Cement Outlook. Ed Sullivan, SVP & Chief Economist

Transcription

1 Cement Outlook Ed Sullivan, SVP & Chief Economist December 2017 I Brooklyn Center, Minnesota

2 Overview a

3 Misery Index Unemployment + Inflation+ Interest Rate Jan 1972 Jan 1977 Jan 1982 Jan 1987 Jan 1992 Jan 1997 Jan 2002 Jan 2007 Jan 2012 Jan 2017

4 Labor Markets Net Job Creation Monthly Gain % Unemployment Rate U3 Measurement % % % % % 4.0%

5 Interest Rates Interest Rates Annual % % 6.0% 4.0% 2.0% 0.0% Inflation Rate CPUI, Annual % Change BAA Bond Rate Conventional Mortgage Rate -2.0% -4.0% -6.0% %

6 Residential a

7 Affordability Conditions Mortgage Rate Conventional Fixed 5.0 New Home Price Change Annual % Change 6% 4.5 4% 4.0 2% 3.5 0% 3.0-2% 2.5-4% %

8 Affordability Conditions Monthly Payment Average New Home 1,500 New Home Price Premium % of Existing Home Price 135% 1, % 1, % 1, % 1, % 1, % % %

9 1,000 Housing Starts Single Family SAAR Multifamily SAAR Mortgage to Rent Ratio: 2005: : : : : 1,719 thousand 2017: 840 thousand % of past peak

10 Nonresidential a

11 Nonresidential Construction 25% 16.4% 20% 15% 11.0% 10% 8.6% 5% 1.2% 0% % -10%

12 Separation Between GDP & Construction Spending Growth a

13 Labor Markets Real GDP Growth Rate Quarterly 6.00% 5.00% 4.00% 3.00% 2.00% Real Construction Growth Rate Monthly 14.0% 12.0% 10.0% 8.0% 6.0% 1.00% 0.00% -1.00% -2.00% % 2.0% 0.0% % -4.0%

14 Construction Markets Private Sector Construction Growth Monthly 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Public Sector Construction Growth Monthly 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% These trends are expected to continue and under minds the growth trend %

15 a States Feel Financial Strain Number of States Enacting Budget Cuts Following Budget Approval Recent rise in budget cuts prior to a recession is not consistent with historical patterns Source: NASBO

16 a States Feel Financial Strain Governor's budgets for fiscal 2018 display significant degree of caution as states contend with slow revenue growth and increasing spending pressures coupled with federal uncertainty. Proposed 2018 budgets would increase 1.0 percent in fiscal 2018 the smallest spending increase since fiscal 2010 when states were in the depths of the Great Recession. Many states are also contending with limited budget flexibility, as spending requirement in less discretionary areas such as pension obligations and health care costs continue to rise faster than inflation and state revenues. Source: NASBO

17 Public Capital Investment Share of GDP 3.0% 2.5% State & Local capital investment in as a share of GDP has declined to a post WWII low State & Local 2.0% 1.5% Federal 1.0% 0.5% Capital investment based on structures, i.e. schools & roads. Excludes equipments & software 0.0% Source: BEA, PCA 17

18 Medicaid Growth vs State Revenues State & Local Governments 1965=100

19 Cement Consumption Performance Thousand Metric Tons 105, ,000 Jan Aug Average 93.8 SAAR 95,000 90,000 85,000 80, % 75,000 Jan Feb March April May June July August Sept Oct Nov Dec

20 Current Trends In the Context of Hurricanes & Fires a

21 Cement Consumption Performance Thousand Metric Tons 105, ,000 Displacement Recoup 95,000 90,000 85, , ,000 Jan Feb March April May June July August Sept Oct Nov Dec

22 Cement Consumption Performance Thousand Metric Tons 105, ,000 September Dues Actuals Versus Texas and Florida Trends = -419K Metric tons 95,000 90,000 85,000 80, SAAR vs the 88.2 SAAR Actual 75,000 Jan Feb March April May June July August Sept Oct Nov Dec

23 Stage II: Trump Policy Initiatives Take Hold a

24 a Fall Forecast: Trump Policies Tax Reform (L 1, 2019) Infrastructure Investment (L 2, 2019) Immigration Reform (EO) Building the Wall (L 1, 2018)

