When the Portland Cement Association's Chief Economist Ed Sullivan released his spring forecast in March 2003, there were many heads shaking at the “optimistic” projections for the path of economic growth. This skepticism was probably warranted: the military campaign in Iraq had just begun, economic growth was anemic, the economy was shedding jobs heartily and declining consumer sentiment threatened a recession. Turns out PCA's scenario was remarkably accurate. And with each passing day, new evidence emerges that suggests the economic recovery is gaining strength, perhaps even faster than envisioned by the spring forecast.

Currently, Sullivan's forecast calls for U.S. portland cement consumption of 105.23 million metric tons in 2004, a 0.8 percent increase over 2003's 104.36 million metric tons, which itself was about 1.0 percent better than 2002 levels. Sullivan goes on to say that every year between 2005 and 2007 will see cement consumption continue to grow between 2 and 3 percent per year, setting growth records along the way. By 2008, Sullivan predicts, total portland cement consumption should top 115.13 million metric tons.

After several years of decline (down 6.6 percent in 2002, 7.2 percent in 2003, and 2.4 percent anticipated for 2004), cement and clinker imports will begin to see an increase to meet growing cement demand. Imports will see about a 3.0 percent rise every year from 2005 to 2007, according to PCA.

Sullivan attributes this healthy state of affairs on several factors, including the nonresidential market, which he sees as the growth leader in the year to come. Higher interest rates will cool residential construction, and public spending will decline slightly as states battle fiscal constraints. “We have sustained consumer spending strength, and the investment environment has improved dramatically,” Sullivan said recently at Reed Construction Data's 8th annual North American Construction Forecast held at the National Press Club in Washington, D.C. “Even other economists are saying the third and fourth quarters of 2004 are going to be very successful — in excess of 3.5 to 4 percent.”

Sullivan adds that this round of consumer strength is not due to job creation or strong, real income growth. Rather, it is because consumers have been borrowing, virtually tapping out home equity. Eighty percent of all mortgages taken out today are for refinancing activity. Yet, as the economy starts to recover through 2004, mortgage rates are going to rise, suggesting downward pressure on consumer spending.

Labor markets has been at the top of Sullivan's areas to watch for economic turnaround in 2003, and he sees these markets reaching a turning point of zero job losses and zero gains in October, followed by small, consistent, sustained gains in job creation throughout 2004.

Also at the Reed Construction event, Gene Sperling, former national economic advisor and director of the Economic Council, backed Sullivan's findings that the forecasting community is bullish about the U.S. economic recovery. Sperling is a more guarded, however, noting, “I'm not in the pessimist camp, but I'm certainly not overly optimistic like so many others — just cautious.”

David Seiders, chief economist for the National Association of Home Builders, reported that housing has been a heroic performer throughout the entire recovery. He believes the United States can retain the levels of home sales and housing production that have been generated in recent times, which have been quite strong. However, he says he would not be surprised if the country could continue to post growth in these areas without getting reasonable job growth. He is looking for this part of the sector to fall into place soon because the 30-year mortgage rate is now heading toward 6.75 percent, compared to historic lows of 5.2 percent in June 2002.

On other fronts, residential remodeling is performing very well, according to Seiders. He says this $180 billion markets, as recorded in the first quarter of 2003, is growing. He expects 4 to 5 percent growth in this sector in 2003 and 2004, holding steady through 2005.

McGraw-Hill Construction Dodge projects total construction will edge up 1.0 percent to $506 billion in 2003. According to Dodge, single-family housing is providing most of the upward push, as both public works and institutional building will register declines for the full year. Income property construction, the major negative during 2001 and 2002, now appears to be turning the corner. Offices and warehouses have continued to retreat in 2003, but a strengthening trend has emerged for stores, hotels and multifamily housing.

