Even before the events of September 11, the U.S. economy was showing clear signs of slowing, if not an outright decline. Now the signs are clear: a recession, hopefully a mild one, has already begun. March 2001 was the official start of this recession, but some sectors of the economy fell off earlier. Luckily, the construction sector has held up better than the overall U.S. economy.

In his recently released report, “U.S. Construction and Cement Industry Update,” Portland Cement Association Chief Economist William Toal reported that this economic and construction outlook leads to a slight easing in activity in the U.S. cement industry for 2002. Declining construction will hit cement use, but the industry's promotion efforts have resulted in an increased use of cement per dollar of construction money spent over the past few years. This should continue and buffer any decline in portland cement consumption.

According to Toal, overall portland cement consumption is expected to increase about 1.7% in 2001. While currently running only about 1.0% above 2000 levels, the final two months of 2000 were hard hit by extremely bad weather. Therefore, the final two months of 2001 should lead to a larger year-end total. But then, with the after effects of the current recession and decline in construction activity, a 4.9% drop in consumption is forecast for 2002. Even with this decline, consumption remains above the previous record levels of 1998. Consumption is then expected to increase about 2% in 2003 and accelerate thereafter, says Toal.

Construction outlook

Construction activity in general has remained stronger than expected. At this point in the business cycle, construction is usually running down sharply, but this is not the case presently.

Residential construction has held up surprisingly well. Both new and existing home sales remain at strong levels. The Federal Reserve's interest rate cuts have held up home sales despite the slippage in consumer confidence and employment. Housing starts remain near the 1.6 million-unit range. For 2001, housing starts are expected to run 1.601 million units, up from 1.569 million in 2000. In 2002, despite the Fed's aggressive easing, long-term interest rates and mortgage rates have not dropped in tandem. Therefore, the economic downturn should lead to a decline in housing construction to 1.448 million units. All of the drop is expected in the single-family area with multifamily starts forecast to rise in 2002 from a slight decline in 2001. Toal believes housing starts should rebound into the 1.5 million- to 1.6 million-unit range in the 2003 to 2005 period.

Private nonresidential construction is an area of major worry. While activity did pick up slightly in October 2001, construction in this sector is running more than 10% below one-year-ago levels. Shortfalls and declines in corporate profits have taken their toll on commercial construction. Industrial construction has been hit by the recession in the manufacturing sector that began in mid-2000. The sharp decline in the high-tech sector also has left existing office space empty and new offices space coming on stream unoccupied.

Toal's current forecast projects a 5.3% decline in private nonresidential construction in 2001 after a 3.6% increase in 2000. In 2002, a 10.1% decline is expected. This will be the weakest area of all construction sectors. Even prior to September 11, hotel construction had reached its peak and was turning down. Since then, hotel occupancy rates have dropped sharply. After a 12.0% decline in 2001, an 18.0% drop in hotel construction is expected in 2002.

Other areas of nonresidential construction are expected to show double-digit declines in 2002. As mentioned earlier, office construction is showing rising vacancy rates. Industrial and retail construction also are expected to be down by double-digit amounts. On the up side, educational and hospital and institutional construction should continue to increase.

Public construction, which slipped off slightly in 2000, is expected to increase 8.6% in 2001. Strong increases in construction of public buildings as well as basic infrastructure facilities has led the way. Highway and bridge construction also has picked up finally after passage of TEA-21 back in 1998. Highway construction is expected to increase 8.3% in 2001 and rise 4.1% in 2002.

There are some trouble spots in the public works area. State and local budgets are dipping near zero. Over-enthusiastic tax revenue forecasts by many states have led to the recent deterioration of state fiscal positions; cutbacks in capital construction projects at the state and local levels may result.

Overall, total construction spending is forecast to increase 2.6% in 2001, according to Toal. But the weakness in nonresidential building construction and a slight decline in residential construction, a 5.0% decline in activity is forecast for 2002 before a recovery sets in 2003.

Cement activity

This economic and construction outlook leads to a slight easing in activity in the U.S. cement industry for 2002. As mentioned earlier, Toal is predicting portland cement consumption to increase 1.7% in 2001, followed by a 4.9% drop in 2002. But Toal reminds us that this is a mild drop by historical standards.

Masonry cement consumption will be affected by the decline in residential construction forecasted for 2002. Consumption is projected to drop 1.4% in 2001, after a 0.5% decline in 2000. A 6.0% slide is then expected for 2002, according to Toal.

Imports of cement, after reaching nearly 30 million metric tons (mt) have started to ease off significantly. New capacity coming on line in 2000 and over the next few years could add more than 20 million mt on a current base of 84 million mt. Combined with the forecasted decline in consumption, imports should continue to drop. Imports are forecast to run 24.9 million mt in 2001, a 13.1% decline. In 2002, imports should drop by an additional 11.6% to 22.0 million mt.