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FEATURE FORECAST 2012 tional states having spent more than 90 percent of their funds. Two aspects must be considered regarding state highway spending levels. PCA's slower job creation out- look suggests a more gradual improvement in the size of state deficits compared to the last forecast projec- tion. Small surpluses are now expected to materialize on a national basis by 2014—pushing back the time- line by roughly one year. Revenue receipts have been increasing and are determined directly, or indirectly, by employment conditions and tax rates. Aside from rais- ing taxes and user fees, state revenue conditions are largely at the mercy of economic conditions and job creation. In the absence of politically unpopular tax hikes, large spending cuts are required to balance a budget in the context of economic distress. On the ex- penditure side, the bulk of state spending is entitle- ment and other mandatory programs, which cannot be easily cut. The spending cuts, therefore, are focused on discretionary state spending - including construc- tion spending. Discretionary state construction spending was hit hard during the recession. During the 10 years pre- ceding the economic downturn, state highway/road construction discretionary spending accounted for roughly 2.4 percent of total state expenditures. Cut- backs in state discretionary highway/roads spending accounted for only 2.1 percent in 2008, 1.9 percent in 2009, and 1.8 percent in 2010. In past reports, PCA attributed these declines completely to states' fiscal distress. Recent data, however, has revealed that some of In 2011, Canada's real GDP is expected to increase 2.1 percent, compared to a 1.6 percent increase in the United States, while next year, the Canadian economy is expected to grow 2.4 percent versus a 2.2 percent gain in the U.S., according to McGraw-Hill Construction Ana- lytic's 2012 outlook for the Canadian construction mar- ket. From a provincial standpoint, Alberta, British Columbia and Saskatchewan will lead the country in growth, fueled by a booming resource sector. The larger provinces of Ontario and Quebec will be restrained by their weak housing markets. Permits for residential and non-residential con- struction, which grew 30 percent in 2010 to $70.3 billion, are now expected to pull back slightly in both 2011 and 2012. Residential permits, which grew 36 percent in 2010, will pause over this year and next as higher mort- gage rates and rising home prices put downward pres- sure on demand. Permits will slip to $40.6 billion in 2012, down from $42.2 billion in 2010. Permits for commercial 16 the decline in state discretionary spending occurred due to ARRA. In theory, ARRA highway spending was supposed to be added on top of state discretionary spending, yielding construction stimulus. Data sug- gests that states swapped ARRA dollars for programs that would have been funded by the state—even in the context of difficult budgetary times. According to PCA calculations, ARRA spending increased $3.2 bil- lion in 2009 (stated in real 1996 dollars) and $3.6 billion in 2010. During these years, state discre- tionary spending declined $2.4 billion in 2009 and $2.0 billion in 2010. State highway spending declines sterilized roughly two thirds of the potential stimula- tory construction impact posed by ARRA. Clearly, the declines in state highway spending could be completely accrued to budgetary pressures. Spend- ing activity year-to-date during 2011 may paint a dif- ferent picture. ARRA spending declined $3.2 billion in 2011 compared to 2010 levels. While states still faced difficult fiscal conditions, state discretionary spending increased by $1.4 billion. As ARRA dollars declined, state spending increased. This implies that states rec- ognized that federal ARRA support was on the way out and swapped planned state spending for Federal dol- lars. While it is likely that some of the decline in state spending was a result of harsh fiscal conditions, it also seems likely that ARRA magnified the decline. If this analysis is correct, it has significant impact on 2012 and 2013 total highway spending projections. In previous forecasts, PCA held constant the state high- way/road construction discretionary spending ratio to total state spending at 1.8 percent, or 2010 levels, until CANADIAN CONSTRUCTION OUTPERFORMS U.S. COUNTERPART IN 2012 construction will flatten in 2011, then decline 6 percent, to $14 billion, in 2012. Institutional construction permits will decline 6 percent this year but will improve 7 per- cent, to $8.3 billion, in 2012. The industrial sector will be the lone area of growth in 2011, with permits increasing 2 percent. But a 1 percent drop in 2012 will bring permits down to $5.0 billion. Capital expenditures for engineering and con- struction have shown strength in recent years as money from government stimulus programs made its way through the sector. Total engineering construction has risen from $57.4 billion in 2009 to an expected $69.3 bil- lion in 2011. In 2012, however, capital expenditures for infrastructure are expected to flatten out at $69.6 billion. The oil-and-gas sector will continue to accelerate as investment in the western provinces grows. By con- trast, the outlook for the transportation, waterworks and sewage sectors will be negative as reduced government spending stifles activity. CEMENT AMERICAS • November/December 2011 • www.cementamericas.com