How Much Pain Before Any Gain? By Eli Lustgarten
Article Date: 10-01-2008
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
2008-2009 Industrial Outlook: Expect another few quarters of stagnant-at-best.
The blinking lights for industrial markets are now beginning to flash red. Trade has been the key contributor to economic growth through the first half of 2008 with strong exports making up for most of the weakness of the domestic economy. Throw in modest growth from consumer spending driven by stimulus rebate checks, government expenditures and investment spending and the U.S. GDP numbers remained solidly positive despite the significant economic headwinds from the ongoing decline in residential construction and inventory liquidation.What’s changed is the outlook for both the domestic and global economy.
The bottom line: The next two to four quarters will be very dicey for Industrial America. We believe it will still be a two-tier economy – either you are out of capacity, as is the case for virtually every large piece of equipment we make, or companies are cutting production.The current weak markets will remain stagnant at best for the next several quarters:
- The U.S. economy looks weaker in 2H2008 with consumer spending and manufacturing slowing down, both consumer and business confidence deteriorating, and credit and housing outlook still uncertain.
- The outlook for developed countries has deteriorated. A major European economic slowdown has surfaced with the European PMI falling off a cliff. Despite the economic weakening, both the European Central Bank (ECB) and the Bank of England continue to focus on inflation not growth. In addition, the Japanese economy has slowed markedly.
- The U.S. dollar has begun to strengthen, indicating that the cor- porate profits from currency may disappear as early as 4Q2008
- Oil and other commodity prices have weakened somewhat from all-time records, but are still at high levels
- Corporate profits will be under pressure from continuing material inflation as current costs hit most income statements. Corporate hedging of materials will expire this year, making 2009 as big or bigger a cost push inflation problem compared to 2008, and suggesting that pricing will go up materially or profits will get squeezed.
- Housing, which will fall another 33 percent to about 950,000 starts in 2008, will hopefully stabilize over the next two to four quarters.
- Auto outlook remains soft with 2008 production now about 13.4 million units compared to about 15 million in 2007 as retail sales fall to or below 14 million from 16.1 million last year. 2009 is likely to be more of the same.
- Construction equipment domestic sales are likely to fall another 15 to 25 percent as nonresidential spending slows from about a 6 to 12 percent gain (driven by inflation) in 2008 to likely down modestly in 2009 (compared to up 16 percent last year). Industry production is now projected at down 10 percent in 2008 and flat to down 5 percent in 2009. International sales remain solid, though exports to Europe will soften; the markets to worry about are those related to rental sectors and especially material handling, excluding cranes.
- The heavy truck sector looks relatively flat in 2008 compared to the 212,000 NAFTA shipments in 2007, while medium truck demand should fall 12 to 15 percent. A muted prebuy is still likely next year for heavy trucks but perhaps only up 20 percent-plus rather than the larger gains previously expected.
- Many other industrial sectors should continue to do well.
- Farm machinery sales should see a 15 to 20 percent-plus rise in larger equipment demand in 2008, reflecting the high level of commodity prices; 2009 large equipment demand is only up 5 to 10 percent due to capacity constraints.
- Mining and oil field machinery demand should also do well with near record metal and energy prices; electrical equipment markets are still improving through 2008.
- Aerospace demand looks solid, though commercial aftermarket sales will soften over the next few quarters as domestic fleets are cut.
- The real strength for Industrial America will remain international demand from developing countries, though the contribution from Europe will wane over the next two to four quarters. The next couple of quarters may be difficult, but compared to history it could be worse.
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