Wisconsin Concrete Pavement Association

Ed Sullivan, SVP & Chief Economist

February 2018 I Pewaukee, Wisconsin

-100

0

100

200

300

400

500

2014 2014 2015 2015 2015 2016 2017 2017

Net Job CreationMonthly Gain

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

2014 2014 2015 2015 2015 2016 2017 2017

Unemployment RateU3 Measurement

Labor Markets

0

2

4

6

8

10

12

2000 2002 2004 2006 2008 2010 2012 2014 2016 201

Unemployment Rate%

Source: BLS 3

Current Rate:Wisconsin:

3.0%National: 4.1%

Inflation RateCPUI, Annual % Change

Interest Rates

0.04

1.04

2.04

3.04

4.04

5.04

6.04

2014 2015 2015 2017

Interest RatesAnnual %

BAA Bond Rate

Conventional Mortgage Rate

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2014 2014 2015 2015 2015 2016 2017

0

20

40

60

80

100

120

140

2014 2015 2015 2017

Consumer Confidence1985=100

0

50

100

150

200

250

300

350

400

2000 2005 2010 2015

Home PricesThousand Current $

Sentiment & Wealth

Stronger Economic Growth

Apply General Cement Intensity

Trump Tax Policies Impact on Cement Consumption

Construction Spending Accounts for Roughly

6% of GDP

a

Cement Consumption Increases

• Joint Committee on Taxation• Wharton • Tax Foundation • Goldman Sachs

Reaction to tax cut takes time to incubate. Stimulus adds 20 BP to

growth initially, and increases to 80 BP by Q4 of 2022.

Trump Tax Policies Preliminary Impacts a

Joint Com./Taxation:

Wharton :

Goldman Sachs :

Tax Foundation :

Average :

GDP % Impact

+0.8%

+0.1%

+0.3%

+0.4%

+0.24%

GDP $ BilImpact

$137

$17

$52

+$61

+$65

Construction $ Bil

Impact

$8.2

$1.0

$3.1

$3.6

+$3.9

Cement Consumption(000) Impact

820

100

310

360

390

PCA’s Fall Forecast Assumed a 2019 Impact:

This is now in play earlier than expected. And MAY add strength to Regional &

National Forecasts

The State of the Economy is Good• Sustained strong job creation & low unemployment rates.

• Wage gains accelerate & compounded by tax cuts.

• 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.

GDP Growth Rate:

2.5% is now the minimum

Residential

a

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2014 2014 2015 2015 2015 2016 2017

Mortgage RateConventional Fixed

Affordability Conditions

800

900

1,000

1,100

1,200

1,300

1,400

1,500

2014 2014 2015 2015 2015 2016 2017

Monthly PaymentAverage New Home

As a Percent of Household Income:

Well Below Past Cyclical Peak

Housing Outlook

• 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.

a

400

500

600

700

800

900

1,000

2014 2014 2015 2015 2015 2016 2017

Single FamilySAAR

200

250

300

350

400

450

500

550

2014 2014 2015 2015 2015 2016 2017

MultifamilySAAR

Housing StartsMortgage to Rent

Ratio:

2005: 2.12010: 1.32015: 1.02017: 1.0

2005: 1,719 thousand2017: 848 thousand- 48% of past peak

SF Starts (thousands):

2016: 7842017: 8482018: 9142019: 964

Nonresidential

a

Linkage to Nonresidential Construction Activity

New Office Hiring

Vacancy Rates

Decline

Leasing Rates

Stabilize

Credit Troubles Ease

Asset Prices Firm

1/5 of all jobs in the office.

Perceived lending risks decline

Leads to growth in office

construction.

Labor market strength translates into nonresidential

construction activity growth across many

commercial real estate markets.

Nonresidential Construction

0

50

100

150

200

250

300

350

2000 2005 2010 2015 2020

NonresidentialReal Construction $

NonresidentialAnnual Growth %

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2000 2005 2010 2015 2020

2016: 1.3%2017: 3.5%2018: 2.1%2019: 2.8%

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

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%

Nonresidential Cement Consumption – WisconsinMetric Tons

Source: PCA 16

CAGR 2017-22+2.5%

Potential Upside RiskTaiwanese 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 official announcement regarding its choice for general contractor, local construction companies expect the subcontractor award process to begin. The project could generate 10,000 construction jobs, representing $600 million in earnings each year, along with 6,000-10,000 additional support jobs like suppliers.

FOXCOM is included in the nonresidential forecast estimates (conservative estimates).

It does not include secondary impact…such as roadways supporting high traffic volumes and

vehicle weights.

Public Construction

a

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

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

State & Local capital investment in as a share of GDP has

declined to a post WWII low

State & Local

Federal

Capital investment based on structures, i.e. schools & roads. Excludes equipments & software

Public Capital InvestmentShare of GDP

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

2015 2016 2017 2018 2019 2020 2021 202229.9% 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3%

Highway Cement Consumption – WisconsinMetric Tons

Source: PCA 20

CAGR 2017-22+5.4%

State DOT Paving - Wisconsin

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Wisconsin Highway Concrete Volume Share(from Oman data – 2017 Q3)

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%

National Average = 15%

Trump Policy Initiatives

a

Federal DebtBillion Nominal Dollars

60

5,060

10,060

15,060

20,060

25,060

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

a

Federal Debt is now at nearly $20 trillion. Since the Budget Control Act

of 2011, the debt increased 31.2%.

