Construction Outlook: 2008 Ed Sullivan, Chief Economist PCA

Introduction: Overview The economy is in recession…and it may not be mild. December beginning Fiscal & Policy actions will not avert a recession. Timing lags Fiscal Policy not have as strong an impact on GDP as expected. Debt, Energy, Adverse Momentum. Lending aversion toward risk is spreading Mortgage here Consumer and Commercial impacts begins to emerge. Job losses compound economic adversities.

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

Portland Cement Consumption Declines Continue Through 2009. = Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) 24.5% (Equal to 1980-82 Recession)

Capacity Expansion Thousand Metric Tons Stated Capacity Expansions Potential Increases From Specification Changes SCM Penetration May Increase More Rapidly as Ready Mix Face Bottom Line Pressures.

Introduction Imports record large, sustained declines. Global conditions suggest high freight rates continue. 2008: Bears most of the burden of correcting market imbalances. Utilization Rates decline. Materializes to a greater extent in 2009. Days Supply Inventory remains above historical average. Most pressure materialize in 2009. Past Peak (2005) not realized until 2014

Recession is Here, and its not going to be Mild Economic Outlook Recession is Here, and its not going to be Mild

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

Lenders Reporting Tighter Lending Standards: Mortgages Percent Reporting Tighter Lending Standards Tighter Credit Will Undermine Sales Recovery Easy Credit Period = Sub-Prime Lending Has disappeared.

Lenders Reporting Tighter Lending Standards: Consumer Percent Reporting Tighter Lending Standards Other Consumer Credit Easy Credit Period = Sub-Prime Has Spilled into Consumer Credit Markets Credit Cards

Lenders Reporting Tighter Lending Standards: Commercial Percent Reporting Tighter Lending Standards Medium to Large Firms Easy Credit Period = Small Firms Sub-Prime Has Spilled into Commercial Credit Markets

Sub-Prime is not just housing… Recession: May not be short or shallow. 2006 Foreign Capital Inflows 2007 Housing 2008 Consumer 2009 Commercial Public Energy

Economic Outlook Recession is Here

Consumer Spending Accounts for 70% of Total Economic Activity Retail Sales Annual Percent Change, Red Book Consumer Spending Accounts for 70% of Total Economic Activity

Consumer Confidence Conference Board, Composite Series Recession Troughs: 1973-4 = 43.2 1980-2 = 50.9 1991-2 = 47.3 2000-1 = 88.2 2003 Iraq = 68.3 Current = 64.4 (Layoffs Just Begun)

Unleaded Gasoline Prices Cents Per Gallon, Department of Energy At $4.10 Per Gallon, Wipes Out $170 Billion Fiscal Stimulus. Every 10 Cent Increase at the Pump Takes $15 Billion Out of Consumer’s Pockets on an Annualized Basis Since January 1st, Gasoline Prices have increased 35 cents = Equating to a $50 Billion Annualized Draw on Consumer Spending.

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. Inflation Running near 4% Credit Card Bills Coming Due Home Equity Lines Tapped or Reduced Slowdown in Job Creation If Job Creation Drops Below 100K on Sustained Basis – Expect a Significant Downward Revision in Forecast.

Net Job Creation Monthly Change in Total Non-Farm Employment, BLS Economy has Shed 240,000 Jobs in Last Three Months…AND…The Recession has Just Begun.

Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey Bullish Business Attitudes =

Economic Risks Global Meltdown?

Introduction: Emerging Risks Sub-prime losses are weighing heavily on solvency of many exposed banks and financial institutions. Lending aversion toward risk is could worsen Mortgage Consumer and Commercial A global financial meltdown is possible. Prolongs and deepens recession. Recession could be as bad, or worse, than 1980-82 recession.

Introduction: Emerging Risks Federal Reserve cuts add weakness to dollar and support higher inflation. Risk of significant reduction in foreign capital inflows are heightened. Higher long term interest rates may develop. Housing and commercial recovery could be delayed. Higher inflation may prompt a pause in Federal Reserve policy of monetary easing.

Economic Policy Actions Policy Actions are too late

Monetary Policy Timing Lags Percent Change, GDP Growth Rate, Inflation Change in Real GDP Growth Rate Change in CPIU Inflation Rate 50 Basis Point Federal Funds Peak Economic Stimulus 8-9 Months After Cut

Fiscal Policy Impacts Per Month Percent Change, GDP Growth Rate Tax Rebate Planned Impact Tax Rebate Impact With PCA Debt Reduction Assessment

Economic Outlook: Policy Stimulus Potential of significant policy impact does not arrive until second half 2008. Ingredients of current economic malaise boil and fester undermining conditions until policy impacts arrive. Fiscal Stimulus: $170 Billion …expected to encourage new consumer spending. Pay debt – past consumption. Monetary Policy: The issue is “Lenders risk aversion”….not interest rates & liquidity. Loan losses, bank closures, sour economic news. Gasoline …over $4 …partially offsets policy stimulus.

Economic Growth Outlook Percent Change, GDP Growth Rate Tax Rebate Bump Hard to Sell Businessmen that Recession is “technically” over in 3rd Quarter – Distress Continues Into 2009.

