Construction Economic News

Fiscal bills affecting construction are hung up; lending shrivels; fiscal outlook dims

September 29, 2008

Key financial, tax and spending legislation affecting construction remains hung up. Today the House rejected a financial rescue package, although the chamber is expected to reconvene on Wednesday. The House and Senate have been unable to agree on a bill to extend tax credits, due to expire at yearend, that have fueled construction of wind and solar power projects. Congress did pass a bill that would continue spending at current levels until March for discretionary spending, including highway and airport construction grants and direct federal spending on construction. President Bush is expected to sign the bill before spending authority expires at midnight Tuesday, September 30. In a conference call to states on September 22, the administrator of the Federal Highway Administration said the government projects that the highway account of the Highway Trust Fund will end fiscal 2009 (a year from tomorrow) with a balance of $1-2 billion, despite enactment this month of an $8 billion transfer from the general fund. 

Financial market turmoil is causing ever-wider problems for construction. More than 30 Data DIGest readers in the past two weeks said lenders were demanding higher collateral or equity participation from borrowers and developers, or had stopped lending altogether, although a few respondents said conditions had not changed. “Lenders are tightening credit to restaurant franchisees in a shift that could make it harder for owners to remodel existing locations and buy new restaurants,” the Wall Street Journal reported today. “The state of Maine could not float a $50 million transportation bond this week because traders told officials there was ‘no market’ at all for large financial transactions such as this one,” the Portland (Maine) Press-Herald reported on Friday. For Las Vegas casino construction, “the recent meltdown on Wall Street…won’t necessarily topple projects under way. But it will mean a longer wait before others, such as Boyd Gaming’s Echelon resort, the proposed Plaza Las Vegas resort and land intended for the now-scrapped Crown Las Vegas resort, can get in the game, analysts say,” the Las Vegas Sun reported on Sunday. “Although many industries, such as retail, have suffered more than casinos, the effect of the economic downturn on Las Vegas has been more dramatic than expected. Gambling was once believed to be resistant to recessions, but that theory has been disproved on an unprecedented scale, with the latest Nevada figures showing slot machine play off by more than a billion dollars from a year ago.”

The budget outlook is rapidly worsening for many state and local governments. Today, the Center on Budget and Policy Priorities (www.cbpp) reported, “Mid-year shortfalls have opened up in the 2009 budgets of [the District of Columbia and] at least 15 states: Arizona, Connecticut, Florida, Georgia, Hawaii, Illinois, Maryland, Massachusetts, Nevada, New Hampshire, New York, Ohio, South Carolina, Vermont, and Virginia. Current estimates of these mid-year gaps for 2009 total $5.9 billion. This new round of shortfalls is in addition to the budget gaps of $48 billion that 29 states—including 14 of the 15 states with new gaps—closed as they adopted their budgets for this fiscal year.” Many local governments will also have to trim spending, as property and other local tax receipts drop along with state government funding. Cities that have lost headquarters for major banks, such as Charlotte (home of Wachovia, whose assets were sold today to Citicorp) and Seattle (where Washington Mutual was based), may experience especially abrupt downturns. But the effect may be even greater on small towns whose community bank is forced to sell or close because losses on preferred shares of Freddie Mac or Fannie Mae wiped out much of its capital. “Camden Fine, president of the Independent Community Bankers of America, says as many as 200 of his 5,000 members have indicated they will have to raise capital because of losses in Fannie and Freddie preferred. He expects a dozen will fail and 40 will be forced to sell to a rival,” the Journal reported today. “‘This could have a chilling effect on credit in many communities,’ he said.”

"Demand for rebar steel, often used to build roads, bridges and office buildings, has fallen dramatically in the U.S. because some projects are being delayed or put on hold amid the uncertainty in financial markets, steelmakers said," the Journal reported today. “Exports for rebar steel fell in July, after six straight months of increases, indicating that demand from foreign markets likely won’t be a substitute for weak domestic growth….Steel service centers, which act as middlemen between steelmakers and steel end users, also are reporting that their inventories have been ticking steadily upward over the past few months. Steel users are limiting their steel purchases and only buying what they immediately need, fearing that they will be stuck with high-priced steel sitting in their factories.  Hot-rolled steel, a basic building block for most all steel products, is selling for about $1,000 a short ton, off about $110 from earlier this year. That is still relatively high, which should cushion steelmakers’ profits.”

Prices and demand for many other construction materials are dropping. The price of crude-oil futures for October delivery on the New York Mercantile Exchange fell more than $10 per barrel today, or nearly 10%, to settle at $96.37. Futures prices for heating oil, a close substitute for diesel fuel, fell 23 cents. Futures prices for natural gas, the feedstock for many construction plastics, fell more than 5%. Copper futures dropped nearly 6% to $2.91 per pound, lower than the year-ago price. “Shipments of aluminum extruded products by domestic producers totaled an estimated 260 million pounds during August 2008, a drop of 18% from August 2007,” the Aluminum Association reported today.