Last year will be remembered for several things, including rampant inflation, rising interest rates, geopolitical conflict, and a contentious midterm election. It was also the first full year after the federal government passed major infrastructure legislation in years in 2021. The Infrastructure Investment and Jobs Act encompasses approximately $550 billion in new federal investment in America’s roads and bridges, water systems, and more.
Additional legislation was passed in 2022, including policymaking focused on attracting more computer chip manufacturing to America and accelerating the shift to renewable energy. President Biden signed the Chips and Science Act into law on August 9 of last year. The bill includes more than $52 billion in support for American companies producing computer chips. Intel, Micron, TSMC, and Texas Instruments are among the companies poised to invest billions of dollars in manufacturing facilities. America’s emerging industrial development policy further supports the notion that the next few years will offer plentiful numbers of mega-projects, including those taking the form of roadway and bridge improvements that better connect the nation’s burgeoning supply chains.
That’s not all. Many state and local governments are flush with cash intended for infrastructure improvements. There is also an urgent public safety motivation to move projects forward. According to an American Road and Transportation Builders Association (ARTBA) report from February 2022, there were more than 43,000 “structurally deficient” bridges in the U.S. Even more worrisome is the fact over 167 million motorists cross these bridges daily. The report goes on to note that roughly 224,000 bridges, or approximately 36% of all bridges nationwide, require major repair work. ARTBA indicates that the cost of repairing these structures is $260 billion.
For years, that figure was merely of passing, theoretical interest. But now with more money available at federal, state, and local levels, many projects are set to move ahead. The U.S. Department of Transportation allocated a bit less than $60 billion in infrastructure related projects for FY2023. The funding will go to a variety of projects, including bridge repair and highway and road renovation. For instance, the Bridge Formula Program represents the “single largest dedicated bridge investment since the construction of the interstate highway system – providing $26.5 billion to states, the District of Columbia, and Puerto Rico over five fiscal years.” In short, the outlook for highway contractors has never been better since perhaps the 1960s.
Challenges
So far so good. But the landscape is not issue free. Higher interest rates may induce certain agencies that purchase construction services to postpone projects or perhaps downsize them. Fears of recession remain pervasive, which may render state and local department of transportation officials more cautious in their decision-making regarding project starts and scale.
But the challenge that rises to the top continues to be America’s shortage of skilled construction workers. Years of retirement, cultural and educational shifts, low fertility rates, declining labor force participation, especially among men, and altered immigration policy have produced a perfect storm of stunted human capital formation. The Associated General Contractors of America indicates that nearly four out of five constructions firms have suffered difficulty staffing up fully. The dearth of qualified workers and associated inflated labor costs had already been pushing out deadlines and exploding budgets before recent legislation. Circumstances are set to become meaningfully worse.
As of December 2022, there were 388,000 available, unfilled jobs in the nation’s construction industry. The figure was higher earlier last year when homebuilding remained among the nation’s hotter industry segments. With the Federal Reserve tightening monetary policy and driving borrowing costs, including in the form of mortgage rates higher, homebuilding activity has softened. However, available research suggests that the elasticity of substitution between residential construction workers and those who specialize in public works construction is limited. In other words, the weakening of the nation’s homebuilding segments is unlikely to provide a meaningful number of relevant workforce to road and bridge builders.
There’s more. Not only have workers become meaningfully more expensive in recent years, but so, too, have a variety of construction materials. While certain construction materials prices dipped last year, including oil and steel prices, other materials became far more expensive. Between December 2021 and December 2022, overall construction input prices rose 7.9%. Concrete product prices were up 14.8%, due primarily to a shortage of cement. Meanwhile, the price of inputs in the category that includes prepared asphalt expanded nearly 12%.