PCA economist: Construction economy is good, but Trump’s infrastructure proposals will take time to show benefit | Aggregate, Excavation, Dump Truck Company

Photo: RAND Corporation

It’s no mirage.

“No matter how you look at it, the near-term economy is in good shape,” says Ed Sullivan, senior vice president and chief economist at the Portland Cement Association.

Even better, there’s at least a couple more years of strong economic growth ahead, he says. After 2020 the picture is still good, but not entirely clear because a handful of factors.

Sullivan’s annual forecast for cement- and concrete-related industries in the United States is considered a bellwether for the economy in general and construction in particular.

The net job gain is the most important thing to determine near term performance of the economy, says Sullivan. And currently the economy is producing 200,000 new jobs a month. This will eventually lead to increased wages and increased inflation. Tightening immigration controls will also exacerbate the labor shortages and add more wage fuel to the inflation fire.

But for now, inflation is still low by historical standards—at or just below the Federal Reserve’s target rate of two percent. Should that rise, the Fed will have to raise interest rates, putting the brakes on the economy.

Also on the upswing: mortgage rates are going to go up, monthly payments and the prices of homes will go up. “But this is not enough to short circuit the growth in the economy,” says Sullivan.

And as much as Congress likes to bellow about the national debt, and how Trump’s tax reform bill will contribute to the debt, that shouldn’t be a problem for now, he says. “Debt by itself is not a problem, says Sullivan. “We can service federal debt as long as the economy continues to grow. When it doesn’t grow, debt becomes problematic.”

Infrastructure bill no panacea

With the economy booming one might think infrastructure funding will follow, but that’s not necessarily the case. Pubic spending on construction declined last year.

Since federal spending on construction did not change, Sullivan blames the decline on state and local outlays. “State and local revenues are good,” he says, but a lot of people are retiring. Entitlement payments are rising and, as Sullivan puts it, “When the choice is between pills for grandma or a new road, grandma wins every time.”

Still, infrastructure growth will accelerate in 2018, and the first half of 2019. But not because of Trump’s much talked about $1-trillion infrastructure proposal. Sullivan cited several reasons why Trump’s plan will do less than advertised.

• First: It will take time to get a bill through Congress and then at least two years as the machinery and logistics of spending all this money ramps up. So, for the first two years, the impact will be muted, Sullivan says.
• Second: The final bill may be much smaller than Trump envisioned. Sullivan predicts it will likely come in at $250 billion over five years and only $5- to $7-billion dollars the first year.
• Third: In response to more federal largesse, the states may pull back on their infrastructure spending, thus reducing the impact of the federal program.
• Fourth: Fearing inflationary pressures, Congress may delay implementation of the infrastructure bill by a few years.

Impact on cement and concrete industry

When factoring in all these elements, cement production will continue to grow for the next five years, but at year five, it’s liable to plateau, says Sullivan. Growth rates will average between 4.5 and 6.4 percent, he says. But in 2022 Sullivan predicts a near stagnant growth rate of just 1 percent.

This plateau won’t be because of any economic calamity, but because the industry will be leveling off after almost a decade of record growth, Sullivan says.

The only threat to cement’s long-term growth comes from one of its long-term rivals—wood, specifically the emergence of cross laminated timbers. In high rise construction, current building codes prohibit the use of CLT in buildings of more than six stories. Since the downturn, cement/concrete construction has lost six points of market share in the four- to seven-story construction to these newly emerging wood products.

But proposals are in the works for codes to allow for 18 story buildings using CLTs. Wood products are still more expensive than concrete construction, and volumes are limited, said Sullivan, but they remain one of the industry’s significant long-term threats. Over the next 25 years this could result in 40-million tons of cement gone, says Sullivan. “It is a threat to the industry,” he says.