Alaska Construction Spending Forecast Excerpt


Spring_2019 Alaska Construction Spending Forecast Excerpt

Total value of construction spending to increase for second year in a row

By Scott Goldsmith,
Institute of Social and Economic Research,
University of Alaska Anchorage

Dear Alaskans,

The Construction Industry Progress Fund (CIPF) and the Associated General Contractors of Alaska (AGC) proudly offer the Alaska Construction Spending Forecast as a guideline to construction activity and its effect on the 49th state in the year ahead.

Under a special arrangement with the Institute of Social and Economic Research (ISER) at the University of Alaska Anchorage, Scott Goldsmith has again compiled and written the “Forecast.” The Forecast reviews construction activity, projects and spending by both the public and private sectors for 2019.

CIPF and AGC are proud to make this publication available annually and are confident it provides useful information for many of you.

The total value of construction spending in Alaska in 2019 will be higher for the second year in a row. We are pleased to present the positive news that the research has indicated for the next year.

The construction trade is Alaska’s third-largest industry, paying the second-highest wages, employing over 16,000 workers and contributing $6.5 billion to the Alaska economy.

The construction industry reflects the pulse of the economy, and when it is vigorous so is the State’s economy. Therefore, it is imperative to keep building and repairing necessary infrastructure for the future, thus laying the groundwork for better times ahead.

AGC is a nonprofit, full-service construction association for commercial and industrial contractors, subcontractors and associates. CIPF is organized to advance the interests of the construction industry throughout the State of Alaska through a management and labor partnership.

— Larry Bell
CIPF Chairman

OVERVIEW

The total value of construction spending “on the street” in Alaska in 2019 will be higher for the second year in a row at $7.2 billion, up 10 percent from 2018. Our revised projection for 2018 was $6.6 billion, slightly higher than the original estimate of $6.5 billion.

We define construction spending broadly to include not only the construction industry as defined by the U.S. Department of Commerce and the Alaska Department of Labor but also other activities. Specifically, our construction-spending figure encompasses all the spending associated with construction occupations (including repair and renovation), regardless of the type of business where the spending occurs. For example, we include the capital budget of the oil and gas and mining industries in our figure, except for large, identifiable equipment purchases such as new oil tankers. Furthermore, we account for construction activity in government (like the carpenter who works for the school district) and other private industries. The value of construction is the most comprehensive measure of construction activity across the entire economy.

“On the street” is a measure of the level of activity anticipated during the year. It differs from a measure of new contracts, because many projects span more than a single year.

Excluding the spending attributable to the 2018 earthquake, spending will be $7 billion, up 8 percent from the previous year.

The increase is primarily due to an increase in petroleum spending, which will grow 13 percent to $2.7 billion, and national defense spending, which will also grow 13 percent to $700 million.

Most other sectors will also see a modest increase in spending in 2019. Private spending excluding petroleum will increase 2 percent to $1.7 billion, and public spending excluding national defense will increase 5 percent to $1.9 billion.

The growth in petroleum spending is attributable to several factors, including many recent large discoveries on the North Slope, technological advances driving down the cost of development, positive federal and state policies towards the industry, and a higher oil price. Spending in future years should continue to increase.

A temporarily high level of national defense spending is due to two projects at the military bases near Fairbanks. One is the missile defense installation at Clear and Greely, and the other is the preparation for the arrival of two F-35 squadrons at Eielson. High national defense spending after this year will depend on the approval of new projects like the Moose Creek Dam in
Fairbanks.

Other private spending growth will come from the mining industry, where several larger mines have expansion projects underway.

Spending will be cautious elsewhere as the economy continues to recover from the recession. Total Alaska employment is forecast to increase slowly in 2019 (0.4 percent) after three years of contraction, but state population experienced a second year of decline in 2018. And as the state Legislature begins to consider the fiscal year 2020 budget, a $1.6 billion deficit is forecast. Without a clear plan to deal with this deficit and the longer-term fiscal gap facing the state, private investors will remain cautious.

Public spending excluding national defense — federal, state and local — will be stable or slightly increase this year. Federal funding for some programs such as highway construction tends to increase each year by a fixed percentage. The state capital budget was a little larger in fiscal year 2019 than the year before, and local government spending, which tends to be for basic infrastructure such as fire stations and water and sewer upgrades, is generally stable from year to year.

Wage and salary employment in construction will increase 5.8 percent to 16.4 thousand, according to information from the Alaska Department of Labor.

As in past years, some firms are reluctant to reveal their investment plans, because they don’t want to alert competitors; also, some have not completed their 2019 planning. Large projects often span two or more years, so estimating “cash on the street” in any year is always difficult — because the construction pipeline never flows in a completely predictable fashion. Tracing the path of federal spending coming into Alaska without double counting is also a challenge, and because of the complexity of the state capital budget, it is always difficult to follow all the flows of state money into the economy.

We are confident in the overall pattern of the forecast — but as always, some surprises can be expected as the year progresses.