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PCA’s Sullivan Addresses Oil Impact on Construction

The falling cost of oil will not just impact consumers at the pump, but will lead to an impact on construction in the United States, according to Portland Cement Association Chief Economist and Group Vice President Edward J. Sullivan.ESullivan 200

Along with low oil prices that are beneficial to U.S. economic growth and an expected 20 to 30 basis points added to real GDP growth rates during 2015-2016, he believes that short-term gains could be made in the housing market – but there could also be a negative impact if the downward trend continues.

“Unfortunately, the transmission process from oil price declines to construction activity contains timing lags,” said Sullivan. “The time it takes for oil prices to impact consumer/business behavior is short, but impacting the decision to build is a longer process.”

Sullivan delivered his remarks on the construction marketplace at this year’s World of Concrete show in Las Vegas. He framed his discussion with an update on present market conditions:

  • Job creation exceeds 3 million net new jobs 2015-2017.
  • Strong job growth in context of sub-6 percent unemployment suggests pressure on wages.
  • Consumer confidence/sentiment has improved significantly and will continue.
  • Low oil prices add 20-30 basis points to economic growth.
  • Inflation remains low, interest rates expected to only gradually increase, slower increases in home prices and stronger increases in rents. New home affordability remains favorable in absolute terms and against rents.
  • Lending risks subside and lending standards ease.
  • Economic recovery moving into higher growth phase in the years ahead, in excess of 3 percent growth on a sustained basis.
  • Sullivan sees cement consumption increasing in 2015 by 8 percent to 93 million metric tons, and another 7.9 percent in 2016 to approximately 100 million metric tons.

Sullivan also said he expects housing starts to rise to 1.2 million units, driving demand for residential construction, which will commandeer 54 percent of all cement usage. Multifamily units in particular should see a significant increase in starts compared to previous years with a 12 percent jump from 2014 levels. Nearly 400,000 multifamily starts are expected in 2015. Nonresidential construction will use 29 percent of cement consumption, while public construction take up 15 percent.

In focusing on the impact of low oil prices on the construction market, Sullivan believes consumer savings will equate to a positive impact on construction spending, while noting that oil-producing states and regions may not get the same consumer effect.

Sullivan also pointed to the example of hotel construction. He believes that with lower oil and fuel prices, consumers react with increased travel, which raises occupancy rates, which accelerates hiring and ultimately leads to more construction.

Sullivan, on the other hand, thinks that low oil prices will not lead to a lowering of asphalt prices, citing a 10-year analysis of oil-price impact.