1. Construction Outlook: 2008
Ed Sullivan, Chief Economist PCA

2. 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.

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

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

5. 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.

6. 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

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

8. 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.

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

10. 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.

11. 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

12. 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

13. 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

14. Economic Outlook
Recession is Here

15. 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

16. Consumer Confidence Conference Board, Composite Series
Recession Troughs:
= 43.2
= 50.9
= 47.3
= 88.2
2003 Iraq = 68.3
Current = 64.4
(Layoffs Just Begun)

17. 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.

18. 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.

19. 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.

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

21. Economic Risks
Global Meltdown?

22. 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 recession.

23. 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.

24. Economic Policy Actions
Policy Actions are too late

25. 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

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

27. 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.

28. 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.

29. Residential Outlook
Recovery Delayed

30. 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

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

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

33. Nonresidential Outlook
Declines in 2008 and 2009

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

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

36. 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

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

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

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

40. 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 $

41. 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

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

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

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

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

46. Correction is Temporary
Conclusion
Correction is Temporary

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

48. 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.

49. 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

50. 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

51. Take a Step Back
Longer Term Outlook

52. Take a Step Back
Cyclical correction is temporary.

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

54. 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

55. 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

56. 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

57. 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

58. Cement Consumption: Long Term
Million Metric Tons

59. Construction Outlook: 2008
Ed Sullivan, Chief Economist PCA