January 11, 2019 1

January 2019 Construction Cost Outlook and Forecast

January-2018 POST-FORECAST REVIEW:

The Ohio DOT Construction Cost Index measured inflation for CY2018 at 3.5%1. In January 2018, we

forecast Ohio DOT’s CY2018 construction cost inflation would be 3.4%. Figure 1 illustrates the first

sustained climb in construction inflation since 2015. We expect liquid asphalt, structural steel,

aggregate, and concrete prices to drive inflation in 2019. Actual inflation was 0.1% higher than

predicted.

Figure 1

January-2019 FORECAST OVERVIEW:

The Ohio DOT Construction Cost Inflation Forecast is presented in Table 1. We predict construction cost

inflation to be 3.1% in CY2019, a decrease of 1.0% from the 4.1% forecast in January 2018. Inflation is

expected to remain steady at 3.0% in CY2020. In CY2021 inflation is expected to increase slightly to

3.4% then gradually decline to 3.3% in 2022, and 3.1% in CY2023. From CY2024 through CY2028

inflation is forecast to be 3.0%, based upon average rates over 30 to 60 years as measured by the GDP

deflator and the Consumer Price Index (CPI). The long-term forecast from 2029 onward is 2.0%, based

on the Federal Reserve’s long run inflation target rate.

Table 1: January 2019—5-YEAR CONSTRUCTION COST INFLATION FORECAST

CY2019 CY2020 CY2021 CY2022 CY2023

High 5.0 6.3 6.0 5.7 5.5

Most Likely 3.1 3.0 3.4 3.3 3.1

Low 1.3 1.1 1.5 1.5 1.3

The following is a narrative of major factors that will have an influence on construction costs through

the forecast period: (1) economic activities globally, nationally, and throughout the state and (2)

regional construction costs for labor, oil and diesel, liquid asphalt, and steel, among others.

1 Ohio DOT Construction Cost Index published July 19, 2018

100.0

104.4

101.0

105.3

109.9108.7

107.3106.0

106.5

110.2

90.0

95.0

100.0

105.0

110.0

115.0

Ind

ex

20

12

Q1

= 1

00

The Ohio DOT Construction Cost Index

Ohio DOT Construction Cost Change Over Time

Ohio DOT Bid Analysis & Review

January 11, 2019 2

STATE & NATIONAL ECONOMIES:

The National economy is positioned well going into 2019. Economic indicators are positive especially for

employment2 (up) and wages3 (up). The current GDP estimate for 2018 Q4 predicts sound growth of

2.6%.4 Ohio’s economy is also performing well. The Ohio Office of Budget and Management (OBM)

reports 115,400 jobs were added in the first 10 months of the year and unemployment is at 4.6%.5 With

tax receipts coming in above estimates, OBM summarizes their outlook for Ohio: “Leading economic

indicators remain consistent with uninterrupted economic growth well into 2019.”6 If the current U.S.

economic expansion which began in mid-2009 lasts through June 2019, it will be the longest in modern

U.S. history. An economic slowdown is inevitable within the forecast period and will most likely occur

within the next 18 months.

Both nationally and in Ohio, construction activity is increasing. Construction employment grew 4.0% in

the U.S. and 4.9% in Ohio from November 2017 to November 2018.7 Nationally, the construction

unemployment rate for December (2018) was 5.1% which is the lowest in the 19-year history of the

series.8 However the construction sector’s outlook for 2019 is less rosy, particularly for residential

housing. The Nationwide Economics (Nationwide Mutual Insurance Company) Health of Housing

Markets Report outlook is mixed9 and residential construction starts were down 20%, November 2017

to November 201810. In the Midwest, both new home sales and existing home sales were down.11

Automobile manufacturing, which has an outsized impact on the Ohio economy, may be weakening.

