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Editorial comment

The end of 2009 brought good news to the US economy. Fourth quarter GDP increased at an annual rate of 5.7%. While encouraging, this figure is a bit deceiving as a large portion of recent growth stems from a dramatic slowing in the rate of inventory decumulation. Nevertheless, final sales increased 2.2%, an improvement from the third quarter’s 1.5% expansion, spurred by strong expansions in exports and business equipment spending. IHS Global Insight expects GDP growth to ease to 3.0% in the first quarter, and maintain that pace for the year.

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While total output expanded in the fourth quarter of 2009, total construction put-in-place contracted 1.3%. Declines in the construction industry will accelerate in the first quarter of 2010 with an expected 20.6% retrenchment in the market. The construction industry is currently battling a rapidly deteriorating nonresidential sector in addition to a still-weak residential sector that has been in decline since 2006.

Residential construction has shown signs of improvement, but its recovery will be slow. While growth in existing home sales will fluctuate due to the expiration of the first and second homebuyers’ tax credit, single-family housing starts and new home sales are expected to improve. Starts and sales are propelled by the need to replenish inventory, a gradual pickup in household formation, and job growth. Overall, single-family home construction spending will increase over the next ten years; however, even by 2019, we do not see the market reaching its 2005 peak level of US$432 million.

While there is light at the end of the tunnel for the single-family market, the multi-family market will remain in the dark for many quarters to come. Multi-family housing faces two main obstacles to growth: low prices in the single-family market, which are pulling renters away from multi-family living and toward purchases of single-family homes, and tight credit in the commercial market, which has made it difficult for contractors to borrow money for new construction. Fortunately, the upturn in the single-family home market will dominate and total residential construction will increase 6.1% in 2010.

Nonresidential construction will remain in its current downturn through 2010. Real spending across most nonresidential construction categories is declining because of difficult financing, continuing job losses, previous overbuilding, and plummeting commercial real estate values. One of the largest players in the nonresidential sector, commercial construction, is expected to post sharp year-over-year declines through 2010, overwhelming gains in the residential sector and dragging annual total construction growth down to 6.1% in 2010 before growing 10.5% in 2011.

Cement consumption has been declining steadily since June 2006, when the housing market entered a large-scale correction. According to the Portland Cement Association, US Portland cement consumption fell 33.4% from a year earlier in October 2009, while masonry consumption dropped 31.5%. US demand for cement will remain anaemic over 2010 due to the bleak nonresidential construction outlook. Cement demand will recover when the nonresidential construction market improves in 2011.

The risk for the cement industry is weighted towards the pessimistic alternative. In this scenario, the downturn in nonresidential construction becomes deeper and longer than expected and demand for cement declines even further.

Looking at the regional view of total cement consumption – which includes Portland, blended, and masonry cement — the South Atlantic, Mountain, and Pacific regions all faced annual declines greater than 30% in October of 2009, while all other regions faced smaller double-digit declines. The West North Central fared the best with a comparatively weak decrease of 14.9%. Every region has been pulling back on cement consumption as total construction spending weakens across the board. In 2009, construction spending shrank 15.4% in the South Atlantic, 17.0% in the Mountain region, and 16.5% in the Pacific region. The West North Central region declined 0.5%, the smallest decline of all nine Census regions. Over the five year outlook, 2009 – 2014, construction growth will be the strongest in the Pacific and Mountain regions. The West North Central region will fare the worst, declining 0.4% over the period.