Cement Outlook: 2008 1 Reed Construction Data Construction Forecast Conference Washington, D.C. October 4, 2007 Ed Sullivan Staff Vice President and PCA Chief Economist

Introduction

Good News Interest rates, Inflation & Unemployment are Low Net Exports & World Growth Investment Spending Job Growth… if Dismiss Recent News as Outlier 2nd Quarter GDP Growth…if Dismiss Consumer Spending

Introduction Fundamentals still sound… ….but is this analysis backwards looking?.. … and not what forward looking? Nearly every downside risk that PCA has warned about in the past is materializing

Introduction The economy is weakening. A recession is very possible. Dependent now on job creation and Federal Reserve actions. Dependent consumer & business confidence. PCA new forecast scenario stops short of projecting recession. Further downside risks to forecast projections exist.

Broad Implications: Crisis is No Longer Contained to Housing Introduction “Threat to economy is not a housing issue... it is a financial/credit issue that arose from past mortgage financing.” 2006 2007 Housing 2008 Consumer 2009 Commercial Public Broad Implications: Crisis is No Longer Contained to Housing

Key Questions How deep will retrenchment go ? How long will it last ?

Economic Outlook

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.

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

Impact on Economic Growth Monthly Payments Increase 50% or More. Credit Card Debt Increases As Consumers Try To Preserve Standard of Living. Delinquencies Increase. Defaults Increase. Adverse Impact on Consumer Spending.

Economic Outlook Consumer Spending has Relied On Debt. Net savings rate has been negative for years. Consumer Debt Burdens Near Historical Highs Often a precursor to reduction in consumption growth. Sub-Prime Defaults Force a Tightening in Lending Standards Reflects a new assessment of risk-return philosophy – beyond mortgages and perhaps globally. Tapping Home Equity Not as Viable As In the Past Can Debt Based Consumer Spending Thrive In This Environment? If not, growth in consumer spending slows. Income Growth is Improving – but perhaps not fast enough.

Consumer Worksheet Pay Increase Averages 3.5%. Health Insurance Premiums Rise 7%-11%. State and Local Property Taxes Rise. Reassessments based on high home appreciation Energy Prices Take a Large Bite. Perfect Storm?...Resets and Home Heating Season? Inflation Running near 2.4% Slowdown in Job Creation If Job Creation Drops Below 100K on Sustained Basis – Expect a Significant Downward Revision in Forecast.

Snap Shot of Economic Activity Consumption acts as the anchor for US economic activity. Any retrenchment in consumer spending will lead to slower economy-wide growth rates 14

Spill Over Effects Slower consumer spending reduces expected ROI on investment (2008) At minimum significant slowdown in nonresidential construction PCA expects a decline. Eventually increases fiscal pressures on government spending (fiscal 2009) Is this the next emerging issue? State fiscal conditions threatened Highway trust fund insolvency Inadequacy of SAFTEA-LU

Impact on Economic Growth Adverse Impact on Consumer Spending can be Contained. As Long As…. Relatively Strong Job Growth Persists. And… Interest Rates Remain Stable.

Job Growth Projections Thousands of Net New Jobs Created Per Month Job Creation is a Key Variable to Monitor Regarding Recession Risks History Forecast Pay Attention to Job Creation Revisions…Downward Revisions occur more frequently when economy sliding.

Real GDP Growth Projections Percent Change, Y-O-Y, Real GDP $ History Forecast Direct & Indirect Impacts of Sub-Prime Crisis Results in Slower Economic Growth

Baseline Scenario AND… …this is PCA’s “Optimistic” scenario!

Recession? Base Case: No Recession 35-40% Chance Recession Materializes Next Six Months If recession materializes, it may not be short lived. Significant downside risks exist for 2008 and 2009 construction projections. Nonresidential at risk: 2008-2009 Public at risk: 2009-2010

Construction & Cement Outlook Overview

Construction Spending Projections Real PIP Construction $ History Forecast Sub-Prime Crisis May Indirectly Spill Over to Nonresidential & Public Construction

Residential Construction

Past Strength in Starts More Than Low Rates… The Cyclical Upside: 2001 - 2005 Low mortgage rates key factor in single family starts over past few years. Emergence of exotic mortgages also a key factor…particularly in strong home appreciation environment. Easy credit conditions contributed to strong home-buying environment. Speculators add froth to market in light of strong appreciation rates. Lean inventories supplement demand …add strength to starts. Each Factor at Work on Cyclical Downside: 2006 – Mid-2009

