OIL PRICES PLAY THE WILDCARD IN FALL ECONOMIC FORECAST

Higher oil prices will slow overall economic activity, delaying a recovery in nonresidential and public construction. In addition, a continuation of low mortgage rates will prolong the boom in residential construction. According to the latest economic forecast from the Portland Cement Association (PCA), consumer spending will be partially compromised, inflation will run stronger, job gains will be smaller, and sentiment in both the consumer and business areas will be more sedated.

“The level and composition of construction spending is shifting,” says PCA chief economist Ed Sullivan. “In retrospect, 2004 represented a year of transition for the U.S. construction market. The strengthening economy and an increase in interest rates have set the stage for a recovery in public and nonresidential activity. The wildcard in PCA’s forecast is oil prices.”

A scenario of higher oil prices and slower economic growth translates into three key considerations to PCA’s forecast. First, slower overall economic growth implies a more gradual recovery in capacity utilization and vacancy rates, and generally lowers the expected return on investment for most commercial properties. This consideration puts PCA’s estimated gains in nonresidential construction at 9.9 percent in 2005.

Finally, mortgage rates will continue to rise, but slowly. PCA considers a mortgage rate of 6.5 percent the tripping rate – the rate that will exert enough pressure on home affordability to result in significant declines in single family construction activity. The tripping rate is not expected to materialize until the end of the first quarter of 2005, thereby adding legs to the already strong single family construction run. Overall residential construction should decrease slightly by 0.3 percent.

For 2005, construction spending is expected to reach an inflation adjusted level of $745 billion or 2.9 percent growth. Through 2008, nonresidential and public spending are expected to assume the mantel of growth leadership and residential activity will step down to become the growth laggard (although maintaining historically strong levels). Real GDP is Forecast at 3.5 percent for 2005.

CEMENT INTENSITIES IN CONSTRUCTION

PCA has incorporated an upward adjustment in cement intensities for most nonresidential and some public construction sectors. Cement intensities measure the amount of cement used per level of construction spending. The increase in cement intensities is based on an improvement in the competitive conditions of concrete, which has not run up as much in price, relative to steel.

CEMENT SHORTAGE ASSESSMENT UPDATE

Tight cement supply conditions now prevail in portions of 35 states; however, not all portions of each state are characterized by tight supplies. The methodology used in the PCA shortage map tends to exaggerate the national shortage assessment. Where cement is in short supply, the reasons are typically twofold: strong cement demand has materialized due largely to strong residential construction activity, and not enough ships are available to bring in imported cement.

PCA forecasts Portland cement consumption of 112 million tons this year, a 4.4 percent gain from last year. Gains of 2.9 percent and 2.1 percent are forecast for 2005 and 2006, respectively.

To obtain a copy of PCA’s Fall Forecast contact Ryan Puckett at rpuckett@cement.org or Ed Sullivan at esullivan@cement.org.

ABOUT PCA

Based in Skokie, Ill., the Portland Cement Association represents cement companies in the United States and Canada. It conducts market development, engineering research, education, and public affairs programs.