Connect With Concrete Construction Outlook 2008 Ed Sullivan

Connect With Concrete Construction Outlook: 2008 Ed Sullivan, Chief Economist PCA

Connect With Concrete Introduction: Overview § The economy is in recession…and it may not be mild. § December beginning § Fiscal & Policy actions will not avert a recession. § Timing lags § Fiscal Policy not have as strong an impact on GDP as expected. § Debt, Energy, Adverse Momentum. n Lending aversion toward risk is spreading § Mortgage here § Consumer and Commercial impacts begins to emerge. n Job losses compound economic adversities.

Connect With Concrete Key Questions § How deep will retrenchment go ? § How long will it last ?

Connect With Concrete Portland Cement Consumption Declines Continue Through 2009. Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) 24. 5% (Equal to 1980 -82 Recession)

Connect With Concrete Capacity Expansion Thousand Metric Tons Stated Capacity Expansions SCM Penetration May Increase More Rapidly as Ready Mix Face Bottom Line Pressures. Potential Increases From Specification Changes

Connect With Concrete Introduction § Imports record large, sustained declines. § Global conditions suggest high freight rates continue. § 2008: Bears most of the burden of correcting market imbalances. § Utilization Rates decline. § Materializes to a greater extent in 2009. § Days Supply Inventory remains above historical average. § Most pressure materialize in 2009. n Past Peak (2005) not realized until 2014

Connect With Concrete Economic Outlook Recession is Here, and its not going to be Mild

Connect With Concrete Introduction § To determine the cause of a slowdown in economic Growth, or even a recession …. § …. Look no further than the excesses and imbalances created during the preceding boom period. § Debt played important role in 2003 -2006 growth. § Responsible debt? § Easy terms & standards § Unprecedented link in consumer spending to housing wealth. § Payback is tough – maybe more than consensus of economists believe.

Connect With Concrete Sub-Prime Mortgage Resets Total Loans Scheduled for Reset Period of Emerging Trouble

Connect With Concrete Lenders Reporting Tighter Lending Standards: Mortgages Percent Reporting Tighter Lending Standards Tighter Credit Will Undermine Sales Recovery Sub-Prime Lending Has disappeared. Easy Credit Period

Connect With Concrete Lenders Reporting Tighter Lending Standards: Consumer Percent Reporting Tighter Lending Standards Easy Credit Period Sub-Prime Has Spilled into Consumer Credit Markets Other Consumer Credit Cards

Connect With Concrete Lenders Reporting Tighter Lending Standards: Commercial Percent Reporting Tighter Lending Standards Easy Credit Period Medium to Large Firms Small Firms Sub-Prime Has Spilled into Commercial Credit Markets

Connect With Concrete Sub-Prime is not just housing… Recession: May not be short or shallow. 2006 Housing Foreign Capital Inflows 2007 Consumer 2008 2009 Commercial Energy Public

Connect With Concrete Economic Outlook Recession is Here

Connect With Concrete Retail Sales Annual Percent Change, Red Book Consumer Spending Accounts for 70% of Total Economic Activity

Connect With Concrete Consumer Confidence Conference Board, Composite Series Recession Troughs: 1973 -4 = 43. 2 1980 -2 = 50. 9 1991 -2 = 47. 3 2000 -1 = 88. 2 2003 Iraq = 68. 3 Current = 64. 4 (Layoffs Just Begun)

Connect With Concrete Unleaded Gasoline Prices Cents Per Gallon, Department of Energy Every 10 Cent Increase at the Pump Takes $15 Billion Out of Consumer’s Pockets on an Annualized Basis Since January 1 st, Gasoline Prices have increased 35 cents = Equating to a $50 Billion Annualized Draw on Consumer Spending. At $4. 10 Per Gallon, Wipes Out $170 Billion Fiscal Stimulus.