25 Political Environment & Impact on Forecast Thousand Metric Tons Trump Trump Trump Trump Face Lite Impasse Weighted Growth Face Lite Impasse Weighted Growth 20% 60% 20% Estimate Rate 5% 65% 30% Estimate Rate ,396 55,189 18,396 91,982 4,599 59,788 27,595 91, ,967 56,900 18,967 94, % 4,742 61,642 28,450 94, % ,801 59,176 19,649 98, % 4,950 64,107 29,474 98, % ,445 62,727 20, , % 5,361 67,954 30, , % ,731 63,668 21, , % 5,683 68,973 31, , % ,527 64,304 21, , % 5,382 69,663 32, , %

26 Stage II: Tax Reform a

27 a Trump Tax Policies Impact on Cement Consumption Uncertainty prevails surrounding details of tax initiative. Economic impacts, a result, contain risk. PCA has reduced the tax impact s contribution to cement consumption. Stronger Economic Growth Reaction to tax cut takes time to incubate. Stimulus adds 20 BP to growth initially in Q1 2020, and increases to 80 BP by Q4 of Construction Spending Accounts for Roughly 6% of GDP Apply General Cement Intensity Citizen Justice Tax Foundation Tax Policy Center Cement Consumption Increases

28 a Federal Debt Billion Nominal Dollars 25,060 Federal Debt is now at nearly $20 trillion. Since the Budget Control Act of 2011, the debt increased 31.2%. 20,060 15,060 Even 10,060 taking into consideration the potential revenue gains associated with stronger economic activity tax 5,060 reform may not be neutral and sets the stage for discussion of infrastructure 60 spending

29 Stage II: Trump Infrastructure Initiatives a

30 a Spring: Infrastructure Timing: Nothing Soon Based on PCA D.C. assessment may be delayed one year. One Month Six Months One Year Eighteen Months House & Senate Passage 1-9 Months Federal & State Paperwork 4-12 Months Bid Letting & Review 6-15 Months Contract Award to Construction Months Average Construction Start: 15 Months or Mid

31 Infrastructure Size of Program Billion $, Stated As Five Year Spending $1,200 With the push-back in the timing of the infrastructure $1,000 bill to 2019 to coincide with tax reform measures federal debt issues take center stage $800 and reduce the size of the infrastructure program to Clinton program of $275 billion, or $55 billion annually. $600 $400 $200 $0 Sanders Clinton Clinton Doubled Vague Suggestion Average Clinton - PCA Assumption Vague

32 Trump Infrastructure :Time Distribution Spending Allocation Calendar Years Billion $ Billion $ $ $ $2.89 $17.60 $17.88 $ $ $5.78 $17.60 $ $ $5.78 $17.60 Occurs during the forecast horizon. Total $ $2.89 $23.38 $41.25 $45.38 Progam $ % 70.0%

33 a S&L Sterilization Changes in Spending, Mil $ $8,000 $6,000 $4,000 $2,000 $0 Sterilization: 31% Sterilization: 88% -$2,000 State -$4,000 & Local Sterilization -$6,000 -$8,000 Assumption 20% Phased In by 2021 TEA/SAFETY-LU Fed + ARRA State/Local ARRA

34 a Rail Safe Water Harbor, Dams & Levees 7% Electric Grid Trump Infrastructure Spending Scenario Airports 9% 48% Public Transit 9% 9% Highway & Bridge 2% 2% 9% 34

35 a Rail Safe Water Airports Harbor, Dams & Levees 4% 3% 9% 2% 4% 2% 1% Electric Grid Trump Infrastructure Cement Distribution Public Transit Highway & Bridge 76% 35

36 Trump Infrastructure Assessments a Months Pouring is not going to happen anytime soon. House & Senate Passage. Federal & State Paperwork Bid Letting & Review Contractor Award to Construction Heightened concern about national debt will reduce the size of infrastructure spending bill. Assume $250 Billion over 5 years. Trillion $ is unlikely. Allocation versus spending reduces stimulus to cement consumption in early years of the program. Only 70% of the program allocated during the horizon and only 41% actually spent during the horizon. States may cut back expenditures on expectation of federal funding sterilizing the impact of infrastructure. Assumes a 20% sterilization

