Good Market News: 2008 Not Like 1991

Negative building and construction numbers matching or surpassing decades-old market lows plagued the first half of 2008. The American Institute of Architects


Negative building and construction numbers matching or surpassing decades-old market lows plagued the first half of 2008.

The American Institute of Architects lamented in mid-May that its Architecture Billings Index Û where 50 or above indicates business on the rise Û declined to its lowest level in history. The most recent Index, measuring the March-to-April change, dropped 24.5 percent to 39.7, with survey participants projecting billings declines in all sectors and regions.

We’ve seen an 11-point fall-off in the first quarter of the year, and the prognosis for commercial construction later this year is not favorable, said AIA Chief Economist Kermit Baker. Aside from historically low project demand, all regions are showing very poor business conditions. This is not likely to reverse itself anytime soon. The Index is statistically shown to be a leading economic indicator, providing a glimpse of nonresidential construction 9-12 months out.

Late last month, National Association of Home Builders Chief Economist David Seiders noted that April’s new-home sales were down 42 percent on a year-over-year basis Û the largest swoon since September 1981. Our latest builder surveys actually show home buying has not yet stabilized, and we are anticipating further erosion over the coming months, he said.

While one market gauge reaches lows not seen since Ronald Reagan was new to the White House, another draws comparison to FDR-era swings. A downward revision in construction activity in Portland Cement Association’s latest forecast suggests U.S. powder consumption over a four-year period will bring the worst decline, on a percentage basis, since the Great Depression. In 2008, consumption is expected to drop 11 percent, followed by an additional 5.5 percent in 2009.

PCA predicts total cement consumption this year and next falling to 101.7 million and 96.1 million metric tons, respectively. When weighed against the industry’s record consumption of 128 million metric tons in 2005, the immediate outlook spells a peak-to-trough powder shipment decline hovering at an unprecedented 30 million metric tons. We are currently in the third year of a four-year industry contraction, said PCA Chief Economist Edward Sullivan. High fuel prices, slow job creation, and tight lending standards will all adversely impact the entire spectrum of construction activity. While harsh residential building conditions continue to act as a significant drag on cement consumption, he added, the nonresidential sector will also see large declines for the next two years.

Although it grew nearly 11 percent in 2007, nonresidential construction spending is expected to fall almost 8 percent in 2008 and another 12 percent in 2009. Nonresidential construction is closely tied to economic activity. As the economy softens, the expected returns on commercial investments decline, reducing the incentive to build and expand, Sullivan said.

An additional slowdown in public construction, which accounts for nearly half of total U.S. cement consumption, is predicted for 2009 and will continue through 2010. PCA projects the second half of 2010 will usher in a period of strong growth in cement and concrete demand, with all U.S. regions poised for a recovery in housing and nonresidential construction activity.

This year’s negative news and cement consumption trends bring to mind the market trainwreck that was 1991, when powder shipments dropped 10 percent from the prior year, new mixer truck deliveries reportedly fell below 2,000, and mainstay operator Lone Star Industries filed for Chapter 11. On a percentage basis, the cement consumption numbers suggest 2008 is as bad or worse than 1991. Thanks to rational, global trade-influenced cement import activity, and the prevalence of better-managed and capitalized cement and concrete operators, we see an industry in 2008 with underpinnings lacking 17 years ago.

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