Pricing power, volume growth shape outlook

By |  February 14, 2019
Source: S-C Market Analytics. Click to enlarge.

Source: S-C Market Analytics. Click to enlarge.

We are past the post-tax cut initial growth spurt and entering the longer-term structural impact.

This phase, while less dramatic, has long legs and will show up with continued strength in capital investments (i.e., machinery, structures, intellectual investments and new business formation). The qualifier is that current pro-growth policies continue.

Helping to keep us on this higher growth track is the leveling off of interest rates, at least for a while. With the new tax rates and changes now evident to everyone, the general movement of people and businesses toward warmer, lower-cost areas will continue. This means the 60-plus-year move to Sun Belt states will accelerate but be more spread out as those states just north of Florida and Georgia capture more of the flow. Add to this the increased attractiveness of most of the Mountain Region states.

These economic and business changes mean all segments of construction materials will do well, with residential and nonresidential plateauing at high levels and nonbuilding providing the bulk of materials growth over the next two to three years.

Residential is about flat due to the high price of new housing, a shift in millennial preferences for renting in more urban areas and the lack of adequate down payments. For nonresidential construction, we are still in the midst of the Amazon effect. This is a huge structural change for retail and, to a lesser extent, other commercial activity, preventing any large overall increase in demand from this segment. Nonbuilding is doing – and will do – the best.

With the economy growing strongly for several years, local conditions are good enough to spend more on infrastructure. Also, with a new Congress, there is an increased probability for more federal money, even though its chances of passage remain below 50 percent.

Overall, the outlook remains good with excellent pricing power and good volume growth.

Dr. David Chereb has many years of experience forecasting construction materials, and his web-based forecasting models have captured every major turning point in materials demand for more than 15 years. Chereb received his Ph.D. in economics from the University of Southern California.

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