Masonry Magazine February 2004 Page. 50
PCA Report
Robust Construction Activity
Unlikely Until 2005
Editor's Note: Due to space limitations, this report has been edited for length. For the full, unedited version of this report, please visit .org/newsroom/fall-forecast20031218.asp.
The U.S. economy is set to move into high gear in 2004 according to the latest economic forecast from the Portland Cement Association. The optimistic outlook arrives courtesy of recent improvements in U.S. labor markets; however, the Portland Cement Association (PCA) does not expect robust construction activity to arrive until 2005.
Chief economist Edward Sullivan explains, "The seemingly contradictory outlook is based on the prospects of cooling single-family construction under the weight of rising interest rates, a delayed and muted improvement in commercial construction activity, and a public construction sector still coping with state-level fiscal crises."
PCA reports the emerging economic recovery will create jobs, escalate wage gains, and lead to stronger capital gains. Combined, these factors will strengthen states' tax base, resulting in a gradual easing of fiscal stress.
Long-term Replete with Optimism
Optimism, absent from the U.S. economic outlook for some time, is now permeating nearly every corner of the economic spectrum. This spirit of optimism arrived on the scene only recently with improvements in the U.S. labor market. However, there remain skeptics whose thinking is still colored by prolonged anemic growth conditions that endured from the fourth quarter of 2000 until the second quarter of 2003 (with economic growth averaging a meager 1.9%).
Fortunately, those days are behind. The economy is poised for a sustained period of relatively robust conditions, with real GDP growth to average between 3.5 to 4% annually.
Residential Construction Outlook
The residential sector accounts for roughly 25% of overall construction activity and is comprised of single-family construction, multifamily construction and home improvements. This sector, despite its relative size, has been raging during the past two years and is responsible for providing essential support to the construction industry and overall economy during the past two years.
Single-Family Construction
While single-family construction will remain at historically strong levels, the economic conditions that are expected to materialize by mid-2004 are adverse. Mortgage rates will begin a sustained ascent beginning late in the second quarter. The increase will adversely affect homebuyer affordability. However, it is important to note that housing starts will remain near record levels during the first half of 2004.
Furthermore, adverse consumer affordability issues are not overwhelming - they are just strong enough to take the edge off the extremely strong market conditions that currently prevail and induce a modest decline in building starts and single-family construction spending.
Without a more rapid increase in interest rates than currently anticipated, a single-family housing bust is not in the cards. Indeed, in some key cement consuming states such as California, Texas and Florida, extremely favorable population and demographic conditions will soften the declines in single-family activity.
Multi-family Construction
Multi-family construction activity has been adversely impacted by the low mortgage rate environment. Low interest rates have decreased the spread between the average monthly mortgage payment and average monthly rent. In 2000, the average monthly mortgage payment was roughly twice that of the average rent. By mid-2003 the mortgage payment premium was only 25%. This measure does not take into consideration the tax benefits of home ownership.
As monthly payments approached parity, more and more apartment dwellers were able to become homeowners-resulting in rising apartment vacancy rates.
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February 2004
48 Masonry