RECOVERY 'CLIFF' HANGER...FORECAST 2013

7/27/2019 RECOVERY 'CLIFF' HANGER...FORECAST 2013.

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F E A T U R EBY STEVE PRDKDPY

R E C O V E R Y ' C L I F F ' H A N G E R . .HDW A NEWLY RE-ELECTED PRESIDENT AND SHIFTING CC WILL DEAL WITH A

STILL-BLDW ECDNDMY AND OVERWHELMING FEDERAL DEBT IB ANYONES GUEE

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Although cement consumption andoverall U.S. construction activity in-creased significantly more than ex-pected in 2012, these gains would beimmediately erased in 2013 if the "fis-cal cliff" isnot resolved ina timelymanner. A forecast from the PortlandCement Association (PCA) expects a7.5 percent jump in cement consump-tion in 2012, up 50 basis points fromits summer forecast. However, the in-stability ofthe political landscapemakes projecting 2013 consumptionmore challenging.

The fiscal cliff came about fromdual economic objectives reflectingthe need to inject fiscal stimulus intoan inert economy and the need todeal with burgeoning federal debt.Packaged to gethe r as the Budget Con-trol Act of 2011, tax increases of $400billion coupled with $200 billion infederal spending cuts are scheduledto go into effect January 1, 2013.If Congress resolves the fiscal cliffduring its lame duck session in 2012,PCA e xpe cts the economy to continueto grow and cement consumption in2013 to increase 6 percent. A late, orno agreement during 2013, couldplunge the economy into recession

with cement consumption falling topast recession trough levels. A widearray ofconsumption outcomes arepossible for 2013 depending upon po-litical decisions.Guidance from PCA's Washington,D.C. office isperhaps the most prag-matic advice inconducting an eco-nomic forecast scenario. According toPCA-D.C, the re is a 50 percent chanceof a lame duck outcome and a50 per-cent chance ofa end-of-first-quarteroutcome. Little chance was given to alate outcome, which would spiral theeconomy into recession. Given this ad-vice, PCA ran two economic scenar-iosone with a lame duck solutionand one with a first-quarter solution,attaching equal weight to the proba-bility of each outcome. This averagedrisk methodological approach is quitedifferent than usually used byPCA andresults in a lower 2013 forecast projec-tion compared to the summer forecast.PCA Chief Economist Ed SulUvan the-orizes that forecasts are based on as-sumptions and are typically moreaccurate when the assumptions madeare "weak"or based on very plausibleoutcomes. Forecasts often errwildlywhen "strong" assumptions are

madeor based on uncertaincomes. The politics surrounding tcal cUff outcome and its timinhighly uncertain. The implicatthat drawing a Une in the sand acepting "A" version ofthe fiscaoutcome carries huge risk. A lamassumption, for example, carriesdownside risk. A "no deal in 201sumption carries large upsiderisking the past several weeks, dozpolitical "experts" have voiced wdifferent conclusions regarding thcome and timing of the fiscal cU

Going by this technique, even igress addresses the poUcies by thquarter of2013, the delay willsignificant economic harm anddrop in cement consumption, Suobserves. "Because we beUeve thfor either outcome are even, weadopted a forecasting approachminimizes up and downside risksaid. "Our baseUne scenario blentwo possible outcomes and proj1.8 percent increase in cemensumption in 2013."SulUvan also reported that theCongress delays in addressing thecUff, the greater the adverse affeconomic growth and constructionity in particular. "If no action is tamid-2013, the country could be hinto a severe recession."The PCA report also said cemensumption through September 20increased 10 percent comparedyear, with 16consecutive mongrowth. SulUvan attributes this gto the return of consumer confidestrong housing market and most tantly, growth in employment.Echoing Sullivan's concerns the fiscal cliff, McGraw-Hill Cotion's report, 2013 Dodge ConstrOutlook, forecasts U.S. constrstarts for 2013 will rise 6perc$483.7 billion, slightly higherth e 5 percent increase to $458 estimated for 2012.


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a5 percent increase," said McGraw-Hillnstruction [part of The McGraw-Hill Com-ofEconomic Affairs

abasis. The modest gains expe-past two years have in ef-an extended bottom for

ThefiscalcUff poses a significant downside

n there are several positiveors to benefit construction, including low

S C A L C L I F F D I V I N G

first-quarter 2012 cement consumption lev-els brought about by very favorableweather conditions. During that period, ce-ment consumption averaged more than a79 milUon metric SAAR (Seasonally Ad-justed Annual Rate)or roughly 7 percentabove the most recent three-month aver-

a g e . Absent poUtical uncertainty, PCA expects first-quarter comparisons will ruroughly 6 percent behind 2012 levels. If thfiscal cliff is not solved during the lamduck session and political uncertainty remains in place, first-quarter cement consumption comparisons could run roughl

