Former Portland Cement Association Chief Economist and Senior Vice President of Market Intelligence Ed Sullivan remains a principal information source for cement, concrete and construction stakeholders through “The Sullivan Report.” The Substack portal offering (sullivansreport.substack.com) launched last month with installments on U.S. cement consumption trends, Federal Reserve policy, and the impact of tariffs on cement imports:
CEMENT SHIPMENTS
Construction market and financing conditions suggest a third consecutive year of decline for U.S. cement consumption in 2025. Without a meaningful drop in mortgage interest rates, lower residential and commercial building activity could result in volume dropping below 100 million metric tons—a level not seen since 2019.
The present diminishing strength of the economy would typically usher in a softening of monetary policy and lower interest rates, in turn supporting residential construction recovery. Given the suppressed housing starts activity over the past several years, that rebound could be strong enough to lead a recovery in real construction spending and overall U.S. cement consumption. Unfortunately, this rosy scenario is not going to happen. U.S. policies regarding trade, tariffs, and immigration have increased the prospects of higher inflation. This will delay Federal Reserve moves to lower interest rates. In addition, the inflation premiums added to mortgage rates are likely to increase.
Heightened inflationary pressures could be combined with a slowdown in U.S. economic growth and gradually weakening labor markets. Economic growth could turn negative. Some may refer to it as a recession, but in the context of rising inflation, this suggests a mild form of “stagflation,” where the economy concurrently experiences rising unemployment and inflation.
U.S. construction activity will not strengthen unless the job markets remain strong and interest rates (mortgage and commercial) decline significantly. That is not going to happen this year. The only way a significant decline in interest rates materializes is in the context of a substantial economic downturn. In any case, U.S. cement consumption is expected to retreat this year.
FEDERAL RESERVE POLICY
Business cycles are often formed by fluctuations in economy-wide demand conditions. Too much demand leads to inflation, too little to unemployment. By the raising or lowering the Federal Funds interest rates, among other monetary tools, the Fed can inject or reduce demand in the overall economy. This “countercyclical demand management” policy is not precise. Raising rates too fast could result in recession. Lowering them too quickly could result in inflation. As such, it is prudent for the Fed to take small steps to avoid over correcting. Such policy actions do not produce immediate results, making the calibration of moves even more difficult.
Finally, the direction of monetary policy is clear when it’s either elevated inflation or high unemployment. Fed policy can address one—not both. Unfortunately, today’s economy is characterized by both increases in inflation and unemployment, a condition not seen since the 1970s. What, then, does the Fed fight: Inflation or unemployment?
The last Fed policy action was in December, when inflation was gradually easing and signs that the economy was cooling surfaced. Since then, progress in reducing inflation to the Fed’s target rate of 2 percent has not materialized as expected. Lacking a clear direction of the economy’s path, the Fed sat—neither raising or lowering rates.
Tariffs raise the prospect of higher inflation and simultaneously threaten near-term economic growth and labor market strength. It will take time for these forces to develop and be clearly seen in the data. For now, this suggests the Fed will continue to sit. The slow emergence in data and the uncertainty regarding policy directive could make the idle period a bit longer than some expected.
A potential slowdown in economic growth by itself will bring down inflation. By delaying the timing of a next move—and allowing recessionary spirits to brew a bit longer—inflation may ease to levels that the Fed is comfortable with. Following this logic, the next move will be to cut rates. A lot of time has to pass for all that to happen. According to this scenario, even as momentum of the recession or downturn gains strength, the Fed will sit. Only after the threat of higher unemployment reaches a level to ensure an easing in inflation will the Fed act to cut. Because of uncertainty of results regarding monetary policy actions, the initial steps are expected to be modest—25 basis points at a time. Any action to cut rates will not materialize until the second half of 2025, if then.
CEMENT TARIFFS
Tariffs the White House announced in March, with adjustments last month, will impact U.S. economic activity, job creation, inflation, and interest rates. These factors in turn, will adversely impact construction activity and cement consumption. Closest to home, cement imports from Canada and Mexico are exempt from tariffs.
There is a difference between a cost increase and a price increase. A cost increase may lead to a price increase, but not necessarily. Tariffs will raise the cost of bringing cement from beyond (tariff-exempted) Canada or Mexico to the U.S. market. How much the costs increase is dependent on the origin of the cement. Most imports will carry a 10 percent tariff. Applying the tariff rates by the 2024 market share held by each importer yields the average increase in costs implied by the new tariff structure. By this calculation the new tariff rates increase the costs on imports by 8.5 percent. For the market as a whole, tariffs add an incremental increase of 1.86 percent to total costs of servicing the market.
The tariff cost is paid by either the foreign exporter or the domestic importer. Some of that cost increase will be passed on directly in the form of higher prices. Price negotiations between the importer and exporter will likely materialize. The importer may partially or fully absorb the added cost associated with the tariff. How much of the tariff cost is passed through determines the price increase. With erosion in U.S. and global demand, the likelihood increases that cement exporters will absorb a high proportion of tariff costs, lowering potential cement price increases.