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Cement & Construction Outlook MCA Winter Conference February 16, 2009 Dave Zwicke, PCA Regional Economist Overview Economic fundamentals are deteriorating quickly. Outlook shaped by policy actions. Details and size of the stimulus plan are fluid and still subject to considerable change….adds risk to PCA projections. Introduction: The Need For Stimulus… Lacking stimulus, the economy enters a deep and long contraction GDP declines 2.7% in 2009 and another 1.5% in 2010 An additional 6 million more jobs lost and unemployment reaches 10.4% State deficits reach $79 billion in 2009, $102 billion in 2010. Cement consumption declines 15% in 2009 followed by another 8.5% in 2010. Single Family housing starts decline to 400,000 annually in 2009 and 2010. Significant recovery does not materialize until 2012. Cement Consumption – U.S. (000) Metric Tons Stimulus Peak (2005)-to-Trough Decline: No Stimulus: -52 MMT With Stimulus: -40 MMT Construction Turning Points 1996=100 180 Residential 2006 160 Public 2008 140 120 100 80 Nonresidential 2008 60 1996 1998 2000 2002 2004 2006 2008 2010 2012 The Bottom Line Economic outlook remains dim…and getting darker. Adversity may continue longer than expected. No recovery in housing until 2010 Nonresidential decline slower to materialize…longer recovery Potential of fiscal crisis at State level brewing Sharp Recovery may materialize beginning in 2011 Economic Outlook Economic Outlook: Five Factors Sub-Prime Mortgage Payments Financial Crisis Defaults Write-Downs Energy Structural Global Realities Credit Cards Risk Aversion Defaults Tight Lending Standards Home Price Declines Reliance on Home Equity Gone Tight Lending Standards Commercial, Consumer, homeowner capital access reduced Global Gasoline Prices Inflation Energy Prices Fertilizer/Biofuels hit Ag Prices Supply Side Costs Ingrained Heating Prices Cost of Business Expected Inflation Rises Fed Tightens Adds Weakness to Dollar Short and Long Term Interest Rates Rise Labor Markets Slower Economic Growth One Million Job Loss in 2008 Housing Recovery Delayed Nonresidential Declines State Fiscal Crisis Looming Public Declines Economic Adversity 2006 Housing Energy Financial Crisis Inflation Labor Markets 2007 2008 2009 2010 States in Recession July December October January May 2007 2008 WA NH MT ME VT ND OR MN ID SD RI WY MI CT IA PA NE NV MA NY WI UT IL OH IN CO DE MD WV CA KS NJ VA MO KY NC TN AZ OK NM AR SC MS AL GA LA TX AK FL HI Recession At Risk Growing Source: PCA/BLS The Stage Has Been Set… Unemployment Rate -- % Change Year Ago Source: BLS = Recession Employment declines … Change in payroll jobs (000) Source: BLS Missouri Unemployment Unemployment Rate Source: BLS = Recession Housing had been the catalyst… Units (000) Source: Census, S&P Case Shiller Annual Growth Consumers now a major drag… Annual Percent Change Monetary Policy Federal Funds Rate Recession Risks Prompt Fed Rate Cuts Long Recognition Lag By Fed…Forcing More Aggressive Policy Posture Fiscal Stimulus Impacts 2nd half 2008 – 1st half of 2009 $150 Billion Rebates Expected to reduce depth and duration of recession Fiscal policy may shorten economic downturn and accelerate recovery…but it will NOT AVERT the recession Energy Prices may offset fiscal stimulus… Unleaded Gas, $ Per Gallon Every 1 Cent Increase at the Pump Takes $1 Billion Out of Consumer’s Pockets on an Annualized Basis Jan - Sep, Gasoline Prices have increased $.92 cents = Equating to a $92 Billion Annualized Draw on Consumer Spending Source: Department of Energy Economic Growth Outlook Percent Change, GDP Growth Rate Recession Scenario: With Stimulus 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% Recession Scenario: No Stimulus -4.00% -5.00% 2008.1 2008.3 2009.1 2009.3 2010.1 2010.3 2011.1 2012.3 Residential Construction Cement Demand Composition: 5Y AVG U.S. Missouri 34% 29.7% 56.2% 43% 14.1% 23% Public Residential Nonresidential Mortgage Rates Composite contract rate % Fed began cutting rates Easy Credit Period Foreclosures continue to rise… % of loans 90 days past due, SA Source: Mortgage Bankers Association 1st 2nd 3rd Foreclosures are concentrated… Below U.S. Near U.S. Above U.S. Source: Equifax, Economy.com % of households defaulting on their 1st mortgage, 08Q2 US: 1.8% Home Prices will stabilize