Total Cement ConsumptionPortland CementMasonry CementCement & C linker ImportsImport Share

U . S . C E M E N T C O N S U M P T I O N F O R E C A S T(000 Metric Tons) United States Fall 20122011 2012* 2013* 2014* 2015* 2016* 2017*72,126 77,470 79,027 86 ,060 97,904 107,864 114,89070,292 75,541 76,878 83,53 0 94,767 104,374 111,0611,834 1,929 2,148 2,529 3,138 3,491 3,8296,542 6,920 6,900 6,900 6,900 8,760 13,1069 . 1 % 8.9% 8.7% 8.0% 7.0% 8.1% 11.4%

PER C EN T C H A N G ETotal Cement ConsumptionPortland CementMasonry CementCement & Clinker ImportsSource: Portland Cement Association

2 . 7% 7.4% 2.0% 8.9% 13.8% 10.2% 6.5%2 . 9% 7.5% 1.8% 8.7% 13.5% 10.1% 6.4%- 4 . 4 % 5.2% 11.4% 17.7% 24.0% 11.3% 9.7%- 3 . 5 % 5.8% -0.3% 0.0% 0.0% 27.0% 49.6%

*estimated


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11 percent behind 2012 levels.Even this late in the year, tremendousuncertainty exists for 2013 cement con-sumption, according toEd Sullivan. Hugerisks are implied in corporate planning ef-forts if a lame duck or fiscal cliff outcomeare assumed. One thing is likely: one of thegeneral scenarios will materialize. SincePCA has used an unusual blended risk ap-proach regarding its fall forecast, this im-

plies it will be off, but less so ifit optedfor the single wrong assumption. PCA haspromised a new forecast as soon as the po-Utical environment becomes more clear.According tothe Lame Duck AgreementScenario, Congress recognizes the urgencyof achieving an accord to avoid the disrup-tive impacts on the economy. Political com-promise trumps political ideologies. Thisimplies that an agreement on the fiscal cUff

G R E E N B U I L D I N G O U T L O O K S T R O N G F O R N O N - R E S I D E N T I A L ,R E S I D E N T I A L S E C T O R S , S A Y S R E P O R T

The U.S. green building market continues to accelerate, according to McGraw-HillConstruction's 2013 Dodge Construction Green Outlook report. The value of greenbuilding has seen growth from $10 billion in 2005 to $78 billion in 2011. In 2012,the total marketnon-residential and residentialis expected to be worth $85billion, and by 2013, overalL new green building is projected to rise to between$98 billion and $106 billion. By 2016, this number is expected to reach $204 bil-lion to $248 billion.According to the report, green building remains a bright spot in astill un-certain economy. Green is expected to represent 44 percent of all commercialand institutional construction in 2012, growing up to 55 percent by 2016. Res-idential green construction is also on the rise. It is expected that by the endof 2012, green homes will comprise 20 percent of the market, and in2013 a22-25 percent share by value is expected, equating to a $34 billion-$38 billionopportu nity. By 2016, this share by value isexpected toincrease to 29-38percentan estimated $89 billion-$116 billion, based on the current single-family residential construction forecast.To break it down further, while education construction is down, green has re-mained astronghold at 45 percent, continuing to be the largest opportunityfor green building. The office market has the largest share ofgreen with 54percent in 2012, abright spot considering the overall expected growth ofthesector in the near term."We're seeing tremendous growth in green building, providing a bright lightin an otherwise uncertain economy," said Harvey M. Bernstein, vice president.Industry Insights and Alliances for McGraw-Hill Construction. "Not only doesthis mean a strong outlook for green building, but also the benefits that goalong with th at: more job s, grea ter financial benefits from green and high per-formance buildings, stronger competitive positioning for those firms that buildgreen, and healthier work and learning environments for our population."Other key points found in the study include: Health-related green building labels are taking force in construction specifi-cations, growing more rapidly than any other aspect ofgreen, according toDodge SpecShare. One-third ofall home buiLders in the U.S. expect to be fully dedicated tobuilding green by 2016. Green construction jobs are following the green building market; 35 percenthave green jobs today. Eighty-one percent of executive leaders in corporate America believe the pub-lic expects them to engage in sustainabilityone of the key forces driving cor-porations to institutionalize some green efforts. 30 percent of senior executiveofficers report that they are greening two-thirds of the buildings in their port-folio, with 47 percent expecting to do so by 2015.