Residential Outlook Recovery Delayed

Home Inventory Thousands of Homes for Sale, December New New New New New New Existing Existing Existing Existing Existing Existing Existing Homes Account for 87% of Total Home Inventory

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

Excess Home Inventory Inventory In Excess of Five Months Desired Supply More Than 2 Million Excess Inventories

Nonresidential Outlook Declines in 2008 and 2009

Nonresidential Construction Nonresidential 2006-2007 Strength Strong Expected ROI Fostered by Strong Economic Growth Pent-up Demand Easy Credit Conditions Nonresidential 2008-2009 Softening Expected ROI Softens With Overall Economic Slowdown Credit Conditions Tighten Risks and Uncertainty Grow

Business Confidence Has Been Shaken Percent of Firms Reporting a Positive Business Outlook, NAM Survey Bullish Business Attitudes =

Industrial Construction Recovery Timing 1970-2001 Recession Recovery Averages Capacity Utilization Reaches Trough Average 20.5 months Industrial Construction Activity Reaches Trough Average 19.2 months Industrial Construction Completes Recovery

Slower Growth in 2008, Problems Looming Ahead Public Outlook Slower Growth in 2008, Problems Looming Ahead

States With Projected Budget Shortfalls District of Columbia 2009 Shortfall 2010 Shortfall No Shortfall

State Fiscal Conditions Billion $ State Surplus/Deficit, NIPA Baseline Recession

Medicaid Pressures Build Billions of $ Blue/Solid: Total Medicaid Spending Red/Striped: State Medicaid Spending 34% 30% 21.5% of Total State Expenditures 25% 2032: State Medicaid Spending Exceeds One Trillion $

Will Medicaid “Crowd Out” Highway Spending? Billions of Real State Spending Targeting Transportation Transportation Spending: Constant 8% Share of Budget Transportation Spending: Share Reduced to 7% of Budget Transportation Spending: Share Reduced to 5% of Budget Gasoline Tax Increases Must Be Viewed in the Context of Future Fiscal Pressures Facing States

Few Regions Offer Shelter During Downturn Regional Outlook Few Regions Offer Shelter During Downturn

Cement Consumption 2008 -5%–-10% 0–-5% 1%– 3% > 3% < -10% District of Columbia -5%–-10% 0–-5% 1%– 3% > 3% < -10%

Cement Consumption 2009 -5%–-10% 0–-5% 1%– 3% > 3% < -10% District of Columbia -5%–-10% 0–-5% 1%– 3% > 3% < -10%

Cement Consumption 2011 -5%–-10% 0–-5% 1%– 3% > 3% < -10% District of Columbia -5%–-10% 0–-5% 1%– 3% > 3% < -10%

Correction is Temporary Conclusion Correction is Temporary

Portland Cement Consumption Declines Continue Through 2009. = Peak (2005)-to-Trough (2009) Decline: 30 MMT (Worst in History) 24.5% (Equal to 1980-82 Recession)

Capacity Expansion Thousand Metric Tons Stated Capacity Expansions Potential Increases From Specification Changes SCM Penetration May Increase More Rapidly as Ready Mix Face Bottom Line Pressures.

Freight Rate Trends $ Per Metric Ton HANDYMAX 40-50,000 DWT South East Asia U.S. Gulf HANDYSIZE 28-40,000 DWT Transatlantic U.S. East Coast/U.S. Gulf

Introduction Imports record large, sustained declines. Global conditions suggest high freight rates continue. 2008: Bears most of the burden of correcting market imbalances. Utilization Rates decline. Materializes to a greater extent in 2009. Days Supply Inventory remains above historical average. Most pressure materialize in 2009. Past Peak (2005) not realized until 2014

Take a Step Back Longer Term Outlook

Take a Step Back Cyclical correction is temporary.

US Population Thousands of Persons US Population Adds Roughly 65 Million People by 2030 …. a 22% Increase.

Demographics: 2007-2030 Population Adds 65 Million Persons Adds 9.1 Million School-Age Persons Education Construction Adds 34 Million Retirement Age Persons Medical Adds 31 Million Households Housing, Retail & Infrastructure

Per Home, Lifetime C02 Savings ICF Home Over Frame Co2 Metric Tons, Per Home Total Heating & Cooling C02 Saving: 92 Tons per Home Additional C02 Emitted by Cement Production Conservatively Assumes 50 Year Life of Home

ICF & Related Systems: CO2 Savings Metric Tons of CO2 Gains Achieved Though Energy Savings In Space Heating & Cooling 30% 25% 10% of Total Housing Starts 20% 2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share

Potential “Green” Gains: ICF & Related Systems Incremental Gains in Cement Consumption, Metric Tons 30% 25% 20% 10% of Total Housing Starts 2030: Housing Starts Average 1.9 Million Annually. ICF & Related Systems Reach 30% Market Share

Cement Consumption: Long Term Million Metric Tons

Construction Outlook: 2008 Ed Sullivan, Chief Economist PCA