Wisconsin Concrete Pavement Association. Ed Sullivan, SVP & Chief Economist

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1 Wisconsin Concrete Pavement Association Ed Sullivan, SVP & Chief Economist February 2018 I Pewaukee, Wisconsin

2 Labor Markets Net Job Creation Monthly Gain % Unemployment Rate U3 Measurement % % % % % 4.0%

3 Unemployment Rate % Current Rate: Wisconsin: 3.0% National: 4.1% Source: BLS 3

4 Interest Rates Interest Rates Annual % % 6.0% 4.0% 2.0% 0.0% Inflation Rate CPUI, Annual % Change BAA Bond Rate Conventional Mortgage Rate -2.0% -4.0% -6.0% %

5 Sentiment & Wealth Home Prices Thousand Current $ Consumer Confidence 1985=

6 Trump Tax Policies Impact on Cement Consumption a Stronger Economic Growth Construction Spending Accounts for Roughly 6% of GDP Reaction to tax cut takes time to incubate. Stimulus adds 20 BP to growth initially, and increases to 80 BP by Q4 of Apply General Cement Intensity Joint Committee on Taxation Wharton Tax Foundation Goldman Sachs Cement Consumption Increases

7 Trump Tax Policies Preliminary Impacts a GDP % Impact GDP $ Bil Impact Construction $ Bil Impact Cement Consumption (000) Impact Joint Com./Taxation: +0.8% $137 $ Wharton : +0.1% $17 $ Goldman Sachs : Tax Foundation : Average : +0.3% $52 $ % +$61 $3.6 PCA s Fall Forecast Assumed a 2019 Impact: +0.24% This is now +$65 in play earlier than +$3.9 expected. And MAY add strength to Regional & National Forecasts

8 The State of the Economy is Good Sustained strong job creation & low unemployment rates. Wage gains accelerate & compounded by tax cuts. GDP Growth Rate: 2.5% is now the minimum Increase in home values & equity markets generate wealth gains. Household debt burdens are low and credit quality is strong, leading to easier access to credit. Interest & inflation rates rise, but slowly and well below historical norms. Willing & able consumer. Business taxes may add strength to investment. Strong private sector generates more income & tax revenue for state & local that supports strength in public spending.

9 Residential a

10 Affordability Conditions Mortgage Rate Conventional Fixed 5.0 Monthly Payment Average New Home 1, ,400 1, ,200 1,100 1, As a Percent of Household Income: Well Below Past Cyclical Peak

11 Housing Outlook a Low mortgage rates, job gains help in affordability despite strong gains in home prices. Millennials burdened by debt, forming households and families later and not as accepting that homeownership a safe bet for asset accumulation, are slow to enter the new SF market. Low inventories, rising prices should provide incentive to accelerate building. Skilled workers left the construction workforce and the pipeline is slow to replenish. Reduces starts by as much as 100,000 annually. PCA takes a conservative position. Upside risks.

12 Housing Starts Single Family SAAR 1,000 SF Starts (thousands): 2016: : : : Multifamily SAAR Mortgage to Rent Ratio: 2005: : : : : 1,719 thousand 2017: 848 thousand - 48% of past peak

13 Nonresidential a

14 Linkage to Nonresidential Construction Activity Leads to growth in office construction. Asset Prices Firm New Office Hiring 1/5 of all jobs in the office. Perceived lending risks decline Credit Troubles Ease Vacancy Rates Decline Labor market strength translates into nonresidential construction activity growth across many commercial real estate markets. Leasing Rates Stabilize

15 Nonresidential Construction Nonresidential Real Construction $ Nonresidential Annual Growth % % 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% : 1.3% 2017: 3.5% 2018: 2.1% 2019: 2.8%

16 Nonresidential Cement Consumption Wisconsin Metric Tons 350, , , , , ,000 50,000 CAGR % % 20.3% -6.5% 23.0% 5.0% -7.1% -1.7% -4.3% Source: PCA 16

17 Potential Upside Risk Taiwanese electronics company Foxconn has awarded Rhode Island-based Gilbane Building Company the general construction contract for its new $10 billion factory in Mount Pleasant, WI, according to BizTimes. Infrastructure and utility work for the four-year project has already started, and construction on the first of three 1.5-million-square-foot buildings could start as early as April. The project is expected to span 22 million square feet when complete. After Foxconn makes an FOXCOM official announcement is included in regarding the nonresidential its choice forecast general contractor, local construction companies estimates expect (conservative the subcontractor estimates). award process to begin. The project could generate 10,000 construction jobs, representing $600 million in earnings each year, It does along not with include 6,000-10,000 secondary additional impact such support as jobs like suppliers. roadways supporting high traffic volumes and vehicle weights.

