Moody's: Outlook for the US building materials industry remains positive

The outlook for the US building materials industry remains positive, Moody's Investors Service says in a new report. Volumes and pricing are improving, underlying demand is strong and economic indicators are favorable.

Moody's industry outlooks reflect expectations for the fundamental business conditions in a given industry over the next 12 to 18 months.

"The positive outlook is supported by higher volumes and prices, strength in private non-residential construction, as well as strong underlying demand and an improving economy," says Vice President -- Senior Credit Officer, Karen Nickerson. "We forecast that organic operating income will grow more than 10% in the next one to two years."

Improving end-market fundamentals continue to drive volume and price growth, Nickerson says in "Volume, Price Momentum Supported by Improving Construction Markets." Private non-residential construction spending was up 13.4% year-over-year as of April, driven mainly by commercial and manufacturing structures, while public construction spending was up a more modest 3.5% year-over-year at the same date. Private residential construction was down 2.1% year-over-year; however, total housing starts increased 5.1% year-over-year in May.

The lack of a long-term federal transportation bill is currently the biggest risk to the US building materials sector. While Congress has extended MAP-21, the Federal Highway Bill, through July 2015, it still hasn't provided the authorization needed for the remainder of the summer construction season or much-needed cash for the Highway Trust Fund, which could run out of money in the next couple of months.

"The lack of a long-term bill increases uncertainty for many states regarding federal funding for highway projects," Nickerson says. "Arkansas, Delaware, Utah and Wyoming are among the states that have either postponed or canceled transportation projects due to this uncertainty, which if it persists could leave more federal, state or local governments reluctant to undertake large projects."

That said, public construction continues to draw strength from states taking the initiative and funding their infrastructure needs without federal dollars. Twelve states have increased their gasoline excise tax or transitioned to gasoline sales taxes since 2013, for example, to support public construction projects. Public construction spending has risen for 10 consecutive months, which is all the more impressive when public funding is at historical lows.