After 3 years of strong auto and light trucks sales, some analysts see a slower sales year for 2019.12

General Motor’s recently announced restructuring affirms that prediction. The plan will close their

Lordstown, Ohio plant along with 3 others in the U.S. and one in Ontario, Canada.13 In addition to these

plants stopping production, their suppliers will also be impacted.14

While wages are increasing, many skilled jobs remain unfilled. The labor market continues to be tight

which may impact domestic growth. Through all this, we are in a trade war with China. Trade tensions

peaked last month and are currently on pause for negotiations. To recap the most significant trade

tensions of the last 12 months, the U.S. imposed tariffs on imported steel (25%) and aluminum (10%)

2 Kitroeff, Natalie, “December Jobs Report Highlights U.S. Economy’s Strength Amid Market Tumult,” The New York Times, January 4, 2019. Accesses

January 07, 2018, https://www.nytimes.com/2019/01/04/business/economy/jobs-report.html. 3 Kitroeff, Natalie, “December Jobs Report Highlights U.S. Economy’s Strength Amid Market Tumult,” The New York Times, January 4, 2019. Accesses

January 07, 2018, https://www.nytimes.com/2019/01/04/business/economy/jobs-report.html. 4 “GDPNow”, Federal Reserve Bank of Atlanta, January 03, 2019, https://www.frbatlanta.org/cqer/research/gdpnow.aspx 5 Keen, Timothy, “Economic Summary,” Ohio Office of Budget Management, December 10, 2018, page 3. 6 Keen, Timothy, “Economic Summary,” Ohio Office of Budget Management, December 10, 2018, page 1. 7 U.S. Bureau of Labor Statistics, All Employees: Construction in Ohio [OHCONS], retrieved from FRED, Federal Reserve Bank of St. Louis;

https://fred.stlouisfed.org/series/OHCONS, January 7, 2019. 8 “AGC’s Data DIGest,” Vol. 19, No. 1 January 2-4, 2019. 9 Nationwide Economics, “Health of Housing Markets (HoHM) Report,” 2018 Q4. Accessed 07 January 2019 https://blog.nationwide.com/wp-

content/uploads/2018/12/HoHM-Report-2018Q4-NFM-13575AO.3.pdf 10 Carrick, Alex “Rough Parch for Nonresidential Starts in November, But YTD Decline Remained Modest,” ConstructConnect, December 13, 2018; Reported

in “AGC’s Data DIGest,” Vol. 18, No. 43 December 10-14, 2018. 11 Keen, Timothy, “Economic Summary,” Ohio Office of Budget Management, December 10, 2018, page 7. 12 Boudette, Neal E. “ U.S. Auto Sales Put Up a Big Number, but Show Signs of Strain,” New York Times, January 3, 2019; Accessed 07 January

2019https://www.nytimes.com/2019/01/03/business/auto-sales.html 13 Colias, Mike, “GM to Close Plants, Cut Jobs,” Wall Street Journal, Tuesday, November 27, 2018. Page A1. 14 Grzelewski, Jordyn, “Impact of GM Lordstown shutdown will be felt for many years,” The Vindicator, December 2, 2018 at 12:09am; Accessed 07 January

2019 https://www.nytimes.com/2019/01/03/business/auto-sales.html

January 11, 2019 3

with an additional 10% tariff imposed on $200 Billion of Chinese imports with the threat to increase that

tariff to 25%.15

In other developments, oil prices have decreased 30% from October 2018 to December 2018.16 Diesel

and gasoline prices typically follow, leading to lower transport costs for goods and people. Prices have

stabilized at a lower level than anticipated just 6 months ago. We discuss this development further in

the “Oil, Diesel, and Natural Gas” section below.

We continue to follow the impact of changing oil and natural gas prices on drilling in the Appalachian

(Marcellus and Utica) shale plays. Construction activity associated with both the initial drilling and the

subsequent production may impact Ohio as well. We discuss this topic in more detail within the

“Appalachian Shale Oil & Natural Gas” section below.

INTERNATIONAL ECONOMY:

The World Bank forecasts 3.0% global economic growth in 2019. That is one tenth of a percent slower

than 2018. 17 Trade disputes with China, Canada and Mexico enter a third year, and surprisingly have

had little effect on market conditions on the street. China’s GDP growth is still expected to remain

above 6.0%.18 Lower oil prices will further damage South America, while a looming “hard Brexit” creates

uncertainty in Europe. We expect slow global economic growth to continue through the forecast period

as growing economies compete for global construction commodities.

