As we head toward the home stretch of 2006, it might be interesting to review some of the predictions I previously expressed. So far, I’m happy to say, it looks like I’m batting 1.000.
Inflation and interest rates
I am more worried about inflationand interest rates than I have been inquite some time. The Fed will continue increasing interest rates in the face ofunderlying inflationary pressures.In almost 35 years of practice, one
fact stands our: When oil prices spike and remain high, there is always inflationary pressure and a corresponding increase in interest rates. This
leads to a slowdown or, in the case of the early 1980s and early 1990s, a
severe recession. Couple that with a runaway deficit that Congress and the administration can’t seem to corral, and we have the makings of a slowdown. While I don’t expect a severe recession, don’t be surprised if we see a couple of quarters of negative growth in 2007.
“Don’t be surprised to see a recession next year.”
A housing slowdown
This is turning out to be worse than I expected. Many of you have already started to feel the slowdown in residential construction that I predicted in January, and it is most acute in the major growth markets. Even more worrisome is the sentiment figures from various national realtor, home builder, and mortgage associations, all of which are exceptionally bearish on the nearterm outlook.
With the sudden softness in housing, cement allocations and shortages
are disappearing across the country. In another trend that portends the future, we are seeing previously announced price increases being rolled back. This will impact the ready-mixed concrete industry’s ability to continue to increase prices, and we can expect to see a period of price stability during this interest rate cycle. Don’t look for concrete prices to rise until interest rates start falling again.
The industry continues to consolidate. Cemento Argos of Columbia alone has completed almost three quarters of a billion dollars in acquisitions, and my firm has been involved in eight different transactions just this year. As summer began, Oldcastle Materials and APAC were negotiating a major deal. The consolidation train continues to whistle down the tracks, with no end in sight.
And what about 2007?
Interest rates may rise the first half of 2007, and then stabilize at a higher level until the U.S. Federal Reserve is absolutely certain they’ve contained
this round of inflation. Don’t look for a housing uptick before late next year or
even 2008. Public and commercial work will take up the slack created by the housing slowdown. I stand by my earlier prediction for stable volume, but don’t expect to see the kind of year-over-year growth that’s occurred since 2003. Cement and concrete price increases will stabilize, and cement shortages and allocations will diminish for now. Don’t expect to see pricing strength in either cement or concrete until interest rates fall. If I am right about the above, this is the time to dial back capital expenditures and tighten up operations to maintain the healthy margins the industry has enjoyed the last couple of years. Don’t expect to see any relief until interest rates head back down.
Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at firstname.lastname@example.org or telephone 985-727-4310.
© 2006 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “A Look Back and Ahead” (The Concrete Producer, August 2006) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “A Look Back and Ahead” under license from Hanley Wood, LLC.