According to cement industry economist Ed Sullivan, of The Sullivan Report, all forecasts contain risk. Risks can originate from the data used, the process of calculations, the assumptions, or a combination of each element. Indeed, an infinite number of alternative scenarios to the Baseline exist – each materializes with even small changes in assumptions.
The risks surrounding the Spring Forecast are extremely high. The risks center on assessments regarding underlying strength of the economy and the headwinds that face the near-term economy. The key assessments include: 1) the impact of administration policies on the economic fundamentals, 2) Federal Reserve monetary policy actions, and 3) the strength and resiliency of consumer spending.
The “Baseline” forecast is believed to be the most likely scenario that will unfold. The Baseline Scenario has been presented in detail to subscribers in the Cement Outlook Report. To recap, the Baseline Scenario suggests that the economy’s strength is easing. Uncertainty, tariff policies, immigration reform and DOGE all add to the near-term economic easing.
Tariff policies hold the prospects of adding significantly to inflationary spirits in the economy. Given the dilemma of rising inflation and weakness in the labor markets, the Federal Reserve may be slow in cutting rates to avert an economic slowdown. Only after the threat of a significant decline in economic growth raises its head, will the Federal Reserve act to lower interest rates.
A lot of time will likely pass for all that to happen and timing is everything. Eighty percent of all construction activity is typically completed by the end of the third quarter. The Fed might only be starting its rate cuts at that time. Once the Fed makes a cut, don’t expect immediate results. Economists estimate the lag as long as 18 months.
Adverse economic momentum, once in place, is hard to reverse. Initial steps by the Federal Reserve to lower rates will likely be modest. This all implies a policy of too little, too late to prevent a significant slowdown for the US construction markets in 2025.
Without sustained strength in the labor market and significant declines in mortgage rates, the residential sector is not expected to improve this year. Adverse affordability conditions will continue as long as mortgage rates remain high. A significant retreat in mortgages rates, to the 5% to 5.5% level, must materialize before the outlook for single family construction turns rosy. Don’t expect that to happen until the second half of next year. In the meantime, weakened labor markets will add further to the woes facing the single-family construction activity.
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