Forecast 2006

Despite factors such as increased fuel costs, rising interest rates, continuing powder shortages, and an increase in demand due to hurricane-related rebuilding,

Despite factors such as increased fuel costs, rising interest rates, continuing powder shortages, and an increase in demand due to hurricane-related rebuilding, the near-term outlook for construction remains positive but with clear signs to proceed with caution in the coming year. Economic and industry analysts who gathered in late October as part of Reed Construction Data’s BuildingTeam Summit agreed that U.S. construction will continue to grow at a steady 3 to 3.5 percent during 2006.

Six experts and two panels of industry leaders at the two-day event in Washington, D.C., emphasized innovation in the areas of architectural design, capital investment and business practices as the critical elements necessary for construction to exceed the economic gains projected for the U.S. economy as a whole. Their consensus is that 2006 will continue the economic recovery seen in 2005, despite higher inflation driven by rising fuel costs. It was forecasted that the next two years will see a strengthening economy, accompanied by positive growth for several sectors of the building industry including commercial, public and other nonresidential segments.

Apparently concurring with this analysis is Portland Cement Association Chief Economist Ed Sullivan who put the construction scene in the perspective of cement consumption in his annual Fall 2005 Economic Forecast. Keep in mind that the expected declines [in home building] will be coming off record 2005 cement consumption of 38.5 million metric tons (mt) in residential, he says. Furthermore, consumption gains in nonresidential and public segments are expected to more than offset the marginal declines in residential.

In addition, PCA expects the rebuilding of New Orleans to begin in earnest during the second half of 2006 Û adding further strength to the near-term outlook. Closely in line with its summer, pre-Katrina forecast, PCA projects cement consumption to reach 120 million mt in 2005 and 125 million mt in 2006, reflecting growth of 5.2 percent and 3.7 percent, respectively.

This summer’s hurricanes served as trigger points to start slightly slower economic growth, explains Sullivan. Higher home heating costs, rising inflation and rising interest rate levels will cause some construction slowdowns. Fortunately, the rebuilding of the Gulf Coast, particularly New Orleans in the latter half of 2006, will help keep cement consumption on track with earlier forecasts, as will increases in public construction.

According to Sullivan, although rebuilding New Orleans could consume 650,000 to 1.8 million mt each year of an expected five-year process, additional powder imports will not necessarily fill this need. The slightly more adverse economic environment early in 2006 will act to neutralize the additional cement consumption anticipated from the post-Katrina rebuilding efforts.

The United States is expected to import 33 million mt of cement in 2005, roughly 27 percent of total consumption. PCA’s fall forecast projects 2006 import levels to reach 35 million mt, in-line with earlier, pre-Katrina estimates.

PCA assumes a complete restoration of the building stock within greater New Orleans, and the potential for building code changes in the aftermath of Katrina could boost material requirements. Code changes have not been incorporated into PCA estimates, adds Sullivan.

Incorporating higher oil prices, inflation and interest rates beyond 2006, Sullivan expects modest 2 to 3 percent growth per year from 2007 to 2009, the year when cement consumption is forecast to top 140 million mt.


According to McGraw-Hill Construction’s 2006 Construction Outlook (which anticipates an overall 3 percent construction increase in 2006), the important construction shift from recent years will be that single-family housing will no longer be a source of expansion. Although this slowdown had been anticipated (and avoided) for 2005, the weight of evidence is mounting that single-family housing will finally begin a cool down, says the report.

McGraw-Hill’s report forecasts a reduced pace in 2006 for single-family homes in four of the five regions, with the Northeast and Midwest continuing declines in the 2 to 5 percent range. The South Atlantic is expected to slip about 5 percent, while the West takes the biggest hit with a 9 percent drop from a healthy 2005. The South Central region will stand apart with a modest increase, thanks to post-hurricane rebuilding.

Meanwhile, public construction provides the rationale for net gain, although PCA’s Sullivan warns that the potential still remains that funds intended for construction and infrastructure building activity may be diverted to a greater extent than anticipated. Still, the passage of the new highway bill is expected to add significant strength to state highway projects in 2006. McGraw-Hill’s outlook toward public works anticipates a 7 percent growth in 2006, after an 8 percent jump in 2005.

Sullivan adds that slower consumer spending activity and job creation reduce the expected improvement in vacancy and utilization rates, and hence, the expected return on investment Û softening the expected growth in nonresidential construction. These signs Û coupled with slightly slower revenue growth that implies a possibly tempered public spending scenario Û point toward a more hostile outlook toward construction spending than PCA’s previous summer forecast.

McGraw-Hill’s report also named commercial building activity as finally beginning its recovery in the last year after four years of decline. Commercial is expected to see gains of more than 5 percent in 2005, with a 9 percent upturn next year. Institutional construction levels tend to remain more moderate through the construction cycle and are expected to rise about 2 percent this year before accelerating to more than 4 percent in 2006.

(000 Metric Tons)

2004 2005* 2006** 2007**
Total Cement Consumption 119,281 126,143 130,768 134,259
Portland Cement 114,716 120,693 125,138 128,512
Masonry Cement 5,172 5,449 5,630 5,748
Portland Share of Total (%) 95.7% 95.7% 95.7% 95.7%
Cement and Clinker Imports 27,305 33,276 35,234 35,713
Import Share of Total (%) 23.8% 27.6% 28.2% 27.8%
Percent Change
Total Cement Consumption 6.8% 5.2% 3.7% 2.7%
Portland Cement 6.7% 5.2% 3.7% 2.7%
Masonry Cement 9.0% 5.4% 3.3% 2.1%
Cement and Clinker Imports 17.5% 21.9% 5.9% 1.4%
Source: Portland Cement Association *trending **estimated


Sales of batch plants, concrete paving machinery and related equipment are projected to increase 14 percent in the U.S. by year-end. Also anticipated are gains of 9.6 percent for Canada and 9.3 percent for other worldwide markets. In a survey of member company year-to-date and projected shipments, the Association of Equipment Manufacturers also projects that the total construction equipment business in 2005 will show increases of 13.9 percent in the U.S., 13 percent in Canada, and 8.4 percent worldwide. AEM’s latest outlook report further notes that in 2006, construction equipment category shipments will collectively increase another 9.3 percent in the U.S., 8 percent in Canada and 8.4 percent for worldwide markets.

Business volume remains solid but our members do not believe this level will be sustained, says AEM Chairman Charles Stamp, (Deere & Co.). The housing market is a key driver of our industry’s sustained business growth. We continue to enjoy an exceptionally long period of historically low mortgage interest rates.

The impact of the SAFETEA highway bill on future business is also a major factor cited by manufacturers, since the building and repair of highways, bridges and other public works are significant components of overall construction activity. The challenge now is that individual states may not have the ability to match the modest federal increase, which may limit new contracts and slow down business. And, with higher oil and gasoline prices, some are calling for money to be diverted away from highway needs into general taxpayer relief, Stamp says.

Steel prices and availability have stabilized somewhat, but they still play a significant role in manufacturers’ ability to build and sell equipment, AEM outlook survey participants report.