18 Public Construction a

19 Public Capital Investment Share of GDP 3.0% 2.5% State & Local capital investment in as a share of GDP has declined to a post WWII low State & Local 2.0% 1.5% Federal 1.0% 0.5% Capital investment based on structures, i.e. schools & roads. Excludes equipments & software 0.0% Source: BEA, PCA 19

20 Highway Cement Consumption Wisconsin Metric Tons 1,200,000 1,000, , , , ,000 CAGR % % 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3% Source: PCA 20

21 State DOT Paving - Wisconsin National Average = 15% Total Pavement Spending ($ mil) Concrete Pavement Spending ($ mil) Sq Yards (000) Cu Yards (000) Volume Share 2006 $ $ , % 2007 $ $ , % 2008 $ $ , % 2009 $ $ , % 2010 $ $ ,014 1,352 35% 2011 $ $ , % 2012 $ $ , % 2013 $ $ , % 2014 $ $ , % 2015 $ $ , % 2016 $ $ , % 2017 (3Q) $ $ , % 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Wisconsin Highway Concrete Volume Share (from Oman data 2017 Q3)

22 Trump Policy Initiatives a

23 a Federal Debt Billion Nominal Dollars 25,060 Federal Debt is now at nearly $20 trillion. Since the Budget Control Act of 2011, the debt increased 31.2%. 20,060 15,060 Even 10,060 taking into consideration the potential revenue gains associated with stronger economic activity tax 5,060 reform may not be neutral and sets the stage for discussion of infrastructure 60 spending. Its not about the need to invest in infrastructure..its how do you fund it

24 $1,000 $600 Infrastructure Size of Program Possible push-back in the timing of the infrastructure bill federal debt issues take center stage and reduce the size of the $1,200 infrastructure program to Clinton program of $250 billion, or $50 billion annually. Billion $, Stated As Five Year Spending Annual appropriation is not annual spending. In $800 the first year of a $50 billion appropriation, only $5 to $7 billion will be spent in that first year. $400 $200 $0 Sanders Clinton Clinton Doubled Vague Suggestion Average Clinton - PCA Assumption Vague

25 a Rail Safe Water Harbor, Dams & Levees 7% Electric Grid Trump Infrastructure Spending Scenario Airports 9% 48% Public Transit 9% 9% 2% 2% 9% Highway & Bridge State & Local Sterilization Assumption 20% Phased In by 2021 and only applied to highways. 25

26 a Rail Safe Water Airports Harbor, Dams & Levees 3% 4% 4% 2% 1% 9% 2% Electric Grid Trump Infrastructure Cement Distribution Potential Contribution to Cement Consumption (MMT) Public Transit Highway & Bridge 76% Year One: 1.5 to 2.0 Year Two: 4.0 to 5.0 Year Three: 6.5 to 7.5 As details emerge on the infrastructure program, estimates will be calibrated. 26

27 The Need for Infrastructure Funding % Share of lane miles rated poor based on IRI WA MT ND NH VT ME OR MN ID WY SD WI MI NY MA RI CT CA NV UT CO NE KS IA MO IL IN KY OH WV PA VA NJ DE MD AZ NM OK AR TN SC NC National Average 12.8% TX LA MS AL GA FL 11%+ 10% to 5% Less Than 5% Source: FHWA Table HM-64, PCA

