March 2013

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Business Outlook 2013: Transition Year for Construction on the Way to Recovery If only politics would get out of the way. Eli Lustgarten The substantial recovery of U.S. construction equipment sales from 2010 to 2012 has been far stronger than underlying activity. While overall construction spending remained challenged, the step-up in demand represented a recovery of sales back to a level more consistent with current construction activity after the dramatic two-thirds decline from its peak in 2006 – sales that were helped by favorable tax policy to help offset regulation-driven price increases. North America (NA) was by far the strength in global demand for construction equipment last year. According to CNH, worldwide demand softened in 2012, falling 6 percent year over year; this is compared to a 27 percent gain in overall equipment demand in 2011 after a dramatic 50 percent gain in 2010. Also, worldwide light equipment demand rose 8 percent last year, led by a 29 percent increase in NA compared to plus or minus 1-2 percent in the rest of the world; heavy equipment demand actually fell 18 percent globally, but was up 24 percent in NA, up 5 percent in Europe/Middle East/Africa. Latin America saw a 6 percent decline, and APAC countries withstood a 32 percent decline driven by very weak conditions in China. While the NA retail sales statistics last year were impressive, the market for construction equipment actually ran out of gas midyear under the pressure of slowing economic growth in NA and the rest of the world. Global politics paralyzed corporate activity in virtually every major end market, especially in the U.S. where the presidential elections, fears about a 2013 budget fight, sequestering and massive tax hikes, and a potential debt ceiling fight all took their toll on corporate confidence and spending. Consequently, most construction equipment manufacturers approached the end of 2012 with a high degree of caution. With manufacturing activity slowing in the U.S. and flat to down in most regions of the world, most construction equipment producers initiated an inventory correction in the second half of calendar 2012 led by a $3 billion reduction at Caterpillar. This reduced activity level will spill over at least into the first quarter of 2013 if not the full first half of the year – particularly in China where material inventory liquidation will follow the February Chinese New Year celebration. There is, however, growing optimism for 2013 and beyond. Most of the crisis issues in the U.S. have passed or have been kicked down the road for a while. More important, the U.S. economy is on the mend. n Housing is bouncing back with starts in 2013 headed for 950,000 or more compared to 780,000 in 2012; home prices are on the rise. n Household debt levels are lower, though combined net worth of U.S. holds still 12 percent below its prerecession peak. n Job growth has somewhat stabilized at 150,000 per month or more. n Energy prices are falling; America is enjoying an oil boom; the natural gas boom is also on the horizon. n The corporate sector is healing. In addition, Europe is addressing its problems, sort of, and China now has clarity over its transition in power, which takes place formally in March. Most forecasts for 2013 construction equipment demand call for flat sales plus or minus 5 percent in virtually every region of the world including NA. Our surveys indicate that in the U.S., rental companies, which bought more than 50 percent of the equipment in 2012, are planning flat expenditures for 2013 with a shift from earthmoving equipment to other products. The only sector facing a difficult outlook for 2013 is mining; our latest surveys suggest that mining capital expenditures will fall at least 10 to 20 percent this year compared to prior estimates of a 5- to 10-percent decline, with NA coal by far being the most pressured. While equipment demand during the first half of 2013 may soften moderately, the key to further increases in equipment demand is growth in underlying construction spending. While the outlook for housing has strengthened and private nonresidential markets show signs of modest improvement – led by increased spending in health care and data centers – public spending is suspect as the outlook for construction and infrastructure outlays are deeply entwined in the discussions on federal spending and cost reduction. Currently, water infrastructure looks to be the most promising for stronger activity in 2013, but the most that pundits hope for is flat spending in the transportation sector for 2013. If sequestering were indeed to occur, the blow of the cuts would be felt more in 2014. We're in a transition year for the construction sector. Push the politics aside, and the construction industry is poised for several years of moderate growth. Eli Lustgarten (elustgarten@aol. com) is president of ESL Consultants, an industrial consulting firm. March 2013 | Construction Equipment Distribution | www.cedmag.com | 53 53_business outlook_KP.indd 53 2/27/13 4:42 PM

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