Connect With Concrete Consumer Worksheet n Pay Increase Averages 3. 5%. n Health Insurance Premiums Rise 7%-11%. n State and Local Property Taxes Rise. § Reassessments based on high home appreciation n Energy Prices Take a Large Bite. n Inflation Running near 4% n Credit Card Bills Coming Due n Home Equity Lines Tapped or Reduced n Slowdown in Job Creation § If Job Creation Drops Below 100 K on Sustained Basis – Expect a Significant Downward Revision in Forecast.

Connect With Concrete Net Job Creation Monthly Change in Total Non-Farm Employment, BLS Economy has Shed 240, 000 Jobs in Last Three Months…AND…The Recession has Just Begun.

Connect With Concrete Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey Bullish Business Attitudes

Connect With Concrete Economic Risks Global Meltdown?

Connect With Concrete Introduction: Emerging Risks n Sub-prime losses are weighing heavily on solvency of many exposed banks and financial institutions. n Lending aversion toward risk is could worsen § Mortgage § Consumer and Commercial n A global financial meltdown is possible. n Prolongs and deepens recession. n Recession could be as bad, or worse, than 1980 -82 recession.

Connect With Concrete Introduction: Emerging Risks n Federal Reserve cuts add weakness to dollar and support higher inflation. n Risk of significant reduction in foreign capital inflows are heightened. n Higher long term interest rates may develop. § Housing and commercial recovery could be delayed. n Higher inflation may prompt a pause in Federal Reserve policy of monetary easing.

Connect With Concrete Economic Policy Actions are too late

Connect With Concrete Monetary Policy Timing Lags Percent Change, GDP Growth Rate, Inflation Change in Real GDP Growth Rate Change in CPIU Inflation Rate 50 Basis Point Federal Funds Peak Economic Stimulus 8 -9 Months After Cut

Connect With Concrete Fiscal Policy Impacts Per Month Percent Change, GDP Growth Rate Tax Rebate Planned Impact Tax Rebate Impact With PCA Debt Reduction Assessment

Connect With Concrete Economic Outlook: Policy Stimulus § Potential of significant policy impact does not arrive until second half 2008. § Ingredients of current economic malaise boil and fester undermining conditions until policy impacts arrive. § Fiscal Stimulus: $170 Billion …expected to encourage new consumer spending. § Pay debt – past consumption. § Monetary Policy: The issue is “Lenders risk aversion”…. not interest rates & liquidity. § Loan losses, bank closures, sour economic news. § Gasoline …over $4 …partially offsets policy stimulus.

Connect With Concrete Economic Growth Outlook Percent Change, GDP Growth Rate Tax Rebate Bump Hard to Sell Businessmen that Recession is “technically” over in 3 rd Quarter – Distress Continues Into 2009.

Connect With Concrete Residential Outlook Recovery Delayed

Connect With Concrete Home Inventory Thousands of Homes for Sale, December New New New Existing Existing Homes Account for 87% of Total Home Inventory Existing

Connect With Concrete Single Family Price Trend: Existing Homes Compared to Year Ago Levels Percent Change, Year Ago (%) High Inventories Will Depress Prices Throughout 2008. Projected

Connect With Concrete Excess Home Inventory In Excess of Five Months Desired Supply More Than 2 Million Excess Inventories

Connect With Concrete Nonresidential Outlook Declines in 2008 and 2009

Connect With Concrete Nonresidential Construction n Nonresidential 2006 -2007 Strength § Strong Expected ROI Fostered by Strong Economic Growth § Pent-up Demand § Easy Credit Conditions n Nonresidential 2008 -2009 Softening § Expected ROI Softens With Overall Economic Slowdown § Credit Conditions Tighten § Risks and Uncertainty Grow

Connect With Concrete Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey Bullish Business Attitudes

Connect With Concrete Industrial Construction Recovery Timing 1970 -2001 Recession Recovery Averages Capacity Utilization Reaches Trough Average 20. 5 months Industrial Construction Activity Reaches Trough Average 19. 2 months Industrial Construction Completes Recovery

Connect With Concrete Public Outlook Slower Growth in 2008, Problems Looming Ahead

