The Good, The Bad, & The Ugly

Ed Sullivan
May 12
10 min read

Updated: Aug 11

Alternative Scenarios to The Sullivan Report - Cement Outlook Baseline Spring 2025 Forecast

Introduction

All forecasts contain risk. Risks can originate from the data used, the process of calculations, the assumptions, or a combination of each element. Indeed, an infinite number of alternative scenarios to the Baseline forecast exist – each materializes with even small changes in assumptions.

The risks surrounding the Spring Forecast are extremely high. They

center on assessments regarding underlying strength of the economy and the headwinds that face the near-term economy. The key assessments include:

The impact of administration policies on the economic fundamentals.
Federal Reserve monetary policy actions.
The strength and resiliency of consumer spending.

The Baseline Scenario

The “Baseline” forecast is believed to be the most likely scenario that will unfold. The Baseline Scenario has been presented in detail to subscribers of The Sullivan Report: Cement Outlook. To recap, the Baseline Scenario suggests that the economy’s strength is easing. Uncertainty, tariff policies, immigration reform, and DOGE all add to the near-term economic easing.

Tariff policies hold the prospects of adding significantly to inflationary spirits in the economy. Given the dilemma of rising inflation and weakness in the labor markets, the Federal Reserve may be slow in cutting rates to avert an economic slowdown. Only after the threat of a significant decline in economic growth raises its head, will the Federal Reserve 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. Economists estimate the lag time 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. This all implies a policy of too little, too late to prevent a significant slowdown for the U.S. construction markets in 2025.

Without sustained strength in the labor market and significant declines in mortgage rates, the residential sector is not expected to improve this year. Adverse affordability conditions will continue as long as mortgage rates remain high. 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.

The nonresidential sector is expected to be hampered by reduced net operating income (NOI) that accompanies a weakening economy. Vacancy rates are high. Leasing rates in many areas are discounted. In the context of a weakening economy, these conditions 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.

Finally, public sector construction activity is expected to be hindered by weaker labor market conditions that typically translate into weaker revenue collections at the state level. This impact also implies less commuting 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 could also impact public construction contracts and activity.

Cement consumption, according to this scenario, declines 3.2% to a level below 100 million metric tons – a level not seen since 2019. Weakness continues until lower interest rates usher in a modest recovery beginning in the second half of 2026. While 2026 is expected to show modest 1.2% growth, the market hovers slightly above 100 million metric tons and below 2024 levels. As interest rates subside and the economy regains its footing, stronger growth is expected to materialize in the out years of the forecast.

Pessimistic Scenario

The Pessimistic scenario reflects a greater adverse impact on the economy arising from tariffs. While some process is made in negotiations with our key trading partners, the prospect of high tariffs levied against our trading partners remains in place. Retaliation materializes. Not only from China, but the EU as well. With the recent news of progress in negotiations with China, the likelihood of this scenario materializing has been reduced.

This scenario suggests fuel is added to inflationary pressures. Not only do tariffs add to inflation, but under this scenario, supply chains are disrupted. Inflation tops 5% by year-end.

Given the choice of fighting inflation or unemployment with monetary policy, a recent survey of Federal Reserve governors suggests that fighting inflation is the number one priority. This suggests that rather than cutting rates, the Federal Reserve raises rates in reaction to the inflationary spirits. Because the supply chain has been disrupted, high inflation may stay around longer than many expect. If so, that means it will likely not be just one rate increase.

These rate increases come in the context of an economy already slowing, and now disrupted by tariffs and DOGE. While policies such as tax reform and reduced regulations suggest positives to economic growth, these potential benefits will not materialize anytime soon.

A moderate recession ensues. It begins in the second half of 2025. It deepens through the first half of 2026. Altogether, the recession lasts the better part of the year. Unemployment tops 5%. Credit conditions tighten for all borrowers including consumers, potential homeowners, and real estate investors.

The tariff acts as a major impetus in bringing about the U.S. recession. A global economic disruption ensues. In addition, the dollar’s prestige declines and loses some of its status as the world’s reserve currency. These factors add to economic weakness in the U.S., and at the same time, reduce the rate of decline in inflation and interest rates.

Residential construction is hindered by a continuation of high mortgage rates. In this scenario, a softer labor market also steals strength from residential activity. Multifamily construction is characterized by rising vacancy rates, reduced leasing rates, and net operating income declines. Nonresidential construction declines significantly.

