Portland Cement Association (PCA) chief economist Ed Sullivan forecasts a 12% decline in cement consumption for 2008, followed by another 6% drop in 2009. He calls this the largest drop in the history of the industry, and a recovery may be two years away.
Although the U.S. economy is not technically in recession because only one quarter of economic decline was reported (4th quarter 2007), Sullivan says in his summer forecast, “for the construction industry, this is a recession.” Rising unemployment, higher inflation, and lower consumer sentiment will have a lingering negative effect on construction and cement consumption.
Construction will decline 9% this year, and another 7% in 2009, he says. On the residential side, there is still a 10.5 month housing inventory, 87% of which are existing homes. Non-residential construction has been steady because of momentum of projects already under contract. But Sullivan cautions that non-residential contract awards were down 29% in the first five months of 2008. If this trend continues, he expects a 15% decline in 2009.
The public sector has also seen slower growth this year, partly due to state budget shortfalls. Sullivan sees increased spending in entitlement programs, such as Medicare, and decreased revenue from job losses resulting in a 4.8% drop in cement consumption by the public sector in 2008. Two more years of decline will follow.
Although the federal government has taken measures to boost the economy, recent legislation has not had a dramatic effect on construction. In July, Congress passed a new housing bill which should give foreclosure relief to about 400,000 homeowners and give tax credits to first-time homeowners. This is not a quick fix for housing, considering there are close to 2 million homes already in foreclosure, Sullivan said.
While February's Economic Stimulus Act (ESA) has helped motivate equipment purchasing, the housing downturn and other economic factors are causing many utility contractors to forego buying new machines. According to a national survey of utility contractors released by the Associated Equipment Distributors and the National Utility Contractors Association (NUCA), the economy and construction industry would benefit more from an increased investment in water infrastructure.
“While the ESA has clearly had some positive impact, this study also shows that contractors aren't going to buy equipment if there's no work to do, no matter what the incentives,” NUCA CEO Bill Hillman said. “Boosting water infrastructure investment would have an immediate and positive impact on the economy, and extending the ESA would continue to provide stimulus next year.”
Sullivan expects an economic recovery to begin in 2010—six months longer than previously expected—although he admits the PCA's outlook is more pessimistic than the general consensus of economists. On the bright side, he foresees a more robust recovery in 2011 and strong growth rates through 2013; up to 7% in some areas.
For a Webcast of Sullivan's most recent forecast, visit www.cement.org.