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Wisconsin Concrete Pavement Association
Ed Sullivan, SVP & Chief Economist
February 2018 I Pewaukee, Wisconsin
-100
0
100
200
300
400
500
2014 2014 2015 2015 2015 2016 2017 2017
Net Job CreationMonthly Gain
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
2014 2014 2015 2015 2015 2016 2017 2017
Unemployment RateU3 Measurement
Labor Markets
0
2
4
6
8
10
12
2000 2002 2004 2006 2008 2010 2012 2014 2016 201
Unemployment Rate%
Source: BLS 3
Current Rate:Wisconsin:
3.0%National: 4.1%
Inflation RateCPUI, Annual % Change
Interest Rates
0.04
1.04
2.04
3.04
4.04
5.04
6.04
2014 2015 2015 2017
Interest RatesAnnual %
BAA Bond Rate
Conventional Mortgage Rate
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
2014 2014 2015 2015 2015 2016 2017
0
20
40
60
80
100
120
140
2014 2015 2015 2017
Consumer Confidence1985=100
0
50
100
150
200
250
300
350
400
2000 2005 2010 2015
Home PricesThousand Current $
Sentiment & Wealth
Stronger Economic Growth
Apply General Cement Intensity
Trump Tax Policies Impact on Cement Consumption
Construction Spending Accounts for Roughly
6% of GDP
a
Cement Consumption Increases
• Joint Committee on Taxation• Wharton • Tax Foundation • Goldman Sachs
Reaction to tax cut takes time to incubate. Stimulus adds 20 BP to
growth initially, and increases to 80 BP by Q4 of 2022.
Trump Tax Policies Preliminary Impacts a
Joint Com./Taxation:
Wharton :
Goldman Sachs :
Tax Foundation :
Average :
GDP % Impact
+0.8%
+0.1%
+0.3%
+0.4%
+0.24%
GDP $ BilImpact
$137
$17
$52
+$61
+$65
Construction $ Bil
Impact
$8.2
$1.0
$3.1
$3.6
+$3.9
Cement Consumption(000) Impact
820
100
310
360
390
PCA’s Fall Forecast Assumed a 2019 Impact:
This is now in play earlier than expected. And MAY add strength to Regional &
National Forecasts
The State of the Economy is Good• Sustained strong job creation & low unemployment rates.
• Wage gains accelerate & compounded by tax cuts.
• Increase in home values & equity markets generate wealth gains.
• Household debt burdens are low and credit quality is strong, leading to easier access to credit.
• Interest & inflation rates rise, but slowly and well below historical norms.
• Willing & able consumer. Business taxes may add strength to investment.
• Strong private sector generates more income & tax revenue for state & local that supports strength in public spending.
GDP Growth Rate:
2.5% is now the minimum
Residential
a
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2014 2014 2015 2015 2015 2016 2017
Mortgage RateConventional Fixed
Affordability Conditions
800
900
1,000
1,100
1,200
1,300
1,400
1,500
2014 2014 2015 2015 2015 2016 2017
Monthly PaymentAverage New Home
As a Percent of Household Income:
Well Below Past Cyclical Peak
Housing Outlook
• Low mortgage rates, job gains help in affordability despite strong gains in home prices.
• Millennials burdened by debt, forming households and families later and not as accepting that homeownership a safe bet for asset accumulation, are slow to enter the new SF market.
• Low inventories, rising prices should provide incentive to accelerate building.
• Skilled workers left the construction workforce and the pipeline is slow to replenish. Reduces starts by as much as 100,000 annually.
• PCA takes a conservative position. Upside risks.
a
400
500
600
700
800
900
1,000
2014 2014 2015 2015 2015 2016 2017
Single FamilySAAR
200
250
300
350
400
450
500
550
2014 2014 2015 2015 2015 2016 2017
MultifamilySAAR
Housing StartsMortgage to Rent
Ratio:
2005: 2.12010: 1.32015: 1.02017: 1.0
2005: 1,719 thousand2017: 848 thousand- 48% of past peak
SF Starts (thousands):
2016: 7842017: 8482018: 9142019: 964
Nonresidential
a
Linkage to Nonresidential Construction Activity
New Office Hiring
Vacancy Rates
Decline
Leasing Rates
Stabilize
Credit Troubles Ease
Asset Prices Firm
1/5 of all jobs in the office.
Perceived lending risks decline
Leads to growth in office
construction.
Labor market strength translates into nonresidential
construction activity growth across many
commercial real estate markets.