The Bank of Mexico has slightly lowered their prediction of 2019 Mexican GDP growth range from 1.8-

2.8% to 1.7-2.7%.19 The Consensus Economic Forecast concurs and predicts the 2018 GDP growth rate

for Mexico to be 2.4%.20 Trade tensions with the United States, including pressure to renegotiate

NAFTA, and President of Mexico Andrés Manuel López Obrador’s policies are still developing. The

Mexican presidency was won on a platform of protectionist and anti-free market policies but changes

have not yet been realized. Despite uncertainty, 2018 is poised to break the trade record set in 2017

when November and December values are released.21

Reciprocal tariffs are still in place between Washington D.C. and Beijing. Steel is the most pertinent

commodity affected. ODOT buys domestic structural steel and has seen an increase of 8.5% in the past

year, on top of a 14.0% increase the previous year. Reinforcing steel reflects a similar situation, up

13.2% in the past year.22

15 For a detailed description of the tariffs and their impact on the U.S. construction industry see the AGC publication “2018 Trade Actions Affecting the

Construction Industry,” September 20, 2018. Accessed 07 January 2019 https://www.ceacisp.org/sites/default/files/documents/Primer%20-

%202018%20Trade%20Action%20Affecting%20Const.%20Industry_Final%20Sept.%2020.pdf 16 West Texas Intermediate average monthly price October 2018 $70.75 per barrel and December 2018 average $49.52. U.S. Energy Information

Administration, Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma [DCOILWTICO], retrieved from FRED, Federal Reserve Bank of St.

Louis; https://fred.stlouisfed.org/series/DCOILWTICO. Accessed 09 January 2019. 17 The World Bank, “Global economic Prospects Highlights from Chapter 1: Global Outlook: The Turning of the Tide?”, June, 2018 18 The World Bank, “China Economic Update – December 2018”, http://www.worldbank.org/en/country/china/publication/china-economic-update-

december-2018 19 Bank of Mexico, “Quarterly Report July – September 2018 Summary” 20 University of Texas at El Paso, “Mexico Consensus Economic Forecast”, Volume 21, Number 3 21 United States Census Bureau, “Trade in Goods with Mexico”, https://www.census.gov/foreign-trade/balance/c2010.html 22 Ohio Department of Transportation, Bid Analysis & Review Team, ODOT Chained-Fisher Construction Cost Index 2018Q4

January 11, 2019 4

Venezuela has entered economic meltdown. Inflation is predicted to be 10,000,000% in 2019. An

estimated 10% of the residents have fled the country.23 Crude oil output continues to decline and will

eventually no longer participate at a meaningful level in the global market.24

KEY CONSTRUCTION INPUT TRENDS:

LABOR: The Associated General Contractors of America reports that nearly four-fifths of contractors

anticipate increasing staffing levels in 2019 despite continued difficulty in finding qualified laborers.

While increased wages and benefit packages have become the norm more contractors are investing in

labor saving technologies such as drones, robots, and 3-D printers. To cover increased labor costs

contractors are passing on the increase to their customers in the form of higher project costs.25

Construction employment increased nationally by 280,000 jobs, a 4.0% rise, in 2018 to its highest level

since March 200826 while unemployment for experienced construction laborers dropped to 5.1%, its

lowest recorded December level.27 Meanwhile Ohio construction employment experienced a 4.9% rise

year-over-year in November increasing by 10,500 jobs to its highest November level in 13 years.28

Hourly wages for construction laborers are averaging 3.9% higher than a year ago at $30.44.

Comparatively, construction wages are 10.8% higher than all other nonfarm private-sector wages.29

Wages are expected to trend above 3.0% in the forecast period due to the continued lack of available

skilled laborers.

CONTRACTOR & SUPPLIER MARGINS: Competition levels for Asphalt work type contracts (Figure 2)

have continued to drop over the last year, ending below 3 bids per project. The trend is concerning.

Competition levels for Bridge Replacement work (Figure 3) continue to rise from the July 2016 low. The

Ohio DOT capital program for FY19 is expected to top $2 billion. However, the FY20 capital program

levels drop to $1.5 billion. We expect competition for contracts built during the 2020 calendar year to

increase driving down contractor and supplier margins.

Contractor and supplier margins will begin to fall on awarded contracts during the next 12 months

reducing construction cost inflation. Margins are expected to fall in the second year of the forecast as

well. If additional funding for infrastructure becomes available through either State or Federal sources,

margins will certainly remain stable or increase depending on the timing and size of any spending

increase.

