The Outlook for Construction Machinery/media/others/events/2008/economic...The Outlook for...
Transcript of The Outlook for Construction Machinery/media/others/events/2008/economic...The Outlook for...
December 5, 20081
The Outlook for Construction
Machinery
Donald A. Johnson
Chief Economist
Caterpillar Inc.
December 5, 20082
Cautionary and Safe Harbor Statement
"The presentation contains certain assumptions, trends and projections
on the global economy, which may impact the construction, mining
and petroleum industries. The data used in this presentation are either
from Caterpillar’s public filings or from external sources outside of
Caterpillar, as indicated in the specific tables discussed in the
presentation. Audiences are cautioned not to place undue reliance on
projections in this presentation, as they are only relevant as of the date
of this presentation and as actual results of the global economy may
materially differ from the projections. All opinions or projections
expressed in this presentation are those of the presenter and not of
Caterpillar. Therefore, Caterpillar is not responsible for any
misstatements or omissions and undertakes no obligation to revise any
of such opinions or projections whether as a result of new information,
future events or otherwise."
December 5, 20083
Dealer Reported Retail Statistics - Machines
Source: Changes computed using dealer reported deliveries of machines to end users in
constant dollars; posted by Caterpillar Investor Relations on www.cat.com.
Weaknesses in
North America
and Europe
Latin America +35%
Asia/Pacific +16%
Europe/Africa ME/CIS -9%
North America -12%
World -2%
Change from
Year Earlier
December 5, 20084
Caterpillar Machinery Sales, 2007
Source: Caterpillar Inc. 2007 Annual report, p. 39.
North America 12,596
Europe/Africa Middle East/CIS 8,588
Asia/Pacific 4,026
Latin America 3,149
Outside North America 15,763
Million
Dollars
Over 55%
outside North
America.
December 5, 20085
New Machine Distribution to End Users, 2007
Heavy Construction 34
Mining 22
General Construction 20
Quarry & Aggregates 10
Industrial 5
Paving 4
Forestry / Other 5
% Share
Source: Caterpillar Inc. 2007 Annual report, p. 38.
Construction
and mining are
main drivers.
December 5, 20086
Preliminary Outlook for 2009
North America
• Recession in the United States
• Fed Funds rate to 1% or lower; substantial liquidity increases
• No improvement in the economy until late in the year
Other Developed Countries
• Recession in Europe
• Recession in Japan
Developing Economies
• Many positives of this cycle still in place
• Expect most to halt, or reverse, policy tightening
• Should fare better than developed economies
Source: Caterpillar Financial Release, October 21, 2008, pp. 14-15.
Unfavorable
environment ahead.
December 5, 20087
Housing – An Industry in Distress
2,073
1,812
1,341
950 1,000
2005 2006 2007 2008 2009
United States (000 units)
Source: Haver Analytics/Census Bureau/Business Economics
3 years of
decline
December 5, 20088
80
100
120
140
160
180
200
220
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Housing Problem: Declining PricesDown over 20%
from the peak
Source: Haver Analytics, S&P, Fiserv, and MacroMarkets LLC.
Case-Shiller Index, January 2000 = 100
Needed to match decline
in the Great Depression
December 5, 20089
Housing Problem – No One Wants to Buy
0
200
400
600
800
1,000
1,200
1,400
1990 1995 2000 2005
Approaching
1990s low
Source: Haver Analytics, Census Bureau.
New Single Family Homes Sold, Thousand Units
December 5, 200810
Housing Problem – Plenty for Sale
0
2
4
6
8
10
12
1990 1995 2000 2005
Not
decreasing
Source: Haver Analytics, Census Bureau.
New Single Family Homes for Sale, Months of Sales
December 5, 200811
Housing Problem – Cautious Lenders
0
50
100
150
200
250
300
1990 1995 2000 2005
May need 5%
mortgage rate
Source: Haver Analytics, Federal Reserve Board.
Spread between 30-Year Mortgage Rate and 10-Year Treasury
(Basis Points)
December 5, 200812
Housing Problem – Bad Loans
0
1
2
3
4
5
6
1991 1993 1995 1997 1999 2001 2003 2005 2007
Further increase in
repossessions
Source: Haver Analytics, Federal Reserve Board.