Boom/Bust Markets Account for Nearly One Third of All Foreclosures Structurally Changed Markets Hurricanes (Louisiana) Economically Depressed (Michigan) Boom/Bust Markets (2010 Recovery) Dynamic Economies Strong Demographics Robust Appreciation Rates High Presence of Speculators Large Inventory Overhang, Large Starts Decline, Slow Recovery Arizona, Nevada, Florida & California = 28% Cement Consumption “Normal” Markets More Modest Appreciation Relatively Low Speculator Presence Smaller Inventory Overhang More shallow decline, Quicker Recovery

Thousands of Homes for Sale, April Home Inventory Thousands of Homes for Sale, April More Than 2 Million Excess Inventories New New New Existing New Existing Existing Existing

Lenders Reporting Tighter Lending Standards: Mortgages Latest Data: Largest Increase Since Conditions Preceding 1991 Recession Percent Reporting Tighter Lending Standards Tighter Credit Will Undermine Sales Recovery Easy Credit Period =

Single Family Price Trend: Existing Homes Compared to Year Ago Levels Percent Change, Year Ago (%) Projected High Inventories Will Depress Prices Throughout 2007 and into 2008.

Burning Off Excess Inventory No significant rebound in starts until inventory reduced to 5 months supply. Starts soften…but does not help inventory conditions 85% of inventory comes from Sub-Prime Defaults Force a Tightening in Lending Standards Reflects a new assessment of risk-return philosophy – beyond mortgages and perhaps globally. Tapping Home Equity Not as Viable As In the Past Can Debt Based Consumer Spending Thrive In This Environment? If not, growth in consumer spending slows. Income Growth is Improving – but perhaps not fast enough.

Single Family Affordability Trend: New Homes Percent Change Home Prices, Year Ago (%): Yellow New Mortgage Payment as % of Household Income: Red Pricing Softness Will Improve Affordability Projected

Residential Slow Down in Job Growth Prolongs Recovery in Sales and Inventory Correction. Mid-2009 Recovery

Nonresidential Construction

Nonresidential Construction Nonresidential Growth Currently Strong Based on improving underlying fundamentals Low Base Strong Expected ROI Pent-up Demand Easy Credit Conditions Expected ROI Softens With Overall Economic Slowdown Pent-up Demand Diminished Credit Conditions Tighten Slowdown In Nonresidential

Nonresidential Spending Projections Real PIP Construction $ History Forecast Tighter Credit & Slower Economic Growth May Rob Momentum From Nonresidential

Nonresidential Spending Projections Percent Change, Y-O-Y, Dodge Contract Awards (Bar), Real PIP Construction $ Line Nonresidential Dodge Contract Award Data Has Already Signaled a Decline in Activity

Public Construction

Public Spending Projections Real PIP Construction $ History Forecast Outlook Dismisses “Bridge Crisis”

Total State Revenues & Expenditures Billion $, NIPA Striped Yellow: Expenditures Solid Green: Revenues Slim Margins. Small Changes in Conditions Impacting Revenues can Impact Funds Dedicated to Construction

Public Sector = Largest cement consuming construction sector. Total Billion $ State Surplus/Deficit, NIPA Point One: Growth slow down = slow down job creation. Recession = Job Loss Point Two: Job growth = state revenues growth Point Three: Entitlement pressures grow unabated. Point Four: Growth slow down = slower growth in state surpluses. Recession = potentially largest state deficits in history…longer lasting that 2001 recession. Public Sector = Largest cement consuming construction sector.

Next Issue Emerging on Horizon Slowdown in job creation State revenue growth slowdown State Fiscal crisis could re-emerge Solvency of Highway Trust Fund Inadequacy of “real” SAFTEA-LU

Market Conditions

Conclusions

Conclusion Sub-prime crisis has leaked beyond housing sector. Impact may hit nonresidential construction in 2008 and public construction in 2009 Recession risks increased significantly Downside risks to forecast Add extra dose of conservatism to plans

Cement Outlook: 2008 1 Reed Construction Data Construction Forecast Conference Washington, D.C. October 4, 2007 Ed Sullivan Staff Vice President and PCA Chief Economist