23 Long, Gideon, “Nicolás Maduro to begin second term as Venezuela goes into meltdown”, Financial Times, January 8, 2019,

https://www.ft.com/content/c30a37f8-0602-11e9-9fe8-acdb36967cfc 24 Slav, Irina, “Venezuela’s Oil Exports Are Falling Even Faster Than Expected”, October 3, 2018, https://oilprice.com/Energy/Crude-Oil/Venezuelas-Oil-

Exports-Are-Falling-Even-Faster-Than-Expected.html 25 AGC of America, “Seventy-Nine Percent Of Construction Firms Plan To Expand Headcount In 2019, But Most Are Also Worried About Their Ability To Find

Qualified Workers”, January 2, 2019, https://www.agc.org/news/2019/01/02/seventy-nine-percent-construction-firms-plan-expand-headcount-2019-

most-are-also 26 Bureau of Labor Statistics, Retrieved January 4, 2019, https://data.bls.gov/timeseries/CES2000000001?data_tool=XGtable 27 Bureau of Labor Statistics, Retrieved January 4, 2019,

https://data.bls.gov/timeseries/LNU04032231?amp%253bdata_tool=XGtable&output_view=data&include_graphs=true 28 Bureau of Labor Statistics, Retrieved January 4, 2019, https://data.bls.gov/timeseries/SMS39000002000000001?data_tool=XGtable 29 AGC of America, “Construction Employment Rises By 38,000 In December And 280,000 In 2018; Hourly Pay Jumps 3.9 Percent, Unemployment Rate Falls

To 5.1 Percent”, January 4, 2019, https://www.agc.org/news/2019/01/04/construction-employment-rises-38000-december-and-280000-2018-hourly-pay-

jumps-39

January 11, 2019 5

Figure 2

Figure 3

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2.3

2.5

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Bid

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rsCompetition for Asphalt Work-type Projects

(12 Month Rolling Average)

Ohio Department of Transportation, Bid Analysis & Review Team

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Av

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Bid

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Competition for Bridge Replacement Work-type Projects(12 Month Rolling Average)

Ohio Department of Transportation, Bid Analysis & Review Team

January 11, 2019 6

OIL, DIESEL & NATURAL GAS: U.S. oil and petroleum product stockpiles are holding steady between 1.8

and 1.9 billion barrels. Reserves are up 1.5% year-over-year.30 The EIA expects crude oil production to

continue at high levels in 2019, over 10 million barrels/day.31 The largest increases are expected in the

Permian basin.

The spot price for natural gas rose unexpectedly from $2.55 per million BTUs in November 2017 to $4.09

in November 2018, a 60% increase. However, prices are still at the lowest levels in a decade.32

Stockpiles are 14.3% smaller than a year ago and production remains high.33 The price increase and

depleting stockpiles can be attributed to higher demand as more natural gas power plants come

online.34 It is expected that natural gas prices will remain relatively low, although prices have already

climbed higher than the $4.00 per thousand cubic feet that we predicted in June.35

Figure 4 shows the Energy Information Administrations (EIA’s) average retail diesel fuel forecast. The

average retail price of diesel fuel reached a low point in February 2016 of $2.00 per gallon. Prices have

climbed nearly every month until December 2018. The EIA revised the price prediction to be slightly

lower than what was predicted in June of last year. Prices are now expected to remain below $3.08

through the end of 2019, rather than $3.15 previously predicted.36

Figure 4

30 U.S. Energy Information Administration, “Weekly U.S. Ending Stocks of Crude Oil and Petroleum Products”,

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WTTSTUS1&f=W 31 U.S. Energy Information Administration, “The United States continues to increase production of lighter crude oil”, October 9, 2018,

https://www.eia.gov/todayinenergy/detail.php?id=37213 32 U.S. Energy Information Administration, “Natural Gas”, Retrieved January 7, 2019, https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm 33 U.S. Energy Information Administration, “Weekly Natural Gas Storage Report”, Retrieved January 7, 2019, http://ir.eia.gov/ngs/ngs.html 34 Popovich, Nadja, “How Does Your State Make Electricity?”, The New York Times, December 24, 2018,

https://www.nytimes.com/interactive/2018/12/24/climate/how-electricity-generation-changed-in-your-state.html 35 U.S. Energy Information Administration, “STEO Natural Gas”, Retrieved January 7, 2019, https://www.eia.gov/outlooks/steo/report/natgas.cfm 36 U.S. Energy Information Administration, “Short-Term Energy Outlook”, http://www.eia.gov/forecasts/steo/