would be reached immediately afteelectionduring the lame duck seFurther, PCA assumes that such an awould minimize the short-term cosnarrowing the deficit and enact awhat more aggressive, longer-term cnation of tax and fiscal spending pothat would avert troubles now facingeral European economies. Italso asthat the federal debt level issue will bdressed at the same time of the agreeGiven these assumptions, the neardisruptive economic aspects assocwith the fiscal cliff are significantduced and real GDP growth would bemarginally impacted during the fohorizon. Consider the following: Real GDP growth strengthens to 2.cent in 2013, with stronger growth rializing in the second half of the y

Recent strengthen ing in job growttinues and accelerates during the shalf of 2013 creating roughly 2 mjobs ineach year. Unemploymenremains and gradually declines tpercent by year-end. State fiscal cond itions healing pcontinues. Surpluses emerge for

2014-2015. Improvements in nonresiden tial varates and net operating incometinue. The nonresidential construrecovery is sustained. Residential construction expan950,000 starts, with single familystruction near 700,000 starts d2013 and reaches over one millionin 2014/2015. Cement consum ption grows at ratesistent with 2012 levels, perhaps str

While there isconsiderable uncerregarding the timing ofCongress' athe acceptance of this scenario is cenon several observations. Eirst, facedthe possibility of the United States' don federal debt, the extension of fdebt limit during 2011 was eventualsolved. While the resolution came11th hour, and atthe expense ofgeoning economic recovery, severe aconsequences to United States' eco


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economicit represents a bipartisan accord., in the post-election timeframe, much

porary agreement. This scenario's projec-tions assume an eleventh hour accord.According to this scenario, the economygrows slowly during the remainder of 2012and gradually through 2013 with real GDPaveraging roughly 2.5 percent annually.

Roughly 2 million jobs are created th is year

and next. Structural impediments to a costruction recovery gradually heal in thconte xt of slow job growth. Housing st arrecord large percentage gains, but in thcontext of gains oft near historic lows. Noresidential continues to achieve volumgains. Gains in the residential and nonre

F M I R E L E A S E S T H I R D - Q U A R T E R C O N S T R U C T I O N O U T L O O K R E P O R T"Contrary toelection-year rhetoric, theeconomy isinching i ts way to improve-ment, and the construction industry hasnot stopped working," according toth ethird-quarter 2012 Construction Outlookreport by FMI, the largest provider ofmanagement consulting and investmentbanking to the engineering and construc-tion industry. The industry forecast is call-ing for an 8.0 percent increase in t o t a lconstruction put in place for 2013. Con-tributing to this positive forecast is morerobust growth in residential construction,as weLl as a few strong markets in nonres-idential and non-bui lding co nstruction.

The focus for 2013 will be on the move-ment of private money back into the mar-kets. For the economy to grow at a fasterrate with the fiscal cliff looming and stateand mu nicipal budgets s till in repair mode,it wiLl be the private markets that must leadthe way. Total construction put in place for2013 is forecast to be $892 billion, a solidimprovement over the last few years, butsti l l jus t edging o ut 2003 levels of con-struction activity.

Housing starts rose to 603,000 units ayear as of September 2012. Single-familypermits also rose to a 545,00 0-unit pace,or 6.7 percent, returning to levels notseen since July 2008.

FMI staff tracks nonresidential con-struction trends and forecasts by sector: LODGINGHotel developers will ren-ovate before buiLding new prop erties.

Bank loans will behard to j us t i f yuntil occupancy and room rates re-main consistently high.

OFFICEThrough the first two quar-ters of 2012, the U.S. office sectorhas now absorbed 10.4 million sq. ft.,100,000 sq. ft. less of net absorptionthan was generated over the first sixmonths of 2 0 1 1 . (Jones Lang LaSalle,"United States Office Outlook-022012). This is not yet enough activity

but we expect CPIP to improve 4.0percent in 2013.COMMERCIALExpect more rethink-ing of commercial construction spaceto accommodate smaller stores andcombining in-store sales with onlineshopping. Look for increasing multi-use projects.HEALTH CARENew health care con-struction w il l include a growing num-ber of renovation projects toupdatecurrent facilities for modern hospitaldesign, using more technology in therooms aswell as for improving airquality and reducing energy usage.EDUCATIONSignificantly less fund-ing from states for K-12 schools.

RELIGIOUSThe lending environmentcontinues to be a chaLlenge for manycongregations.PUBLIC SAFETYDespite overcrowd-in g in prisons, we expect publicsafety construction to remain slow forthe next couple of years, at least withonly 1 percent growth in 2013 to$10.2 bi l l ion.AMUSEMENT AND R E C R E A T I O N -Money for sports stadiums will be hardto find from local government invest-ment, and banks will be reluctant tolend toanyone who couldn't alreadypay for the project from cash flow.TRANSPORTATIONThis remains astrong sector for construction. CPIP isexpected to grow 6 percent in 2013 toa to ta l of $38.2 bill ion for the year.This is due in part to The FAA Modern-ization and Reform Act will provide$63.6 billion for the agency's programsbetween 2012-2015.COMMUNICATIONSGrowth incom-munication construction is beingpowered by an insatiable need forspeed and to send and store largeamounts of multimedia files over theInternet. One trend that might slow

