Sub-prime crisis to extend into next two years; recession possible

Sub-prime crisis to extend into next two years; recession possible
Published: 30 October 2007

Despite recent Federal Reserve actions, the sub-prime crisis will adversely impact investment and public spending through 2010, leading the Portland Cement Association (PCA) to again adjust its cement
consumption forecast.

At his presentation at the PCA Board Meeting last week, chief economist Ed Sullivan announced that PCA now expects 2007 cement consumption to decline 6.9 per cent, followed by a 2.5 percent decline in 2008.

Sullivan believes that as the economy weakens due in large part to the sub-prime crisis coupled with increased energy costs, overall non-residential construction will experience declines, negatively affecting cement consumption.  The housing market, according to the PCA forecast, is not expected to rebound until mid-2009.

"Our forecast anticipates the impact of a significant economic growth slowdown on the construction industry, but does not predict a recession," said Sullivan. "A recession scenario is a much grimmer picture."

PCA believes the possibility of a recession materialising in the next six months is 40 per cent.  It expects the Federal Reserve to reduce the interest rate 75 basis points during the next three quarters.  However, if
the impact of the sub-prime crisis is worse than expected and energy costs hit consumers harder, a recession is possible.

"If a recession occurs, construction spending will decline nearly 13 per cent, causing a 10 per cent decline in 2008 cement consumption and decreasing kiln utilization rates to 85 per cent," said Sullivan. "An
additional 3.8 consumption decline would occur in 2009, followed by growth in 2010."