in late 2009 Existing Single Family Homes High Inventories Will Depress Prices Into 2009 Missouri Housing Permits Units Missouri Housing Market Annual % Change -- Single Family Median Home Market Source: National Association of Realtors Economy Residential Cement Consumption Metric Tons Source: PCA Nonresidential Construction Nonresidential Construction Nonresidential Strength in 2006-2007 Favorable ROI supported by active investment environment Pent-up Commercial Demand Easy Credit Conditions Nonresidential Softening in 2008-2010 ROI Softens With Overall Economic Weakness Credit Conditions Tightening Risks and Uncertainty Grow Financial Liquidity Sub Prime TED Spread – Difference between 3m T-Bill & LIBOR Nonresidential Cement Consumption – MO Metric Tons Source: PCA Exposure to Credit Crisis Nonresidential Share of Total Cement Consumption 1 2 3 4 5 6 7 8 9 10 11 12 Source: PCA NORTH DAKOTA NEBRASKA KANSAS IOWA MINNESOTA INDIANA NATIONAL WISCONSIN SOUTH DAKOTA OHIO ILLINOIS MISSOURI MICHIGAN 28% 21% 21% 20% 20% 18% 18% 16% 16% 15% 15% 14% 12% Office Vacancy Rates. Percent Vacant Source: CB Commercial Office Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q4, 2008 Q4, 2007 Source: CBRE Office Cement Consumption - MO Metric Tons Source: PCA Industrial Vacancy Rates Percent Vacant 25 20 St. Louis 15 Kansas City 10 5 0 1995Q1 Source: CB Commercial 1999Q3 2004Q1 2008Q3 Industrial Production – U.S. Institute of Supply Management Index Source: CB Commercial Industrial Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q4, 2008 Q4, 2007 Source: CBRE Industrial Cement Consumption- MO Metric Tons Source: PCA Retail Sales Decline… Annual Percent Change Source: U.S. Census Bureau Retail Cement Consumption 000 Metric Tons Source: PCA Public Construction Cement Demand Composition: 5Y AVG U.S. Public Missouri Residential Nonresidential 2009 Fiscal Deficits Deficit % Share of Total Expenditures WA NH MT ME VT ND OR MN ID NY SD MA WI RI WY MI CT IA PA NE NV UT IL IN DE CO MD WV CA KS NJ OH VA MO KY NC TN AZ OK NM AR SC MS AL GA LA TX FL HI No Deficit Source: PCA/Census 0-10% 11%-15% 16% + Fiscal Health - Missouri Surplus/Deficit Index, 2005=100 Surplus Deficit Exposure to Fiscal Deficits SAFETEA-LU Share of Total Highway Spending 1 2 3 4 5 6 7 8 9 10 11 12 Source: PCA MINNESOTA IOWA KANSAS ILLINOIS OHIO MICHIGAN NATIONAL WISCONSIN NEBRASKA MISSOURI INDIANA SOUTH DAKOTA NORTH DAKOTA 25% 26% 29% 29% 34% 34% 34% 35% 39% 40% 40% 49% 49% Public Cement Consumption - MO 000 Metric Tons 2008: -2.0% 2009: -8.3% 2010: -2.6% 2011: +4.1% Source: PCA Take a Step Back… Current Stimulus Plan $787 Billion $120B Infrastructure/Science $27.5B Highways (Missouri: $637 Million) Allocation (70% State / 30% Local) $196B Aid to State Governments $54B Fiscal Relief $282B Tax Cuts “Shovel Ready” Timeline Jan Feb March April May June July August House Bill Obama Inaugurated Senate Passes & Bill Signed Federal Paperwork State Paperwork Bid Letting Bid Review Contractor Paperwork Construction Begins Job Creation May Come Later Than Many Expect Stimulus Timeline Policy Tool Objective 2009 Job Saving Phase I Phase II Phase III Tax Cuts, Entitlement Spending, State Aid Shovel Ready Projects Long Term Investments Stabilize Economy, halt adverse momentum Job Creation Job Creation, Address Structural Economic Issues 2010 2011 Job Creating U.S. Cement Demand -- Senate Stimulus Scenario Fall Forecast Annual Change 2009 85,485 -11.6% 2010 83,327 -2.5% 2011 91,507 9.8% No Stimulus Annual Change 76,950 -19.0% 70,025 -9.0% 76,327 9.0% 5,004 500 5,504 16,972 3,394 20,366 6,641 13,281 19,922 82,454 -13.2% 90,391 9.6% 96,248 6.5% Direct Tons Indirect Tons Total Added Demand Total Market Annual Change Total Cement Consumption – Missouri 000 Metric Tons No Stimulus 2008: -12.6%................. 2009: -11.9%................. 2010: -1.9% (+9.5%) % ……….. Source: PCA Stimulus Long Term Cement Consumption Thousands Metric Tons Missouri 2007: 2.4 MMT to 2030: 3.7 MMT Long Term Conclusions Cyclical downturn is temporary. Growth rates 2011-2013 extremely strong. Demographics remain favorable. Green building adds to consumption. Residential alone could add 9MMT over demographics. Consumption could approach 200MMT by 2035. Cement & Construction Outlook MCA Winter Conference February 16, 2009 Dave Zwicke, PCA Regional Economist