$2.00

$2.50

$3.00

$3.50

$4.00

Pri

ce/g

all

on

2019 U.S. Average Retail Diesel Fuel Forecast

Actual Diesel Fuel + Taxes Forecast

Source: U.S. Energy Information Administration Short-Term Energy Outlook

January 11, 2019 7

LIQUID ASPHALT: Crude oil prices have both risen and fallen substantially in the last year. Prices for

liquid asphalt have also increased dramatically, especially over the past two years. Liquid asphalt prices

are up 36% year-over-year. Liquid asphalt prices have begun to stabilize, albeit at a higher level than the

previous two years. We expect prices to decline in the next six months to reflect the lower input costs.

High production levels contributed to the EIA lowering their West Texas Intermediate projection to be

$61 per barrel37, rather than $71 per barrel published in June 2018.38

Figure 5 shows the price per ton of asphalt binder PG64-22 over time. Prices rose sharply in 2018, as did

crude oil, though prices have stabilized as predicted. Figure 6 shows the annual percentage price

change over the same period. The Ohio DOT Asphalt Cost Index rose 36% from January 2018 to January

2019.39 The current trend is a decrease in price due to the recent price collapse of crude oil.

Figure 5

37 37 U.S. Energy Information Administration, “Record-high U.S. crude oil production contributes to lower forecast prices”

https://www.eia.gov/petroleum/weekly/archive/2018/181212/includes/analysis_print.php 38 U.S. Energy Information Administration, “EIA expects Brent crude prices will average $71 per barrel in 2018, $68 per barrel in 2019”

https://www.eia.gov/todayinenergy/detail.php?id=36493 39 Ohio Department of Transportation, Bid Analysis & Review Team, ODOT Chained-Fisher Construction Cost Index 2018Q4

$0

$100

$200

$300

$400

$500

$600

$700

$800

Pri

ce/T

on

Asphalt Binder PG64-22

Source: Ohio Department of Transportation, Office of Construction Administration. Bituminous Placing Index 2002-2005-2008.

January 11, 2019 8

Figure 6

STEEL: Over the past year prices have increased for the steel products that are placed on ODOT projects.

However, several indicators suggest that these price increases have begun to level off as the domestic

market for steel acclimates to the demand shock caused by the 25% steel tariff implemented in March

(2018). The Federal Reserve Bank of Cleveland’s latest Beige Book notes that while the steel import

tariff continues to negatively impact manufacturers using steel due to increased costs, an increasing

number of firms polled are reporting stable prices in recent months.40 This leading indicator is

corroborated by the PPI commodity data for steel mill products which, after a steep rise from January

2018 to August 2018, leveled off in recent months (see Fig 7). The prices for steel mill products

increased 20% from November 2017 to November 2018 but rose less than 0.5% from October to

November 2018.

While all steel used on ODOT projects must be sourced from domestic producers, ODOT projects are not

completely insulated from the effects of tariffs or the world steel market. The higher price of foreign

steel after tariffs are applied has allowed domestic suppliers to raise their prices without being

undercut.41 This has led to manufacturers that are reliant on domestic steel to encounter product price

increases of 50% or more for particular products in August as well as supply shortages due to high

demand.42 Prices appear to be leveling out as domestic producers have adjusted to the increased

demand by raising production. As a result, the domestic market is beginning to stabilize. Over the latter

half of 2018 NUCOR reported that U.S. raw steel output and utilization trended strongly upwards,

currently residing at around 80% utilization according to data provided by the American Iron and Steel

Institute.43

40Federal Reserve Bank of Cleveland, “The Beige Book”, November 2018 41 Tita, B., & MacDonald, A. (2018, 12 06). “Tariffs on Steel Hardly Dent Imports”. The Wall Street Journal, pp. B1-B2 42 Wilson, Bill, “The Swelling Hurts: Road and bridge industry falls victim to steel tariff”. Roads and Bridges, vol.56/No.8, August 2018 43 NUCOR, “Steel Industry Barometer”, December 2018

-50%

-25%

0%

25%

50%

75%

100%

125%

150%

An

nu

aliz

ed

% C

ha

ng

ePercent Change in Asphalt Binder PG64-22 Unit Price

Source: Ohio Department of Transportation, Office of Construction Administration. Bituminous Placing Index 2002-2005-2008.

