PCA Scales Back Forecast
Ed Sullivan, vice president and chief economist with the Portland Cement Association, issued his Fall 2011 Forecast in mid-November.
"PCA has reduced its projections for near-term economic growth and job creation," Sullivan said.
"Despite economic growth, the residential sector will continue to be plagued by a large volume of foreclosures, tight lending standards, and weak new home prices," said Sullivan, who forecasts single-family home starts of 443,000 in 2012, increasing to 1.2 million in 2016. "A significant residential recovery is not expected until 2014."
Home builders are waiting for two developments: Unsold home inventory falling to five months or less, and stable or rising home prices. "Lacking either condition, a substantive recovery in home building will not materialize."
"Without a significant improvement in expected return on investment, commercial construction activity will remain depressed," Sullivan said. "Potential investors in commercial buildings are likely to wait until occupancy and leasing rates improve and asset prices appreciate. Nonresidential recovery will remain prolonged, with substantive cement volume gains materializing in 2013."
Highway spending in 2012 could fall by double digits. So far, 83 percent of 2009 Stimulus money has been spent. An extension of the highway bill at constant nominal levels suggest fewer real dollar spending after inflation. "Slower job creation implies a prolonged period of state governments' duress," he said.
Slow and Gradual Recovery
Pierre Villere, is president and managing partner at Allen-Villere Partners and is a TCP contributor. He spoke at the Command Alkon Customer and Training Conference in Las Vegas in November. Look for a full report on the NRMCA Industry Data Survey in the January 2012 issue of TCP.
Ready-mixed concrete production will total 257 million yards in 2011, identical to 2010, according to the NRMCA Industry Data Survey, which Villere presented. The industry record was 458 million yards in 2005.
"We will not get back to 350 million or 400 million yards of concrete until the housing industry recovers," Villere said. "Housing must recover because it drives and pulls additional new construction. We have no visibility on the housing market and recovery. We don't know what's behind the curtain. There is no sense of how many foreclosures are left."
Villere sees business in the new year being similar to 2011, although he believes the economy should improve toward the end of 2012. "Our industry's recovery will be slow and gradual," he said. "There will be definite signs of recovery by this time next year. By 2015, we expect close to a full recovery, with accelerating growth due to pent up demand."
Overall, consumer spending, which accounts for 70 percent of the U.S. economy, remains in the doldrums. "We have a long-term structural problem in our economy known as a 'balance sheet adjustment,'" Villere said. "It is a crisis of confidence and a crisis of sentiment, which is why the construction industry is performing so badly."
Housing Shortage on the Way
Thomas Freeman, senior vice president at UBS Financial Services, spoke at NRMCA's ConcreteWorks Conference in San Diego.
With annual growth in consumer spending averaging 0.2 percent the past three and a half years, Freeman called this "the most anemic consumer recovery in history."
"With jobs growth, comes consumer confidence," Freeman said. But why has there been no jobs growth since the recession officially ended in 2009? Uncertainty is impeding hiring. Freeman blames the new national health care law, the Dodd-Frank financial reform bill, regulations by the U.S. EPA, rulings by the U.S. National Labor Relations Board, and unknown future tax rates.
To break the "cycle of uncertainty," Freeman suggests giving consumers a permanent increase in income by lowering taxes and increasing employment by giving businesses incentives to expand. "The biggest problem is the consumer. We have to get the consumer spending again."
Forty percent of the economy relies on housing and there is excess inventory of 2 million homes in the U.S. today. But because 2 million new household are added annually, Freeman says, "In a couple of years, we will have a housing shortage. "That's great news for the housing industry."
"While there is gloom, there is no doom," he said. The U.S. still produces more than the next three largest economies (Japan, China, and Germany) combined. U.S. gross domestic product is 10 times larger than China's and 50 times that of India.
The U.S. has one of the youngest populations of the developing countries. "The growing population offers the hope of expanding markets, new workers, and entrepreneurial innovations," he said.
We Will Feel a lot Better
Kermit Baker, chief economist at the American Institute of Architects; and Mark Zandi, chief economist at Moody's Analytics, spoke at Hanley Wood's Foundations conference in Chicago earlier this fall.
"Economic growth has stalled, with growing concern that the debt problems in Europe will create problems in the U.S.," said Baker. In the U.S., employment remains weak and housing has still not recovered. Having undertaking a $900 billion stimulus program and with interest rates near zero, "further fiscal and monetary policy seems limited."
"Commercial property values fell further than house prices, but unlike housing, recovery in values seems underway," Baker said.
"It's going to take the broader economy to generate growth before we see it in the construction industry," said Baker, who forecasts a "modest" recovery in nonresidential construction in 2012.
"The economy is struggling to avoid recession," said Zandi, who pegged the chances of the U.S. slipping into another recession at 40 percent. While U.S. employers were adding about 200,000 jobs per month early in 2011, hiring has slowed at the year progressed. Higher gasoline prices and the earthquake and tsunami in Japan have created uncertainty.
But Zandi sees a promising future quicker than most commentators. Bussiness' balance sheets and profits are strong, household debt has been reduced by 10 percent the past three years, and the banking industry is capitalized and profitable.
"The key source of recovery for our economy will be the construction industry," Zandi said. Housing is back to being fairly valued or even undervalued. "I'm quite confident that a this time next year and when we get to 2013, we will feel a lot better."
Zandi forecasts housing starts to total 725,000 in 2012, 1.25 million in 2013, and 1.75 million in 2014.