37 Stage II: Immigration Reform a

38 a Immigration Scenario Based on Center for Immigration Studies, past peak deportations were roughly 400,000 and 5,000 customs agents were deployed. That translates into 80 annual deportations per agent. Greater powers could imply higher deportations per agent. Trump hires 10,000 additional agents. At 80 deportations per agent, that implies a potential of 1.2 million deportations. 46% of deportees return within one year. That leaves a net decline of roughly 650,000 annually. This is supplemented with voluntary departures of roughly 500,000 annually. 60% of which return in one year. That leaves a net total decline in illegal immigrants of 850,000 annually. 38

39 The Wall : Cement Consumption Low Baseline High Border length Natural Barrier In Place Barriers * Length To be built Cement Consumed Cement Consumed Cement Consumed Miles Metric Tons Total 1, ,377 1,075,902 1,550,426 Texas 1, , , ,124 Arizona , , ,332 New Mexico , , ,276 California ,294 21,994 31,695 Annual consumption based on Four Year Build 150, , ,606 Other material adjustment (Percent Concrete) 50% 75% 90% Annual consumption based on Four Year Build, Material Risk 75, , ,846 Assumes existing barriers will not require replacement Low estimate based on a 20' tall wall 8" thick. High estimate based on a 60' tall wall 12" thick. * Excludes Vehicle Barriers

40 Market & Policy Response a

41 a Marketplace Reaction Financial markets react first as inflation expectations get baked into long interest rates. The yield curve steepens. Risk premiums on loans begin to edge up. Pressure on wages increases as unemployment is pushed lower. Nonlinear relationship. Wages increase faster given a 100 basis point decline in unemployment when rates are at 4%, than when they are at 5%. 41

42 a Marketplace Reaction With wage increases, labor force expands. Business invests in labor saving machinery results in a tripling in labor productivity by 2021 (If not, wages rise further). This investment will occur during a period of monetary policy tightening (high and rising interest rates). Some jobs are foregone to detriment of GDP growth. 42

43 Real GDP Outlook vs Potential 4.0% 3.5% 3.0% Growth Potential: High Range 2.5% 2.0% Growth Potential: Low Range 1.5% 1.0% 0.5% 0.0%

44 Next Federal Reserve Chairman Current Term Ends February 1, 2018 a Probability Monetary Policy Regulation Jerome Powell 41% Dove Tilts Strict Kevin Warsh 27% Hawk Big Ease John Taylor 19% Hawkish Ease Janet Yellen 10% Dovish Strict Gary Cohen 7% Dove Ease Others 5% Federal Reserve Board of Governors consists of 7 members that are appointed by the President and confirmed by the Senate. Trump may appoint 5. 44

45 Federal Funds Rate & Chairman Changes 25 Prior After Prior.41 After 2.88 Burns Volker Greenspan Bernanke Yellen 20 Miller Prior 0.48 After 0.10 Prior 0.79 After 0.75 Prior -.01 After Prior 0.80 After Nov 1969 Nov 1972 Nov 1975 Nov 1978 Nov 1981 Nov 1984 Nov 1987 Nov 1990 Nov 1993 Nov 1996 Nov 1999 Nov 2002 Nov 2005 Nov 2008 Nov 2011 Nov 2014

46 Conclusion a

47 a Portland Cement Consumption Thousand Metric Tons 140, , ,000 80,000 60,000 40,000 20, = 2.4% 2017 = 1.7% 2018 = 2.6% 2019 = 4.5% 2020 = 6.4% 2021 = 3.6% 2022 = 1.1%

48 Comparative Stimulus: Housing vs Trump a $250 3 Yr Average: 6.41% $ : 5.7% 2004: 6.3% $ : 6.6% Stimulus: 9.6 MMT 110 Stimulus: 12.6 MMT 230 $ $50 55 $0 Housing 2005 Spending Intensity Trump

49 Cement Outlook Ed Sullivan, SVP & Chief Economist December 2017 I Brooklyn Center, Minnesota