PCA economist: Debt crisis could usher 13 percent cement consumption drop over 2011-12

Sources: Portland Cement Association, Skokie, Ill.; Staff reports

Inaction by Congress and the White House on the federal debt ceiling could derail the fragile U.S. economic recovery, spurring a second recession and adversely impacting cement shipments, according to a recent PCA report.

A federal default stemming from the absence of a higher debt ceiling would affect business, consumer and bank confidence, leading to a rise in interest rates and the likelihood of forced government austerity spending measures. Such moves, in turn, could depress highway and other government construction programs at the federal and state level.

“In this scenario, cement consumption would record a 5.6 percent retraction in 2011, followed by a 7.5 percent drop in 2012,” says PCA Chief Economist Ed Sullivan. “In fact, the debt crisis may already be exerting adverse influence on near-term cement consumption due to suspension of state and local treasury bonds as well as an overall uncertainty that has been injected into the economic landscape.”

PCA estimates the cyclical downturn caused by the “Great Recession” reduced federal revenues by $1.9 trillion and raised income security payments like unemployment insurance by $600 billion. Aside from revenue and tax assessments, part of the increase in debt has been recorded due to necessary counter-cyclical spending such as the stimulus package. Defense spending in the Middle East has also contributed to the recent large deficits. Finally, and perhaps most worrisome, deficits have come from increases in entitlement spending fueled by demographic changes. The Congressional Budget Office expects entitlement spending on Social Security, Medicare and Medicaid will rise from $1.5 trillion in 2010 to $2.6 trillion in 2020.

Prior to the recession, total accumulated federal debt held by the public totaled $5 trillion. Since 2007, this debt has more than doubled, increasing by $5.8 trillion to $10.8 trillion. The debt accumulation during the past four years actually exceeds the total debt accumulated since the country’s inception.

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