Aggregate production forecast for 2017-22

Most of the economic data says we are near full employment and that this is a mature aging business cycle. But it doesn’t feel that way. Somehow it feels younger, more energetic, with more room to grow. For now it is just a gut feeling; soon real changes must occur to translate the feelings into better jobs, profits and construction numbers.

The first test of real change will come with the effort to pass a new health care bill. The second effort will be tax reform. If both fail, the energy will be gone and our outlook will be reduced.

Construction contracts were up about 44 percent during the 2010 to 2016 period ($457 billion to $660 billion) and are now approximately at record highs (not adjusted for inflation).

Leading the way has been a slow, steady climb for residential activity. While slow to take off, the former fast-flyer states (Arizona, California, Florida, Nevada and Texas) are at it again with large gains in new housing units.

Nonresidential gained only 12 percent during the recovery as financing restraints, poor shopping mall revenue growth and slow job growth kept vacancy rates at elevated levels until recently.

Nonbuilding is now at record levels and posed to move higher. Most engineering studies conclude that even with our higher spending, the backlog of infrastructure needs continues to grow. With state and local tax receipts in record territory, more funds should flow into public works over the forecast horizon.

While the demand for aggregate plunged between 2006 and 2010, the drop was not as bad as overall construction. Since infrastructure accounts for about 45 percent of total aggregate demand, aggregate is somewhat insulated from the full brunt of most recessions.

Aggregate consumption is now at 2.33 billion metric tons per year. This is a high level of demand that has been exceeded only by the 2004 to 2007 bubble years that created artificial demand. Notice that nonbuilding has not been a significant factor in the recovery, a reflection of the much-delayed highway bill (now passed).

The outlook

The economy seems to have a new energy behind it. Job growth is picking up and interest rates are heading back into a normal range.
While we are near “full employment,” there remains a significant amount of underutilized resources in terms of labor and capital. It is our estimation that our official statistics do not capture the upward potential available.

Thus, we can increase the number of new jobs and boost capital investment, without unleashing rapid inflation (remember we said rapid inflation; inflation is going higher).

But we do have a problem that is going to be difficult to manage – a mismatch between job openings and qualified applicants. Whether it is for ready-mix drivers or mechanics, there are growing shortages.

Flexible market dynamics will sort most of this out through a combination of higher wages, capital-labor substitution and retraining. Larger problems may occur even during this short five-year outlook as automation aggressively replaces labor.

We don’t know if the labor markets can adjust fast enough to create a large number of new jobs (as it has done numerous times in the past). However, we can deal with problems of rapid growth and displacement much easier than we can when growth is slow and job destruction is widespread.

The strongest segment of construction over the next five years will be nonbuilding for two reasons: 1) State and local governments have higher tax receipts; and 2) the administration has made infrastructure spending increases a priority.

In both cases the political part is more difficult than the needs part. Nonresidential will remain relatively flat as the upward tug from more financing availability is countered by vacancy rates that are not dropping enough in most markets.

Homebuilding is strong and will remain strong for most of 2017. By the end of 2017, the clash of higher mortgage rates and higher home prices vis-à-vis more potential buyers will begin to restrict the number of qualified buyers. This results in lower residential activity in 2018 and 2019.

The outlook for aggregate based on this future environment is good. This year and through 2022, demand will be in the 2.3- to 2.6-billion-metric-ton range. Higher infrastructure work provides almost all the extra demand.

The wall

Our base case is that some type of wall between the United States and Mexico will be built along with fencing and electronic surveillance. Most of the impact is in the nonbuilding category for the 2018 to 2022 period. Regionally, the impact is large for the many small counties along the border; not so large for the large-population counties (San Diego, El Paso and Pinal) because they have so many other projects.

To estimate how much impact there might be on aggregate demand, we made some rough assumptions. We assumed where there is a new wall, it will be made of concrete and be 30 ft. high, 6 ft. wide and 6 ft. below ground. This translates into about 42,000 cu. yd. of concrete per mile or about 27,000 tons of aggregate per mile.

If a wall is built for most of the border, it means 1,600 miles of concrete wall, or 44 million tons of aggregate, just for the wall. This adds about 2 percent to total aggregate consumption for the U.S., and that is if a concrete wall is built along the entire border.

Our guess is that actual aggregate demand will be less for just the wall portion. Support facilities and new roads will add to this, resulting in the total wall impact being somewhere in the 30- to 60-million-metric-tons range.

Will the wall be built? Probably. Will it be as big and as long as we’ve analyzed? Probably not.

An alternative path: rapid growth

The “rapid growth” path reflects both a sharp increase in infrastructure work, including the wall, along with a faster growing economy for the 2017 to 2020 period.

GDP growth averages about 0.5 percent higher (3.1 vs. 2.6 percent) for several years and drives near-term construction higher than our base case. All segments of construction are higher for the 2018 and 2019 period, and nonbuilding is higher through 2021.

Since we are starting near full employment and owing to the likelihood of higher interest rates, higher inflation and higher import prices, by the end of 2020 construction begins to weaken.

The higher financing costs hinder private projects and the completion of major infrastructure projects (the wall) eliminate the stimulus from these large contracts. As a result, total aggregate demand is lower than our base case by 2021.

The next five years look good for total aggregate demand as the economy accelerates during the 2017 and 2019 period. Both residential and nonresidential grow for several more years before declining owing to higher interest rates.

Nonbuilding continues to grow for most of the next five years as policy changes and improved tax receipts provide the funds necessary to meet high infrastructure needs.

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Prepared by David Chereb, with contributions by Colin Sutherland and Jim Ward.