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We Need That Extra Injection

We Need That Extra Injection

Ed Sullivan, chief economist and vice president of the Portland Cement Association, has more than 30 years experience of industrial economic analysis with Chase Manhattan Bank, Standard & Poor's, Wharton Economics, the Central Intelligence Agency and the office of Senator Edward Kennedy. We need aid to the states, increased infrastructure spending and support for small businesses in the midst of the worst downturn since the Great Depression. So why is he so optimistic? RER's Michael Roth recently spoke with Sullivan to find out.

RER: You recently mentioned a 5-percent increase in cement consumption for 2010. How much of an improvement do you expect in residential and nonresidential construction?

Sullivan: For residential it will probably reflect a relatively large percentage gain. That really doesn't mean anything. Because we're at such low levels percentages kind of disguise things. Percentage-wise, it's going to show a big increase in terms of where we're at, most people in the construction industry are not going to see much relief coming from that sector.

For non-residential, we expect to see dramatic declines. That sector is still in contraction. The reasons are a little different, but both sectors are tied to the overall economy. On the private side, there really is no relief coming in 2010. If demand goes up, the meager gains you might see in overall construction dollars in residential will be largely offset by further declines in nonresidential. That leaves the third sector, the public, and that's the key. The issues are a little more complex. Everyone focuses on the ARRA (American Recovery and Reinvestment Act), or the stimulus spending. In our industry, there is quite a bit of discussion, but, they haven't seen much work come their way. They've dismissed the potential impact of it ever coming and I think that's wrong because there is still a heck of a lot of money to be spent. Only 15 percent of that money has been spent. Paperwork delays have been one of the key problems, and those paperwork delays are gradually being overcome.

There is some momentum there, we are starting to see some money get out, but now it just coincides with the winter. During the winter, you'll see the paperwork continue to make progress, and now what you've got is the potential for some of these ARRA projects to start to materialize in the spring. But the problem is that ARRA is only a portion of the public [sector], because state and local fiscal conditions will, in our mind, sterilize a large portion of those ARRA funds.

So you might see the ARRA really pick up, the stimulus come out and that might be a net positive. But anyone in construction will also see the continued decline in discretionary state and local spending. Many people are suggesting that they are swapping one for the other. So, any way you look at it, the private sector — residential and nonres — will continue to be weak this year and the relief that's coming will be largely offset by state and local conditions. Any improvement that you do see in 2010 is probably going to be in the back half of the year. So it's going to be another rough year.

You stated last year at the World of Concrete that you wanted to see the ARRA at about $1.2 trillion. You still feel that would have made a difference?

Absolutely, there's a whole bunch of issues. I kind of suggested that they knew at the time that it wasn't going to be enough. A larger stimulus would help. Here's what the issue is, take a step back in terms of how it looks for the economy. The private sector economy is sagging. It will only start to recover on its own legs once job creation materializes. What ARRA is trying to do is provide a little bit of a bridge to that. If the ARRA stimulus declines and there is still no job creation, we've got a double-dip recession. So what they're looking at is we need that extra injection of stimulus real early in 2010, so we can make that bridge and the economy can start to recover its own legs. Without that, it's touch and go. So $1.2 trillion, or extra spending, would absolutely help.

The second issue is not only the level of spending but how you get it. If you look back at the Obama stimulus, and conceptually I agree with it, we needed the stimulus and he labeled it an infrastructure program. Well, how he termed infrastructure is completely different from the way I term it. A heck of a lot more jobs are created in traditional infrastructure, such as building bridges, versus some of the other things they've got in the program. Secondly, what they should have done is provide more leadership in types of programs that would make a difference in terms of job creation instead of turning it over to Congress and let them decide and pork-barrel it, and that's exactly what they did do. A lot of this money is being spent foolishly in terms of the goal to stimulate the economy and provide jobs.

