3-2009 MSCI Conference
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Steel Won’t Feel Construction Stimulus Until 2010: Economist

Federal spending will shorten the recession, but real recovery for the construction sector won't take hold until 2010 and beyond, says one leading forecaster.
 
By Dan Markham, Senior Editor

After listening to economists deliver a trio of troubling forecasts, attendees of the Metals Service Center Institute’s Carbon Conference last month in Austin, Texas, hoped Edward Sullivan’s infrastructure session would offer more heartening news. Unfortunately, not really.

Based on his analysis of the just-released federal stimulus bill, Sullivan suggested it will be 2010 before metals suppliers to the construction market see significant stimulus-related increases to their businesses.

Sullivan is chief economist of the Portland Cement Association and is one of the leading forecasters for the construction industry. He broke down the stimulus package and its effect on the infrastructure market for the entire construction industry, including metals suppliers.

Economists consider the size of the stimulus, its details, its presumed effectiveness and its timing, but don’t always give enough weight to the underlying economic fundamentals, Sullivan said. “People are taking these assessments and overlaying them on top of their 2008 performance to come up with a metals volume forecast. That methodology is completely wrong.”

The problem, Sullivan said, is that the economic fundamentals are deteriorating at an alarming rate. In 2007, only Florida and Michigan were in recession. By the end of 2008, only a handful of states were not in recession, and their exclusion was likely a result of data lag.

“It’s not specific to one area pulling down the country. It’s not industry specific. It’s broad-based, across all industries and all regions. That’s unique in terms of recessions,” Sullivan said.

Without the stimulus package, Sullivan estimates GDP would have fallen by 3.5 percent in 2009, with another decline to follow in 2010. Unemployment would have worsened with the loss of an additional six million jobs, eventually hitting 11 percent. State deficits would have ballooned to over $100 billion by 2010, five times worse than they were in the 2002-03 state deficit crisis period.

With the stimulus, he sees economic growth turning positive again in first-quarter 2010, a year sooner than in a no-stimulus scenario (see chart).

Sullivan said the economy had been resilient, but five simultaneous blows proved too difficult to overcome: the subprime mortgage crisis, the financial crisis, energy/inflation, labor market losses, and the bulging state deficits. “We are a strong economy, but it can’t handle all those adversities,” he added.

Moreover, only energy/inflation has run its course. The subprime crisis will extend for the better part of 2009, while the financial crisis, labor issues and state deficits will stretch into 2010.

Perhaps the most significant, and least discussed, of these issues are the deficits being faced at the state level, Sullivan said. The state deficits are projected to last longer than other drags on the economy. Much of the money from the stimulus package will be funneled through the hands of state officials, who often have a different perspective than industry.

“For public officials, it’s often a question of, ‘Am I going to build that new bridge or am I going to cut pills for grandma?’” Sullivan noted. “It’s a very easy choice. Highway funds get cut even when they’re earmarked.”

The stimulus package is being laid upon these shaky fundamentals. And, though Obama administration economists have a rosier picture of the fundamentals than Sullivan, he agrees the stimulus bill should help shorten the recession.

Sullivan explained that the package is designed in three phases, which will influence how quickly the construction industry sees resulting increases in demand.

Phase I of the stimulus exists to simply stop the hemorrhaging. It includes tax cuts, entitlement spending and state aid, and is merely a job-saving, rather than job-creating, measure. This is the part of the stimulus that will have the most impact in 2009, he said, “but it simply prevents the economy from getting worse than it otherwise would.”

Phase II is for shovel-ready projects. Though there is job creation involved, most of it will take place in 2010. The requirements between the passage of the stimulus and the start of construction are lengthy, with an August start date the earliest possible for even the most ready-to-go projects. Weather issues in the northern half of the United States during the final months of the year will further limit the potential benefit in 2009.

Additionally, what the government considers “shovel ready” can detour considerably from how the construction industry uses the term. Shovel-ready projects include such line items as energy-saving light bulbs and fire trucks, while states can also choose to launch quick-fix projects such as bridge painting or road resurfacing instead of their more labor-intensive counterparts such as bridge replacement or road expansion.

The final phase involves long-term investments, the projects that are most likely to benefit steel customers heavily invested in infrastructure. This phase will do the most to create substantial numbers of jobs and address structural economic issues, Sullivan said, but will not take hold until 2010 and beyond.

The stimulus will speed economic recovery, Sullivan asserted. Without the stimulus, U.S. GDP would most likely have remained negative through all of 2010. With implementation of the package, GDP will begin trending upward in mid-2009 and will hit positive numbers by the first quarter of 2010. “It will shorten the recession, make it less severe, and you’ll have growth realized faster than under a no-stimulus scenario.”

There is, however, a price to be paid. By the second half of 2011, GDP growth will slow as the U.S. begins to pay the price for the 2009 stimulus package in terms of taxes and deficit reduction.

Additionally, Sullivan and other economists at MSCI’s Carbon Conference all suggested that the approved stimulus bill might not be enough to trigger the kind of improvement needed or expected. A second package that would take the bill up to $1.2 trillion may be required, said Sullivan, noting that unemployment could still reach 8 percent even after the $800 billion stimulus is implemented.

“Don’t be surprised if sometime next year another stimulus bill is raised. This time, my guess is, it will be more targeted for hard infrastructure,” Sullivan said.

And that would be OK with him. Though he acknowledges his bias as a representative of the concrete association, he believes dollars spent toward hard infrastructure deliver the greatest “bang for the buck.”

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