1. 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

2. Introduction

3. 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

4. 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

5. 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.

6. 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

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

8. Economic Outlook

9. 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 growth.
Responsible debt?
Easy terms & standards
Unprecedented link in consumer spending to housing wealth.
Payback is tough – maybe more than consensus of economists believe.

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

11. 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.

12. 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.

13. 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.

14. 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

15. 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

16. 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.

17. 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.

18. 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

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

20. 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:
Public at risk:

21. Construction & Cement Outlook
Overview

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

23. Residential Construction

24. Past Strength in Starts More Than Low Rates…
The Cyclical Upside:
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

25. 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

26. 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

27. 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 =

28. 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.

29. 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.

30. 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

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

32. Nonresidential Construction

33. 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

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

35. 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

36. Public Construction

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

38. 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

39. 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.

40. 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

41. Market Conditions

42. Conclusions

43. 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

44. 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