Editor’s Note: This is an abbreviated report* from a national overview of the construction economy builds from the states up. California, the largest state economy, showed up as the twelfth largest contributor to its state economic growth at 5.8 percent, well above the national average of four percent. The numbers are from 2016, the most recent data available…and construction in California has been more robust this year…we just don’t know how much.

According to a report released just before Thanksgiving by Associated Builders and Contractors (ABC), the private construction industry’s value added as a percentage of the nation’s real gross domestic product (GDP) rose to 4 percent in 2016, the highest level since 2009.

The report also shows annual growth in real construction spending, which rose 3.5 percent in 2016. Thirty-seven states benefited from the rise in construction activity in their state, while 13 states experienced a reduction in activity.

“Although the relative impact of the value added by private construction on various state economies varies both among states in a particular year and within a state over time, every state benefits from construction activity,” said Bernard M. Markstein, Ph.D., president and chief economist of Markstein Advisors, who conducted the analysis and prepared the report for ABC. “The increase in that activity in a particular year adds to the income and potential growth of each state. A decline in that activity acts as a drag on a state’s economic performance.”

The 3.5 percent national increase in real construction spending was a slowdown from the 4.9 percent increase in 2015. Only 18 states had a greater growth in real construction spending in 2016 compared to 2015.

Construction has always played a vital role in the nation’s economy despite some ups and downs. From 1999 through 2015, real (inflation-adjusted) construction investment (both residential and nonresidential) varied from 5.1 percent of real gross domestic product (GDP) in 2010 and 2011 to 9.4. percent of GDP in 1999. In 2015 and 2016, construction investment was 6.2 percent of GDP.

Outlook for Government Infrastructure Projects

Politicians have been talking about the pressing need for investment in U.S. infrastructure for well over a year. Yet little has been done to carry out these promises to meet these needs. Opposition to raising taxes, even for badly needed infrastructure projects, remains strong among politicians, even though several surveys show the public is willing to accept higher taxes for infrastructure projects—particularly highway projects. Public-private partnerships have partially filled the gap. Despite both the president and Congress endorsing large investments in infrastructure, little has happened at the federal level. Until our politicians resolve their differences, little is likely to change.

One of the issues that continue to vex our representatives is providing funding for the Highway Trust Fund (HTF). The HTF is mainly funded by the federal gas tax, which has not been raised in more than 20 years. Occasionally Congress transfers funds to the HTF. Attempts to raise the gas tax have gone nowhere (again despite numerous surveys indicating the public would be willing to accept an increase in that tax if it meant better roads). More fuel-efficient cars have made funding the HTF through this tax more problematic.

Several states have experimented with different ways to raise money for highway construction. Ultimately, these experiments may provide the roadmap to solving this problem. However, it could be a long time before a solution is reached at the federal level. Recognizing that more funds are unlikely to come from the federal government, many states have devoted more funds to highway projects, though not enough to replace what came from the federal government in the past.

The nation’s infrastructure problems are not confined to highways and bridges but include everything from our power grid to water and sewer systems. Although the private sector can be expected to invest in some of this infrastructure, the outlook for significant government investment in infrastructure is bleak at this point despite major needs for maintenance, repair and upgrade. Total investment in infrastructure is headed down this year and is projected to advance in line with inflation next year.

*for the ful l report, visit http://www.abc.org/NewsMedia/ConstructionEconomics/StatebyStateConstructionEconomics/tabid/7497/entryid/9801/constructions-contribution-to-u-s-economy-highest-in-seven-years.aspx

By Dr. Mark Gray,
CICWQ Chief Consultant