Connect With Concrete States With Projected Budget Shortfalls District of Columbia 2009 Shortfall 2010 Shortfall No Shortfall

Connect With Concrete State Fiscal Conditions Billion $ State Surplus/Deficit, NIPA Baseline Recession

Connect With Concrete Medicaid Pressures Build Billions of $ Blue/Solid: Total Medicaid Spending Red/Striped: State Medicaid Spending 30% 21. 5% of Total State Expenditures 25% 2032: State Medicaid Spending Exceeds One Trillion $ 34%

Connect With Concrete Will Medicaid “Crowd Out” Highway Spending? Billions of Real State Spending Targeting Transportation Spending: Constant 8% Share of Budget Transportation Spending: Share Reduced to 7% of Budget Transportation Spending: Share Reduced to 5% of Budget Gasoline Tax Increases Must Be Viewed in the Context of Future Fiscal Pressures Facing States

Connect With Concrete Regional Outlook Few Regions Offer Shelter During Downturn

Connect With Concrete Cement Consumption 2008 District of Columbia < -10% -5%–-10% 0–-5% 1%– 3% > 3%

Connect With Concrete Cement Consumption 2009 District of Columbia < -10% -5%–-10% 0–-5% 1%– 3% > 3%

Connect With Concrete Cement Consumption 2011 District of Columbia < -10% -5%–-10% 0–-5% 1%– 3% > 3%

Connect With Concrete Conclusion Correction is Temporary

Connect With Concrete Portland Cement Consumption Declines Continue Through 2009. Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) 24. 5% (Equal to 1980 -82 Recession)

Connect With Concrete Capacity Expansion Thousand Metric Tons Stated Capacity Expansions SCM Penetration May Increase More Rapidly as Ready Mix Face Bottom Line Pressures. Potential Increases From Specification Changes

Connect With Concrete Freight Rate Trends $ Per Metric Ton HANDYMAX 40 -50, 000 DWT South East Asia U. S. Gulf HANDYSIZE 28 -40, 000 DWT Transatlantic U. S. East Coast/U. S. Gulf

Connect With Concrete Introduction § Imports record large, sustained declines. § Global conditions suggest high freight rates continue. § 2008: Bears most of the burden of correcting market imbalances. § Utilization Rates decline. § Materializes to a greater extent in 2009. § Days Supply Inventory remains above historical average. § Most pressure materialize in 2009. n Past Peak (2005) not realized until 2014

Connect With Concrete Take a Step Back Longer Term Outlook

Connect With Concrete Take a Step Back § Cyclical correction is temporary.

Connect With Concrete US Population Thousands of Persons US Population Adds Roughly 65 Million People by 2030 …. a 22% Increase.

Connect With Concrete Demographics: 2007 -2030 n Population Adds 65 Million Persons n Adds 9. 1 Million School-Age Persons n Education Construction n Adds 34 Million Retirement Age Persons n Medical n Adds 31 Million Households n Housing, Retail & Infrastructure

Connect With Concrete Per Home, Lifetime C 02 Savings ICF Home Over Frame Co 2 Metric Tons, Per Home Total Heating & Cooling C 02 Saving: 92 Tons per Home Additional C 02 Emitted by Cement Production Conservatively Assumes 50 Year Life of Home

Connect With Concrete ICF & Related Systems: CO 2 Savings Metric Tons of CO 2 Gains Achieved Though Energy Savings In Space Heating & Cooling 30% 25% 10% of Total Housing Starts 20% 2030: Housing Starts Average 1. 9 Million Annually. ICF & Related Systems Reach 30% Market Share

Connect With Concrete Potential “Green” Gains: ICF & Related Systems Incremental Gains in Cement Consumption, Metric Tons 30% 25% 20% 10% of Total Housing Starts 2030: Housing Starts Average 1. 9 Million Annually. ICF & Related Systems Reach 30% Market Share

Connect With Concrete Cement Consumption: Long Term Million Metric Tons

Connect With Concrete Construction Outlook: 2008 Ed Sullivan, Chief Economist PCA