Outlook for 2005 - Market Lines
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Outlook for 2005

Written By: Frank Manfredi

Article Date: 01-03-2005
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.


Expect a 2005 that is 5 percent to 10 percent above a fabulous 2004.

For the past four years, I've said forecasting the year ahead is difficult because of the great uncertainty. This year I don't have that problem. 2004 is up 10 percent to 40 percent depending on whether you're talking asphalt pavers or hydraulic excavators. The market got a big kickoff in December 2003 when equipment buyers discovered they could use the temporary depreciation tax benefit to purchase new machines and offset taxes.

Since December 2003, the market has been nothing but spectacular. Jim Owens, the new chairman and CEO of Caterpillar, said in September that Cat was "experiencing unprecedented growth in demand for its products" in all product categories and across all market segments. That about sums up the 2004 market.

The 2004 market benefited from a very accommodating credit policy from the Federal Reserve with interest rates at a 40-year low. That, in turn, has kept the housing market growing at a level that most analysts said was not sustainable.

Although energy prices have a dampening effect on the economy overall, the positive effect for equipment companies is that high oil prices have dragged along coal prices and coal mine production to levels the coal mining industry hasn't seen in years. Marginal mines are reopening, and existing operators are expanding and upgrading their fleets to make their mines more productive.

Not only are energy prices high but so are most other commodities. Copper, iron, grain crops and many others are trading at all time highs. Higher commodity prices have also driven steel prices up.

Part of the reason commodity prices are high is because they are sold in U.S. dollars, which is presently selling much lower against other currencies, especially the euro and yen. In the short term, the lower value of the dollar will benefit manufacturers, especially mining equipment manufacturers that build their products in North America.

Other manufacturers that have operations around the world will not have the same benefit. Higher steel prices have increased new equipment prices by 3 percent to 9 percent.

Non-residential construction has come around after a long period of declining spending. It's a huge segment of the economy in which companies have hesitated to commit to new brick-and-mortar. People who influence construction in this segment have finally started to spend, and we expect to see gains this year in the 3 percent to 4 percent range. That may not seem like much, but the dollar amounts are huge.

Road construction was a question mark in 2004. The six-year Federal Highway Bill (TEA- 21) expired in September 2003. Federal road construction was kept on life support throughout the presidential election with four extension bills that continued the previous legislation but didn't give enough comfort to road builders for them to commit to buying much equipment.

The current bill expires in May. Most observers believe a new bill modeled after the House or Senate version will pass, which should put some stability into this segment.

Most of the trends that started in late 2003 and continued in 2004 will continue into 2005. The dollar will remain low relative to other currencies. Commodity prices will remain high, which will mean mining activity will remain high as well. Oil prices probably will trade at between $30 and $40 per barrel throughout the year. Interest rates will remain relatively low, but will rise throughout
the year, probably to the Federal Funds rate of 3.5 percent, up from 2.0 percent. Housing construction will slow a little in reaction to the rising interest rates but not much. When new road legislation is passed by Congress road construction will start to improve.


The only uncertainty at the moment is how much expiration of the depreciation tax benefit will take away from sales in first quarter 2005. But I don't think the market will be down more than 5 percent. Higher equipment prices could also be a drag on the market. At the moment, I'm predicting equipment prices will rise between 3 percent and 5 percent in 2005 compared with 2004.

I predict second quarter 2005 machinery sales will be flat compared with 2004 and by the third quarter and certainly by the fourth quarter, we will see gains that on an annual basis will offset the earlier declines.

We'll end up with a 2005 that is 5 percent to 10 percent above a fabulous 2004.



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