Heavy construction market drivers strong but will weaken

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Jim Haughey, Reed Construction Data’s Chief Economist, reports heavy construction market drivers remain positive but are expected to weaken. Highway funding is likely to continue at the current level with no increase beyond the expiration of the current funding on September 30th. Federal heavy construction funds will get little if any increase in the 2012 fiscal year budget. However, existing appropriations authority is unlikely to be retracted based on the tentative federal spending plan announced on July 31. Forced spending cuts at state and local governments will also keep this source of heavy construction funding steady to slightly down into next year. Water and sewer projects related to site development will expand with the expected subdued building construction through next year

A small share of the constraint imposed by reduced public funds will be offset by more private involvement in public facility construction in the form of toll roads and leased back buildings.

The small private heavy construction sector will expand in parallel with economic growth. This includes communication and transportation facilities and power generation. The economic growth outlook remains subpar at least through next year so growth in private heavy construction funding will be modest.

The outlook for the power sector has become fuzzy. After a four-fold jump, power construction has been ebbing erratically lower since last year. The earlier surge was driven partly by alternative fuel power stations and related transmission lines and pipelines. Much of this was funded by federal subsidies. Expansion of these subsidies is now off them table in Washington. However, the mandates to use more alternative fuel remain. This conflict has yet to be resolved. The small solar market has the most risk because of its high cost per kwh. Solar costs could drop quickly with improved technology but not in 2011-12. The much larger wind market is price competitive at $120 /bbl oil and could possible prosper with subsidies or mandates. But again this is not likely in 2011-2012. Separately, the pipelines for shale natural gas are not subsidized; spending will continue to expand even with subpar economic growth. Read More.

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