Inflation threatens to erode impact of trillion-dollar infrastructure law

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The number of roads, bridges, railroads, fiber optic lines and other types of infrastructure the United States can build or repair under the law – a central achievement of President Biden which, according to experts, is a generational investment – will largely depend on the magnitude of increases in everything from the cost of diesel fuel to worker wages.

High material and labor costs are already pushing contractors to charge more for construction projects, government data shows, increases that economists and industry officials say could reduce the number of infrastructure projects the new federal money can fund. State and local authorities facing higher prices may prioritize easier, less ambitious projects, and some fear a rush in government spending could exacerbate inflation in the industry.

“As the cost of materials for these projects increases, there will be fewer projects you can complete,” said Jim Tymon, executive director of the American Association of Highway and Transportation Officials. “All of these factors are going to have an impact on the extent to which this influx of new federal funds will go towards solving our infrastructure problems.”

A rail yard at a steel mill in Pennsylvania. Steel mill revenues have increased by 113% over the past year.


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Luke Sharrett/Bloomberg News

The cost of government construction projects rose 13% in January from a year earlier, according to supplier pricing information released by the Labor Department last week. The producer price index also showed that the prices of inputs for the construction of highways and streets increased by 20% compared to the previous year, with steel products and construction plastic products respectively increased by 113% and 35% over one year. Gasoline and diesel fuel prices have each increased by more than 50%. These cost increases far exceed consumer inflation, which has risen 7.5% over the past year, the fastest rate in four decades.

“The blow to the infrastructure world is even greater than it is to the broader economy,” said Rick Geddes, founding director of Cornell University’s infrastructure policy program.

While experts expect building material prices to eventually moderate, wage gains could prove more sustainable.

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Average hourly wages in the construction industry rose about 5% in January from a year earlier, according to Labor Department data. The construction industry is still short of about 100,000 workers compared to February 2020, and a US Chamber of Commerce survey of construction contractors found in December that 91% of respondents were struggling to find workers qualified. A continuing shortage of construction workers could lead to additional wage increases.

Some industry members hope that advances in technology, along with new job opportunities generated by federal infrastructure spending, could ease the labor shortage. But Ken Simonson, chief economist at the Associated General Contractors of America, said greater flexibility and higher wages in other jobs could limit the attraction of new workers to construction jobs, where workers must be on site.

“I’m afraid the situation is not getting better, it’s only getting worse,” he said. While continuing to rise, hourly wages for construction workers have risen at a slightly slower pace than wages for all private sector workers over the past year, according to Labor Department data. . “It will make it harder to attract and retain workers,” Simonson added.

Gasoline and diesel fuel prices have each increased by more than 50% over the past year.


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mandel ngan/Agence France-Presse/Getty Images

Gordon Lansford, general manager of JE Dunn Construction Co., based in Kansas City, Mo., said the company recently aimed to staff a hospital construction project with 400 workers, but was unable to hire only 300.

“It slows down the pace of the project or requires overtime, which obviously costs more and drives up the cost of the project,” he said.

Of the approximately $1 trillion in spending authorized by law, about $550 billion exceeds previously planned federal investments in infrastructure. Mr. Biden signed the bill in November, but much of that money is still tied up in Washington and expected to be spent over five years.

Rising prices could affect decisions made by states and local governments about how to spend new federal funds, economists said. If prices continue to rise, managers may prefer projects with shorter lead times – and therefore more certain costs – or projects that rely less on volatile raw materials such as steel.

“There is this hidden effect of inflation, which is that it should push you to choose projects that have less risk of delay and whose costs are more certain,” said Leah Brooks, an economist at the school. in public policy from George Washington University. “These are probably smaller projects.”

President Biden recently spoke about the infrastructure law in Ohio.


Photo:

Daniel Lozada/Bloomberg News

In other cases, infrastructure managers will likely select projects based on need, which means they will simply have to absorb the higher costs and longer lead times for projects.

“If your bridge breaks, you have to repair the break, even if you wait months for your components to come from Thailand,” Ms Brooks said.

Some contractors and pundits say the new federal funding will increase demand for scarce materials and labor, driving up prices even further. Others disagree, saying the multi-year disbursement of funds will mitigate any effect they have on costs.

“There will be an increase in demand for materials, but it’s spread over time,” said Alison Premo Black, senior vice president and chief economist for the American Road and Transportation Builders Association. “We know it’s coming.”

The size of the new bipartisan infrastructure bill isn’t the only thing that separates this legislation from its predecessors. The WSJ’s Gerald F. Seib explains five key ways this bill takes a different approach to infrastructure. Photo illustration: Elise Dean

Write to Andrew Duehren at [email protected]

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