Virginia’s Construction Outlook

2019 & Beyond

Luck Companies Marketing Research Team: April 2019

1. Recap 2018

2. Outlook for 2019 & 2020

Agenda

Crushed Stone Sales: Virginia

USGS

After 4 years of growth, Crushed Stone sales declined in 2018

3

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cru

shed S

tone S

ale

s (

Tons 0

00)

Virginia Crushed Stone Sales2006-2018

Volume

-3%

Decline

WEATHER?

ECONOMY?

What Happened in 2018?

5

A Normal Year of Rain…2017

6

An Abnormal Year of Rain…2018

7

2019: Still raining…but closer to average

What’s the Economic Outlook?

What’s the Economic Outlook?

Economic Growth (GDP)

Consumer Sentiment

Highway Maintenance

Economic Growth

US Bureau of Labor & Statistics

The national economy continues to grow at a slow pace (<3%).

In 2017, Virginia’s economy grew at its fastest rate since the recession, and is on par with the National

average.

11

3.9%

5.3%

2.3%

0.8%

0.0%

0.5%

2.4%

0.6% 0.7%0.4%

0.0%

1.4%

0.6%

2.0%

3.8%

3.3%

2.7%

1.8%

-0.3%

-2.8%

2.5%

1.6%

2.3% 2.2%2.4% 2.4%

1.5%

2.3%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

US & Virginia Real GDP Growth2004-2017

VA US

Economic Growth

US Bureau of Labor & Statistics

In Q2 & Q3 2018, Virginia experienced strong GDP growth.

Virginia’s growth is ranked 20th in the nation.

12

2.0

4.0

2.3

1.8

-2.7

0.1

2.1

1.5

-0.7

2.4

2.8

1.3

2.1

4.2

3.3

2.1 2.2

1.9

1.00.8

1.1

3.5

1.9 1.8

3.0

2.3 2.2

3.4

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018

US & Virginia Real GDP Growth (Quarterly)Q1 2015 – Q3 2018

Virginia United States

0

20

40

60

80

100

120

Univ. of Michigan Survey of Consumer Sentiment

Jan 2004- Mar 2019

Consumer Sentiment

Univ. of Michigan Survey of Consumers

The current 12-mo average is at its highest level since June 2001.

In general, consumers are very optimistic about their current and future spending and savings, and

consumer spending is the biggest driver of growth in the economy.

Recession

13

VDOT Maintenance Budget

VDOT Six-Year Improvement Plan FY16

The approved FY19 VDOT Maintenance budget is expected to be 2% more than FY18

The current budget is projecting flat spending in FY20

14

3%

2%

7%

1%

5%

1%

2%

0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

$1,600

$1,700

$1,800

$1,900

$2,000

$2,100

$2,200

$2,300

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Ann

ua

l G

row

th

Main

ten

an

ce B

ud

ge

t (0

00)

VDOT Maintenance ProgramFY13-FY20

Main. Budget Annual Growth

Liquid Asphalt

VDOT

US Refinery Asphalt production is at a 40-year low and is down 9% year-over-year. The limited

supply is contributing to higher prices.

Overall, liquid asphalt prices remain lower than historical average.

15

$0

$100

$200

$300

$400

$500

$600

$700

Virgin

ia A

sp

ha

lt In

de

x

Virginia Asphalt Index

2010 – April 2019

+10% YoY Increase

Largest refinery in

US shuts down due

to declining demand

Construction Spending

Residential Building Permits

Nonresidential Construction

VDOT Construction

Construction Employment

0.3%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

$1,200,000

$1,300,000

$1,400,000

$1,500,000

Pe

rce

nt C

ha

ng

e (

An

nu

al)

Co

nstr

uctio

n S

pe

nd

ing

(S

ea

so

na

lize

d:0

00

)

US Construction Spending Jan 2006- Jan 2019

% Change Construction Spending (Seasonally Adj)

U.S. Construction Spending

US Bureau of Labor & Statistics

17

Nationally, annual construction spending has been slowing since last Fall.

Last time construction spending turned negative was September 2006.

+0.3%

-6%

5%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Con

str

uctio

n S

pe

nd

ing (

Se

aso

na

lize

d:0

00

)

US Construction Spending Jan 2012- Jan 2019

Residential (% Change) Nonresidential (% Change)

U.S. Construction Spending

US Bureau of Labor & Statistics

18

Residential construction starting to decline– for the first time since July 2006.

Nonresidential construction has bounced back from declines in 2017.

Residential Building Permits

US Census Bureau

Single-family permits had been steadily increasing– but only 50% of the peak (2006).

Market showing signs of minor weakness/declines.

19

-5%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

10,000

15,000

20,000

25,000

30,000

35,000

Pe

rce

nt C

ha

nge

(A

nn

ua

l)

Bu

ildin

g P

erm

its

Single-Family Building Permits: VirginiaJan 2010- Feb 2019

Annual % Change Annual Permits

Nonresidential Construction

McGraw-Hill Construction Forecast

Moderate growth expected in 2019, but forecasted to decline significantly in 2020.

