Transcript US Construction & Cement Outlook

Cement Outlook: 2008
Reed Construction Data Construction Forecast Conference
Washington, D.C.
October 4, 2007
Ed Sullivan
Staff Vice President and PCA Chief Economist
Introduction
Good News
 Interest rates, Inflation & Unemployment are Low
 Net Exports & World Growth
 Investment Spending
 Job Growth… if Dismiss Recent News as Outlier
 2nd Quarter GDP Growth…if Dismiss Consumer Spending
Introduction
 Fundamentals still sound…
 ….but is this analysis backwards
looking?..
 … and not what forward looking?
 Nearly every downside risk that PCA
has warned about in the past is
materializing
Introduction
 The economy is weakening.
 A recession is very possible.
 Dependent now on job creation and Federal
Reserve actions.
 Dependent consumer & business confidence.
 PCA new forecast scenario stops short of
projecting recession.
 Further downside risks to forecast
projections exist.
Introduction
“Threat to economy is not a housing issue... it is a
financial/credit issue that arose from past
mortgage financing.”
2006
Housing
2007
Consumer
2008
2009
Commercial
Public
Broad Implications: Crisis is No Longer Contained to Housing
Key Questions
 How deep will retrenchment go ?
 How long will it last ?
Economic Outlook
Introduction
 To determine the cause of a slowdown in economic
Growth, or even a recession ….
 …. Look no further than the excesses and imbalances
created during the preceding boom period.
 Debt played important role in 2003-2006 growth.
 Responsible debt?
 Easy terms & standards
 Unprecedented link in consumer spending to housing wealth.

 Payback is tough – maybe more than consensus of
economists believe.
Sub-Prime Mortgage Resets
Total Loans Scheduled for Reset
50,000
45,000
40,000
35,000
30,000
25,000
Period of Emerging
Trouble
20,000
15,000
10,000
5,000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Impact on Economic Growth

Monthly Payments Increase 50% or More.

Credit Card Debt Increases As Consumers Try
To Preserve Standard of Living.

Delinquencies Increase.

Defaults Increase.

Adverse Impact on Consumer Spending.
Economic Outlook

Consumer Spending has Relied On Debt.


Consumer Debt Burdens Near Historical Highs


Net savings rate has been negative for years.
Often a precursor to reduction in consumption growth.
Sub-Prime Defaults Force a Tightening in Lending
Standards

Reflects a new assessment of risk-return philosophy – beyond
mortgages and perhaps globally.

Tapping Home Equity Not as Viable As In the Past

Can Debt Based Consumer Spending Thrive In This
Environment?


If not, growth in consumer spending slows.
Income Growth is Improving – but perhaps not fast enough.
Consumer Worksheet

Pay Increase Averages 3.5%.

Health Insurance Premiums Rise 7%-11%.

State and Local Property Taxes Rise.


Reassessments based on high home appreciation
Energy Prices Take a Large Bite.

Perfect Storm?...Resets and Home Heating Season?

Inflation Running near 2.4%

Slowdown in Job Creation

If Job Creation Drops Below 100K on Sustained Basis – Expect
a Significant Downward Revision in Forecast.
Snap Shot of Economic Activity
Government
18%
Investment
15%
Consumer
69%
Consumption acts as the anchor for US economic activity.
Any retrenchment in consumer spending will lead to slower economy-wide growth rates
Spill Over Effects

Slower consumer spending reduces expected ROI on
investment (2008)
 At minimum significant slowdown in nonresidential
construction
 PCA expects a decline.

Eventually increases fiscal pressures on government
spending (fiscal 2009)
 Is this the next emerging issue?



State fiscal conditions threatened
Highway trust fund insolvency
Inadequacy of SAFTEA-LU
Impact on Economic Growth

Adverse Impact on Consumer
Spending can be Contained.

As Long As….

Relatively Strong Job Growth Persists.

And…

Interest Rates Remain Stable.
Job Growth Projections
Thousands of Net New Jobs Created Per Month
400.0
Job Creation is a Key
Variable to Monitor
Regarding Recession Risks
350.0
300.0
250.0
History
Forecast
200.0
150.0
100.0
50.0
Pay Attention to Job Creation
0.0
Revisions…Downward Revisions
2004
2005
2006
occur
-50.0 more frequently when
economy sliding.
2007
2008
Real GDP Growth Projections
Percent Change, Y-O-Y, Real GDP $
8.0%
7.0%
History
6.0%
Forecast
5.0%
4.0%
3.0%
2.0%
1.0%
0.0% & Indirect Impacts of
Direct
2003.1Crisis2004.1
Sub-Prime
Results in 2005.1
Slower Economic Growth
2006.1
2007.1
2008.1
Baseline Scenario
 AND…
 …this is PCA’s “Optimistic” scenario!
Recession?
Base Case: No Recession
35-40% Chance Recession Materializes Next Six
Months
 If recession materializes, it may not be
short lived.
 Significant downside risks exist for 2008
and 2009 construction projections.
 Nonresidential at risk: 2008-2009
 Public at risk: 2009-2010
Construction & Cement
Outlook
Overview
Construction Spending Projections
Real PIP Construction $
8%
History
Forecast
6%
4%
2%
0%
-2%
Sub-Prime Crisis May Indirectly
-4%
Spill Over to Nonresidential &
-6%
Public Construction
-8%
2003
2004
2005
2006
2007
2008
Residential
Construction
Past Strength in Starts More
Than Low Rates…
The Cyclical Upside: 2001 - 2005

Low mortgage rates key factor in single family starts over past few
years.

Emergence of exotic mortgages also a key factor…particularly in
strong home appreciation environment.

