The economy is continuing along a path reflecting a fragile recovery, including the recent slowdown in economic growth that fully was anticipated by the Portland Cement Association (PCA), Skokie, Ill. Stimulus money and inventory building fueled progression during the first half of 2010. Going forward, growth will be fed by the underlying core fundamentals of the private sector. Although employment is a key driver of these core fundamentals, so is consumer and business confidence. Job growth is preceding in-line with expectations. This gradual improvement in the labor market was anticipated also to generate increased business and consumer confidence and the combination was expected to be the cornerstone for gathering private sector momentum.
Unfortunately, business confidence remains weak. Lacking an improvement in this area, economic momentum could stagnate or even deteriorate. Potential downside risks posed to the economy now are heightened, and any slip in the economy suggests adverse risks to cement and concrete consumption in 2011.
PCA's most likely scenario (a 60% probability) regarding the economy and construction markets suggests sustained gradual economic growth and accompanied by modest cement and concrete consumption gains. Unfortunately, there are currently substantial downside risks facing the economy and a 30% chance of this “lower growth scenario” materializing.
According to the “lower growth” scenario, state deficits worsen—leading to further declines in state construction activity through 2012. Increases in spending in this sector don't materialize until fiscal 2014. At the same time, housing prices continue to fall and at a faster pace than baseline estimates, while foreclosure activity abates more slowly compared to the baseline. PCA expects housing starts to remain under 600,000 through 2012. Normally, there are improvements in nonresidential fundamentals that accompany employment gains, however, PCA anticipates that this improvement will be delayed compared to the baseline and a nonresidential recovery will not begin to materialize until 2014.
Such a dire scenario has more of an impact on the timing of the cement consumption recovery than acting as a further depressant on consumption levels; although some further declines will materialize. According to this scenario, annual cement consumption remains in the 67 million to 68 million metric ton range through 2012. Maintaining our assumption regarding the timing of a new highway bill, gains in cement consumption are realized in 2013 with double-digit gains materializing in 2014 and 2015.
The current risks suggest the economy may be in need of additional stimulus to guard against such a dire outcome. However, it is unlikely any significant relief will materialize. The Federal Reserve's monetary policy actions also will bear little fruit. Interest rates already are extremely low and any economic endeavor not undertaken in today's interest rate environment will probably not be induced at lower rates. With this regard, it may well be that policymakers face a “liquidity trap,” whereby only fiscal policy initiatives can help stimulate the economy. Unfortunately, fiscal policy initiatives currently are not politically acceptable and as result unlikely.
The industry has weathered the largest volume declines in its history. PCA's “most likely” scenario expects a sustained gradual recovery in volume. The peak-to-peak recovery could take as long as 11 years (from 2005 to 2016). This scenario implies that overall economic growth will be slow and gradual—but it will be positive. Nevertheless, prudent planning should not dismiss the possibility of a “low-growth scenario.” Contingency plans should remain in place.
Portland Cement Association