Outlook As Economy Transitions To Mid-Cycle - Business Outlook
Construction Equipment Distribution magazine is published by the Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada. AED membership also includes equipment manufacturers and industry-service firms. CED magazine has been published continuously since 1920. Associated Equipment Distributors
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Outlook As Economy Transitions To Mid-Cycle

Written By: ELI LUSTGARTEN

Article Date: 07-03-2006
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.


Expect strong business conditions to continue for the rest of 2006.

Forget Wall Street for now. The financial markets spent most of the first quarter of 2006 playing catch-up to the strength of the domestic economy. This has been immediately followed by an intense correction reflecting an increasing inflation outlook, and the fear of ongoing rising interest rates ultimately taking its toll on domestic economic growth. Wall Street's gyrations have nothing to do with reality. Business conditions across most of the industrial sector remain robust with positive momentum in virtually all industrial markets, particularly in construction equipment. Construction activity remains solid driven by ongoing strong residential and non-residential activity, as well as rebuilding projects in the gulf region, and infrastructure projects including road and bridge construction. We expect strong business conditions to continue the rest of 2006.

More than 70 percent of the respondents to our construction equipment surveys report higher volume. Strong end-markets were broad-based and diverse, ranging from large commercial shopping malls and strip malls, to industrial petrochemical plants (including ethanol plants), to residential apartment and home-building projects.

We continue to receive anecdotal information supporting strong demand, high utilization rates for equipment, growing inventory levels in preparation for a busy summer construction season, along with improving cost/price fundamentals.

Moreover, virtually all global markets for construction equipment are now pointing up. North America continues to lead the way. However, a number of manufacturers have reported strengthening in both Asia and Europe, which may be turning after several years of lackluster growth. This includes China, which saw a decline in demand for construction equipment in 2005 similar to the 37.5 percent decline in the truck sector.

It's inevitable that the current robust conditions begin to change, and all signs point to a domestic economy headed toward a typical mid-business cycle pause, similar to slowdowns in 1966, 1986, and 1995.

While Q1:06 GDP growth of 5.3 percent made the United States the second fastest growing advanced economy in the world (behind Greece), in many respects it appears to have been a one-time catch-up for the unusually slow, hurricane affected Q4:05 GDP growth of 1.1 percent. In fact, the average of the two quarters is about 3.5 percent, in line with the consensus view of the long-term growth for the U.S. economy.

In addition, it has always been clear that the first quarter economic growth rate was not sustainable. The smaller Q1:06 trade deficit (which increases GDP growth) benefited from higher exports and lower oil imports; business inventories are slowly being rebuilt, and job creation has waned. A slowing of economic activity is inevitable as energy costs and inflation increase along with interest rates.

Construction activity will likely begin to slow in selected markets, particularly homebuilding, in the second half of 2006. Higher interest rates have begun to take a toll on new home sales, and the inventory of single-family homes on the market has risen to about 5.9 months in April, up 40.5 percent from a year earlier, and the largest year-on-year rise since 1982, when the realtor association began collecting data. A slowdown of residential markets is clearly on the horizon, but most forecasts still hold for a soft landing.

Our surveys also suggest that 63 percent of the construction equipment rental companies are increasing inventories at a time when fleet refurbishing appears to be almost done. With relatively young fleets, it's not hard to speculate that demand from this sector will begin to wane with any signs of higher interest rate induced slowdown in construction activity.

There may also be some concern that although business conditions are very favorable for most light construction equipment products, the likely weakening in residential construction may take its toll on future demand.

In addition, we've noted discounting has begun to appear in the construction equipment markets in North America and Europe as some dealers and companies appear to be focusing on improving market share in the current robust market, perhaps in anticipation of a potential future slowing.

The bottom line is 2006 is still expected to be a mid-cycle year where top-line growth falls from above normal double-digit levels to mid-single-digit growth as the domestic economy returns to a more normal growth rate. Remember, average is good!



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Article Categories:  Business Outlooks  »  Economic Outlooks