% of Mortgage Loans Delinquent at Commercial Banks
December 5, 200813
Total Housing Supply
0
500
1,000
1,500
2,000
2,500
3,000
1945 1955 1965 1975 1985 1995 2005
Worst year
since 1945
Source: Haver Analytics, Census Bureau.
New Housing Units Produced, Thousand Units
Housing Starts
Housing Starts + Mobile Homes
December 5, 200814
Households Drive Housing Stock
50,000
70,000
90,000
110,000
130,000
1965 1975 1985 1995 2005
Stock averages
13% higher than
households
Source: Haver Analytics, Census Bureau.
Housing Stock and Household, Thousands
Households
Housing Stock
Second and
vacant homes
December 5, 200815
New Units and Stock Growth
0
20,000
40,000
60,000
80,000
1965 1975 1985 1995 2005
Units produced
exceeds growth
in stock
Housing Stock and New Homes, Thousand Units
Change in Housing Stock
Cumulative Housing Starts
(includes mobile homes)
Source: Haver Analytics, Census Bureau.
Replacement of
Homes
December 5, 200816
U.S. Housing Needs
Primary
111
Million
Other
19
Million
Housing Stock
Increases 1%
yearly
1.1 million new
units yearly
Increases
1.5% yearly
0.3 million new
units yearly
0.4% of stock
yearly
0.5 million new
units yearly
Replacement Needs
Demand
Primary 1.1
Other 0.3
Replace 0.5
Total 1.9
Supply
Mobile 0.1
Starts 1.8
Total 1.9
Driven by
population
Source: Haver Analytics, Census Bureau, Business Economics.
December 5, 200817
Types of Housing
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
1990 1995 2000 2005
Likely to be more
apartments
Source: Haver Analytics, Census Bureau.
New Housing Starts, Thousand Units
Single Family
Multi-Family
December 5, 200818
Building Construction – Heading for Trouble
3.4
-3.9 -4.2
2007 2008 2009
% Change in Building Orders
Source: McGraw-Hill/Business Economics
Orders are
declining
December 5, 200819
Recoveries in U. S. Nonresidential Structures
80
90
100
110
120
130
0 5 10 15 20 25 30 35
Re
ce
ssio
n E
nd
= 1
00
Decline
5 Quarters
Weak Growth
9 Quarters
1991:Q1 to
2000: Q4
2001:Q4 to
2008: Q3
Source: Data from Bureau of Economic Analysis, Haver Analytics
Recently moved ahead
of last recovery
December 5, 200820
30
40
50
60
70
1996 2001 2006
A Leading Indicator Is Down Signals worse
decline than in
last recession
Source: Haver Analytics, American Institute of Architects.
Architectural Billings Index (+50 = Increasing)
Signals future decline
December 5, 200821
Prices Are Dropping
50
100
150
200
250
300
1994 1996 1998 2000 2002 2004 2006 2008
Declined for
several quarters
Source: Haver Analytics, MIT Center for Real Estate.
Price Indices (1st Quarter 1994 = 100)
Offices
Retail
December 5, 200822
Delinquencies Are Rising
0
2
4
6
8
10
12
14
1991 1993 1995 1997 1999 2001 2003 2005 2007
Additional problems
for banks
Source: Haver Analytics, Federal Reserve.
% of Commercial Real Estate Loans Delinquent at Commercial Banks
December 5, 200823
Vacancy Rates Are Rising
0
5
10
15
20
25
1986 1989 1992 1995 1998 2001 2004 2007
Bottomed at higher
rates than in the
last cycle
Source: Haver Analytics, CB Richard Ellis.
Vacancy Rates (%)
Offices
Industrial
December 5, 200824
U. S. Growth and Construction since 1929
0
2,000
4,000
6,000
8,000
10,000
12,000
1929 1939 1949 1959 1969 1979 1989 1999
0
50
100
150
200
250
300
350
400
450
500
Billions of 2000 Dollars
GDP
Structures
Source: Haver Analytics, Bureau of Economic Analysis.
Construction lagging
the economy.
December 5, 200825
No Net Growth in U. S. Business Structures
-25
0
25
50
75
100
125
150
175
200
1929 1939 1949 1959 1969 1979 1989 1999
4.9%
-2.8%
Real Net Investment in Structures: Billion 2000 Dollars
Source: Bureau of Economic Analysis, Haver Analytics
Depreciating
the stock.