the trend touse mini cel l " towers,"which are small, easily installed boxesthat help to maximize spectrum.MANUFACTURINGManufacturing con-struction is starting to make a comebackwith both new growth inplant outputand with some companies repatriatingtheir capacity.POWER-RELATEDPower constructionwil l continue to be one of thestrongest growth sectors for construc-t i on . Worthy to note is U.S. ArmyCorps of Engineers has a proposal outfor $7 bill ion inlocally generated re-newable energy through power pur-chase agreements.HIGHWAYState budgets wil l con-t inue to be strained and it wiLl bed i f f i cu l t to get larger projects offthe ground. Therefore, funds fromthe MAP-21 and TIGER grants makeup a large percentage of construc-t ion put in place included in FMI's2013 forecast of $84.7 bi l l ion forhighways and streets.SEWAGE AND WASTE D ISPOSALWaste-to-energy may be one of th ebest bets for future work in this sec-to r if more municipal i t ies can f indways to work with private investors.WATER SUPPLYExpect this sector tostruggle to find funds for necessary re-mediation and construction. Strengthin water supply construction wilL befound in pockets for industrial projectslike the mining sector, power and in-dustrial plants.CONSERVATION AND OEVELOPMENTThe 2012 annua l budget for the Depart-ment of Agriculture eliminates fundingfor the Resource Conservation and De-velopment (RC&D) and Watershed andFlood Prevention Operations programs.New projects in this sector. Like watersystem projects, will more likely comefrom cleanup for the mining and energy


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idential sectors more than offset expectedpublic sector drags.Economic momentum gains strengththrough 2014 and beyond. GDP grows at anaverage rate of more than 3 percent annu-ally. Job growth averages more than 2.5million jobs annually. Stronger U.S. andglobal economic growth translates in tohigher oil pricesstealing some economicgrowth momentum, but resulting in an en-hancement in concrete's competitive posi-tion against asphalt.The key economic impediments to a con-struction recovery, namely foreclosure ac-tivity, high vacancy rates and weak statefiscal conditions gradually subside. Theseconditions, coupled with the release ofpent-up demand, prompt a construction re-covery in all residential, nonresidential andpublic sectors. Cement consumptionachieves double-digit growth 2014-2015.According tothe Eiscal Cliff Scenario,Congress fails to reach an accord during thelame duck session. Competing politicalideologies hold firm until noticeable harmto the economy m aterializes. PCA assumesan agreement regarding the fiscal cliff isreached at the end of the first quarter2013. Lacking any firm understanding re-garding the details of the agreement, PCAassumes taxes rise half the level currentlyprescribed by law. Similarly, spending cutsare assumed to be 50 percent less severe.Furthermore, PCA assumes that Congresswill recognize thedamage done to theeconomy due to their hesitancy to addressthe fiscal cliff and will retroactively applythe new tax and spending rates back toJanuary 1, 2013. This assumption essen-tially neutralizes any direct fiscal cliff im-pacts on GDP during the second quarter.

resulting in near neutral GDP growth.Once an agreement is reached regardingthe fiscal cliff, investment and job hiringuncertainty will diminish. PCA has esti-mated the amount of investment activityforegone since the end of the second quar-te r 2012 due to fiscal cliff unc erta inty . PCAassumes that half of the estimate will bereleased equally in the three quarters sub-sequent to the agreement. These estimatesand assumptions add 0.3 percent torealGDP in these quarters.Furthermore, weak United States' eco-nomic growth during the first half of 2013,in the context of slowing world growthplaces downward pressure on oil prices. Oilprices decUne to the low $80/barrel range.Gasoline prices follow the decline in oilprices, adding as much as $25 billion backinto consumer pockets and offsetting someof the impact of higher taxes.According to this scenario, first-quarter realGDP growth declines 1.8 percent. Given theadverse momentum generated, first-quarteradversities translate into near-zero growthduring the second quarter and tepid growthduring the remainder of 2013, leaving overallreal GDP growth near zero. The job gains theeconomy is now achieving are replaced by agradual decline in job momentum during thefirst quarter of 2013, near zero growth in thesecond quarter, followed by modest job cre-ation in the second half of 2013.The gradual recovery from the first-half2013 contraction is expected to continuethrough 2014, resulting inmodest eco-nomic growth. Shaken consumer confi-dence gradually improves, while corporateprofits and business sentiment also slowlymend. Job creation, as aresult, managesonly tepid growth, but achieves moderate-

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RECOVERY 'CLIFF' HANGER...FORECAST 2013