been revising their budgets, slashing spending and redirecting money in order to avoid deficits yet still fund critical programs.

As I write this year's forecast for 2009, the National Bureau of Economic Research has officially declared that the U.S. economy has been in a recession for a year. Surprise! Many economists feel that this will be the worst recession since 1981–1982 and will continue well into 2009. States throughout the country have been revising their budgets, slashing spending and redirecting money in order to avoid deficits yet still fund critical programs.

In October, Maryland Governor Martin O'Malley and the Board of Public Works approved over $345 million in budget reductions to balance the FY09 budget, including over $297 million in general funds, and over $50 million in special and federal funds. The board also approved the elimination of 830 state positions, bringing the total number of positions eliminated to more the 1,500.

Following the national economic downturn and the Board of Revenue Estimates projections predicting a revenue shortfall of $432 million for FY09, Governor O'Malley directed the Department of Budget and Management to cut spending in all state agencies up to 5 percent.

Over the next six years Maryland is delaying $1.1 billion worth of transportation projects, which includes postponing $20 million in spending for the proposed Inter-County Connector. The State Highway Administration will have to delay $530 million worth of projects. Projects such as the preservation and maintenance of highways, transit systems, seaports and airports, bridge maintenance and replacement, and safety projects will be fully funded in the 2009–2014 plan.

Virginia Governor Timothy Kaine has revised his estimate of the state's budget shortfall for 2009–2011 to $2.8 billion, up from an original estimate of $2.5 billion. The state announced an executive spending reduction plan in October to meet the fiscal year 2009 shortfall. The governor's plan reduces spending by making operations more efficient and reducing the scope of some government programs. The cuts include reductions in the governor's office and residence budgets, previously announced.

Governor Kaine will balance the FY 2009 budget through state agency savings and spending reductions of over $348 million and additional steps, including a withdrawal of about $400 million from the Revenue Stabilization Fund.

The new forecast predicts a decline in the general fund budget for fiscal year 2009 of 4 percent, and very slow growth — of 3.6 percent — as the recovery begins in fiscal year 2010.

Officials are feeling the economic crunch at the county level as well and are struggling to prioritize their budgets. For example, in establishing their priorities, the Prince William Board of County Supervisors approved a list that includes seeking reinstatement of $300 million in annual transportation funding in Northern Virginia as part of a regional effort.

North Carolina's Governor Mike Easley plans to fast-track more than $700 million in capital improvement projects to keep North Carolina's economy moving as the national economy continues to struggle. The governor will put several priority education and public safety projects on the Council of State's agenda for approval, which will create new jobs and help stimulate the state economy.

Governor Easley has also instructed Commerce Secretary Jim Fain to be even more aggressive than usual on job recruitment, since in a tough national and global economy the state can use its incentive programs to create future jobs. The governor expects to make several new job announcements soon.

Governor Easley also noted that going to the market with these projects now is cost effective since interest rates and building costs are lower. Economists estimate that for each dollar spent on a construction project, $2.28 is pumped into the state's economy, and that every $1 million spent on a project results in 36 new jobs, meaning these projects will produce nearly 26,000 new jobs.

"President-elect Obama and Congress will pass a new economic stimulus package early next year, and moving these projects forward will give us a two-month head start on that effort," said Governor Easley.

While the state has suffered some job losses because of the decline in the national economy, the number of people employed in North Carolina has actually increased three of the past four months, according to the N.C. Employment Security Commission.

South Carolina Governor Mark Sanford agreed with the General Assembly's plan to cut nearly $500 million from the state budget. In doing so, he also laid out seven key principles for the General Assembly to improve budgeting practices in the future, including addressing long-term commitments and liabilities like capital projects.

Meanwhile, the South Carolina Department of Transportation (SCDOT) highway and bridge construction contracts awarded August through October 2008 have been approximately $15 million under the anticipated cost estimates, apparently due to economic and market conditions. SCDOT engineers have observed increased competition among contractors seeking work in difficult economic times. The recent drop in fuel prices has also contributed to the bids below estimates.

"This will allow us to move further down our priority list of projects for critical needs across the state such as highway resurfacing or bridge projects," said Secretary of Transportation H.B. "Buck" Limehouse Jr. "Any money saved will go directly toward our state's transportation system."

Limehouse cautioned that SCDOT revenues, which come primarily from gasoline user fees, are down 5 percent in the current fiscal year beginning July 1 compared to last year. Revenues in September were down 8 percent compared to the same month in 2007.

He added that SCDOT continues to stress cost savings. Earlier this year, The SCDOT Commission voted to approve using funds from a reduction in the agency's administrative budget for the maintenance of highways and bridges. These savings total $18.7 million and represent a 16.3-percent reduction in administrative expenses.

"Any costs savings in the administrative area of the Department we are applying toward our core mission, which is the maintenance of South Carolina's existing highway system," Limehouse said.

With negative economic news dominating the headlines, an atmosphere of uncertainty as the federal government transitions to a new administration, state and local governments in limbo as they wait for news from Washington, and the private sector at the mercy of a financial market in chaos, it is difficult to make any forecast for the coming year. However, with a proposed $700-billion economic stimulus package on the horizon — and state governors asking President-elect Barack Obama for $136 billion in funds for infrastructure projects that are ready to go within 90 days — the construction industry is poised to be a key player in rescuing the economy in the years ahead.

"This is certainly a challenging and unpredictable time," states Dennis Slater, president of the Association of Equipment Manufacturers. "We need to get dollars into the construction pipeline. An immediate increase in public works funding will help jumpstart the U.S. economy. Construction projects are being deferred, and our customers are looking for work. It's estimated that there are currently 3,000 projects that could begin work within 30 to 90 days of a governmental funding commitment.

"Our aging roads, bridges and highways need repair and upgrades. Committing funds to infrastructure renewal not only provides manufacturing and construction jobs, but also helps ensure we have safe and efficient movement of goods and people. An adequate transportation network is essential to commerce and maintaining U.S. competitiveness in global markets.

"We also need a proper investment in our water infrastructure to replace an aging and inefficient system. Here too, more jobs are created at the same time that the public benefits.

"But we have learned from previous downturns how to operate more efficiently, and we are positioned for a rebound, hopefully as 2009 progresses, and into 2010. Government measures to boost infrastructure investment will play a critical role in our industry's recovery as well as strengthening the U.S. economy overall."

Transportation Sewer/Water Mic. Civil Total Highway & Heavy Buildings* Total
2007 2,543,308,275 2,483,292,501 863,749,305 5,890,350,081 25,267,939,945 31,158,290,026
2008 2,191,000,000 2,030,000,000 1,120,000,000 5,341,000,000 29,400,000,000 34,741,000,000
2009 2,500,000,000 2,210,000,000 1,350,000,000 6,060,000,000 28,400,000,000 34,460,000,000
* Excludes SF housing