Easy credit conditions contributed to strong home-buying
environment.

Speculators add froth to market in light of strong appreciation
rates.

Lean inventories supplement demand …add strength to starts.
Each Factor at Work on Cyclical Downside: 2006 – Mid-2009
Boom/Bust Markets Account for
Nearly One Third of All Foreclosures
Structurally Changed Markets


Hurricanes (Louisiana)
Economically Depressed (Michigan)
Boom/Bust Markets (2010 Recovery)






Dynamic Economies
Strong Demographics
Robust Appreciation Rates
High Presence of Speculators
Large Inventory Overhang, Large Starts Decline, Slow Recovery
Arizona, Nevada, Florida & California = 28% Cement Consumption
“Normal” Markets




More Modest Appreciation
Relatively Low Speculator Presence
Smaller Inventory Overhang
More shallow decline, Quicker Recovery
Home Inventory
Thousands of Homes for Sale, April
More Than 2 Million Excess
Inventories
4500
4000
New
3500
New
3000
2500
New
New
Existing
2000
Existing
1500
Existing
1000
Existing
500
0
2004
2005
2006
2007
Lenders Reporting Tighter Lending
Standards: Mortgages
Latest Data: Largest Increase
Since Conditions Preceding
1991 Recession
Percent Reporting Tighter Lending Standards
20
Tighter Credit Will Undermine Sales
15
Recovery
Easy
Credit
Period
10
5
0
-5
-10
-15
2000Q1
2002Q1
2004Q1
2006Q1
Single Family Price Trend:
Existing Homes Compared to Year Ago Levels
Percent Change, Year Ago (%)
Projected
20.00%
10
High Inventories Will Depress Prices
Throughout 2007 and into 2008.
9
15.00%
8
7
10.00%
6
5.00%
5
4
0.00%
3
2
-5.00%
1
-10.00%
0
2004
2005
2006
2007
Burning Off Excess Inventory

No significant rebound in starts until inventory
reduced to 5 months supply.

Starts soften…but does not help inventory conditions


85% of inventory comes from
Sub-Prime Defaults Force a Tightening in Lending
Standards

Reflects a new assessment of risk-return philosophy – beyond
mortgages and perhaps globally.

Tapping Home Equity Not as Viable As In the Past

Can Debt Based Consumer Spending Thrive In This
Environment?


If not, growth in consumer spending slows.
Income Growth is Improving – but perhaps not fast enough.
Single Family Affordability Trend:
New Homes
Percent Change Home Prices, Year Ago (%): Yellow
New Mortgage Payment as % of Household Income: Red
20.00%
29.00%
27.00%
15.00%
25.00%
10.00%
23.00%
5.00%
21.00%
0.00%
19.00%
Pricing
Softness Will Improve Affordability
-5.00%
17.00%
-10.00%
15.00%
2004
2005
2006
2007
Projected
Residential
 Slow Down in Job Growth Prolongs
Recovery in Sales and Inventory
Correction.
 Mid-2009 Recovery
Nonresidential
Construction
Nonresidential Construction

Nonresidential Growth Currently Strong




Slowdown In Nonresidential

Based on improving underlying fundamentals
Low Base
Strong Expected ROI
Pent-up Demand
Easy Credit Conditions

Expected ROI Softens With Overall Economic
Slowdown

Pent-up Demand Diminished

Credit Conditions Tighten
Nonresidential Spending Projections
Real PIP Construction $
25%
History
Forecast
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
Tighter Credit & Slower Economic
Growth May Rob Momentum From
Nonresidential
-25%
2003
2004
2005
2006
2007
2008
Nonresidential Spending Projections
Percent Change, Y-O-Y, Dodge Contract Awards (Bar), Real PIP Construction $ Line
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Nonresidential Dodge Contract Award
1999
2000
2001
2002
Data Has Already Signaled a Decline in
Activity
2003
2004
2005
2006
2007
Public Construction
Public Spending Projections
Real PIP Construction $
History
15%
10%
Forecast
Outlook Dismisses
“Bridge Crisis”
5%
0%
-5%
-10%
-15%
2003
2004
2005
2006
2007
Total State Revenues &
Expenditures
Billion $, NIPA
Striped Yellow: Expenditures
1950
Solid Green: Revenues
1750
1550
1350
1150
950
Slim Margins. Small Changes in Conditions
750
Impacting Revenues can Impact Funds
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Dedicated to Construction
Total
Billion $ State Surplus/Deficit, NIPA
Point One:
• Growth slow down = slow down job
creation.
• Recession = Job Loss
60
40
Point Two:
•Job growth = state revenues growth
Point Three:
20
0
•Entitlement pressures grow unabated.
Point Four:
-20
• Growth slow down = slower growth in
state surpluses.
-40
•Recession = potentially largest state
deficits in history…longer lasting that 2001
recession.
-60
1995
1997
1999
2001
2003
2005
2007
2009
2011
Public Sector = Largest cement
consuming construction sector.
Next Issue Emerging on Horizon
 Slowdown in job creation
 State revenue growth slowdown
 State Fiscal crisis could re-emerge
 Solvency of Highway Trust Fund
 Inadequacy of “real” SAFTEA-LU
Market Conditions
Conclusions
Conclusion
 Sub-prime crisis has leaked beyond housing
sector.
 Impact may hit nonresidential construction in
2008 and public construction in 2009
 Recession risks increased significantly
 Downside risks to forecast
 Add extra dose of conservatism to plans
Cement Outlook: 2008
Reed Construction Data Construction Forecast Conference
Washington, D.C.
October 4, 2007
Ed Sullivan
Staff Vice President and PCA Chief Economist