Construction in Early Stage of RecoveryBy Eli Lustgarten
Article Date: 10-01-2010
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Expect to wait two to four years before ’06 levels return in most industrial sectors.
Industrial companies are hearing a nearly uniform message from eco-nomists about the outlook for the remainder of 2010 and 2011. The consensus view is that the recent soft patch of economic growth is real but not likely fatal, and a double-dip for now is unlikely, barring any outside shock. More important, the pace of economic recovery will likely be slower from here onward and a return to 2006/2008 peaks for most industrial sectors will still take two to four years or more.
This economic viewpoint is very consistent with our overview of the unfolding economic outlook as presented at the AED/Lawson Executive Forum. Capital goods markets are leading the U.S. recovery with manufacturing ISM Purchasing Managers Index (PMI) having shown a strong V-shaped recovery that is now rolling over somewhat. Inventory change has been a key contributor to GDP growth but will start to wane. The question is how long will the bull-whip (supply chain rebuilding and stabilizing) effect continue. The U.S. (and Europe) housing market is stable at low levels; nonres. activity is still slipping.
The key takeaways for the second half of 2010 and beyond are:
Slow industrial capacity utilization recovery in 2010
2010 will favor demand for short-cycle, productivity- and efficiency-related equipment
Current economic data is mixed; for now it is slower growth, not double dip
The bull whip effect will likely taper out in 2H2010
2011-2012: Finding the new level of normal demand for most end markets
Specifically, the outlook for 2011 is for continuing gains in the industrial sector. Trucks are clearly expected to be the strongest industrial growth market next year, with the focus being on just how strong. Ag markets are now expected to continue to show more moderate gains of 5 to 10 percent in both 2010 and 2011, benefiting from the atypical weather patterns outside the U.S., which has improved the outlook for commodity prices and farm income. After big gains in 2010 for fluid power (bull-whip effect – up 30 to 35 percent) and construction equipment (exports, end of inventory liquidation – up 25 to 30 percent or more), the 2011 outlook is for more moderate gains of around 10-plus percent, more closely reflecting end market demand.
The construction sector is now in the early stages of recovery. The weak construction environment of 2009 continued during the first half of 2010. We believe the environment for construction activity for the rest of 2010 and 2011 will likely improve but be less than robust with the key being financing availability. We still expect financial institutions to continue to be reluctant to rapidly expand availability.
– The NAHB’s most recent forecast of housing starts for 2010 of 656,000 (recently lowered to
Housing will likely show improvement over the next two years, rising from about 554,000 starts in 2009 to perhaps 625,000 to 675,000 plus in 2010 and perhaps 850,000-900,000 or more in 2011.
632,000), up from 554,000 in 2009 is no longer viewed as extremely conservative.
– NAHB’s 2011 forecast of 906,000 for 2011 is less certain today.
Nonresidential construction is expected to fall 5 to 15 percent in 2010 and perhaps stabilize in 2011 before resuming growth sometime that year.
Infrastructure spending will likely be flat into 2011, or at least until a new Highway Bill is passed. History suggests that growth will resume about a year after it has been funded.
For 2011, we expect at least a mid-single digit gain in construction spending led by residential 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 improve activity.
Production of construction equipment should continue to be strong for the remainder of 2010, reflecting increased purchases in developing countries for mining equipment that will drive export demand. Rental demand has also begun to increase as construction activity improves and both rental companies and sophisticated buyers engage in a modest pre-buy of equipment to reflect the higher prices that will accompany the new Interim Tier 4 emissions regulations. We expect at least 10 to 15 percent higher prices for IT4 machines, as the engine needs to be upgraded for extra cooling capacity because it won’t have the airflow of a truck through the radiator going at 60 mph.
We do note that current sales of construction equipment are well below replacement rates in North American even at current levels of construction activity. With more normal activity, construction equipment demand should rise materially.
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