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Cement & Construction Outlook Precast Concrete Association of Virginia: Fall Conference September 25, 2008 Dave Zwicke, PCA Regional Economist The Bottom Line Near Term Adversity Economic outlook remains dim. 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 Construction Spending Millions 1996$ Declines Continue Through 2009. Peak (2006)-to-Trough (2009) Decline: -20.8% -- $-154 billion Cement Consumption (000) Metric Tons Declines Continue Through 2009. Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) (On a Percentage Basis: Equal to 1980-82 Recession) Construction Turning Points 1996=100 180 Residential 2006 160 Public 2009 140 120 100 80 Nonresidential 2008 60 1996 1998 2000 2002 2004 2006 2008 2010 2012 Outlook Double-digit declines in consumption with trough in 2009 Large capacity increases in the pipeline magnify potential market imbalances Imports record large, sustained declines Global demand conditions suggest high freight rates 2008 bears most of the burden of market imbalance Inventory levels remain above historical averages Past peak (2005) not realized until 2014 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 Sub-Prime Energy Financial Crisis Inflation Labor Markets 2007 2008 2009 2010 States in Recession As of August, 2008 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 Recession GA At Risk LA TX AK FL HI Source: PCA/Economy.com Growing The Stage is Set… Unemployment Rate -- % Change Year Ago Source: BLS = Recession Employment declines … Change in payroll jobs (000) 400 300 Period of slowed hiring 200 100 0 -100 2007: + 1,096,000 YTD: -605,000 -200 Jan-05 Source: BLS Jan-06 Jan-07 Jan-08 5 year Average Employment Declines are Regional July Year-to-date 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 Loss GA Flat LA TX AK FL HI Source: BLS Gain County Job Growth July Year-to-date Job Growth Job Loss Source: BLS Housing has been the catalyst… Units (000) Source: Census, S&P Case Shiller Annual Growth Consumers feel the crunch… Annual Percent Change Consumer Pessimism Growing 1985=100 Source: Conference Board Monetary Policy Federal Funds Rate Recession Risks Prompt Fed Rate Cuts Rising Inflation Forces a Policy Reversal 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 Since January 1st, Gasoline Prices have increased $1.23 cents = Equating to a $120 Billion Annualized Draw on Consumer Spending Source: Department of Energy Economic Growth Percent Change, GDP Growth Rate Tax Rebate Bump Hard to Sell Businessmen that Recession is “technically” Avoided or Short Lived – Distress Continues well Into 2009. Residential Construction Cement Composition - Virginia 2005 2009 49.0% 39% 26.6% 41% 24.4% 20% Public Residential Nonresidential Mortgage Rates Composite contract rate % Fed began cutting rates Easy Credit Period Foreclosures on the rise… % of loans 90 days past due, SA Source: Mortgage Bankers Association Foreclosures are concentrated… Below U.S. Near U.S. Above U.S. Source: Equifax, Economy.com % of households defaulting on their 1st mortgage, 08Q1 US: 1.8% Home Prices will stabilize in late 2009 Existing Single Family Homes High Inventories Will Depress Prices Throughout 2008 National Housing Starts 000 Units States Most at Risk to Residential Weakness Residential Share of Total Cement Consumption DELAWARE FLORIDA NORTH CAROLINA GEORGIA VIRGINIA SOUTH CAROLINA MARYLAND NATIONAL WEST VIRGINIA Source: PCA 51.6% 47.0% 40.1% 38.8% 36.1% 33.0% 31.7% 30.2% 28.6% Virginia Housing Market Annual % Change -- Single Family Median Home Source: National Association of Realtors Single Family Housing Annual Percent Change Metro Home Prices Percent Change Year Ago, June 2008 (3MA) Source: Case Shiller Residential Cement Consumption - Virginia 000 