Two-Tier Economic Recovery on Track - 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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Two-Tier Economic Recovery on Track


Article Date: 09-03-2007
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

The worst is hopefully over for the construction equipment sector.

The U.S. economy has taken several body blows that have created significant volatility in the stock market and threatened to send many companies and investors searching for cover. Despite further deterioration in the housing sector, $3-plus gasoline and near $80 oil, and the sub-prime meltdown, the domestic economy has still managed to show a sharp rebound in economic growth in Q2:07. GDP was initially reported at 3.4 percent compared to a revised 0.6 percent in Q1, and the consensus forecast for GDP growth in the second half of 2007 is projected at least at a 2.5 to 3.0 percent clip. Several key trends continue to drive the industrial sector. The U.S. economy appears to be regaining momentum after a very slow start for the year; inventory liquidation seems to be running its course, residential construction and automotive markets in North America continue to be weak but may be approaching stabilization, while nonresidential construction in North America remains solid.

Looking into the second half of 2007, the trends in labor markets to date show that income growth will support the consumer, the manufacturing sector is springing back to life, and businesses have expanded operations and increased capital spending.

Domestic Expectations
Current economic data continues to support our forecast for an improved domestic economy in the second half of the year. It is still likely, however, to be a two-tier domestic industrial recovery. We do not expect much more than stabilization for the truck sector and continuing weak domestic construction equipment demand (off 5 to 15 percent with the current weak residential markets at best stabilizing, offset by rising nonresidential demand). Auto is still facing difficult times, though there may be some strike-hedging inventory built in Q3 in advance of the upcoming major UAW negotiations this fall.

Most other industrial sectors should show modest improvements as the second half of 2007 unfold, with the real strength in the industrial economy still outside the U.S.

Construction Forecasts
For the construction machinery sector, our forecasts are essentially unchanged domestically but have strengthened outside North America. Demand peaked at historic highs in Q2:06 in the U.S. and has fallen in most markets, though this is 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 still down 10 to 15 percent. It's clear the suppliers to the residential construction sector have recognized that there is no housing recovery until 2008 at best and have begun to right-size their fleets of compact equipment to a lower level of future activity.

Heavy equipment demand is still expected to decline 5 to 10 percent in 2007, reflecting the softness of domestic mining markets - particularly coal and inventory rebalancing.

Our recent surveys of the construction equipment sector are consistent with our outlook. July was essentially
a continuation of moderating trends in demand, pricing and inventories seen in the May-June periods. Purchase intentions for the remainder of the year, as well as outlook have moderated as well.

The good news is that global demand appears to be strengthening and our surveys of OEMs suggest at least a 10 percent increase for both light equipment and heavy equipment as most markets outside North America remain robust with double-digit gains in virtually every part of the globe.

Our preliminary 2008 outlook is for moderate growth in construction activity both here and abroad. North American markets should return to a more normal level of activity as (1.) GDP growth approaches 3 percent and (2.) housing stabilizes at lower levels as we mark the anniversary of the large decline in demand, and comparisons become easier.

We note that nonresidential construction activity is expected to slow in 2008 to perhaps a growth rate of 5 percent plus - spending in some sectors will slow, reflecting the structural changes in the housing sector such as educational (related to property taxes and housing values) and commercial (neighborhood retail, remodeling), or will weaken due to other structural changes in the economy (e.g. office spending impacted by weakness in specific financial markets).

One key unknown is the outlook for the highway sector as the OMB has reported that the highway fund will be running a $4 billion deficit in F2009 and would require about a $16 billion cut in new highway funding to states unless Congress appropriates more money. The recent tragedy in Minneapolis will likely have the positive result of saving spending in this sector.

The bottom line hasn't changed: 2007 is a much more challenging year, but the worst is probably over. Better growth is likely ahead for the second half of 2007 and 2008.

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Article Categories:  Business Outlooks  »  Economic Outlooks