Nonresidential Construction
0
50
100
150
200
250
300
350
2000 2005 2010 2015 2020
NonresidentialReal Construction $
NonresidentialAnnual Growth %
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2000 2005 2010 2015 2020
2016: 1.3%2017: 3.5%2018: 2.1%2019: 2.8%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
2015 2016 2017 2018 2019 2020 2021 2022-2.7% 20.3% -6.5% 23.0% 5.0% -7.1% -1.7% -4.3%
Nonresidential Cement Consumption – WisconsinMetric Tons
Source: PCA 16
CAGR 2017-22+2.5%
Potential Upside RiskTaiwanese electronics company Foxconn has awarded Rhode Island-based Gilbane Building Company the general construction contract for its new $10 billion factory in Mount Pleasant, WI, according to BizTimes.
Infrastructure and utility work for the four-year project has already started, and construction on the first of three 1.5-million-square-foot buildings could start as early as April. The project is expected to span 22 million square feet when complete.
After Foxconn makes an official announcement regarding its choice for general contractor, local construction companies expect the subcontractor award process to begin. The project could generate 10,000 construction jobs, representing $600 million in earnings each year, along with 6,000-10,000 additional support jobs like suppliers.
FOXCOM is included in the nonresidential forecast estimates (conservative estimates).
It does not include secondary impact…such as roadways supporting high traffic volumes and
vehicle weights.
Public Construction
a
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015Source: BEA, PCA 19
State & Local capital investment in as a share of GDP has
declined to a post WWII low
State & Local
Federal
Capital investment based on structures, i.e. schools & roads. Excludes equipments & software
Public Capital InvestmentShare of GDP
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
2015 2016 2017 2018 2019 2020 2021 202229.9% 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3%
Highway Cement Consumption – WisconsinMetric Tons
Source: PCA 20
CAGR 2017-22+5.4%
State DOT Paving - Wisconsin
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Wisconsin Highway Concrete Volume Share(from Oman data – 2017 Q3)
Total Pavement Spending
($ mil)
Concrete Pavement Spending
($ mil)
Sq Yards (000)
Cu Yards (000) Volume Share
2006 $166.60 $50.46 2,099 545 19%2007 $190.81 $53.82 2,351 575 17%2008 $233.96 $50.21 1,738 428 20%2009 $352.49 $106.43 3,224 886 27%2010 $423.18 $144.84 5,014 1,352 35%2011 $277.55 $99.54 3,179 861 34%2012 $314.63 $100.18 3,150 875 33%2013 $282.52 $102.64 2,990 795 35%2014 $238.18 $96.04 2,155 589 34%2015 $208.88 $90.41 2,104 570 36%2016 $203.52 $109.24 2,335 624 43%
2017 (3Q) $108.00 $73.21 1,803 547 68%
National Average = 15%
Trump Policy Initiatives
a
Federal DebtBillion Nominal Dollars
60
5,060
10,060
15,060
20,060
25,060
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
a
Federal Debt is now at nearly $20 trillion. Since the Budget Control Act
of 2011, the debt increased 31.2%.
Even taking into consideration the potential revenue gains associated
with stronger economic activity…tax reform may not be neutral and sets
the stage for discussion of infrastructure spending.
Its not about the need to invest in infrastructure…..Its how do you fund it.
$0
$200
$400
$600
$800
$1,000
$1,200
Sanders Clinton Clinton Doubled VagueSuggestion
Average Clinton -Vague
PCA Assumption
Infrastructure Size of ProgramBillion $, Stated As Five Year Spending
Possible push-back in the timing of the infrastructure bill – federal debt issues take center stage and reduce the size of the infrastructure program to Clinton program of $250 billion, or $50 billion annually.
Annual appropriation is not annual spending. In the first year of a $50 billion appropriation, only $5 to $7 billion will be spent in that first year.
Trump Infrastructure Spending Scenario
48%
9%
2%2%
9%
9%
9%
7%
Highway & Bridge
25
Public Transit
Airports
Harbor, Dams & Levees
Safe Water
Rail
Electric Grid
a
State & Local Sterilization Assumption
20% Phased In by 2021 and only applied to highways.
Trump InfrastructureCement Distribution
76%
4%
1%2%
4%3%
9%2%
Highway & Bridge
26
Public Transit
Airports
Harbor, Dams & Levees
Safe Water
Rail
Electric Grid
a
Potential Contribution to Cement Consumption (MMT)
Year One: 1.5 to 2.0Year Two: 4.0 to 5.0Year Three: 6.5 to 7.5
As details emerge on the infrastructure program,
estimates will be calibrated.
