June 2003

The Past Foretells the Industry’s Future

An examination of prior recessions shows that, despite a potentially bumpy road, the future should be bright.

By Steve Kimmerle

To see what is in front of us, we should look to the past. The short-term outlook for this industry may be tough if history is any guide. Following the recessions of the ’80s and ’90s, it took about four years for volumes to reach their record outputs prior to the recession.
As you can see from Figures 1 through 3, the recession hit this industry hard for several years. Why is that? It may take four years to recover because of the lag time generated in the bidding and construction process. Many jobs let this year will not be in full production for 18 to 24 months.
Any slow down in the volume of work being let shows up a year later. Alternatively, any surge in volumes will take as long. Work started slowing down in 1999, and if the economy picks up, it will take a year or so for volumes to pick up because of the aforementioned construction cycle.
Looking at the long-term forecast, you can see that stone sales have increased at a compound annual rate of 2.54 percent per year over the past 50 years. As you can see from the graphs below, it has not always been a smooth ride from 1947 through today. Over time, however, the trend has always been increasing volumes.
Construction spending since 1973 has increased at a compound annual rate of 5 percent per year. From the same source, we can see that the value of shipments for non-metallic mineral products has increased at 4.25 percent per year since 1992.
Construction spending, volumes, and prices have been increasing over time. If one was to take a long-term view of this industry, history would suggest that it would be a safe bet to invest in your own aggregate business.
It has been suggested that population was the driving force behind the increased transportation spending.
Table 4 shows the population of the United States since 1901. Annualized, it is growing at a rate of 3.66 percent since 1901, 1.25 percent since 1947, and 1.08 percent since 1970. There doesn’t appear to be a direct correlation between volumes and population, but as time has passed, society has also become more mobile, thus increasing volumes.

Summary
Although we face some rough spots in the short term, I think the long-term prospects are good. We are a mature industry growing at about 2 percent per year in volume and 5 percent a year in price.
That indicates that we are keeping up with inflation and still growing modestly over time.
Investing in your aggregate business makes good sense to me — with one caution. With shortfalls in local, state, and federal government budgets, how many of the local legislatures or governors will divert money from the highway trust fund into their general funds to make up their budget shortfalls?
If they do, this action may bring a drastic slow down to all road building and put many in this industry under financial stress. It’s a possibility the industry must be prepared to deal with.

Steve Kimmerle, P.E., is the vice president of operations for L&A Contracting Co, a large bridge building firm in the southeastern United States. He joined L&A after years in the aggregates industry. In addition to his civil engineering degree, he has a master’s in business administration from Bellarmine University.