Construction forecast down 10 percent

  • The Juneau Brotherhood Bridge, originally constructed in 1964, was replaced by Orion Marine Contractors in 2015. Construction spending is projected to fall 10 percent in 2017, to about $6.5 billion according to University of Alaska economists. (Photo/Courtesy/Orion Marine Contractors)

Those who attended the 2017 Associated General Contractors of Alaska forecast on Thursday heard many of last year’s talking points: Construction forecasts are down, again, the Legislature is at fault, again, but things aren’t as bad as they seem. Again.

Every year the University of Alaska Anchorage Institute for Social and Economic Research, or ISER, compiles data for AGC to project how much job-creating construction will happen in recession-struck Alaska.

In 2017, ISER professor emeritus Scott Goldsmith said construction spending will fall another 10 percent from 2016, from $7.1 billion to $6.5 billion. This will in turn drop the overall number of construction jobs to roughly 15,000, the lowest level in a decade.

Last year, ISER projected an 18 percent decline in spending from 2015, bringing the year back to 2013 spending levels.

As with last year, AGC-Alaska Executive Director John MacKinnon described the short-term outlook for state construction spending with the word “challenging.”

Also like last year, MacKinnon said the recession won’t be as bad as the oil price-driven recession in the late 1980s.

“We’ve got a lot of good here,” he said. “We’re a lot more resilient. In ‘86 we were a lot younger demographic. The impact of the economy in 1986 was a lot more severe that it is today.”

Spending cuts

ISER lumps construction spending into public, which includes federal, state and local spending, and private, more than 60 percent of which is the oil and gas industry.

As with last year, the oil and gas sector will see a 15 percent dip in spending, rounding this year’s spend out to $2.4 billion.

Utilities, the largest chunk of non-oil and gas private construction spending, will go down 1 percent in 2017, driven mainly by fewer projects by telecommunications companies.

The second-largest non-oil and gas private sector, healthcare spending, stands out with a huge projected growth of 55 percent, which is itself carried in large part by record-breaking amounts of federal money.

This growth is largely attributed to the Yukon-Kuskokwim Health Corp.’s new $287 million clinic and hospital in Bethel. YKHC received a $165 million U.S. Department of Agriculture loan for the project, the largest single loan the USDA has ever approved, according to corporation leaders.

Residential construction spending will drop 21 percent to $277 million, driven in large part by statewide declines in residential homebuilding demand.

According to statistics, Anchorage, in which 40 percent of Alaska’s population lives, had fewer residential construction permits in 2016 seen since 2000.

Statewide, every other area is seeing the same pattern with the exception of the Mat-Su Valley, according to Goldsmith and municipal records.

Public construction will go down 12 percent from last year, with every category except national defense taking a hit.

National defense is the largest bracket in public spending, as Alaska’s federal defense budget is larger than that of any other state, according to Goldsmith. More than $561 million was appropriated by Congress for the 2017 fiscal year for military projects at Eielson Air Force Base in Fairbanks includes a new flight simulator in preparation for new squadrons of F-35 fighters and upgrades to the base’s heat and power plant.

Upwards of $1 billion will be invested in missile defense systems over the coming years at Clear Air Force Station near Nenana and Delta Junction’s Fort Greely.

Highways and roads, the next largest public building sector, will go down 4 percent.

Especially hard hit in the public domain is education, which ISER forecasts a whopping 48 percent decrease in construction spending.

Looking for the upside

Capping both sides of the spending projections were appeals to positive thinking and state solutions.

Goldsmith agreed with MacKinnon, saying Alaska’s situation isn’t as bad as people may think, or that it can’t get any worse.

Anyone who says different doesn’t know what he’s talking about, Goldsmith said, contending economists who predict a gloomy outcome.

“I am not sure I would buy this,” Goldsmith said of an Alaska-Dispatch News article written by columnist Charles Wohlforth, citing Northern Economics vice president Jonathan King and warning of another three years of recession with a “smaller, poorer Alaska” on the other side.

“I think any economist who tells you he knows what’s going on is not being entirely honest with you,” Goldsmith said. “We’re not sure what’s going on. What it does tell us is that the economy is at this moment fragile, and we don’t want to do something to cause it to go off a cliff if we can avoid it…that headline might be a little bit of an overstatement.”

Goldsmith went on to claim that oil and gas spending cuts are “hitting a floor,” and that state and local construction spending “can’t go down any lower, right?”

Goldsmith’s analysis teetered slightly, acknowledging that oil and gas spending “will probably not turn around anytime soon, and neither will state spending.”

However, Goldsmith said, “it looks like we may be starting to bottom out in terms of oil and gas capital expenditures.”

Goldsmith bases this perception on oil prices, which have risen to more than $50 per barrel and he said may move higher, and outlook for certain Alaska producers.

“There’s been some drive to reduce costs, not only in Alaska but nationwide,” he said. “That makes things look a little more attractive. ConocoPhillips announced they would be spending the same this year as last. Several of the companies like Caelus and Armstrong pulled back last year because the price was low, and they may be taking a second look at this and starting to bring those projects back.”

As with last year, MacKinnon and Goldsmith used the opportunity to appeal to the Legislature to find a solution to the $3 billion budget gap being discussed in Juneau.

Legislative gridlock and the State of Alaska’s spending habits, he said, fed both a negative reality and a pessimistic outlook.

After Goldsmith warned the Legislature not to “kick the can” on a budget fix and cause economic uncertainty, MacKinnon pointed to an oil price analysis that shows a fairly steady $50-per-barrel trend.

“We used to be able to get along great at $50 a barrel, but that was before we had bad spending habits in the state of Alaska, and we’re going to have to change those habits very soon,” he said. “Last year we predicted an 18 percent drop (in construction spending). Lack of action on the part of the Legislature helped us meet that goal.”

DJ Summers can be reached at [email protected]

01/27/2017 - 2:38pm