Alaska's Construction Spending, 2010 Forecast

Abstract

The total value of construction spending “on the street” in Alaska in 2010 will be $7.0 billion, down 3% from 2009.1,2,3 Wage and salary employment in the construction industry will continue the slow decline which began in 2006, but the level remains above the long-term average for the industry. Excluding the oil and gas sector—which accounts for 43% of the total—construction spending will be $4.0 billion— down 4% from 2009. Private-sector construction spending will be down only 1% from 2009, to $4.4 billion, in spite of the slowdown in the Alaska economy. Oil and gas sector spending will be flat. Spending will increase in the utilities and hospitals4 categories but will decline in mining, residential, other commercial, and the other rural basic sector categories. Public construction spending will be down 5%, to $2.6 billion, in spite of the infusion of cash from the American Recovery and Reinvestment Act (ARRA). Although some categories of federal spending will be higher, many will be lower and state spending will also be lower because of the lean FY 2010 capital budget. Uncertainty in this year’s forecast comes from several sources. As we start 2010 there is no clear indication if the national economy is starting to recover from the recession, and if it does, how strong that recovery will be. Although Alaska has been insulated from the worst effects of the recession—the crash in the housing market, high unemployment, and lack of credit—concerns about the national recovery will continue to influence investment decisions in the state, particularly in the commercial and residential markets. Local government capital spending is also vulnerable to reductions in tax revenues from activities, like tourism, driven by the national economy. The passage of the American Recovery and Reinvestment Act (ARRA) in early 2009 has provided an important boost to construction spending this year. A second stimulus may be undertaken later this year, but it is too soon to speculate on how that might impact construction spending, so we assume no further federal action. The Alaska economy contracted in 2009 for the first time in 22 years—but the reduction in employment was only about 1%. Forecasts for Alaska’s economy in 2010 vary from further moderate declines in employment to a resumption of growth. This difference of opinion underscores the sense of caution in the business community about the near-term prospects for the economy. As the year begins, petroleum and precious metal (gold and silver) prices are strong and rising, and base metal prices (zinc) have rebounded from the lows of last year. Petroleum and mining capital budgets are particularly sensitive to these prices, which are likely to continue to fluctuate throughout the year. We assume these prices remain strong throughout the year.