December 5, 200826
22.6
19.821.5
20.2
14.713.2
15.6
20.1
18.219.0
22.6
26.1
Commercial Hospitals Manufacturing Power
1945 1982 2007
Structures Have Aged About matching the
oldest on record
Average Age of Private Nonresidential Structures (Years)
Source: Bureau of Economic Analysis, Haver Analytics
December 5, 200827
Nonbuilding Construction – More Delays
-0.9
-4.8
0.6
2007 2008 2009
% Change in Nonbuilding Orders
Source: McGraw-Hill/Business Economics
But we will
probably try!
December 5, 200828
Government Structures
-25
0
25
50
75
100
125
150
1929 1939 1949 1959 1969 1979 1989 1999
1.3%
Real Net Investment in Structures: Billion 2000 Dollars
Source: Bureau of Economic Analysis, Haver Analytics
Inadequate
investment.
December 5, 200829
State Budget ProblemsWill impact
construction.
December 5, 200830
24.0
17.016.2 16.2
21.6
24.1
Schools Highways
1945 1969 2007
Government Structures Are Aging Back to WWII
ages
Average Age of Government Nonresidential Structures (Years)
Source: Bureau of Economic Analysis, Haver Analytics
December 5, 200831
U.S. Infrastructure Indicators
1. 25% of bridges are structurally deficient or obsolete
2. 50% of waterway locks are obsolete
3. 20% of airports have runways that are in poor to fair
condition
4. 30% of dams are at or over their designed lifespan
5. Traffic congestion costs $63 billion yearly
Source: Congressional Research Service, American
Society of Civil Engineers, Bureau of Transportation,
Federal Highway Administration
December 5, 200832
European Housing Permits
EU 27: Housing Permits
(SA, 2000 = 100)
80
90
100
110
120
130
140
Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08
Turning down
sharply
Source: Statistical Office of the European Communities, Haver Analytics
Jun. 2008
December 5, 200833
Developing Country Economic Indicators
1990s Latest
GDP growth (%) 3.5 6.9
Inflation (%) 51.4 9.4
Current account (Billion $) -65 785
Foreign Debt/GDP (%) 39 26
Liquid Assets (Trillion $) 1.1 8.5
Still looking better
than in the past
Source: IMF/World Bank/Business Economics Estimate
December 5, 200834
Construction in Developing Countries
-3.3
-0.6
1.6
1.9
6.9
7.6
9.4
11.2
12.4
14.5
14.7
17.7
Ukraine
S. Korea
Mexico
Turkey
Venezuela
Argentina
Brazil
India
Chile
S. Africa
Poland
Russia
Most still showing
good gains
Year-to-date Percent Changes
Source: Haver Analytics
December 5, 200835
Mining Is a Growing Industry
Source: U. S. Geological Survey
6.6
3.7
1.0
11.8
3.9
4.5
7.8
1.1
2.4
2.8
3.0
3.1
3.7
3.8
Coal
Zinc
Gold
Iron Ore
Copper
Nickel
Aluminum
Average Annual Percent Growth
Long-term
Current cycle
Strong growth
this cycle
December 5, 200836
Worldwide Metals Exploration Budgets
0
2
4
6
8
10
12
14
1989 1992 1995 1998 2001 2004 2007
Billions of Dollars
Source: Metals Economics Group/Business Economics’ estimate of real spending
6 years of double-digit
percentage increases
Actual
1989 Prices
December 5, 200837
Commodity Prices
Dollars per Market Unit
Threshold for new investment
Recent Peak Price
Latest Price
146
129
49
70
5041
WTI Crude Oil CA Coal
13.28
6.52 6.50
HH Natural Gas
4.07
1.631.30
Copper
Prices still
favorable for
investment
December 5, 200838
Key Points – 2009 Outlook
Most developed countries in recession
• Construction is already declining
• Some recovery in U.S. in last half year
• No recovery in Europe or Japan in 2009
• Likely to see new lows in interest rates
Developing countries to fare better
• Still retain strengths shown in the current recovery
• Have halted or reversed policy tightening
• Expect most will use reserves to combat serious difficulties
Source: Caterpillar Financial Release, October 21, 2008, pp. 14-15.
Cautious outlook;
significant risks