What's in Store for Congress' Next Highway Bill?
D.C. gridlock creates near-term uncertainty for construction-related companies.
As construction-related companies wrap up an eventful summer season interrupted by hurricanes, flooding, drought, fire, excessive heat, and other natural disasters, we think the modest demand gains driven by the traditional seasonal uptick may not be enough to alleviate the underlying weak work flows these companies are facing. Overcapacity remains stubbornly high, and we still anticipate some further weakness in the near term. The tepid construction environment has led to a record level of unemployment in the industry and unprecedented belt-tightening across the board during the past couple of years. Although most of the industrial sector in the U.S. economy enjoyed at least a couple quarters of upbeat earnings and expanding margins, the engineering and construction industry and building materials companies have been in solid recession territory throughout the year. One of the most troubling indicators is the perceived deterioration in public infrastructure market conditions. The spread between infrastructure work that needs to be done and the availability of public financing remains wide, and sentiment supporting spending has become weaker since the most recent raucous debt-ceiling debate. The reading of one leading indicator--the Architecture Billing Index--has not been supportive for the industry development six to nine months down the road, consistent with the weakness in sentiment for construction activity.
The Highway Bill has been extended through March 31, 2012. The Highway Trust Fund was created in 1956 as a dedicated funding source for building and maintaining the nation's transportation system with user fees. Prior to the HTF program, the federal government funded highway construction through general funds (general tax receipts, including income taxes and fuel taxes). The dedicated source of HTF funding is fuel taxes, which include the 18.4 cents per gallon gasoline tax and the 24.4 cents per gallon diesel tax. All of the tax rates were last updated in 1997 and have not been indexed for inflation or subject to change since. We're currently operating under the eighth extension of SAFETEA-LU, the highway bill that was signed into law in 2005 and originally was set to expire on September 30, 2009. SAFETEA-LU, which is the guaranteed minimum funding for highway, safety, and public transportation for the 2005-10 period, totals $244.1 billion (averaging $40.67 billion per year). In the past few years, spending levels have actually not been fully supported by fuel taxes, requiring the federal government to transfer money from the general fund every year to make up the difference. In mid-September, Congress extended SAFETEA-LU through March 31, 2012, after much 11th-hour wrangling between the two major political parties. The new short-term extension should give politicians additional time for further negotiation before deciding on a new multiyear bill. However, the gap between the two parties has never been wider, which may mean another round of wrangling or even another extension. The current extension calls for the same level of funding for highway transportation, and the next step is for Congress to appropriate the authorized funds.
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