Spring 2002 

 A 5.8% rise in highway construction spending is expected in 2002 after a 10.5% gain last year.  After a burst of spending during the unusually warm winter the pace of spending will ease in the spring as some projects planned for the spring were advanced to winter.  Then spending growth will slip further in the second half of the year as state and local governments begin lean new budgets. Yes, highway trust funds are separate accounts.  But budgets will be balanced, if necessary, by trimming highway construction and repair costs.  The good news is that the overall economy is already rebounding from the near recession more quickly and strongly than expected.  As a result, 2002-2003 fiscal year public finances will generally be better than early 2002 budget plans. There are unlikely to be many interim cuts in highway spending.  Restored general rust fund revenues means that calendar year will begin subpar for highway contractors but will finish will spending growth at least average.

However the cost outlook for 2002 is favorable.  Credit considerable slack in the US economy as well as abroad restraining commodity and labor costs. Although they will be rising during the year, asphalt costs should be near the 2001 average.  Ready-mix and cement price gains will be about 1%.  Equipment price inflation should remain well under 1%.  However precast concrete prices will jump 3-4%.  The steel price outlook is fuzzy.  Inflation in an open market would be 0-1% but the new import duties recently imposed by the US could pump up prices quickly in the spring, but only temporarily.  The US action is certain to be reversed by the World Trade Organization.

While rising again and likely to rise up to $0.20 more through yearend, both diesel and gasoline pump prices will average about 10% lower than in 2001. Then prices will rise more in 2003, probably reaching “above average” levels as the worldwide economy expands faster Cheap fuel will directly boost contractors’ margins and indirectly spur equipment sales in 2002.  The reverse happens the following year as energy markets continue to tighten. 

Energy demand is extremely sensitive to changes in economic activity. Inventories of crude oil, refined products and natural gas, are above normal for this time of the year and can absorb the initial surge in demand as factories raise production and recall workers.  But a year later increments to demand will exceed readily available supplies, prompting prices to rise and inventories to decline.  So next year we will be at risk again or temporary price spike of availability problems arising from supply disruptions.