It's no secret that we are long-term bulls when it comes to this industry. And while the current times are the most difficult in memory, and we think the construction materials industry will experience a slow and gradual recovery, there is a growing sense that we may be in for a pleasant surprise.
Several economists have forecast that for the second half of this year and all of 2010, real inflation-adjusted economic growth may average more than 4% at an annual rate for the 18-month period, well above the consensus, which expects about 2%. The recent Cash for Clunkers trade-in program also will have a positive impact on third-quarter gross domestic product (GDP).
One well-respected economic group projects business inventories will end 2010 about $25 billion lower than they are currently. But with businesses no longer reducing stockpiles as aggressively as they have been in recent months, inventories could contribute 1.3 points to GDP.
But how can inventories fall and still add to GDP? Let's say you make and sell 100 automobiles every month. If sales are surprisingly low one month and fall to 80, you are left with 20 extra units inventory. The next month, if you expect sales to stay at 80,h, if you might make 65, so you can reduce your inventories by 15. The following month, if you still expect sales to be 80 and want to reduce your inventories by another five, you can increase production from 65 to 75. So even though inventories are still falling, the fact that they are falling more slowly adds to your production.
Others see continued declines in the trade deficit, although not as quickly as in the last two years, adding a positive impact to the economy. The trade deficit was 5.4% of GDP in early 2007 and is now only about 2.2%. If the trade gap declines to 1.1% by the end of 2010, net exports can contribute 0.9 points to the GDP.
Some believe the housing market will bottom out later this year and rise in 2010, contributing 0.4 points to the real GDP growth rate. Housing starts are now only one-third of the long-term trend due to excess home inventories, but inventories have already dropped from about 4.5 million a few years ago to 2 million today. Realistically, it will take another three or four years to fully eliminate the excess. But over this time, the rate of housing starts is going to have to rise substantially just to get back to normal levels.
Others see government spending adding its long-term average of 0.4 points to GDP. But that spending will be offset by a projected decline in plant and equipment spending at an annualized rate of 3.2%, which subtracts 0.3 points from GDP.
Finally, some think real consumer spending will rise at a modest 2.1% annual pace, adding 1.5 points to GDP, with real consumption rising at only 0.6% from the end of 2007 through the end of 2010. This would be the slowest three-year period for real consumer spending since World War II, including the early 1980s when the jobless rate increased to almost 11%. This also means consumer spending will drop to the lowest share of GDP since 2001.
Adding all these factors points to an average expected real GDP growth rate of 4.2%, which would clearly trickle down to the construction materials industry and kick-start our recovery.