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Update On The United States

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World Cement,

Ed Sullivan, Senior Vice President and Chief Economist, Portland Cement Association, provides a forecast of near-term US economic growth, construction activity, and the implications for cement consumption during 2023 – 2024.

The US cement market has expanded for 13 consecutive years. Even during Covid-19, when economic growth turned sour, cement consumption recorded robust growth. Covid ushered in an era of high inflation. This forced the Federal Reserve to pursue an aggressive tightening in monetary policy. Interest rates increased dramatically. The weight of high interest rates raised the prospect of a decline in cement consumption based on the weakening of private construction activity – threatening the growth streak.

This article offers the Portland Cement Association’s (PCA) view on near-term economic growth, construction activity, and the implications for cement consumption during 2023 – 2024.

The US economic outlook

The US economy is running stronger than many expected. The economy, measured by real GDP, has expanded at a rate of 1.6%. This growth has translated into the creation of more than 1.7 million jobs since the start of the year. Inflation has been cut in half since its mid-2022 peak. All this has been achieved in the context of tight Federal Reserve monetary policy that has resulted in more than a 500-basis point increase in the federal funds rate.

The remarkable strength in the labour market translates into consumer spending strength. This strength has been amplified by Covid relief spending programmes. Consumers have paid down debt and padded savings. These conditions cushion consumer spending activity when and if the adverse impacts of monetary policy reach their peak. Since consumer spending accounts for 70% of total economic activity in the US, this implies an overall economic resistance to tightening monetary policy.

Although economic growth rates have not shown significant decay from tight monetary policy, it is important to note that the lags in monetary policy are long. This makes the precise impact of these policy initiatives difficult to calibrate. According to economic studies, the lag between the start of the policy initiative and its maximum potential impact on economic activity is as long as 18 months.

PCA’s model assumes a 12-month lag. This implies two things:

  • The full brunt of the policy actions already undertaken yet to be seen.
  • It is likely that the full adverse effects of monetary policy actions already undertaken will materialise later than previously expected.

A slowdown in economic growth is expected to materialise later this year and spill over into the first half of 2024. This expected slowdown is based on the tightening of monetary policy. The brunt of its impact may surface late this year or early next year. Even then, a recession may be avoided. A more accurate portrayal may be an inflation induced economic growth slowdown – something PCA has been suggesting for some time.

PCA expects a gradual weakening in general economic conditions during the second half of 2023 and into the first half of 2024. Labour markets are expected to gradually lose strength. While inflation is expected to ease, it is not expected to recede to the Federal Reserve target rate. That implies that the Federal Reserve will be slow to pivot policy. Instead, it will likely maintain high interest rate levels before gradually easing in 2024.

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