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

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

Labor Markets Net Job Creation Monthly Gain 500 7.0% Unemployment Rate U3 Measurement 400 6.5% 300 6.0% 200 5.5% 100 5.0% -100 0 2014 2014 2015 2015 2015 2016 2017 2017 4.5% 4.0% 2014 2014 2015 2015 2015 2016 2017 2017

Unemployment Rate % 12 10 8 Current Rate: Wisconsin: 3.0% National: 4.1% 6 4 2 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 201 Source: BLS 3

Interest Rates Interest Rates Annual % 6.04 5.04 4.04 3.04 8.0% 6.0% 4.0% 2.0% 0.0% Inflation Rate CPUI, Annual % Change 2.04 1.04 BAA Bond Rate Conventional Mortgage Rate -2.0% -4.0% -6.0% 0.04 2014 2015 2015 2017-8.0% 2014 2014 2015 2015 2015 2016 2017

Sentiment & Wealth Home Prices Thousand Current $ 400 350 300 250 200 150 100 50 Consumer Confidence 1985=100 140 120 100 80 60 40 20 0 2000 2005 2010 2015 0 2014 2015 2015 2017

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 2022. Apply General Cement Intensity Joint Committee on Taxation Wharton Tax Foundation Goldman Sachs Cement Consumption Increases

Trump Tax Policies Preliminary Impacts a GDP % Impact GDP $ Bil Impact Construction $ Bil Impact Cement Consumption (000) Impact Joint Com./Taxation: +0.8% $137 $8.2 820 Wharton : +0.1% $17 $1.0 100 Goldman Sachs : Tax Foundation : Average : +0.3% $52 $3.1 +0.4% +$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 310 360 390

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.

Residential a

Affordability Conditions Mortgage Rate Conventional Fixed 5.0 Monthly Payment Average New Home 1,500 4.5 4.0 1,400 1,300 3.5 3.0 2.5 1,200 1,100 1,000 900 As a Percent of Household Income: Well Below Past Cyclical Peak 2.0 2014 2014 2015 2015 2015 2016 2017 800 2014 2014 2015 2015 2015 2016 2017

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.

Housing Starts Single Family SAAR 1,000 SF Starts (thousands): 2016: 900 784 2017: 848 2018: 800 914 2019: 964 700 600 Multifamily SAAR 550 500 450 400 350 300 Mortgage to Rent Ratio: 2005: 2.1 2010: 1.3 2015: 1.0 2017: 1.0 500 2005: 1,719 thousand 2017: 848 thousand - 48% of past peak 400 2014 2014 2015 2015 2015 2016 2017 250 200 2014 2014 2015 2015 2015 2016 2017

Nonresidential a

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

Nonresidential Construction Nonresidential Real Construction $ Nonresidential Annual Growth % 350 300 250 200 150 100 50 0 2000 2005 2010 2015 2020 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% 2000 2005 2010 2015 2020 2016: 1.3% 2017: 3.5% 2018: 2.1% 2019: 2.8%

Nonresidential Cement Consumption Wisconsin Metric Tons 350,000 300,000 250,000 200,000 150,000 100,000 50,000 CAGR 2017-22 +2.5% 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2015 2016 2017 2018 2019 2020 2021 2022-2.7% 20.3% -6.5% 23.0% 5.0% -7.1% -1.7% -4.3% Source: PCA 16

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.

Public Construction a

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% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: BEA, PCA 19

Highway Cement Consumption Wisconsin Metric Tons 1,200,000 1,000,000 800,000 600,000 400,000 200,000 CAGR 2017-22 +5.4% 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2015 2016 2017 2018 2019 2020 2021 2022 29.9% 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3% Source: PCA 20

State DOT Paving - Wisconsin National Average = 15% Total Pavement Spending ($ mil) Concrete Pavement Spending ($ mil) Sq Yards (000) Cu Yards (000) Volume Share 2006 $166.60 $50.46 2,099 545 19% 2007 $190.81 $53.82 2,351 575 17% 2008 $233.96 $50.21 1,738 428 20% 2009 $352.49 $106.43 3,224 886 27% 2010 $423.18 $144.84 5,014 1,352 35% 2011 $277.55 $99.54 3,179 861 34% 2012 $314.63 $100.18 3,150 875 33% 2013 $282.52 $102.64 2,990 795 35% 2014 $238.18 $96.04 2,155 589 34% 2015 $208.88 $90.41 2,104 570 36% 2016 $203.52 $109.24 2,335 624 43% 2017 (3Q) $108.00 $73.21 1,803 547 68% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Wisconsin Highway Concrete Volume Share (from Oman data 2017 Q3) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Trump Policy Initiatives a

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. 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

$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

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

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

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

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

Highway Cement Consumption Wisconsin Metric Tons 1,200,000 1,000,000 800,000 600,000 400,000 200,000 CAGR 2017-22 +5.4% 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2015 2016 2017 2018 2019 2020 2021 2022 29.9% 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3% Source: PCA 29

Public Cement Consumption Wisconsin Metric Tons 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 CAGR 2017-22 +4.5% 0 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2015 2016 2017 2018 2019 2020 2021 2022 10.5% -0.4% -7.1% -0.7% 4.6% 9.1% 6.5% 3.3% Source: PCA 30

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

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

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

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

Summary a

a Portland Cement Consumption Thousand Metric Tons 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2016 = 2.4% 2017 = 2.2% 2018 = 2.6% 2019 = 4.5% 2020 = 6.4% 2021 = 3.6% 2022 = 1.1% Stage I 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Stage I: Solid Economic conditions. Adversities held in check. Dovish Fed Policy. Labor Shortages Exist 2018-2019 Q2

a 140,000 120,000 100,000 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 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Stage II: Economic Growth Accelerates. Inflation, Interest Rates increase at a faster pace. Fed Policy is tighter but not severe. Labor Shortages Increase.

a 140,000 120,000 100,000 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% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 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.

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 2017-18 Winter State Forecast

Total Cement Consumption Wisconsin Metric Tons 2,500,000 2,000,000 2017-2022 CAGR: 3.7% I II III 1,500,000 1,000,000 500,000 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2015 2016 2017 2018 2019 2020 2021 2022 8.9% 4.3% -5.4% 3.9% 4.7% 5.2% 3.7% 0.9% Source: USGS, PCA 40

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