By Allen-Villere Partners
THE PULSE: CONSTRUCTION MATERIALS MARKET ANALYSIS
The Federal Reserve raised its benchmark rate 11 times to cool inflation, with the last rate increase in July. Most recently, the Federal Reserve held rates steady in December for the third straight time and acknowledged a possibility of three rate cuts in 2024.
- Inflation has been gradually moderating – 3.1% yearover-year in November 2023 compared to 3.2% in October – the largest force in November was due to lower gasoline prices.
- The continuation of inflated housing prices, the presidential election, and whether or not we will truly see rates cuts are all things to watch in 2024 as they will have a significant impact on the overall economy
- Both Concrete Products and Construction Aggregates prices held steady this month, after consistent increases over the past year
- ABC’s Construction Backlog Indicator rose to a most recent monthly reading of 8.5 months in November. This is up from October’s reading of 8.4 months, while down from 9.2 months in November 2022
- The Infrastructure Investment and Jobs Act has provided a safety net to the Construction Materials Industry by increasing infrastructure investments which will help negate the possible slowing in residential construction due to higher interest rates and a slowing overall economy
PIERRE VILLERE’S MARKET ASSESSMENT
The final quarter of the year shows the Index up 0.6% for last month, and up 3.8% for the last 12 months. With our proprietary algorithm, a major upward pressure was exerted by the continued run-up in Industry Stock Prices, just as we witnessed last quarter. The publicly traded companies that make up this metric are up 7.7% for the month, but a whopping 44% for the Trailing Twelve Months (“TTM”).
Other metrics show a turn upwards in certain sentiment measures, with Construction Confidence up 2.3%, and overall Construction Spending up 0.6% last month for a total of 12.1% TTM. With Jay Powell’s surprise announcement in early December that the Fed is planning three rate cuts in 2024, the market has not yet felt the true impact of this shift in Fed policy towards reducing interest rates. I have said as soon as consumers start seeing a slow-but-steady fall in interest rates, watch them come flying off the benches to buy homes as the pent-up demand is unleashed, a move that will plug the only weak hole in the entire construction economy.
At the risk of sounding like a broken record as I harped for months on my “No Recession” outlook, that discussion is also now completely absent from all the Wall Street research and notes from its top economists. Last quarter, I warned that “The current UAW strike is an unknown, and of course the concern that the Fed will over-tighten and stall the economy is still a possibility, but I am not betting on any of that happening” … it is very apparent those risks are both behind us, and it appears the grind of war in Ukraine and Gaza seem to have absolutely no impact on the outlook for our economy, a sentiment I did not predict as recently as a couple of months ago.
A curious metric is the fact that production of total construction aggregates tonnage is down a couple of points so far in 2023, but pricing is up and the industry is set to outpace 2022 in terms of total industry profitability. The Index will continue to show a slow-but-steady increase in 2024 with the curve pointing up, possibly with an occasional see-saw, but construction aggregates are headed to another year of margin expansion and volume growth as interest rates fall.