It's not just the level; it's also the composition of projects. We're hoping right now in terms of this new round, that it is going to be spent on infrastructure. It absolutely has got to give some sort of relief to private business so they can get the capital. Also the third part has to be aid to the states. Any kind of stimulus program that doesn't address the capital issue for small private businesses, doesn't increase infrastructure and doesn't give aid to the states, will fall short of its goals.

Do you see much likelihood of those three things happening?

I do. They are already talking about how they can get more money to small private business. That's absolutely one part. Aid to the states, I haven't seen as much talk about that, but I've got to believe that would be a huge aspect because of the huge fiscal problem these states are having. If you give money to the states, it reduces the sterilizing impact. What you want to do is get more government spending out there. You can increase the federal spending but if the states cut back there's no increase. Spending on infrastructure is going to provide jobs and have long-term benefits.

How about lending standards? Any likelihood of any improvement before the last half of 2010?

You're going to see some improvement, but it's going to be gradual. It's not going to be nearly enough [compared with] what we need to have. You'll only see significant improvement lending standards when job creation materializes and when asset prices stop declining. Those are the two sources, in my mind, of risk in lending. These banks are scared stiff. They got hit bad and they want to see potential lending losses go down before they start opening the pockets up. Job creation has got to be sustained. And then the asset prices. Well, even if you've got job creation and home values continue to decline, or commercial property values continue to decline, I'm not going to give that loan because I don't know how low that could go and I got burned once.

So those are the two key things that have to materialize before you can see that and it's going to take months of a pattern that you see asset prices stabilize and job creation materialize before you're going to get that lending. So I think optimistically you can say “well, maybe that can change in the second half of 2010.” It will pick up its paces, but even then that's just the beginning of the process, I don't think you'll really see things back to normal before 2012.

Do you see it the same way with regard to business investment?

Yes. Keep in mind too that the tight lending standards hit everybody, but apparently it's not hitting the large corporations quite as bad. And fortunately a lot of people miss the point that much of business activity isn't the Fortune 500, it is the small mom and pops.

Any thoughts on how the equipment rental industry will fare in the year ahead?

I'll look at it from the cement perspective. Not only do you have to have an economic recovery then what you have to do is push up utilization. Our utilization rates are extremely low even with a continued recovery this year. We won't reach 80 percent utilization until 2012. I'm guessing on this one, but let's look at ready-mix concrete trucks. Why would I want to go out and buy a new Ready-Mix truck if I've still got some sitting in my lot, I'm not going to go there until I'm pressured, until utilization rates rise and lending materializes. Those conditions, my guess is it's going to lag. You might have an extra year of kind of flat conditions before you see improvement.

At the World of Concrete last year you stated that between now and 2030, the U.S. population would grow by about 60 million people and thus the need for infrastructure spending was huge. Do you still see it that way and are you more pessimistic about the likelihood of those investments being made given the current economic situation and carrying of debt for so long in the future?

It's going to be an absolute requirement; we've ignored it too long. Give Obama credit, he did bring that out. But I can argue that if you re-pave something you haven't really done anything in terms of improving the long-term infrastructure. It's got to be addressed, that's number one. Longer term, I'm even more optimistic than I was before. You still have the demographics. That's still got to be there.

Number two, you are going to have to invest in the infrastructure. But overlaying this now is this green revolution. There is so much opportunity at least in our industry to be tuned in to the green. You hear a lot more now about these wind farms, these are alternative energies, you hear a lot more now about nuclear, you hear a lot more about energy-savings aspects, these are all things that are vital, and we can contribute in terms of concrete because of its characteristics. We've put out a long-term report and we actually identify all these green aspects.

What about the deficit that's being created?

We've taken that into consideration. There's no question in my mind, if you look at not only the deficit being created right now because of Middle East involvement, because of our stimulus involvement, but longer-term we're getting older. So potentially we won't be looking at lower-than-historical averages in terms of economic growth. The Congressional Budget Office has taken a look at this, we are absolutely going to have persistent sustained deficits, that means a structural change potentially in interest rates and tax rates. That's what that adds up to. Even in that context, when we calculate these things, we see a pretty solid future long-term and it's being funneled by the sheer magnitude of the population.

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