Be Patient With the RecoveryBy Eli Lustgarten
Article Date: 12-01-2010
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2011 to be a better year for all classes of machines.
The domestic economic recovery continues to putt-putt along. Real GDP increased at about a 2 percent rate in the third quarter of 2010, up from 1.7 percent in 2Q2010. While moderately better (and perhaps slightly stronger than reported based on recent trade figures), the domestic economy continues to be driven by inventories for restocking and rebalancing the manufacturing supply chain. Inventory build of $115.5B in 3Q10 accounted for 1.44 percent of the 2 percent GDP increase and compares to the $68.8B increase in inventories, or 0.8 percent of the 1.7 percent growth 2Q10 GDP growth, and $44.1B or 2.6 percent of the 3.7 percent 1Q10 GDP increase.
The inventory rebuild, often referred to the as the bull-whip effect, of sharply higher component/raw material purchases on a small gain in production, is clearly coming to an end, intensifying pressure for public policy responses that to date have resulted in new round of Quantitative Easing (QE2) by the Federal Reserve.
There were some modest signs of life for the construction sector. Real investment in private nonresidential structures rose 3.9 percent in 3Q2010 after falling for eight straight quarters. The improvement was more than offset by a 29 percent decline in real residential investment, a reversal of the 26 percent gain in 2Q10, which reflected the end of the home buyer's tax credit in April. Government investment in structures also registered an 8.8 percent increase following a 9 percent second quarter gain, boosted by federal spending on stimulus projects, military base realignments, and the Gulf Coast recovery programs.
We continue to believe the environment for construction activity for the rest of 2010 and 2011 will likely improve, but will be less than robust, with the key being financing availability. We still expect financial institutions to continue to be reluctant to rapidly expand availability.
Domestic construction equipment end market demand looks up moderately for the remainder of 2010 and 2011, with better machine sales from low levels. The improvement reflects aging rental fleets and higher utilization and dealers likely adding some inventory. Production will increase 20 to 30 percent in 2010 or more due to the end of inventory liquidation and very strong sales outside North America driving higher exports.
- Housing will likely show muted improvement in 2010, rising from about 554,000 starts in 2009 to perhaps 605,000 to 610,000-plus in 2010. The National Association of Home Builders continues to ratchet down its forecast for 2010, which has drifted downward from 656,000 to 605,000 over the past several months. We are still hopeful for a rebound in 2011 to perhaps 750,000 to 800,000 units (the NAHB is currently at 804,000 or 100,000 units below prior forecasts).
- Total nonresidential construction will probably decline about 10 to 20 percent in 2010 with private nonresidential construction down 15 to 25 percent and public construction about flat to down 5 percent in 2010. We expect nonresidential markets to stabilize in 2011 before resuming growth sometime that year.
- Infrastructure spending will likely be relatively flat into 2011 or at least until a new highway bill is passed. History suggests that growth will resume about a year after the new highway bill has been funded.
- 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 (up 3 to 10 percent).
- By 2012, new legislation should relieve the bottlenecks in infrastructure and other public works markets leading to vastly improve activity.
FY2011 will likely be a better year for all classes of machines with sales and production rising at least double-digits (10 to 15 percent) and at least similar gains in 2012, assuming sustained growth in the global economy. Global mining equipment demand is expected to be up 10 percent to 20 percent in 2011 and perhaps an additional 10 percent to 15 percent in 2012. We also expect at least 5 to 15 percent higher prices for interim Tier 4 (IT4) machines, as they are introduced into the market over the next few years.
- The domestic upturn will initially favor smaller to medium equipment (more units, less dollars), which has been declining for the past three to four years.
- Global mining equipment demand has fully recovered because of demand from emerging markets.
We should note that current equipment sales in North America are well below "normal" replacement levels, even at the current level of construction activity. With more normal industry activity, construction equipment demand should rise materially from current levels.
Eli Lustgarten (email@example.com) is president of ESL Consultants, an industrial consulting firm.
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