January 11, 2019 9

Figure 7

A second way in which ODOT steel prices are exposed to the world steel market is through the price of

steel scrap, specifically carbon steel scrap. Most of the steel produced in the U.S. is recycled from steel

scrap, an internationally traded commodity subject to market pressure from outside the U.S. In general,

the price of steel scrap has steadily increased over the past three years with a 9.5% increase recently

from October to November. However, the steel scrap market is particularly volatile. This general

upward trend isn’t necessarily consistent from month to month (see fig. 8). The rise in price is due in

part to growing demand for steel in developing countries, especially China.44 China continues to both

consume and produce about half the world’s steel each year. As we have stated in the past, China’s

ongoing construction boom continues to fuel its demand for steel, which in turn increases demand for

steel scrap. U.S. producers must therefore compete within the international steel scrap market.

44 Hodari, David (2018, 11 09). “Chinese Home Building Lifts Steel Prices”. The Wall Street Journal, pp. B11

January 11, 2019 10

Figure 8

China is closing older plants to decrease its own steel production and to improve environmental

conditions, meanwhile global demand for steel has continued to rise due to the decreased supply.45

Whether this upward demand trend for steel in China continues into 2019 is contingent on Chinese

administration stimulus measures to maintain the current construction boom, or a policy to stimulate

other industries that consume scrap steel.46 If this trend continues, however, we should expect to see

the price for scrap steel, and in turn, U.S. steel increase.

In summary, current indicators suggest that while the price of steel may continue to rise somewhat into

2019, the domestic market for steel has likely begun to stabilize from the turbulence caused by the

tariffs. As such we should not expect to see the kind of price spike we saw in 2018, barring any future

tariffs or major disturbances, as the market reaches equilibrium.

READY MIX CONCRETE (RMC): Ready mix concrete is priced relative to the cost of aggregate and

cement, its primary components, along with the cost of delivery, mainly diesel costs. Prices fluctuate

according to regional demand for aggregate prices due to its limited delivery range and global demand

for cement.

Nationally, ready mix concrete prices rose 2.9% year-over-year in November following increases of 3.7%

in both CY2015 and CY2016, and 3.1% in CY2017. 47 Except for a spike in ready mix concrete prices

during the first half of 2018 the current trend of increases indicates a continued healthy construction

industry. Ohio DOT ready mix concrete (in place) prices decreased 1.0% in CY2018 after seesawing

downward by 2.9% in CY2015, upward by 5.3% in CY2016, and downward again by 7.6% in CY2017.48

Changes in the quarterly year-to-year index revealed that prices were flat over the second half of 2018

45 Ibid. 46 World Steel Association, “Worldsteel Short Range Outlook 2018/2019”, https://www.worldsteel.org/media-centre/press-releases/2018/worldsteel-

Short-Range-Outlook-2018-2019.html 47 Bureau of Labor Statistics, Retrieved January 8, 2019, https://data.bls.gov/timeseries/WPU13330101 48 Bid Analysis & Review Team, “ODOT Chained Fisher Construction Cost Index”, December 31, 2018: The Structural Concrete Series

January 11, 2019 11

rivaling the final three quarters of 2017. Oscillating diesel prices appear to be the primary reason for the

current fluctuation in ready mix concrete prices. In the near term, the price of ready mix concrete for

Ohio DOT projects is anticipated to remain stagnant due to an anticipated drop in funding in Ohio.

AGGREGATE: Aggregate is priced relative to the cost of the aggregate itself along with the cost of

delivery, mainly diesel costs. Due to its limited delivery range of approximately 50 miles the price of

aggregate is strongly influenced by regional demand.

Nationally, aggregate prices rose 4.5% year-over-year in November following increases of 4.6% in

CY2015, 2.3% in CY2016, and 4.2% in CY2017. 49 Continued steady increases over time is a sign of a

healthy construction industry. For Ohio, aggregate (in place) prices rose 22.4% in CY2018 following

increases of 16.6% in CY2015 and 18.5% in CY 2016, and a decrease of 22.0% in CY2017.50 Looking at the

quarterly year-to-year changes revealed that prices steadily increased during the past three quarters of

2018 after remaining flat over the second half of 2017. An uptick in construction levels in Ohio appear

to be the primary reason for the current rise in aggregate prices. The price of aggregate for Ohio DOT

projects is anticipated to trend higher despite the anticipated drop in funding in Ohio.

