CED

January 2014

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Business Outlook Outlook 2014: Optimism Continues To Grow Most world markets stabilize; U.S. construction activity climbs. ELI LUSTGARTEN A recent Barron's headline talked about "Dreaming of a Just-Right 2014." As the U.S. economy enters 2014, macroeconomic indicators have been improving, which is similarly generating optimism for improved economic growth both here and abroad. After all, the U.S. economy grew 2.8 percent in 2012, about 1.7 percent or 1.8 percent in 2013 (year over year) and the consensus forecast for 2014 of about 2.6 percent does not seem much of a stretch. The manufacturing sector has righted itself and the Institute of Supply Management Purchasing Managers Index has shown remarkable strength since last summer. Moreover, economic activity is also seen to be improving in most developed countries, led by positive ISM PMIs in Europe. Even economic activity in most emerging markets has begun to stabilize. The ingredients for the upcoming modest improvement in economic growth include a series of big transitions. Barron's argues that these changes include reduced monetary support (Tapir), a shift toward more organic growth, and hopefully the Wall Street boom finally trickling down to Main Street. The big surprise: Even Congress has helped by agreeing to a modest two-year budget deal to keep the government operating. In the current environment, the construction sector is growing. In 2013, construction spending is likely up about 5 to 8 percent (versus 9 percent in 2012) according to the Associated General Contractors of America. Residential spending is growing about 15 to 20 percent (versus 15 percent in 2012) led by the multifamily sector. Private nonresidential spending (55 to 60 percent of total nonres.) is up 4 to 7 percent in 2013 (versus 16 percent in 2012) led by manufacturing, warehousing, data centers, hotel remodeling, office, and retail. Healthcare, private education and power are about flat. However, public nonresidential spending is likely to decline 3 to 5 percent in 2013 (versus -3 percent in 2012) with highway flat, education down 5 percent, federal and local spending down while state spending is flat. Meanwhile, construction spending hit a four-year high in October 2013. Construction employers added 17,000 jobs in the sector in November, bringing employment to 5.85 million, the highest levels since 2009. The unemployment rate among construction workers has fallen from 12.2 percent in November 2012 to 8.6 percent in November 2013, though employment in the sector was still 1.9 million below the April 2006 peak. The outlook for 2014-2017 is for construction spending to rise about 6 to 10 percent per year. Main drivers are shale (both gas and oil), Panama Canal widening, and increased spending on elderly and kids. Housing and retail should continue to improve, but public spending is likely to remain negative for the foreseeable future. Our assessment for 2013 construction equipment demand has improved modestly for light (small to medium) equipment at flat to down 5 percent (was forecast flat to down 10 percent) in North America though heavy equipment is still expected to decline 5 to 10 percent, driven by the weakness in mining. Europe still is projected to have a 5 to 10 percent decline in demand; Latin America remains on track for about a 5 to 10 percent gain (was forecast up 9 percent) underscored by resurgence in government spending across most regions, led by civil construction, infrastructure, and energy. At the time of this writing in mid-December, China's reviving outlook for 2H2013 continues to support expectations for a modest improvement. Construction activity in the U.S. should continue to improve in 2014, driven by further growth in housing and higher spending in private nonresidential construction markets. We look for double-digit growth for light and medium equipment demand next year, but a 5 to 10 percent decline in larger, heavy equipment. Mining's multiyear outlook is for the sector output to stabilize in 2014-'15 and demand for equipment returning toward replacement level hopefully in 2015, well below the sales recorded in 2010-2012. Besides macroeconomics, the key input into the equipment buying decision in 2014-2015 is Tier-4 Final emissions regulations, which become effective for larger equipment over 174 horsepower in 2014 and all equipment in 2015. Unlike the truck emissions cycle, the good news is that Tier-4 Final costs are probably only 60 percent of the costs associated with moving to Tier-4 Interim in 2011-2013. However, that still suggests a mid-single-digit price increase (estimated at 4 to 6 percent), though less onerous than the doubledigit price increases that characterized the move to Tier-4 Interim. Structurally, the construction sector is poised for multiple years of modest to moderate growth. ELI LUSTGARTEN (elustgarten@aol. com) is president of ESL Consultants, an industrial consulting firm. January 2014 | Construction Equipment Distribution | www.cedmag.com | 65

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