Finally, the weak labor market hurts revenue collections at state and local governments. The Highway Trust Fund requires greater financial assistance. While weak economic conditions may add to the likelihood of a generous replacement of Infrastructure Investment and Jobs Act (IIJA), the market impacts may not appear in force until 2027-2028.

In reaction to this decay in the economic environment, inflation pauses, and then retreats - slowly at first. Inflation expectations decline as economic conditions worsen. The Federal Reserve begins yet another policy pivot – and begins to cut rates in the first half of 2026.

Cement consumption, according to this scenario, declines 5.6% to 97 million metric tons – 2.5 million metric tons below the baseline. After first-half weakness, the recovery begins in the second half of 2026, resulting in a 1.5% gain. Stronger growth, averaging 3.5% annually, materializes in the "out years."

Optimistic Scenario

In the Optimistic Scenario, the economy’s resilience is maintained. The “art of the deal” is successful.

All trading partners negotiate and agree to terms that are favorable to the U.S. This happens quickly thereby reducing economic uncertainty. The adverse economic impacts associated with the tariffs are dramatically reduced.
Consumers’ and businesses’ trust in U.S. policy is restored. Consumer and business sentiment swells. With the recent news of progress in negotiations with China, the likelihood of this scenario materializing has been increased.

With the tariff’s inflationary threat reduced, the Federal Reserve cuts rates. The policy rate cuts and lower inflation premiums prompt declines in interest rates.
Renewed confidence in the Administration’s economic policies leads to increases in hiring. Investment accelerates. Uncertainty is replaced with confidence.

Stronger job and income growth, along with the mortgage rate dropping below 6% by year-end 2025, supports a stronger near-term, and single-family construction outlook.
With no job losses, vacancy rates ease, and rent growth is stronger compared to the Baseline Scenario. Net operating income is much better.
As a result, tighter lending standards are not a significant deterrent to construction. Multifamily starts improve compared to Baseline levels. The nonresidential construction recovery accelerates under the Optimistic Scenario.
With job and income gains, commerce increases and leads to stronger business earnings. Net operating conditions for commercial real estate are stronger. Access to credit is easier under this scenario compared to the Baseline Scenario.

Job market strength under this scenario translates into increased state revenue collections. States’ fiscal conditions improve. State construction spending has increased. In addition, the fiscal strength reduces the likelihood of state sterilization. Under this scenario, state sterilization of IIJA programs is reduced from 20% to 15%.

In the Optimistic Scenario, cement consumption records growth throughout the forecast horizon. Declines in interest rates ushers in a modest recovery in private sector construction beginning in the second half of 2025. Stronger successive gains follow in the subsequent years.

The Baseline Scenario: Probability 45%

Macroeconomic Summary

The economy gradually weakens. Administration tariff policies add to expectations of higher inflation. Uncertainty embraces consumers and business. Consumer spending and labor hiring rates ease. Supply chains are disrupted and cannot be repaired quickly, even if tariff issue dissipates.
Facing the prospects of both rising inflation and unemployment, the Fed initially sits. Only after data clearly shows the potential of recession does the Fed act. It begins cutting rates in second half of 2025. Given the lags in monetary policy, construction activity endures high interest rates throughout most of the building season.
Tariffs impact the economy in second half of 2025. The job market weakens. The unemployment rate increases. The improvement in inflation is slow. Business and consumer delinquencies increase. Risk premiums and access to credit tightens. Real GDP growth slows significantly in late 2025 and early 2026.
With the slowdown, the Fed accelerates its cuts. Accounting for policy lags, lower rates improve economic growth in second half of 2026.
Economic growth path in 2027 and 2028 characterized by lower inflation, lower interest rates, and possibly beneficial tax cuts. Stronger economic growth materializes.

Residential Summary

Mortgage rates remain in 6.5% to 7% range throughout 2025. Home price appreciation moderates. Affordability does not materially change through first half of 2026. Single family remains at a saddle point – neither rising nor falling significantly during 2025. Slowing rent growth, modest increases in vacancy rates, rising maintenance costs reduce multifamily Net Operating Income (NOI). This is accompanied by tightening credit standards.
As mortgage rates drop below 5.5%, it unleashes a strong residential demand that has been pent up by high rates. Strengthening is expected to begin in second half of 2026 and beyond.

Nonresidential Summary

The nonresidential business cycle slowly recovers. Credit tightens modestly and restricts lending for new construction. This dampens the recovery. Existing technology trends - that were accelerated by Covid - reduce amplitude of recovery in 2024 and beyond.
Made-in-America investments in semiconductor chips and electric batteries add tremendous strength to industrial construction through 2025. This strength masks the slow recovery that materializes in other nonresidential construction activities.

