Something is in the air. You can almost feel it, touch it. Its aroma is distantly familiar. Labour markets have firmed. Unemployment has dropped below 6%. Stronger wage gains are on the way. Interest rates and inflation remain low. Aside from volatility, the stock market is performing well. Home prices are up. Consumer wealth is growing. And to top it off, oil prices are low – padding consumer pocketbooks.
I remember what it is. It is the comfortable awareness that the economy is OK again. Unquestioned economic optimism is back after eight painful years.
While PCA has been touting the coming recovery in the economy and the United States cement market for some time, such assessments were generally met with skepticism and doubt. Not this year. US cement consumption grew by more than 6.5 million t, an 8% growth rate during 2014 – on the nose with PCA projections. Furthermore, the sales pace at the end of the year showed acceleration and exceeded a 100 million t seasonally adjusted selling rate for the first time since mid-2008.
The foundation for optimism: the US economic outlook
It is OK to embrace the new optimism. The strengthening of the US job market lies at the core of PCA’s optimistic outlook regarding the economy, construction markets and expected cement volumes in the years ahead. Recently, the monthly job creation rate has been averaging more than 250 000 net new workers. This pace is expected to be maintained through the first half of 2015 and accelerate during the second half of 2015 – resulting in more than 3 million new jobs created this year. These sustained gains in monthly job creation translate into more consumer spending power, stronger state and local tax receipts, more favourable ROIs for commercial building and stronger household formation – all leading to stronger construction spending in 2015.
This implies three phenomenon are likely to accompany the job creation scenario. First, the job expansion becomes broader based and moves well beyond certain part-time and lower paid service jobs that typically characterise the early stages of recovery. Second, as labour markets tighten, pressure on wage gains will materialise in a much stronger way than they have thus far. Third, stronger wage gains will encourage a re-investment by workers in themselves to acquire new skills and induce a higher labour participation rate. This will moderate improvement in unemployment rates.
The favourable labour market conditions come in the wake of a long period of consumer deleveraging – or, paring down debt. Debt to household income now lies at an 18-year low. Consumer balance sheets have endured a healing period and, with improvement in the labour markets, will be more able to spend than they have been in quite some time.
The picture painted for consumers is one of a willing and able consumer. Two out of every three dollars the US economy generates is from consumer spending. Not only will consumers be in an improved position to increase spending, the existence of massive pent-up demand suggests that they will need to spend, propelling US economic growth at rates well in excess of 3%. Barring international risks to this scenario, this optimistic growth picture is expected to be sustained for some time.
Read part 2 here.
Written by Ed Sullivan, Group VP and Chief Economist, Portland Cement Association, USA. This is an abridged version of the full article, which appeared in World Cement’s IEEE-IAS/PCA Cement Industry Technical Conference Supplement 2015.
Read the article online at: https://www.worldcement.com/the-americas/10042015/something-is-in-the-air-part-1-666/