There’s a Light at the End of the Tunnel - 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:
Infor

SECTION: Business Outlook

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


There’s a Light at the End of the Tunnel

Written By: ELI LUSTGARTEN

Article Date: 07-02-2007
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.


Better growth is likely ahead for the second half of 2007 and for 2008.

The U.S. economy appears to be regaining momentum after a very slow start to the year. GDP growth slowed sharply in the second half of 2006 and probably bottomed in the first quarter of 2007 with a barely positive showing of 0.6 percent. The first quarter was significantly impacted by a much larger than expected trade deficit and a sharp contraction of inventories, which declined $4.5 billion in the January to March period. The path of economic growth is following our mid-cycle forecast with the slow period extending from the second half of 2006 into the second quarter of 2007. End markets have mostly followed our projections with only power generation showing somewhat better results.

There is a perceptible light at the end of the tunnel. Job growth in May nearly doubled from April, led by the service sector and a surprisingly flat construction job market. In addition, manufacturing activity has begun to expand, consumers continue to spend despite the higher gasoline cost environment, and inflation has moderated, including the all-important PCE index, which has fallen to the top of the Federal Reserve target range of 2 percent.

Non-farm jobs expanded 157,000 in May, nearly double the 80,000 new jobs recorded in April. One of the big surprises was no change in construction-related employment. While subject to revision, the data is consistent with the strength in non-residential construction offsetting the weakness in the residential sector. Indeed, the government reported domestic construction activity in the first quarter of 2007 was $1.19 trillion (SAAR) or nearly flat with the $1.20 trillion reported for 2006. The mix is clearly changing with private residential falling from 53 percent in 2006 to 48 percent during first quarter '07, offset by the gain in nonresidential construction from 24 percent to 28 percent and the rise in public construction from 22 percent to about 24 percent.

Moreover, the ISM reported its index of manufacturing activity rose to 55 percent in May, up from 54.7 percent in April, indicative of expanded factory production. This is a stark contrast to the PMI average of 50.9 percent for the previous six months and 50.8 percent for the first quarter of 2007, including some months of negative growth of the sector (index below 50 percent). The customer inventory index has receded below 50 percent, suggesting the end to inventory liquidation in the economy is approaching.

Growth in Non-Residential Expected
Construction spending should still remain about flat in 2007 but with a weaker housing sector and stronger non-residential spending. We now look for housing to stabilize in late 2007 with housing starts falling at least 18 to 20 percent to 1.45 million or 1.5 million (forecast was 1.55 million) from 1.82 million in 2006 before recovering modestly to perhaps 1.6 million in 2008. The offset is that non-residential construction should continue to grow 10 to 12 percent, reflecting modestly higher expenditures in highway and streets, office and lodging sectors.


For the construction machinery sector, our forecasts have weakened slightly. Demand has peaked at historic highs and the cooling that is under way in most markets will be much more pronounced in smaller and medium machines and in areas that have benefited from the extraordinary housing bubble.

Our projection for small to medium equipment demand is now down 10 to 15 percent (prior forecast was down 7 to 15 percent).

Heavy equipment demand is now expected to decline 5 to 10 percent in 2007 (prior forecast was up 5 percent) reflecting the softness of domestic mining markets, particularly coal, and inventory balancing.

Our most recent surveys of the construction equipment sector are consistent with our outlook; demand is
strengthening and pricing is flat. A majority of respondents (62 percent) reported increasing inventory levels and 38 percent reported flat inventories with none reporting a drop in inventory. Many have not been adding overall inventory so much as reshuffling existing inventory to match demand in commercial construction or to change their fleet mix away from housing.


Global demand is still essentially unchanged for light and heavy equipment as most markets outside North America remain robust with double-digit gains.

2008 Predictions
Our preliminary 2008 outlook is for moderate growth in construction activity both here and abroad. North America markets should return to more normal levels as GDP growth approaches 3 percent and housing stabilizes at lower levels. We note that non-residential construction is expected to slow in 2008 to perhaps a growth rate of 5 percent as spending related to the housing sector, such as educational and commercial, weakens.


The bottom line hasn't changed: 2007 is a challenging year. But we've probably been through the worst of the weakness. Better growth is likely ahead for the second half of 2007 and for 2008. If the Fed will cooperate and begin to cut rates in the next six to nine months, this expansion may have legs to last to the end of the decade.



[ TOP ]


Article Categories:  Business Outlooks  »  Economic Outlooks