PCA: construction activity rebound in 2005

Pit & Quarry, Feb, 2004

The U.S. economy is set to move into high gear in 2004 according to the latest economic forecast from the Portland Cement Association (PCA). The optimistic outlook arrives courtesy of recent improvements in U.S. labor markets, however, PCA does not expect robust construction activity to arrive until 2005.

Chief Economist Edward Sullivan explains, "The seemingly contradictory outlook is based on the prospects of cooling single-family construction under the weight of rising interest rates, a delayed and muted improvement in commercial construction activity and a public construction sector still coping with state-level fiscal crises."

PCA reports the emerging economic recovery will create jobs, escalate wage gains and lead to stronger capital gains. Combined, these factors will strengthen states' tax base, resulting in a gradual easing of fiscal stress. PCA projects 2.7 to 3.0 percent growth in cement consumption for 2005-2008.

Highway construction

Troubling state fiscal conditions will continue to place stress on discretionary state highway spending during the near term. This, coupled with the lack of a reauthorization of TEA-21, will continue to cast a cloud over highway construction during 2004--with flat to small declines anticipated.

Not all state highway and street expenditures are tied to TEA. These non-TEA expenditures are more closely tied to the fiscal condition of the state, referred to as "discretionary highway and street state expenditures." Discretionary spending is calculated as the difference between total state highway expenditures and the estimated TEA apportionment for each state.

According to PCA's methodology, the more severe a particular state's fiscal condition, the greater the moderation in overall state expenditures and discretionary state highway spending. Discretionary highway spending for states under financial duress, such as California, will be adversely affected. As state revenue conditions improve, discretionary state highway spending will improve as well. By 2005, PCA expects the beginning of improvement in discretionary highway spending to materialize in 2006-2007. Increased spending is expected to be supplemented by larger TEA funding levels.

TEA Assumptions

Based upon discussions with various experts, there are considerable differences in opinion regarding the political outcome for new national TEA funding levels. Rather than bet the bank on a political assessment, PCA Economics has opted to employ the average of the Bush plan and the Senate plan. In doing so, the political risk associated with PCA's projections is theoretically minimized. PCA has adopted one modification to a strict average. Given the late date and no clear political solution on the horizon, PCA has taken the Senate's plan levels and pushed them back one year--making 2004 planned levels the 2005 estimates used in their calculations.

Federal legislation aimed at national transportation is expected to be renewed for the 2005 fiscal year. At worst, the Bush plan will be implemented, resulting in a 17 percent increase in funds directed at national transportation construction. The House and Senate each have progressively more generous proposals that embrace 2005-2010. While these proposals suggest strong public sector construction in 2005 and beyond, congressional delays and inaction on these programs have doomed the prospects of a significant federal stimulus for 2004.

Summary

The composition of construction growth is on the verge of change. In past years, residential activity has been the principal source of strength in the construction market. Growth in public construction activity has been under fiscal stress and nonresidential has suffered as a result of anemic overall economic growth conditions. Moving forward, PCA expects nonresidential and public spending construction activity will increasingly become the growth leaders, with residential construction recording negative growth.

The improving economy is expected to bring rising interest rates, which will result in a sustained and gradual erosion of single family starts activity beginning in the second half of 2004. At the same time, improving economic conditions will increasingly drive the recovery in nonresidential activity. The recovery in nonresidential construction is expected to be led by other commercial activity. Long lag times between improvement in economic conditions and improvement in office and industrial construction activity imply that those sectors will not begin to turn until late 2004 or early 2005.

The emerging economic recovery will create jobs, escalate wage gains and lead to stronger capital gains. Combined, these factors will strengthen states' tax base resulting in a gradual easing of fiscal stress. While this improvement will do little to help 2004 state construction spending, it will offer hope for 2005. PCA's outlook for 2004 construction calls for cautious optimism reflected in the forecast of sub 1 percent growth in cement consumption. Recent economic reports show a strengthening pattern in excess of PCA's baseline. This implies the possibility of upside risk to PCA projections.