The ease in lending standards for nonresidential loans is expected to lag residential by one to two quarters. The improvement process for fundamentals in nonresidential is longer than residential. Improvement in nonresidential economic fundamentals begins with stabilization in the labor markets, but these gains must then be translated into higher occupancy rates, lower vacancy rates, and firmer leasing rates. This additional translation takes time. Furthermore, PCA expects nonresidential property prices will continue to decline through late 2011. These factors, coupled with the existing credit issues surrounding nonresidential loans, suggest a longer recovery will materialize for nonresidential loans.
Construction sector performance
The residential sector has largely run its course as a significant contributor to construction declines. The expectation of a slow reduction in home inventories suggests that this sector will likely be a neutral contributor to cement consumption growth rates through mid-2010. Whatever gains materialize in the meantime will be meager. Despite the stabilization in residential construction, nonresidential construction is expected to exert a significant drag on construction activity during 2010. By 2011, the nonresidential drag on growth is expected to become milder and is expected to become a contributor to growth by the end of 2011. Substantial gains are expected to materialize in nonresidential construction in 2012 and beyond. These gains in nonresidential construction activity are expected to coincide with gains in nonresidential cement intensities - amplifying gains in cement consumption.
Given the weak outlook for private sector construction, any near-term turn in overall construction activity and cement consumption will be dictated by public construction. While attention is focused on the timing and magnitude of the potential positive impacts on construction arising from the American Recovery and Reinvestment Act (ARRA), keep in mind that more than 90 percent of all highway and street spending is put-in-place by state and local governments. State fiscal conditions impact discretionary public construction spending, and the harsh economic environment facing state and local governments may result in a double-digit decline in discretionary highway/street spending during 2009, followed by another large decline in 2010. The harsh fiscal picture facing state and local governments will partially sterilize the ARRA impacts for street and highway construction. The extent to which this materializes could pose significant risks to PCA's cement projections.
Furthermore, ARRA highway spending, at least initially, is likely to be dominated by highway preservation activities such as resurfacing. While some benefit will be accrued to cement consumption, as a whole, these projects are likely to carry low cement intensities - further muting the potential near-term stimulatory benefit to cement consumption.
Finally, bureaucratic delays have hindered the release of ARRA highway funds. Through September, highway outlays represented a meager 8.9 percent of total apportionments. These represent levels that were expected to be achieved in June-July by PCA. Outlays, however, are accelerating on a month over month basis. Allowing for lags between outlays and cement usage during the stages of construction suggests that very little second half stimulatory impact from ARRA will materialize during 2009. Delays in the release of ARRA monies imply that some of the outlays that were previously expected to materialize in 2009 will likely materialize later - boosting the potential stimulatory impact of ARRA in 2010-2011.
Taken together, PCA does not expect a sustained and significant improvement in construction activity or cement consumption to materialize until the second half of 2010. By that time, the economy is expected to be creating jobs and ensuring a sustained recovery. Substantial percentage gains in cement consumption are expected to materialize during 2011-2014.