20

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2013 2014 2015 2016 2017 2018 2019 2020

No

nre

sid

en

tia

l C

on

str

uctio

n (

00

0 s

f)

Nonresidential Construction: Virginia2013-2020

+7%

-20%

VDOT Construction Budget

VDOT

The approved FY19 VDOT Maintenance budget is expected to be 2% more than FY18

The current budget is projecting flat spending in FY20

21

$1,605

$1,456

$1,073

$1,959

$1,869 $1,891

$1,703

$0

$500

$1,000

$1,500

$2,000

$2,500

FY13 FY14 FY15 FY16 FY17 FY18 FY19

Con

str

uction B

ud

ge

t (0

00)

VDOT Construction BudgetFY13-FY19

VDOT Fuel Tax Revenue

VDOT

The approved FY19 VDOT Maintenance budget is expected to be 2% mote than FY18

The current budget is projecting flat spending in FY20

22

$819

$600

$683

$812$832

$811$840

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

FY13 FY14 FY15 FY16 FY17 FY18 FY19

Sale

s T

ax o

n M

oto

r F

uels

(00

0)

Sales Tax on Motor FuelsFY13-FY19

-20%

-15%

-10%

-5%

0%

5%

10%

US

Co

nstr

uctio

n E

mp

loym

en

t (0

00

)

National & Virginia Construction EmploymentJan 2005- Feb 2019

Virginia National

Construction Employment

US Annual Growth

:

+3.10%

VA Annual Growth

:

+0.30%

US Bureau of Labor & Statistics

Virginia’s employment growth has experienced a significant slow-down since July 2018.

Virginia construction employment growth is at it’s lowest levels since 2014.

23

Recession Probability

Political Uncertainty

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

Historical Treasury Spread:10yr vs. 3mo1981 – Mar 2019

12 Months 20 Months18 Months18 Months

Treasury Yield CurveBased on the current spread between treasuries, there’s an increased likelihood of a recession within the next 18-months.

25Federal Reserve Bank of New York

Current Spread:

0.12

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jan

-90

Au

g-9

0

Ma

r-91

Oct-

91

May-9

2

De

c-9

2

Jul-

93

Fe

b-9

4

Se

p-9

4

Ap

r-9

5

No

v-9

5

Jun

-96

Jan-9

7

Au

g-9

7

Ma

r-98

Oct-

98

Ma

y-9

9

De

c-9

9

Jul-

00

Fe

b-0

1

Se

p-0

1

Ap

r-0

2

No

v-0

2

Jun

-03

Jan

-04

Au

g-0

4

Ma

r-05

Oct-

05

Ma

y-0

6

De

c-0

6

Jul-

07

Fe

b-0

8

Se

p-0

8

Apr-

09

No

v-0

9

Jun

-10

Jan

-11

Au

g-1

1

Ma

r-12

Oct-

12

Ma

y-1

3

Dec-1

3

Jul-

14

Fe

b-1

5

Se

p-1

5

Ap

r-1

6

No

v-1

6

Jun

-17

Jan

-18

Aug

-18

Ma

r-19

Oct-

19

Pro

babili

ty o

f R

ecessio

n

Probability of Recession within Next 12-monthsJan 1990- Mar 2020

Recession Probability

Federal Reserve Bank of New York

There is a 25% chance of a recession within the next 12 months--the highest likelihood since Jan 2006.

The chances are continuing to grow, and it’s something to keep an eye on in 2019/2020.

27% Probability

of Recession

26

Political Uncertainty

27

• Virginia is one of the top recipients of Federal

contracts, and a shutdown/sequestration could

be devastating to the state’s economy.

• Government could exceed debt limit in the fall

and might risk not paying its bills for the first

time ever.

• Sequestration could return in September,

triggering automatic cuts to all government

budgets.

• If a bipartisan agreement can’t be reached,

another government shutdown is increasingly

likely.

Federal Contracts (FY19)By Place of Performance

28

CA: $20b

TX: $18b

VA: $14b

PA: $9b

Usaspending.gov

Virginia: Most federal contracts per capita, #3 by total contract value

Economic Growth

US Bureau of Labor & Statistics

29

3.9%

5.3%

2.3%

0.8%

0.0%

0.5%

2.4%

0.6% 0.7%0.4%

0.0%

1.4%

0.6%

2.0%

3.8%

3.3%

2.7%

1.8%

-0.3%

-2.8%

2.5%

1.6%

2.3% 2.2%2.4% 2.4%

1.5%

2.3%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

US & Virginia Real GDP Growth2004-2017

VA US

Sequestration

Summary

30

2019: Looks Good

• VA economy is growing steadily, and construction could be

stronger after wet 2018

• Starting to see weakening nonresidential and residential

construction growth.

2020: Transition?

• Leading indicators are pointing towards a weakening

economy

• Political forces could negatively impact VA

Questions?Contact: Scott Seaborn (sseaborn@luckcompanies.com)

31