Factory output, utilization rose in June; high oil prices affect contractors, road funds
Industrial production at mines, utilities, and factories all moved up strongly in June, with a combined increase of 0.8%, seasonally adjusted, the Federal Reserve reported today. Manufacturing output increased 0.7%. Production of construction supplies rose 0.4% for the month and 6.3% since June 2005. Factories operated at 82.4% of capacity, the eighth straight month above the long-term average capacity utilization rate of 81%. Together, high rates of output and capacity utilization can trigger demand for factory construction.
The national average retail price of on-highway diesel fuel rose to $2.93 per gallon today, the Energy Information Administration reported. The increase from last week was only 0.8 cents, but that was still enough to bring it to the highest level ever except for the four weeks immediately after Hurricane Rita struck last fall. Today’s price was 53 cents (22%) higher than a year ago. Contractors use on- and off-highway diesel (the latter costs about 45 cents per gallon less because it is not subject to federal and state highway fuel taxes), and pay diesel fuel surcharges on deliveries. The average price of gasoline rose 1.6 cents from last Monday to $3.03, 70 cents (30%) higher than one year ago and second only to the post-Katrina record of $3.12. Diesel, gasoline and asphalt prices are being pushed up in part by record prices for crude oil. The August futures contract for “light sweet crude” reached an intraday record of $78.40 a barrel on the New York Mercantile Exchange on Friday before settling at an all-time closing high of $77.03. Today that contract skidded $1.73 to settle at $75.30.
The high fuel and asphalt costs are eating into state highway construction budgets and trimming gas tax receipts. The Business Journal of the Greater Triad Area (North Carolina) reported on Friday, “the state's road-building fund has shrunk due to an anticipated $720 million cut from the federal government and an anticipated $200 million budget shortfall from the state largely because of less revenue,” citing Ernie Seneca, spokesman for the N.C. Department of Transportation. “Double-digit inflation for highway construction hasn't helped things either, and with the rising price of asphalt, the money isn't going as far. For example, the project cost of the eastern leg of the Northern Beltway in Winston-Salem could rise from an estimated cost of $351 million to $657 million, an 87% increase.”
On Tuesday, the Office of Management and Budget (OMB) released its Mid-Session Review, revising budget estimates published in February, including estimates for federal Highway Trust Fund (HTF) receipts through fiscal 2009. The February budget had projected a surplus in the Mass Transit Account but a deficit in 2009 in the Highway Account, using spending levels set by SAFETEA-LU, the 2005 surface transportation reauthorization act. The new estimates increased receipts for the Highway Account, but not enough to eliminate the 2009 shortfall, and reduce the 2009 surplus in the Transit Account. Reportedly, gasoline tax receipts have been weaker than expected, because higher-than-anticipated gas prices have depressed sales volumes. Excise taxes on truck and tire sales have exceeded earlier estimates, thanks to strong “pre-buying” of 2006 trucks to avoid price increases and uncertainty over performance of 2007 trucks, which will have new engine and fuel systems and will require pricier, ultra-low-sulfur diesel fuel. Heavy-vehicle use tax receipts may have increased due to improved compliance now that truck owners must pay the entire tax at once rather than in installments. The truck, tire, and use taxes go only to the Highway Account; fuel taxes are split.
Property tax receipts, the basis for many local-government and school-district construction budgets, are being affected at varying rates by the slowdown in house prices. The Washington Post reported on Tuesday, “The era of double-digit property assessment increases for northern Virginia homeowners appears to be over. Government officials say a rapidly cooling housing market means residents can expect minimal growth in the value of their property this year, perhaps as little as 1%....Homeowners in Maryland and the District [of Columbia] are not expected to have the same drop-off in soaring valuations, even though home sales in these areas are also down sharply. Unlike Virginia real estate, Maryland properties are reassessed every three years, so the upcoming valuation will reflect the huge appreciation that occurred in 2004 and 2005. District properties, although reassessed annually, usualy reflect a two-year lag….[Fairfax County, Virginia] Board Chairman Gerald Connolly said…’The schools will be looking at one of the smallest budgets in terms of growth they’ve seen in decades.’” Other regions have had sharp drops in home sales but not necessarily declining prices. The Wall Street Journal reported on Friday that in Los Angeles County, home-sales volume in May was “down 11.6% compared with the 2005 period. Though sales volume is slipping, the median price of a home in the county rose 13.5% from the previous month…, second-biggest gain in state. Miami home sales [in May were] down 26% comared with the 2005 period. Median prices for single-family homes were up 1% from...the year before…San Francisco home sales [fell 18% but] year-over-year price increases were in the single-digit range.” Meanwhile, hotel property taxes took “the biggest annual jump since 1987,” USA Today reported on Wednesday.
The Data DIGest is a weekly summary of economic news; items most relevant to construction are in italics. All rights reserved.
Ken Simonson, Chief Economist, Associated General Contractors of America
Phone: 703-837-5313 · Fax: 703-837-5407 · simonsonk@agc.org
