US Cement Outlook Summary

US Cement Outlook: 2025 Summary

Ed Sullivan, Economist at The Sullivan Report

The Economic Outlook

The economy’s strength is waning. Even prior to the tariff announcements, evidence suggested that the economy was drifting to a slower growth path. Job growth, a principal source of the economy’s strength over the past few years, has slowed. During the first quarter, an average of 174,000 net new jobs were created monthly - nearly 100,000 lower from a year earlier.

There are other data that suggest an easing in economic growth. Uncertainty is rising among consumers and businesses. Many consumers are struggling to keep up with inflation. Defaults on credit cards, student loans, and mortgages are rising. This all paints a picture of a slowdown.

The Administration’s tough stance on tariffs has dramatically increased the prospects of higher inflation and reduced the outlook for growth in 2025. Indeed, a recession cannot be ruled out this year.

The Federal Reserve may be late in providing support to an ailing economy. The Fed has a dual mandate – controlling inflation and unemployment. At this point, battling inflation is probably its top priority. As a result, the prospect of higher tariff induced inflation could delay any moves by the Federal Reserve to lower rates. Only after the threat of a more significant decline in economic growth and labor market weakness raises its head, will the Federal Reserve slowly act to lower interest rates.

A lot of time will likely pass for all that to happen and timing is everything. Eighty percent of all construction activity is typically completed by the end of the third quarter. The Fed might only be starting its rate cuts at that time.

Once the Fed makes a cut, don’t expect immediate results. While there will be some immediate results that materialize in some sectors, such as finance, the full impacts of a rate cut on the economy take a long time. The effect of a rate cut policy gradually builds, reaching a maximum impact, and then the effect of the cut gradually fades. Economists estimate the lag as long as 18 months.

Adverse economic momentum, once in place, is hard to reverse. Initial steps by the Federal Reserve to lower rates will likely be modest (25 basis points at a time). This all implies a policy of too little, too late to prevent a significant slowdown for the US economy in 2025.

Residential Construction

Without sustained strength in the labor market and significant declines in mortgage rates, the residential sector is not expected to improve this year. Single family construction is the largest subsector within the residential sector. Single family sales are hampered by affordability issues. The median home price in the United States last year was $414K. The 30-year conventional mortgage rate was 6.8%. The average monthly payment accounted for more than 38% of household income. This high level represents a significant deterrence to potential home buyers.

Adverse affordability conditions will continue as long as mortgage rates remain high. At prevailing mortgage rates, many existing homeowners will hold off selling their home in place of a new one because they would likely be replacing a low mortgage rate (3%) with a much higher mortgage rate for the home they move into (7%). This reduces the supply of existing homes on the market. Lacking adequate existing home supply, home prices are expected to remain elevated – to the detriment of affordability.

A significant retreat in mortgages rates, to the 5% to 5.5% level, must materialize before the outlook for single family construction turns rosy. Don’t expect that to happen until the second half of next year. In the meantime, weakened labor markets will add further to the woes facing the single-family construction activity.

Nonresidential Construction

Data center and new plant onshoring construction are bright spots in nonresidential construction. These forces will continue to act as positives to nonresidential construction this year and beyond. On a broader scope, the nonresidential sector will be hampered by sustained high interest rates. Large inflation and loan risk premiums account for high commercial lending rates. In addition, access to credit will become harder. The Federal Reserve’s survey of loan officers indicates a tightening in lending standards. As the economy slips, access to credit by commercial borrowers will become even more difficult.

To make matters worse, the outlook for net operating income (NOI) is not encouraging. Vacancy rates are high. Leasing rates in many areas are discounted. In the context of a weakening economy, they are expected to worsen. These adverse factors affecting the cyclical sectors of nonresidential construction activity (office, hotel, and retail) are expected to more than offset the positives associated with data centers and onshoring.

Public Construction

Several factors confront public construction activity. First, weakening economic conditions typically translate into weaker revenue collections at the state level. This impact stems from lower employment levels and fewer vehicle miles travelled (gas tax revenues). Second, federal funding programs are denominated in nominal dollars. High inflation levels have eroded the potency of these programs. Third, according to some there exists a shortage of civil engineers to execute infrastructure construction needs. Finally, DOGE efforts to streamline government spending has led to $55 billion in cuts. While details remain elusive, this could also impact public construction contracts and activity.

Supply Conditions

Supply conditions could darken the US cement outlook even further. According to various estimates, 450,000 undocumented persons work in the construction industry. Prior to the clamp down on undocumented workers, it was generally thought that construction workers were in short supply. The new immigration policies will likely magnify this labor shortage and could further reduce overall construction.

Tariff policy lacks clarity. It could all go away, or it could lead to disruptions in supply and logistics – to the detriment of construction activity. If they materialize in full force, shortages could materialize. While these supply disruptions will likely be temporary, disruptions to the supply-chain and logistical systems could take time to fix. In the meantime, domestic production will likely increase.

Summary

The economy is expected to weaken. That is expected to become more evident in the second half of this year. A recession cannot be ruled out. Federal Reserve reaction in cutting rates is expected to miss seasonal peak construction and are not expected to offer much help to the private sectors of construction during 2025. Finally, supply conditions could rob further strength from the cement market.

Altogether, the US cement market is expected to record another year of decline. The decline could be significant. US cement consumption volumes are expected to recede below 100 million metric tons – a level not seen since 2019.

These conclusions weigh heavily on the assumption that the tariffs remain in-place. The tariff announcements may be the first step in “the art of the deal” and force trading partners into negotiations. Such a scenario reduces the potential adverse impact that the tariffs hold for the economy and the cement market. Be clear, it dilutes the severity of decline, it does not eliminate the likelihood of decline. Any help to the economy accrued from tax reform will have no impact on 2025 activity.

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