APPALACHIAN SHALE OIL & NATURAL GAS:

Drilling activity has increased over the past year in Pennsylvania, declined in Ohio, and is flat in West

Virginia. Figure 9 shows the number of drill rigs engaged over time in these three states. The dotted

line shows natural gas production for the region is increasing steadily.

Figure 9

49 Bureau of Labor Statistics, Retrieved January 8, 2019, https://data.bls.gov/timeseries/WPU1321?data_tool=XGtable 50 Bid Analysis & Review Team, “ODOT Chained Fisher Construction Cost Index”, December 31, 2018: The Aggregate Base Series

January 11, 2019 12

Ohio wells typically tap the Utica shale play which is rich in natural gas with very little oil production. As

we have stated in the past, natural gas production in the region is having a direct impact on construction

activity in Ohio, Pennsylvania, and West Virginia. Several natural gas-fired powerplants have recently

been completed or are currently being built within the region. Several local and regional pipelines are

being built in Ohio (as well as Pennsylvania and West Virginia) to carry natural gas to processing centers

and out of the region to retail markets.51 52 Royal Dutch Shell’s $6 billion investment which broke

ground a year ago, is an ethane cracker being built on the Ohio River just north of Pittsburgh. The

massive construction project 15 miles from the Ohio border may impact the availability of trucks and

specialty labor at times in Ohio during its multi-year construction phase.53 54

FUNDING:

President Trump along with leaders from both chambers of Congress have stated that infrastructure

funding will be a top priority in 2019. The biggest challenge will be figuring out how to generate the

revenue needed to fund the Highway Trust Fund. One option under consideration is raising the federal

fuel tax.55 Legislative actions will be closely monitored to determine what impact additional funding

would have on the Ohio DOT capital program.

The Ohio DOT capital program is expected to award $2.1 billion in contracts during the current fiscal

year (2019). This is a decrease from the $2.3 billion awarded in FY2018, but an increase from the $1.9

billion awarded in both FY 2017 and FY2016. With remittances from the turnpike bond program

concluding in FY2019 the budget is anticipated to drop to $1.5 billion in FY2020. The forecast assumes

the budget for FY2021 and beyond will be at the $2 billion level as additional funding sources become

available.

SUMMARY:

Construction cost inflation is predicted to be lower than previously expected due to the unforeseen drop

in crude oil prices. Lower crude prices will lower the cost of asphalt, the largest construction cost driver

for the Ohio DOT. Across the state and nation, modest growth is forecast for the calendar year. Ohio

DOT’s projected construction budget for FY2019 will be the largest in the foreseeable future. Contractor

backlogs are expected to peak in 2019, though we have tempered our inflation forecast to account for

expected price decreases for asphalt and diesel. After 2020, we predict tapering inflation that is more

consistent with long term averages as multiyear projects conclude and contractors adjust to ongoing

program levels.

Prepared by the Bid Analysis & Review Team, Office of Estimating, Ohio Department of Transportation, January 11, 2019

51 Legere, Laura, “Falcon pipeline to Shell's petrochemical plant gets OK from Pa. DEP,” Pittsburgh Post-Gazette, December 20, 2018; Accessed 08 January

2019 https://www.post-gazette.com/business/powersource/2018/12/20/Shell-Falcon-pipeline-ethane-cracker-Pennsylvania-DEP/stories/201812200132 52 “Yes! NEXUS Pipeline OK’d by FERC to Begin Service” Marcellus Drilling News, October 11, 2018; Accessed 08 January 2019

https://marcellusdrilling.com/2018/10/yes-nexus-pipeline-okd-by-ferc-to-begin-service/ 53 “Pieces of Pennsylvania ethane plant move through the region”, The Herald-Dispatch, December 18, 2018; Accessed 08 January 2019

https://www.herald-dispatch.com/news/pieces-of-pennsylvania-ethane-plant-move-through-the-region/article_e7b52e7f-48a5-5e1c-a6ab-

893f7303b305.html 54 Stonesifer, Jared, “One of the largest cranes in the world in action at Shell site”, The Times, December 19, 2018. Accessed 08 January 2019

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