Public Summary

Economic weakness implies weakening in revenue collections by state and local governments as well as a worsening in the Highway Trust Fund. Inflation erodes potency of IIJA construction.

The Pessimistic Scenario: Probability 30%

Macroeconomic Summary

The economy is characterized by a tariff war with China and EU. Inflation increases significantly.
Marred by high inflation, the Federal Reserve raises interest rates.
A recession materializes in the second half of 2025 and through the first half of 2026. Job losses materialize. Unemployment tops 5%.
The recession is global. The status of the dollar as the world’s reserve currency is compromised. The dollar weakens. This adds to inflation and unemployment. Oil prices declined compared to the baseline. Recession deepens.
Lending standards tighten more than baseline. Bank failures materialize with significant adverse impact on nonresidential construction lending and refinancing.
In the context of economic weakness, a retreat in inflation materializes. The Federal Reserve pivots policy and begins to lower the Federal Funds rate beginning in 2026.

Residential Summary

Higher unemployment and income weakness heightens affordability erodes (even though mortgage rates are slightly lower).
Compared to baseline, multifamily vacancy rates increase. Rents decline. NOI is hurt. Bank failures result in significant lending tightening. Credit conditions for multifamily development loans tighten significantly.
Income weakness, lower home equity, softer home prices, tighter credit conditions and family budgets force significant contraction in residential improvements.

Nonresidential Summary

The nonresidential business cycle takes a setback. NOI conditions worsen. Credit tightens significantly and restricts lending for new construction. Existing technological trends that were accelerated by Covid reinforce a retreat in nonresidential.

Public Summary

Job losses weaken state and local government fiscal strength. Sterilization increases to 25% and weakens net impact of IIJA.

Optimistic Scenario: Probability 25%

Macroeconomic Summary

The “art of the deal” is successful. All trading partners negotiate and reach agreement. Disruption to supply chains is minimized. Inflation heals quickly. With the threat of higher inflation eased, the Federal Reserve begins to ease. Rates begin to decline in the second half of 2025. Given lags, much of the benefits of declining rates materialize in the second half of 2026.
The success of trade policy restores confidence in the Administration’s economic policy. Uncertainty is replaced with confidence. Hesitation by business and consumers is replaced by a robust return to investment and spending.
Strong economic growth materializes in second half of 2025 and beyond. Lending standards ease modestly. Monthly job gains accelerate in second half of 2025. The unemployment rate retreats below 4.0%. Personal income growth runs stronger than baseline.
World economic growth follows this trend. Oil prices increase compared to the baseline. The dollar reclaims some of its status as the world’s reserve currency. The dollar strengthens and supports economic growth, lower inflation, and lower interest rates.

Residential Summary

Mortgage rates (30-year conventional) begin a sustained decline in the second half of 2025. They average less than 5.5% in 2025. This supports a significant improvement in homebuyer affordability. Strong single-family sales and construction is unleashed. This new momentum is sustained through the end of the forecast horizon.
Stronger employment growth results in lower vacancy rate and stronger rent outlook versus baseline. Multifamily NOI stronger. Recession fears are muted. Tighter credit standards remain modest.
Lower home equity interest rates, stronger income, and home price conditions strengthen the outlook for residential improvements compared to baseline.

Nonresidential Summary

The nonresidential business cycle recovers more quickly than the baseline. Credit tightens modestly. The adverse impact of existing technological trends that were accelerated by Covid are smaller than estimated in the baseline. Onshoring efforts by U.S. industry accelerates beyond the baseline.

Public Summary

Stronger employment outlook strengthens state and local government fiscal compared to the Baseline. In this context, state sterilization is less likely and assumed at roughly 15% given strength of state fiscal condition. IIJA construction materializes earlier and stronger than baseline.

About The Sullivan Report

The Sullivan Report delivers subscription-based economic forecasts and market updates tailored to the cement, concrete, construction, and aggregates industries. Its flagship publication, the Cement Outlook, is released three times a year and features 5-year forecast projections, expert analysis, and actionable insights to support informed decision-making and long-term strategic planning amid an evolving economic landscape.

Guided by renowned economist Ed Sullivan, The Sullivan Report also offers keynote presentations and customized forecasting services for organizations and regions seeking deeper, data-driven market intelligence. For more information, message us here, visit TheSullivanReport.com, or email us at info@thesullivanreport.com.