ME
RI
MA
VTNH
AL GA
SC
TN
FL
MSLA
TX
OKNM
KS
MN
IA
MO
AR
WY
CO
ND
SD
NE
WA
ID
MT
OR
NVUT
AZ
CA
WI
ILIN
MI
OH
WVVA
NC
MD
DE
PA
NY
CT
NJ
11%+ 10% to 5% Less Than 5%
% Share of lane miles rated ‘poor’ based on IRI
Source: FHWA – Table HM-64, PCA
The Need for Infrastructure Funding
KY
National Average12.8%
ME
RI
MA
VTNH
AL GA
SC
TN
FL
MSLA
TX
OKNM
KS
MN
IA
MO
AR
WY
CO
ND
SD
NE
WA
ID
MT
OR
NVUT
AZ
CA
WI
ILIN
MI
OH
WVVA
NC
MD
DE
PA
NY
CT
NJ
Top Third Middle Third Bottom Third
Estimated allocation of funding based on stock of deficient roads & bridges
Source: PCA, FHWA
Infrastructure Funding Allocations?
KY
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
2015 2016 2017 2018 2019 2020 2021 202229.9% 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3%
Highway Cement Consumption – WisconsinMetric Tons
Source: PCA 29
CAGR 2017-22+5.4%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
2015 2016 2017 2018 2019 2020 2021 202210.5% -0.4% -7.1% -0.7% 4.6% 9.1% 6.5% 3.3%
Public Cement Consumption – WisconsinMetric Tons
Source: PCA 30
CAGR 2017-22+4.5%
Stimulating an Economy Near Full Employment Will Require a Monetary Policy Response
a
Marketplace Reaction
32
• 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%.
a
Marketplace Reaction
33
• 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.
a
Policy Reaction: Federal Reserve Actions
34
• The Federal Reserve accelerates its increases in the federal funds rate.
• These increases are expected to take place as the Federal Reserve reduces financial assets acquired during its Quantitative Easing policies.
• Construction is interest sensitive.
• Growth in the private construction sector slows and disappears.
• Downside risks increase in this gentle boom-bust scenario. The existence of huge federal debt could deepen a growth slowdown.
a
Summary
a
Portland Cement ConsumptionThousand Metric Tons
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
2016 = 2.4%2017 = 2.2%2018 = 2.6%2019 = 4.5%2020 = 6.4%2021 = 3.6%2022 = 1.1%
a
Stage I
Stage I:
• Solid Economic conditions.
• Adversities held in check.
• Dovish Fed Policy.
• Labor Shortages Exist
• 2018-2019 Q2
Portland Cement ConsumptionThousand Metric Tons
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
2016 = 2.4%2017 = 2.2%2018 = 2.6%2019 = 4.5%2020 = 6.4%2021 = 3.6%2022 = 1.1%
a
Stage II
Stage II:
• Economic Growth Accelerates.
• Inflation, Interest Rates increase at a faster pace.
• Fed Policy is tighter but not severe.
• Labor Shortages Increase.
Portland Cement ConsumptionThousand Metric Tons
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
2016 = 2.4%2017 = 2.2%2018 = 2.6%2019 = 4.5%2020 = 6.4%2021 = 3.6%2022 = 1.1%
a
Stage III
Stage III:
• Private Sector retreats under weight of higher interest rates.
• Inflation, Interest Rates increase at an even faster pace.
• Fed Policy is Hawkish.
• Labor Shortages Ease.
Regional Cement Trends: Through 2018
ME
RI
MA
VTNH
AL GA
SC
TN
FL
MSLA
TX
OKNM
KS
MN
IA
MO
AR
WY
CO
ND
SD
NE
WA
ID
MT
OR
NVUT
AZ
CA
WI
ILIN
MI
OH
WVVA
NC
MD
DE
PA
NY
CT
NJ
Exceed National National Average Subnational
Based on year-over-year % Growth
KY
Source: PCA 2017-18 Winter State Forecast
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Total Cement Consumption – WisconsinMetric Tons
Source: USGS, PCA 40
2017-2022CAGR: 3.7%
2015 2016 2017 2018 2019 2020 2021 20228.9% 4.3% -5.4% 3.9% 4.7% 5.2% 3.7% 0.9%
I IIIII
Wisconsin Concrete Pavement Association
Ed Sullivan, SVP & Chief Economist
February 2018 I Pewaukee, Wisconsin