Will higher interest rates slow construction in 2022?
By Lindsey Anderson and Jenny LescohierJanuary 25, 2022
The U.S. saw cement consumption grow by 3.6% year-over-year in 2021, the Portland Cement Association (PCA) announced during a press briefing in Las Vegas. The uptick was largely driven by the residential sector.
Ed Sullivan, senior vice president and chief economist for the PCA, said the U.S. is poised to spend $1.2 trillion on new and rehabilitated infrastructure projects, consuming 46 million metric tons of cement over a five-year program, with a quarter of that spend going toward roads and bridges.
The Infrastructure Investment and Jobs Act of 2021 (IIJA) is the leading factor behind the increasing demand for construction materials, Sullivan said.
“The IIJA is extremely important to maintain healthy growth rates in cement consumption,” said Sullivan. “Given the timing, significant infrastructure spending will materialize just as higher interest rates slow private sector construction, particularly in housing.”
Sullivan also noted that mortgage rates are on the rise in the U.S., and looking ahead to 2023-2024, cement consumption will be driven by nonresidential construction and public works.
As a whole, the U.S. reported real GDP of 6% in 2021, and the PCA is forecasting 4% for this year.
When Sullivan spoke in Las Vegas in June of last year, he said the economy is reawakening post Covid, but challenges persist.
“Some of our supply chain is still partially asleep,” Sullivan said, noting that a lack of workers is creating difficulty for some businesses to meet demand for their products and services. This has caused transitory inflation to spike.
As this transitory inflation becomes structural, interest rates tend to rise, potentially slowing private sector construction.
“Because we went through that huge decline in GDP activity, the threat to our economy was huge,” Sullivan said of the nation’s response to the pandemic. “The Covid relief packages ... expanded the money supply at a rate unseen before, and that can cause structural inflation. The Federal Reserve is now readjusting slowly ... tightening interest rates.”
Still, as the economy continues to climb out of its Covid-induced stupor, Sullivan predicted in June that a surge of consumer confidence is coming.
“It will take several quarters, but it will be faster than expected as we see consumers become comfortable again,” he said.