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The Benicia-Martinez Bridge is under construction on the Carquinez Strait, about 50 miles east of San Francisco. Transportation spending should be especially strong in California.
Public works

Nonbuilding, or public works construction increased 14% through the first eight months of this year. Highway and bridge construction were strong at the end of the summer, as were the sitework and miscellaneous categories, thanks partly to the World Trade Center memorial site in New York and a new $200 million racetrack and stadium project in Pennsylvania, according to McGraw Hill Construction.

FMI's Ellis says new highway bill spending, power plant construction, hazardous waste cleanup, and water and sewer projects will keep the public works sector humming for the foreseeable future.

Transportation construction will be particularly strong in California. The fiscal year 2007 budget approved during the summer allocates $5 billion for new projects, an $800 million increase over the previous year, and a $900 million increase over 2005. California voters also were asked to approve a $37 billion general bond issue in November, which includes $20 billion for transportation projects.

“We expect the broad strength in public infrastructure and private nonresidential construction in our markets to more than offset weaker residential activity in certain key markets,” according to Birmingham, Ala.-based Vulcan Materials. “As a result, we expect our full year aggregates shipments to increase 2% to 4% from the record 260 million tons shipped in 2005.”

Construction inflation

Oil's price drop of more than $20 a barrel late this summer and in early autumn has brought relief to the construction industry, both in materials and transportation costs. For instance, The Wall Street Journal reported that while overall inflation crept up 3.3% in 2004, steel and iron prices surged 34%. Lumber was up almost 17% and gypsum was up 20%. Such increases continued in 2005 and the first half of this year.

Still, the producer price index (PPI) for construction materials rose 0.3% in September, the same as in August, and it increased 8.1% from 2005, or nine times as much as the general PPI.

“Contractors will get good news for the next few months relative to the artificially high post-hurricane prices of last autumn,” said Ken Simonson, chief economist for the Associated General Contractors of America.

“Also, the steep drop in home construction will drive down prices for gypsum wallboard, which will help nonresidential building contractors,” Simonson added. “Falling diesel prices are helping contractors. But construction material costs over the next year will rise at least 6% to 8%, versus 2% to 4% for the overall economy.”

Overall, 2007 looks slightly weaker than 2006, but no one expects a recession. Inflation is under control, leaving many to believe the U.S. Federal Reserve won't raise interest rates and may even be on the verge of a series of rate cuts starting later in 2007. In anticipation, this is why the Dow Industrial Average hit a record high in October, reaching 12,000 for the first time.