Metric Tons 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 2008-2009 ROI Softens With Overall Economic Weakness Credit Conditions Tightening Risks and Uncertainty Grow Nonresidential Construction Annual Percent Change Dodge Data Has Already Signaled a Decline Financial Liquidity Sub Prime TED Spread – Difference between 3m T-Bill & LIBOR Lenders Reporting Tighter Lending Standards: Commercial Percent Reporting Tighter Lending Standards 40 Medium to Large Firms Easy Credit Period 30 20 10 0 Small Firms -10 -20 -30 Sub-Prime Has Spilled into Commercial Credit Markets 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008 Q1 Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey 120 Business Leaders Confidence Index has declined 23% during past year. 100 80 Bullish Business Attitudes 60 40 20 0 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008 Q1 Nonresidential Construction 2007 Momentum is Burning Off Measured by PIP, Nonresidential Outperformed PCA Expectations. But, Cement Intensities Declining Evidence that a retraction in nonresidential lies ahead Fundamentals Deteriorate…Longer Recovery Larger declines of 2009 Nonresidential Cement Consumption - VA 000 Metric Tons States Most at Risk to Credit Crisis Nonresidential Share of Total Cement Consumption WEST VIRGINIA VIRGINIA MARYLAND NORTH CAROLINA NATIONAL DELAWARE GEORGIA FLORIDA SOUTH CAROLINA Source: PCA 24.7% 21.2% 20.8% 18.8% 18.5% 17.5% 15.0% 14.3% 11.4% Office Vacancy Rates – U.S. Percent Vacant Source: CB Commercial Office Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q2, 2008 Q2, 2007 Source: CBRE Office Cement Consumption - Virginia Metric Tons Industrial Vacancy Rates – U.S. Percent Vacant 20 18 Washington D.C. 16 14 12 10 8 6 U.S. 4 2 0 1984Q2 1987Q2 1990Q2 1993Q2 1996Q2 1999Q2 2002Q2 2005Q2 2008Q2 Source: CB Commercial Industrial Vacancy Rates Metros with largest increase in vacancy rate, % Vacant Q2, 2008 Q2, 2007 Source: CBRE Industrial Production – U.S. Institute of Supply Management Index Source: CB Commercial Industrial Cement Consumption - Virginia Metric Tons Public Construction Cement Composition - Virginia 2005 Public 2009 Residential Nonresidential State Fiscal Conditions $49 Billion Shortfall in 2009 2009 Projected Budget Gaps 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 Deficit GA LA TX AK FL HI Source: PCA/Center on Budget and Policies Priorities Surplus States Most at Risk of Budget Shortfalls Public Cement Consumption Share of Total SOUTH CAROLINA NATIONAL MARYLAND WEST VIRGINIA GEORGIA VIRGINIA NORTH CAROLINA FLORIDA DELAWARE Source: PCA 52.8% 51.2% 47.8% 46.4% 46.0% 42.9% 41.1% 38.6% 30.0% Other Public Cement Consumption - VA Metric Tons 2008: -14.2% 2009: -8.2% 2010: +4.4% 2011: +7.8% Other Public Cement Consumption - VA Metric Tons 2008: -14.2% 2009: -8.2% 2010: +4.4% 2011: +7.8% Market Dynamics Total Cement Consumption - Virginia 000 Metric Tons 2008: -12.0% 2009: -9.3% 2010: +2.8% 2011: +9.3% Virginia Metro Markets User Group Residential Nonresidential Public DC Metro 33% 21% 46% Norfolk 34% 16% 50% Richmond 42% 14% 44% Source: PCA Market Research Direct Shipments Survey - Virginia User Group 2005 2006 2007 Ready-Mix 64% 64% 74% Street & Highways Contractors 6% 6% 3% Building Materials Dealers 1% 5% 4% Pre-Cast 12% 14% 14% All Other 9% 6% 3% Brick & Block 7% 4% 1% Concrete Pipe 1.5% 1.4% 1.3% Source: PCA Market Research Take a Step Back… Long Term Cement Consumption 000 Metric Tons Long Term Cement Conclusions Growth Outlook Favorable Discount current short-term business cycles Population and economic growth support consumption “Green” advantages of concrete will add to demand Cement & Construction Outlook Precast Concrete Association of Virginia: Fall Conference September 25, 2008 Dave Zwicke, PCA Regional Economist