The Transition To Slower Growth - 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
Home         About Us         Media Kit         Subscribe         Previous Issues         Search Articles         Meet the Staff        AED Homepage

CED Menu

Arrow Home
Arrow About Us
Arrow Media Kit
Arrow Digital Subscription
Arrow Search Articles
Arrow Meet the Staff
Arrow Trade Press Info
Arrow AEDNews

Premium Sponsor:

SECTION: Business Outlook

Questions or feedback?
Contact Kim Phelan at (800) 388-0650 ext. 340.

The Transition To Slower Growth


Article Date: 11-01-2006
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Continuing high levels of demand, but softening unit volume outlook in 2007.

By now it should be becoming evident that there are changes underway in the construction industry, as well as in the rest of the economy. After three strong years of economic growth through the summer of 2006, the U.S. economy is in the midst of a slowdown that will undoubtedly carry over into 2007. This slowdown will take its toll on key industrial and equipment markets, especially construction equipment. The economic framework we believe is most likely to occur is:

  • The industrial sector will keep rolling through 2006 but will see a transition into a mid-cycle economy where top-line growth falls from above-normal double-digits to mid single digits.
  • The slow-down is here - mostly on the consumer side and particularly in residential construction and consumer durables (especially autos and perhaps appliances.)
  • Key characteristics for a recession - principally above-normal inventories and tightening credit are not now prevalent, but there is a noticeable increase in inventories beginning to develop.
  • Second half 2006 economic growth will be slow with the fourth quarter uncertain due to the expected large cuts in automotive production and further weakening in the consumer sector led by housing. First quarter 2007 is also troublesome as it compares to a very strong 5.6 percent first-quarter 2006 growth. There will be lingering production problems similar to fourth quarter 2006, and the heavy truck sector is expected to crater in the first half of 2007.
  • The good news is the interest rate rhetoric will shift toward a possible Fed cut during the first half of 2007, with lower rates potentially by the second half of next year.
  • Construction spending will likely remain strong but we have probably seen the peak
    in North American equipment demand. Unit volumes in most construction and material handling categories will likely be lower in 2007, driven by ongoing weakness in residential construction reflected in reduced purchases from rental companies, especially for small to medium-sized equipment. Medium and larger equipment demand should remain strong, as should demand outside of North America. Since the presentation, the outlook for auto production has softened and with a very unfavorable mix (light trucks and SUVs are down) as GM, Ford and Daimler-Chrysler endeavor to reduce bloated inventories, which rose from 83 to 90 days at the end of August and into September.
Recent government data shows a continuing housing slump but surging non-residential and highway markets. Industry construction machine sales declined 3 percent to 7 percent in second quarter 2006 and recent government data suggested a 13-percent decline in July and a 5.1-percent decline in August (mostly related to housing although industry sales are up 7.3 percent year-to-date). The farm sector also continues to report weaker than expected retail sales.

The current consensus is that housing will fall from 2.07 million starts in 2005 to about 1.85 million in 2006 and about 1.72 million in 2007 - a decline of 7 percent to 10 percent a year.

Non-residential construction should continue to grow at least 8 percent to 10 percent a year or more for the foreseeable future. Public construction is up 10 percent since last year and will continue to grow as long as states have funds to support Federal programs. Mining should remain robust through 2006 and into 2007, even if commodity prices fall a bit.

This outlook translates into a construction equipment forecast with continuing high levels of demand, but softening unit volume outlook (7 percent to 15 percent) in 2007, mainly for smaller to medium-sized equipment, due to the effects of the downturn in residential construction, and the potential reduced level of equipment purchases by rental companies.

Rental equipment companies have been strong buyers of new machinery for the past three years. Most rental fleets have been refurbished and the average age is in the 36-month-plus range. In addition, a number of financial transactions are likely next year including possible IPO's from Hertz and Neff; plus, the sale of RSC (owned by Atlas Copco) has just been announced and Sunbelt Rental recently purchased NationsRent.

These factors help to confirm our belief that as light to medium construction activity wanes, purchase of equipment in 2007 will be good but below 2006 levels.

The bottom line is that 2007 is expected to be much more challenging. If the Fed will cooperate and begin to cut rates sometime next year, this expansion may have legs to last to the end of the decade.

[ TOP ]

Article Categories:  Business Outlooks  »  Economic Outlooks