Economic conditions are changing rapidly. The current Portland Cement Association (PCA) forecast reflects a significant economic growth slowdown, not a recession scenario. Economic growth is expected to remain near 2% in 2007 and 2008. Despite this assessment, the risk of a recession materializing during the next six to nine months remains high. Given the downside risks, added caution should characterize planning efforts.
“Our forecast anticipates the impact of a significant economic growth slowdown on the construction industry, but does not predict a recession,” said PCA’s chief economist Ed Sullivan. “A recession scenario is a much grimmer picture.
“If a recession occurs, it will cause a 10% decline in 2008 cement consumption,” he added.
Real construction spending is expected to contract during 2007 and 2008. Slow home sales, increased foreclosures and persistently high inventories imply a deeper and more prolonged retraction in new home starts activity. A recovery in housing starts is not expected to materialize until mid-2009.
Regions experiencing boom or bust conditions will endure a longer recovery. In addition, the prospects of slower economic growth combined with tighter credit conditions are likely to result in a contraction of nonresidential construction activity during 2008. Finally, a more subdued pace of job creation will moderate growth in state revenues and—considering lags—should materialize in more subdued growth in public construction activity in 2009 and 2010.
PCA now expects 2007 cement consumption will decline 6.9% followed by a 2.2% decline for 2008. Gradually, cement consumption is expected to begin a recovery in 2009, but volumes are expected to remain below record 2005 levels until 2011.
Increases in domestic cement capacity coincide with the cyclical erosion in economic conditions. The current cyclical downturn is expected to reach a trough during 2008. According to PCA’s baseline cement consumption scenario, the current peak-to-trough reflects nearly a 12 million metric ton reduction or a 9.1% decline (2005-08). It is likely that domestic capacity increases will outstrip growth in cement consumption during 2007-09. Reduction in imports, lower capacity utilization rates and potentially higher-than-desired inventory levels may characterize this time period.
Import volumes are expected to show a sustained decline throughout most of the forecast, remaining at or below 20 million metric tons during the entire forecast horizon. Imports are expected to decline 33% during 2007, followed by an additional 17% decline in 2008, a 11% decline in 2009 and a 5% decline in 2010. The expectation of stronger consumption leads to a small increase in imports by 2011. The likelihood of sustained high freight rates adds downside risk to PCA’s import projections.
The real deal
Real construction spending is expected to decline 3.9% in 2007 and 3.7% during 2008. PCA expects the residential recession will continue through 2008 and into 2009. This assessment is an important ingredient in the expectation of overall construction spending declines.
In public construction, which includes highways and streets, PCA is forecasting relatively modest growth through 2011. After posting a healthy 9.2% increase in construction in 2007, public construction is expected to only report a growth of 2.1% in 2008. The rise will be held to under 2% through 2011. Highways and streets, which recorded a 4.1% increase this year, should hold relatively steady over the next three years (from a projected 3.2% increase in 2008 to 2.4% in 2010).
Portland cement consumption in public construction was up a modest 1.9% in 2007. It is expected to hover around 1% for the next three years before spiking to a projected 2.8% in 2011.