2017 Alaska Construction Spending Forecast.

• Author: Goldsmith, Scott
• Position: SPECIAL SECTION: Building Alaska

Overview

The total value of construction spending "on the street" in Alaska in 2017 will be $6.5 billion, down 10% from 2016. (1,2,3)

Oil and gas sector spending will fall 15% to $2.4 billion, from $2.9 billion last year.

All other construction spending will be $4.0 billion, a decline of 7% from $4.3 billion last year.

Private spending, excluding oil and gas, will be about $1.6 billion, up 2% from last year--while public spending will decline 12% to $2.5 billion.

Wage and salary employment in the construction industry, which dropped by 8.5% in 2016 to 16.2 thousand, will drop another 7.4% in 2017 to 15,000, the lowest level in more than a decade. (4)

In 2016 the Alaska economy slipped into a recession that is expected to continue at least through 2017. Total wage and salary employment fell in 2016 by 6,800, about 2%. This year it is anticipated the decline will be 7,500, or 2.3%, which will return the economy to the 2010 level. (5) Weakness in the economy is also reflected in a net outmigration of population over the last four years.

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 and Pamela Cravez have again compiled and written the Forecast. The forecast reviews construction activity, projects and spending by both the public and private sectors for 2016.

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

We recognize in these times of economic uncertainty there is a likelihood of reduced construction activity, and some of this information contained herein may change.

The construction trade is Alaska's third largest industry, paying the second highest wages, employing over 16,000 workers and contributes $6.5 billion to Alaska's 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 laying the groundwork for the future.

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.

Michael I. Shaw

CIPF Chairman

The economic decline has been the result of the precipitous drop in the price of oil that began in the second half of 2014, after it had reached a high of $110 per barrel. By early 2015 it had fallen below $50, and after moving higher for a few months it plunged again over the next year to a low close to $25 in the spring of 2016. However, since then the price has again moved up, and it has been fluctuating around $50 as the new year begins.

The outlook for the price remains unclear as the world oil market struggles to balance slowly growing demand with uncertainty about future supply. Because of the importance of petroleum to the Alaska economy, this uncertainty surrounding world oil (and gas) markets is a source of concern about the underlying strength of the economy in the future.

The drop in oil prices was first reflected in a decline in employment in the oil patch, and then last year--as the decline in the oil patch accelerated--construction and state government employment also started to fall. This year employment is expected to be lower in almost all sectors and regions of the state. But the decline in construction activity will be somewhat less than it was last year, for several reasons.

First, federal spending will be higher because of increased spending for national defense. Federal spending not related to defense, mostly consisting of grants to the state for transportation (roads, harbors, the railroad, and the ferry system) and sanitation projects, and to non-profits for health facilities and housing. It is not sensitive to the price of oil and tends to be stable from year to year.

Second, although state government spending will be lower, particularly for education, there will still be state money on the street. The drop in oil prices has resulted in huge state general fund deficits since fiscal year 2014, and the capital budget--excluding federal grants--has fallen to less than $200 million in the last three years, down from more than $2 billion in 2013. But because it takes considerable time for appropriated funds to become cash on the street, there is still money in the pipeline--although less than last year.

Third, private spending excluding oil and gas will be marginally higher, mostly due to construction related to health care. Strength in that sector will offset declines in residential and commercial construction, both of which will be lower because of the weakness in the overall economy and uncertainty about the state government's ability to deal with the deficit.

Fourth, the decline in activity in the oil patch will be less than last year. Reductions in spending last year brought the level close to a "bare minimum" to maintain production from existing fields. A large share of activity for developing new reserves in existing and new fields was postponed. But now, as the oil price is showing signs of some recovery, some of those postponed projects could be resumed.

As in past years, some firms are reluctant to reveal their investment plans, because they don't want to alert competitors; and, some have not completed their 2017 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, we can expect some surprises as the year progresses.

Privately Financed Construction

Oil & Gas: $2,430 Million

Construction spending related to oil and gas will be lower for the second year in a row, but the decline will be less than last year.

Oil and gas is always a difficult sector to forecast, because plans can and do change, and because of many factors associated with weather, logistics, the availability of contractors and supplies, the evaluation of work completed, regulatory and environmental challenges, tax policy, and other operational and strategic concerns.

This year is a particular challenge because of the uncertainty surrounding the price of oil.

Consequently, many companies have announced a "wait and see" attitude about moving forward with development projects.

The decline last year resulted from completion of a number of massive one-time projects on the North Slope, as well as the low price of oil.

The large projects completed included Exxon's development of the technically challenging Point Thomson field east of Prudhoe Bay, ConocoPhillips' development of...