CE Outlook: We Are HItting Bottom, But No Upturn Yet in SightBy Eli Lustgarten
Article Date: 08-01-2009
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Delays with infrastructure funding would not be surprising.
The severity of the domestic economic recession will result in at least a 35 to 45 percent decline for all types of equipment for 2009. Construction equipment demand outside North America is expected to decline about 40 percent or more virtually everywhere including Europe (-40 percent plus), Latin America (-45 percent plus) and Asia (-30 to -40 percent or more).
The light at the end of this bleak forecast for the construction equipment sector is that we have probably hit the bottom of the cycle; however, finding help to stimulate demand is more difficult than usual.
Infrastructure spending was supposed to be a savior, providing increased spending for jobs and equipment as part of the $787 billion stimulus bill passed by Congress. Unfortunately, the Highway Trust Fund is fast running out of money again, as it did in September 2008. Approximately $5 billion to $7 billion will be needed in August 2009 to avert a slowdown of Federal Highway Administration reimbursements to state DOTs. It is also likely that a further $8 billion to $10 billion will be needed in FY2010 to maintain the highway program at its current $40.7 billion level next year.
- The housing sector has stabilized with some signs of improvement. However, falling housing prices, rising unemployment and stagnant income levels all suggest that any material recovery in housing is still well into the future.
- Our forecast for nonresidential construction spending has been for a 5 to 15 percent decline in both 2009 and 2010. Current data suggest that 2009 will be down at least 10 percent, though the impact of the stimulus package may hold the decline next year to similar levels as 2009.
Over the next several months several political actions will be discussed and likely taken to:
We would expect Congress to pass, as they historically have done, a patchwork bill that will fund the current shortfall and likely extend the current legislation in place, pending development of a new comprehensive program. If history is a guide, the earliest we could expect a new highway/i Infrastructure program would be February 2010 – but next year may be a key mid-term election year and even a retroactive bill passed in 2011 is within the norm. The stumbling block is providing new sources of funds for the highway/infrastructure program. It will be difficult to find new funding sources that are acceptable; increasing taxes is likely to be more palatable in 2011 after the mid-term election that next year.
- Try to prevent the FY2009 spending level for infrastructure from falling below last year.
- Endeavor to at least hold the federal infrastructure spending for FY2010 at the FY2009 level to allow the impact of the recently passed stimulus bill to actually be additive to current spending levels. The Congressional Budget Office (CBO) indicates that of the $27.5 billion in stimulus money expected for infrastructure highway spending, only 35 percent (or $9.65 billion) is likely to be spent by the end of FY2010. The rest will likely be spent from 2011 to 2016.
- Develop and pass a comprehensive approach for a much larger transportation reauthorization bill ($410 billion to $430 billion or more) to replace the current (six-year $286 billion) highway bill scheduled to expire in September 2009.
Our most recent survey of the construction equipment rental markets also points to a bleak near-term outlook. Reports of higher demand remained weak in our July 2009 survey; pricing continues to deteriorate. Ninety-six percent of our contacts reporting decreased pricing – a new low; and inventory levels decreased significantly, with anecdotal evidence suggesting that rental fleets are selling off used equipment attempting to:
Purchase intentions continue to be negative, declining for the sixth consecutive month. Anecdotal evidence suggests that economic concerns, weak construction activity, credit concerns, as well as lack of material impact from stimulus-related projects may be driving the less positive outlook.
- Bring inventory in line with demand
- Increase fleet utilization
- Manage for cash in the near term
Getting out of this morass will take time. OEMs will have to slash production and sharply reduce inventories both at the plant and at dealerships. Existing fleets will have to be scaled back to match a much lower level of activity. Only then can renewed equipment demand take hold when construction financing becomes more readily available, probably not before 2010 at the earliest.
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