Election, Markets Send Mixed Messages

Voters on Election Day approved a huge schedule of state and local bond and tax issues in support of infrastructure spending for schools, colleges, other public buildings and highways. The Bond Buyer estimated that successful bond issues alone totaled $54 billion, the second-highest total after 2006 and about 82 percent of issues on the ballot. The presidential and congressional election results make it more likely that infrastructure spending will be part of a new fiscal stimulus bill, either this month or early in 2009. In the long term, an Obama administration may be more supportive of a larger surface transportation funding bill once Congress gets around to writing a replacement for SAFETEA-LU, the funding bill that expires on September 30, 2009. Meanwhile, however, credit markets, economic indicators and state and local receipts are all pointing to tough times in the near term for contractors. Municipal bond markets have reopened to some state and local borrowers, but developers continue to have trouble lining up bank financing. The dismal news about job losses, shrinking consumer spending, weakening exports and business investment make many private projects less attractive than they were a few months ago. Plunging portfolios have forced universities and hospitals to postpone construction that they expected to fund from endowment earnings or capital campaigns. Tumbling tax receipts are causing governors, mayors and school boards to rewrite budgets, often by deferring construction projects. Owners who do go ahead with projects will be pleasantly surprised in many cases by how much less they cost than they would have a few months ago. As of November 10, the national average retail price of diesel fuel had fallen 38 percent from the peak in July to $2.94 per gallon, a 14-month low. Steel and copper prices are also beginning to skid, and other key materials are likely to drop over the next several months. Contractors and subcontractors are eager to bid. These conditions should spur both public and private owners to launch construction in 2009, especially since materials prices could resume their upward march in 2010 if world economic growth accelerates again. But getting the go-ahead may require a lot of persuading. For more information, contact Ken Simonson at (703) 837-5313 or simonsonk@agc.org.