On December 26, the Federal Highway Administration released its quarterly update of highway construction costs, showing that those costs dropped slightly in the April-June 2024 fiscal quarter.

The National Highway Construction Cost Index (NHCCI) had total construction costs dropping 0.9 percent, quarter-on-quarter, which (times 4) equals an annualized rate of costs dropping by 3.7 percent.

This the second quarter out of the last three to show a slight drop in costs after almost three full years of epic cost increases that have seen the cost of highway construction increase by 70 percent since the end of 2020.

Since the NHCCI started skyrocketing, the FHWA economics staff began publishing short analytical documents alongside the number itself. That document noted that “the decrease in the NHCCI was mostly driven by asphalt and concrete, which contributed to a 0.98 and 0.81 percentage point decrease, respectively…Conversely, grade excavation and bridge contributed to an 0.87 and 0.22 percentage point increase, respectively.”

The price of crude oil has a great deal to do with highway construction costs – the primary binder used in pavements in the U.S. is asphalt, which is the gunk left over from a barrel of crude oil after all of the more volatile fractions have been removed. But diesel fuel also powers all the heavy equipment used, and other uses of petroleum affect overall inflation in a number of ways. FHWA has a nifty chart comparing the NHCCI with the Producer Price Indices (PPI) for crude oil, for asphalt, and for all commodities. The chart shows that the question really should be “why didn’t earlier spikes in asphalt and crude prices cause this kind of NHCCI disruption?”

When the NHCCI started going up-up-up, the initial explanation was post-COVID supply chain disruptions. But in the broader economy, the Producer Price Index leveled off in the middle of 2022, while NHCCI continued going up for almost two more years, a sign of demand for components outpacing supply, thanks to the funding increases from the bipartisan infrastructure law. The chart below, assembled by FHWA, compares the NHCCI, the PPI, the commonly used CPI, and the Employment Cost Index for the construction industry as a measure of labor costs.

While FHWA’s chart rebases the NHCCI to the start of 2020, we rebase it to the end of 2020 because that was the last decrease before the recent increases started. By starting there and deflating subsequent fiscal quarters using NHCCI, we can see how much buying power has been lost due to the recent surge in highway construction costs.

As the measure of federal spending, we use obligations (contracts signed), not outlays (cash out the door to reimburse states after a project is complete) because obligations better reflect decisions made due to rising prices at the time the components were being purchased. We include all FHWA spending except for the Emergency Relief program.

For example, the latest NHCCI update was for the April-June 2024 quarter, during which the Federal Highway Administration recorded $20.6 billion in new obligations. The comparable total for the April-June 2021 quarter was $14.8 billion in new obligations, so in nominal terms, FHWA spent $5.8 billion more, or a 39 percent increase.

But if you deflate the new total using NHCCI down to the buying power as of October-December 2020, the $14.8 billion 2021 total drops a little (to $13.5 billion), but the new total drops from $20.6 billion to $12.1 billion. In effect, the buying power of the federal-aid highway program dropped by 10 percent over three years (13,497 – 12,111 = 1,386, and 1,346 / 13,497 = 0.1026).

Since the end of 2020, the federal government has lost $61.5 billion of the value of its spending increases on roads and bridges, due solely to increased construction costs.