Even taking into consideration the potential revenue gains associated

with stronger economic activity…tax reform may not be neutral and sets

the stage for discussion of infrastructure spending.

Its not about the need to invest in infrastructure…..Its how do you fund it.

$0

$200

$400

$600

$800

$1,000

$1,200

Sanders Clinton Clinton Doubled VagueSuggestion

Average Clinton -Vague

PCA Assumption

Infrastructure Size of ProgramBillion $, Stated As Five Year Spending

Possible push-back in the timing of the infrastructure bill – federal debt issues take center stage and reduce the size of the infrastructure program to Clinton program of $250 billion, or $50 billion annually.

Annual appropriation is not annual spending. In the first year of a $50 billion appropriation, only $5 to $7 billion will be spent in that first year.

Trump Infrastructure Spending Scenario

48%

9%

2%2%

9%

9%

9%

7%

Highway & Bridge

25

Public Transit

Airports

Harbor, Dams & Levees

Safe Water

Rail

Electric Grid

a

State & Local Sterilization Assumption

20% Phased In by 2021 and only applied to highways.

Trump InfrastructureCement Distribution

76%

4%

1%2%

4%3%

9%2%

Highway & Bridge

26

Public Transit

Airports

Harbor, Dams & Levees

Safe Water

Rail

Electric Grid

a

Potential Contribution to Cement Consumption (MMT)

Year One: 1.5 to 2.0Year Two: 4.0 to 5.0Year Three: 6.5 to 7.5

As details emerge on the infrastructure program,

estimates will be calibrated.

ME

RI

MA

VTNH

AL GA

SC

TN

FL

MSLA

TX

OKNM

KS

MN

IA

MO

AR

WY

CO

ND

SD

NE

WA

ID

MT

OR

NVUT

AZ

CA

WI

ILIN

MI

OH

WVVA

NC

MD

DE

PA

NY

CT

NJ

11%+ 10% to 5% Less Than 5%

% Share of lane miles rated ‘poor’ based on IRI

Source: FHWA – Table HM-64, PCA

The Need for Infrastructure Funding

KY

National Average12.8%

ME

RI

MA

VTNH

AL GA

SC

TN

FL

MSLA

TX

OKNM

KS

MN

IA

MO

AR

WY

CO

ND

SD

NE

WA

ID

MT

OR

NVUT

AZ

CA

WI

ILIN

MI

OH

WVVA

NC

MD

DE

PA

NY

CT

NJ

Top Third Middle Third Bottom Third

Estimated allocation of funding based on stock of deficient roads & bridges

Source: PCA, FHWA

Infrastructure Funding Allocations?

KY

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

2015 2016 2017 2018 2019 2020 2021 202229.9% 1.5% -14.9% -0.8% 7.0% 11.1% 5.6% 4.3%

Highway Cement Consumption – WisconsinMetric Tons

Source: PCA 29

CAGR 2017-22+5.4%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

2015 2016 2017 2018 2019 2020 2021 202210.5% -0.4% -7.1% -0.7% 4.6% 9.1% 6.5% 3.3%

Public Cement Consumption – WisconsinMetric Tons

Source: PCA 30

CAGR 2017-22+4.5%

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

a

Marketplace Reaction

32

• 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%.

a

Marketplace Reaction

33

• 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.

a

Policy Reaction: Federal Reserve Actions

34

• 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.

a

Summary

a

Portland Cement ConsumptionThousand Metric Tons

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

2016 = 2.4%2017 = 2.2%2018 = 2.6%2019 = 4.5%2020 = 6.4%2021 = 3.6%2022 = 1.1%

a

Stage I

Stage I:

• Solid Economic conditions.

• Adversities held in check.

• Dovish Fed Policy.

• Labor Shortages Exist

• 2018-2019 Q2

Portland Cement ConsumptionThousand Metric Tons

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

2016 = 2.4%2017 = 2.2%2018 = 2.6%2019 = 4.5%2020 = 6.4%2021 = 3.6%2022 = 1.1%

a

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.

Portland Cement ConsumptionThousand Metric Tons

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

2016 = 2.4%2017 = 2.2%2018 = 2.6%2019 = 4.5%2020 = 6.4%2021 = 3.6%2022 = 1.1%

a

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

ME

RI

MA

VTNH

AL GA

SC

TN

FL

MSLA

TX

OKNM

KS

MN

IA

MO

AR

WY

CO

ND

SD

NE

WA

ID

MT

OR

NVUT

AZ

CA

WI

ILIN

MI

OH

WVVA

NC

MD

DE

PA

NY

CT

NJ

Exceed National National Average Subnational

Based on year-over-year % Growth

KY

Source: PCA 2017-18 Winter State Forecast

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Total Cement Consumption – WisconsinMetric Tons

Source: USGS, PCA 40

2017-2022CAGR: 3.7%

2015 2016 2017 2018 2019 2020 2021 20228.9% 4.3% -5.4% 3.9% 4.7% 5.2% 3.7% 0.9%

I IIIII

Wisconsin Concrete Pavement Association

Ed Sullivan, SVP & Chief Economist

February 2018 I Pewaukee, Wisconsin