Turning Point is at HandBy Eli Lustgarten
Article Date: 03-01-2010
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Signs emerge of modest upturn, though financing and federal government will play lead roles.
The U.S. economy has begun its recovery. So says the most recent GDP data which trumpeted real growth of 5.7 percent in Q4-2009, up sharply from the twice restated 2.2 percent real growth in Q3-09, even if more than half of the gain came from reduced inventory destocking. Even non-farm payrolls were reported by the Bureau of Labor Statistics (BLS) as essentially unchanged (-20,000) in January 2010, and unemployment fell from 10 percent in December to 9.7 percent (seasonally adjusted) in January.
The construction sector, however, is still suffering. Construction employment fell about 75,000 in January, a rate very similar to the average 77,000 monthly decline over the last 12 months. Unemployment in the construction sector now stands at about 24.7 percent; the AGC reports that over the last 12 months, construction accounted for about 23 percent of all the job losses (926,000 out of 4 million) in this country, even though the industry only accounts for about 4.3 percent of all workers (5.5 million out of 129.5 million). Even architectural services employment, a leading indicator of future construction activity, fell for the 17th straight month in December and is 14.8 percent below December 2008.
Despite all this gloom, we are beginning to see some early signs of hope. On Feb. 1, 2010, the Federal Reserve released its latest survey of senior loan officers at 55 of the largest U.S. banks and 23 subsidiaries or branches of foreign banks. The survey, which focuses on commercial and industrial (C&I) loans, reported that respondents who had tightened standards over the past three months were virtually zero! This is a key step toward increasing fund availability, a necessary condition for any recovery of construction activity. We note that bank policies on commercial real estate lending were an exception as standards further tightened in this segment.
Further, though private residential construction declined 2.8 percent at year-end 2009 and was 11 percent below a year earlier figures, the numbers mask a seventh consecutive rise in new family construction, which was up 0.6 percent for the month. Even private nonresidential construction spending edged up 0.2 percent at year-end though it was off 18 percent compared to December 2008, with nearly double digit declines in virtually every category but power construction.
It’s our belief that we are coming to the turning point in construction activity. Construction spending may fall marginally for several more months as residential gains are offset by falling nonresidential activity. The economic recovery and an increased flow of stimulus funds should be sufficient to drive an upturn in domestic construction activity, hopefully by spring.
The latest data suggests that construction equipment demand fell about 37 percent globally with light equipment off about 46 percent and heavy equipment down about 30 percent. Production fell well over 50 percent as virtually every manufacturer produced well below retail sales to reduce field inventories. The period of under-production has come to an end.
In the near-term, domestic demand for construction equipment will likely remain soft as even government-funded projects come to the market in less than desirable small chunks. Many major users and rental fleets still have plenty of idle equipment precluding any rapid rebound in demand. We expect the environment for construction activity in the second half of 2010 and 2011 will improve but be less than robust. The key is financing availability; financial institutions will likely be reluctant to rapidly expand availability.
Overall, construction equipment end market demand looks relatively flat to up modestly in 2010. However, with the end of field inventory liquidation, we still expect production to increase 15 to 20 percent or more as OEMs produce at or near retail demand. Mining equipment may be the one category of heavy equipment market that begins to show recovery in the second half of this year, driven in part by the recent rebound in commodity prices being helped by China-led global growth and the weak U.S. dollar.
We note that the construction sector could get a boost if the administration and Congress can get together and finally address two key areas:
Infrastructure spending by passing a new Highway Trust Fund Bill, which is likely to be at least $450 billion over six years, up from the $286 billion, six-year bill that expired in September 2009
Emission rules, carbon tax rules and any other issue preventing the construction of new power plants in the U.S. from being approved or financed.
Alas, we do not expect movement in these key areas until the spring of 2011 at the earliest.
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