PCA Economist:
Positive Present, Fuzzy Future

The Portland Cement Association's chief economist is predicting real growth in the cement and construction industries for the first time since the recession struck – although the approaching "fiscal cliff' could undo all of the progress made this year.

Portland Cement Association (PCA) vice president and chief economist Ed Sullivan addressed attendees of the Associated Equipment Distributors Executive Forum September 7, providing insight into the state of the current and future construction market.

Despite his reputation as a pessimist – Sullivan told his Rosemont, Ill. audience that he's sometimes called "Dr. Doom" – the economist's forecasts were upbeat, though he added enough grains of salt to his predictions to fill an industrial-size shaker.

Sullivan noted that construction activity grew 5.8 percent during the first half of 2012, boosted by a 14.4 percent increase in nonresidential and 8.4 percent rise in residential construction compared to 2011. "If we hold on that track, it will be the first time in four years construction has posted real gain," he said.

The PCA upwardly revised its forecast for construction spending earlier this year, predicting 2012 to end with 5.5 percent growth, 2013 to decline slightly to 5.0 percent, then a surge in 2014 to 9.5 percent as demand grows and the economy heals from the damage done by the housing crisis. Sullivan predicts all three sectors will be back in positive territory by 2014, and double-digit gains in construction could once again start to materialize.

The salt in Sullivan's shaker was the looming "fiscal cliff," a combination of tax increases and spending cuts expected to drain $600 billion out of the economy if they kick in as scheduled on Jan. 2, 2013.

"It was thought that in two years, the economy would get strong enough to handle the spending cuts and tax increases," Sullivan said. "The economy didn't gain as much strength as expected, and Congress has failed to reach an agreement. Now we are left at the mercy of this law, which will go into effect unless Congress acts.

"Given the current fragility of the economy, many believe that the fiscal policy could push the economy into another recession "?(R)? as the risks of recession rise, consumer sentiment declines and economic growth declines with it."

Sullivan foresees three possible scenarios for the rest of 2012: Congress acts to prevent the fiscal cliff; Congress allows the cuts and tax hikes to kick in and does nothing; or, the "fiscal cliff" occurs, and Congress tries to fix it after the fact. The third scenario, while possible, could have a "too little, too late' effect on the economy. "Once you let the genie out of the bottle, it's difficult to put it back in," Sullivan said. "Adverse momentum will kick in and it will be difficult to turn around. You're left with a very tepid recovery into the second part of next year – zero percent growth, maybe slightly negative."

In spite of the imminent deadline, the PCA is working under the assumption that the fiscal cliff will be averted. "Our expectation is they will deal with it, but the economy will be slow to come back," Sullivan said.

The U.S. economy is already experiencing a slowdown as the fiscal cliff nears. Economic growth in the second half of 2012 is down to a crawl, with job creation and construction activity also slowing, and consumer sentiment is at its lowest recorded level since 2009.