28 Infrastructure Funding Allocations? Estimated allocation of funding based on stock of deficient roads & bridges WA MT ND NH VT ME OR MN ID WY SD WI MI NY MA RI CT CA NV UT CO NE KS IA MO IL OH IN KY WV PA VA NJ DE MD AZ NM OK AR TN NC SC MS AL GA TX LA FL Top Third Middle Third Bottom Third Source: PCA, FHWA

29 Highway Cement Consumption Wisconsin Metric Tons 1,200,000 1,000, , , , ,000 CAGR % % 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3% Source: PCA 29

30 Public Cement Consumption Wisconsin Metric Tons 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 CAGR % % -0.4% -7.1% -0.7% 4.6% 9.1% 6.5% 3.3% Source: PCA 30

31 Stimulating an Economy Near Full Employment Will Require a Monetary Policy Response a

32 a Marketplace Reaction Financial markets react first as inflation expectations get baked into long interest rates. The yield curve steepens. Risk premiums on loans begin to edge up. Pressure on wages increases as unemployment is pushed lower. Nonlinear relationship. Wages increase faster given a 100 basis point decline in unemployment when rates are at 4%, than when they are at 5%. 32

33 a Marketplace Reaction With wage increases, labor force expands. Business invests in labor saving machinery results in a tripling in labor productivity by 2021 (If not, wages rise further). This investment will occur during a period of monetary policy tightening (high and rising interest rates). Some jobs are foregone to detriment of GDP growth. 33

34 a Policy Reaction: Federal Reserve Actions The Federal Reserve accelerates its increases in the federal funds rate. These increases are expected to take place as the Federal Reserve reduces financial assets acquired during its Quantitative Easing policies. Construction is interest sensitive. Growth in the private construction sector slows and disappears. Downside risks increase in this gentle boom-bust scenario. The existence of huge federal debt could deepen a growth slowdown. 34

35 Summary a

36 a Portland Cement Consumption Thousand Metric Tons 140, , ,000 80,000 60,000 40,000 20, = 2.4% 2017 = 2.2% 2018 = 2.6% 2019 = 4.5% 2020 = 6.4% 2021 = 3.6% 2022 = 1.1% Stage I Stage I: Solid Economic conditions. Adversities held in check. Dovish Fed Policy. Labor Shortages Exist Q2

37 a 140, , ,000 80,000 60,000 40,000 20,000 0 Portland Cement Consumption Thousand Metric Tons 2016 = 2.4% 2017 = 2.2% 2018 = 2.6% 2019 = 4.5% 2020 = 6.4% 2021 = 3.6% 2022 = 1.1% Stage II Stage II: Economic Growth Accelerates. Inflation, Interest Rates increase at a faster pace. Fed Policy is tighter but not severe. Labor Shortages Increase.

38 a 140, , ,000 80,000 60,000 40,000 20,000 0 Portland Cement Consumption Thousand Metric Tons 2016 = 2.4% 2017 = 2.2% 2018 = 2.6% 2019 = 4.5% 2020 = 6.4% 2021 = 3.6% 2022 = 1.1% Stage III Stage III: Private Sector retreats under weight of higher interest rates. Inflation, Interest Rates increase at an even faster pace. Fed Policy is Hawkish. Labor Shortages Ease.

39 Regional Cement Trends: Through 2018 Based on year-over-year % Growth WA MT ND NH VT ME OR MN ID WY SD WI MI NY CT MA RI CA NV UT CO NE KS IA MO IL IN KY OH WV PA VA NJ DE MD AZ NM OK AR TN NC SC MS AL GA TX LA FL Exceed National National Average Subnational Source: PCA Winter State Forecast

40 Total Cement Consumption Wisconsin Metric Tons 2,500,000 2,000, CAGR: 3.7% I II III 1,500,000 1,000, , % 4.3% -5.4% 3.9% 4.7% 5.2% 3.7% 0.9% Source: USGS, PCA 40

41 Wisconsin Concrete Pavement Association Ed Sullivan, SVP & Chief Economist February 2018 I Pewaukee, Wisconsin

More of the Same; Or now for Something Completely Different?

More of the Same; Or now for Something Completely Different? C2ER Place cover image here Richard Wobbekind Chief Economist and Associate Dean for Business and Government Relations June 14, 2017 Real GDP