Aggregate demand expectations for 2018

The outlook continues to be positive with aggregate consumption at its highest level in nine years.

The economy is picking up some speed, as household incomes and corporate incomes register solid gains. The hundreds of billions of dollars of new money added to the system over the past eight years, mainly as bank reserves, is finding its way into the real economy through higher business investment.

With inflation low, unemployment low and wages increasing, consumer spending is posting solid gains. Durable orders for business are also gaining strength and adding to a robust outlook for corporate profits.

Reflection

Looking back a year, we thought 2017 aggregate demand would be at 2.41 billion metric tons (up 1.3 percent from 2016). Our current outlook for 2017 is 2.39 billion metric tons (up 2.1 percent), a difference of less than 1 percent from last year. That is, our current view for 2017 is just about the same as our current estimate for 2017.

Also looking back a year, we thought consumption for 2018 would be 2.31 billion metric tons (up 4.1 percent from 2017). Now, we think 2018 will be at 2.36 billion metric tons (down 1.3 percent from 2017).

While the two forecasts are within 2 percent of each other, we now think 2018 will be slightly better.

The improved view is due to a somewhat better outlook for nonresidential and nonbuilding segments. These segments reflect the improved economic environment since the 2016 election.

The improved outlook stems from more optimism from consumers and businesses. Some of it is due to past actions, and some is due to the modification of energy and bank rules.

Our outlook assumes some corporate tax relief and some personal tax reductions. If the changes are dramatic, the outlook will be even better than we’ve projected. If the final tax changes are modest, the outlook will be lower than our forecast.

GDP growth of more than 3 percent per year is likely if the full tax plan is passed. Even with only modest changes, the GDP will still grow near 3 percent for 2018.

Category analysis

By segment, nonbuilding will lead the way with gains of more than 15 percent for the 2016-to-2019 period. Because this segment is the biggest driver of aggregate, it alone will result in higher total volume.

Our outlook for nonbuilding depends on some modest increases at the federal level plus more support from many states and local governments. The private segments – residential and nonresidential – will not be a source of growth during the next two years. In residential, higher prices, higher mortgage rates and changing consumer attitudes (more renters, fewer home buyers) will prevent a housing boom. While the demographics support much higher building rates, the prior factors are enough to keep the lid on housing starts for the next two years.

Nonresidential, while strong, faces its own set of headwinds that will cause aggregate volume to plateau near its current level.

There is more money available for building, but the structural shift to Internet shopping is hurting retail. And because we are at full employment, there are only small gains from higher employment during the next few years.

The net result of all these factors means a good outlook for aggregate, but consumption in 2019 will only be 3 percent higher than our estimate for 2017 due to small changes for residential and nonresidential. After 2019, things should be even better as pro-growth policies take hold.

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David Chereb, Ph.D., SC-Market Analytics (SC-MA) produces customized market forecasts by major segments of construction, from the county level up. Clients use SC-MA market intelligence reports for business planning and acquisition analyses in aggregate, ready-mix concrete and cement. For more information, visit www.sc-marketanalytics.com.