Like others, the Dodge forecasts indicates that the fragile economic expansion seems to be gaining traction. There has already been much in the way of stimulus, including the 13 rate cuts by the Federal Reserve from 2001 to the present, plus the $350 billion tax reduction package passed by Congress in May. Furthermore, the economy is no longer dealing with the uncertainty that was present in the period leading up to the Iraq war, corporate profits have begun to improve and consumer spending is proceeding at a decent clip. After a sluggish 1.4 percent gain in the first quarter of 2003, the economy in the second quarter advanced 3.3 percent, and the next few quarters are likely to see growth at about 4 percent. On an annual basis, economic expansion for 2003 is pegged at 2.7 percent, followed by a 4.0 percent increase in 2004, according to Dodge.

As a result, it is projected that the construction industry in 2004 will once again see an offsetting pattern by major sector, with a somewhat different mix of pluses and minuses than 2003. Fortunately, the pluses will slightly outweigh the minuses. The following are the main points for the 2004 construction market according to Dodge:

• Single-family housing will settle back from its elevated 2003, due to moderately higher mortgage rates. A 2 percent drop in dollar volume is forecast, corresponding to a 5 percent decline in the number of dwelling units to 1.2990 million, representing the third highest number in the past 25 years.

• Public works will rebound about 2 percent, following a 10 percent drop in 2003. The late-September passing of the five-month extension to TEA-21 and the recent Congressional introductions of hefty six-year reauthorization bills will certainly boost projects in this market, but the delay in passing the new legislation puts 2004 increases at risk.

• Electric utilities will continue to fall from 2001's record high, dropping another 19 percent.

• Income properties will climb 9 percent in dollar volume and 5 percent in square feet. Hotels and warehouses should see double-digit growth, while the upturn for offices will be more modest given the subdued improvement expected for office employment. Stores and multifamily housing will be up slightly, maintaining the upward trend reported in 2003.

• Institutional building will be down 1 percent in dollar volumes and 5 percent in square feet. Tight fiscal conditions for states and municipalities will contribute to a reduced pace for school construction. Healthcare facilities also will recede, given decreased capital spending by major hospital chains.

• Manufacturing construction is expected to rise 9 percent, as the capacity glut recedes alongside the strengthening economy. The level of plant construction estimated for 2004 remains very weak by recent standards — down 57 percent compared to the most recent peak in 1997.

U.S. Cement Consumption Forecast - Fall 2003
(THOUSANDS OF METRIC TONS)

		2002	2003	2004	2005
Total Cement Consumption		108,205	108,924	109,722	112,557
	Portland Cement	103,769	104,355	105,232	108,034
	Masonry Cement	4,436	4,569	4,490	4,523
Cement and Clinker Imports		24,128	22,400	21,867	22,524
PERCENT CHANGE
Total Cement Consumption		-3.9%	0.7%	0.7%	2.6%
	Portland Cement	-4.0%	0.6%	0.8%	2.7%
	Masonry Cement	-1.0%	3.0%	-1.7%	0.7%
Cement and Clinker Imports		-6.6%	-7.2%	-2.4%	3.0%
Source: Portland Cement Association

The Sequence of Expansion
(BILLIONS OF DOLLARS)

	2001	2002	2003	2004
Total Construction	495.9	501.7	505.6	508.9
	+5%	+1%	+1%	+1%
Single Family Housing	186.9	214.2	230.5	226.0
	+6%	+15%	+8%	-2%
Public Works	83.5	87.6	78.9	80.5
	+7%	+5%	-10%	+2%
Electric Utilities	23.6	12.0	9.3	7.5
	+75%	-49%	-23%	-19%
Income Properties	103.1	92.9	92.9	100.9
	-8%	-10%	-0-	+9%
Institutional Buildings	90.7	89.7	88.6	88.1
	+9%	-1%	-1%	-1%
Manufacturing Buildings	8.1	5.3	5.5	6.0
	-8%	-35%	+5%	+9%
Source: McGraw Hill Construction