The Road to Recovery

Overview

While the economic recession is nearly over, the construction recession may have another 18 months before it runs its course.

The disconnect between the timing of the economic and construction recoveries is explained by the existence of structural wounds generated by the construction focused recession. Despite improvement, for example, the residential sector will continue to be plagued by a large volume of foreclosures, tight lending standards and weak new home prices. Aside from difficult access to credit markets, potential investors in commercial buildings are likely to wait until occupancy and leasing rates improve and asset prices appreciate. Finally, the impact of the stimulus is winding down and state fiscal conditions remain weak.

While the recovery process for the construction industry is long, its beginning is tied to general economic growth and job creation. Job creation will reduce, and eventually eliminate, the adverse impacts of foreclosures, tight lending standards, commercial occupancy and leasing rates, as well as the severity of state fiscal conditions. As the impediments to a construction recovery are so large, even if an acceleration in economic growth and job creation materialises on a sustained basis, the benefits will not materialise in increased construction activity until 2012, leaving construction activity relatively unaffected in 2011.

Cement outlook

The PCA expects modest growth will characterise the US cement industry during 2011 – 2012. These modest gains in residential cement consumption must be put in context of stagnant conditions in nonresidential, a continuation of state fiscal problems and a decline in stimulus spending.

Recessions correct the market imbalances created during the preceding boom periods. They cleanse. The severity and length of the recession are tied to the nature and magnitude of the imbalances generated during the boom. Unfortunately, the imbalances generated during 2003 – 2007 were extremely large, complex, and embraced all sectors of the economy, but with specific focus on the construction industry. Despite this, all recessions are temporary and a full recovery will eventually materialise. The issue is not if this will unfold, but when.

The PCA expects 2013 will mark a watershed year for the cement industry in terms of a substantive and sustained recovery in volume and company decisions to re-open in the context of harsh EPA NESHAP regulations.

By mid-2012, the exotic mortgage resets will dramatically subside, thereby ending the foreclosure crisis. By the end of 2012, residual foreclosed properties on the market will be dramatically reduced; home inventories are expected to decline to 5 – 6 months’ supply; home prices will show a sustained period of appreciation, and three years of job growth will reduce bank lending risk – making credit standards for new mortgages somewhat easier. Indeed, the PCA believes some semblance of a subprime credit market will begin to re-emerge as the risks associated with these mortgages subside (job and home price growth) and the interest rate premiums for such mortgages become more lucrative. By 2013, the combined improvement in job market conditions, lending standards, foreclosure activity and home appreciation is expected to unleash the pent-up demand for residential property that has been generated during the recession.

Furthermore, by 2013, stronger job growth will pare down the excess inventory of commercial property. Occupancy rates are expected to increase; vacancy rates are expected to decline leading to a recovery in net operating income for commercial properties. This in turn is expected to lead to asset appreciation for commercial buildings. The combination of rising net operating income and asset appreciation is likely to result in a substantial improvement in credit availability for nonresidential construction.

Finally, by 2013, stronger job growth will lead to an increase in revenue streams to state governments, substantially improving their fiscal conditions. Note the recession has led to a dramatic reduction in state discretionary cement consumption as a result of a shift in state spending priorities away from construction activity. From 2007 to 2010, state discretionary cement consumption declined by roughly 13 million t. The postponement of state construction spending during 2007 – 2012 has led to a build-up of public pent-up demand – potholes do not fix themselves. With the recovery of state fiscal conditions, this pent-up demand will be unleashed.

By 2013, the PCA expects all sectors of construction activity will record significant percentage gains from record low levels, which will result in increased cement consumption.

Compliance to Environmental Protection Agency (EPA) regulations in the form of NESHAP is scheduled to begin in 2013. The PCA estimates the EPA mandate could result in the closure of 18 cement plants. If this transpires, the combination of rising demand and capacity reduction could lead to a dramatic increase in cement industry operating rates. If demand continues to rise beyond 2013, as expected, cement executives could be facing a new challenge of sourcing the US cement market.

This is an abridged version of the full article from Ed Sullivan, Portland Cement Association, which was published in the May 2011 issue of WORLD CEMENT, available for subscribers to download now.

Read the article online at: https://www.worldcement.com/the-americas/23052011/us_economic_recovery_and_its_impact_on_the_construction_industry/