Believe It Or Not, the Recession is OverBy Eli Lustgarten
Article Date: 06-01-2010
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Now, would someone please give this news to the domestic construction sector?
It seems relatively clear that the great recession ended in June/July 2009, followed by a gradual economic recovery led by strong growth in China, India and Brazil. U.S. data is generally positive with clear strength in manufacturing, while Europe and Japan both show signs of slow economic growth. That doesn’t mean that there aren’t numerous (global) concerns that may lead to volatility in world financial markets. The key issues are: (1.) financial stability of sovereign nationals, particularly Greece, Portugal, Spain and Ireland; even in the U.S. there are rising concerns about Fannie/Freddie and state financial conditions, for example Calif., N.Y., and Ill.; (2.)the exit path for all the fiscal/monetary stimulus; and (3.)banks’ exposure to commercial real estate.
Domestically, most capital goods markets are leading the U.S. recovery with the manufacturing ISM Purchasing Managers Index (PMI) showing a strong “V” shaped recovery from a low of 32.5 in December 2008 to 60.4 in April 2010. Residential markets are showing moderate improvement helped by expiring incentives, and inventory change has become a key contributor to GDP growth of 5.6 percent in 4Q2009 and the preliminary 3.2 percent on 1Q2010 (and likely revised upward). In addition, sentiment has improved across the U.S. economy as evidenced by CEO outlook surveys from the Business Roundtable, confidence indexes from the University of Michigan and Conference Board, and the NFIB Small Business Optimism Index.
Alas, the domestic construction sector continues to lag as investment structures was a major drag on 1Q2010 GDP growth. The Bureau of Economic Analysis (BEA) reported that real investment in private nonresidential structures decreased 14 percent after dropping 18 percent in the fourth quarter; real residential fixed investment decreased 11 percent, in contrast to an increase of 3.8 percent in 4Q09; and real government investment in structures dropped 16 percent, following a decline of 14 percent.
The good news is that it appears that we have bottomed, with the modest growth in construction activity that is unfolding being primarily driven by government incentives and the stimulus program. Through the first three months of 2010, total construction on an unadjusted basis, as measured by McGraw-Hill Construction, was up 2 percent compared to a year ago.
The fear within the construction industry is that the modest increases in construction spending would be unlikely to last once the stimulus runs its course. There is little hope for Congress to come up with a transportation/highway bill, aviation legislation or a renewed water trust fund until 2011, after the midterm elections.
In our view, the domestic economic recovery and ongoing cheap money will slowly eliminate the excesses in the economy. We expect construction spending to be down modestly (low to mid-single digit) overall in 2010, helped by the bulk of the $135 billion construction-related package in the stimulus bill finally making its way into the market in the second half of 2010 with some spill-over into next year. For 2011, we expect at least a mid-single digit gain in construction spending led by residential spending and a modest turnaround in the nonresidential sector. By 2012, new legislation should relieve the bottlenecks in infrastructure and other public works markets leading to vastly improved activity.
Construction equipment manufacturers will see a far better 2010, driven by the end of inventory liquidation and surging demand in the emerging markets offsetting lingering weakness in developed countries.
1Q2010 sales for light construction equipment surged 21 percent as strength in Latin America (up 77 percent) and Asia/Rest of World (ROW) (up 55 percent) offset a decline in North America (-4 percent) and Western Europe (-6 percent)
1Q2010 heavy equipment demand rose 40 percent as strength in Latin America (up 81 percent) and China/ROW (up 57 percent) offset a decline in North America (-16 percent) and Western Europe (-14 percent)
We are projecting a 15 to 20 percent improvement in global construction equipment for 2010 driven by broad strength in Latin America (up 60 percent to 65 percent) and China/ROW (up 20 to 30 percent) offsetting weaker NA (+/-5 percent) and European (flat to down 5 percent) demand. We see 2011 looking much better and is potentially the beginning of multiple years of double digit gains in both NA and Europe, enhanced by ongoing demand from the developing countries.
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