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Inventory Overhang Abates, Time For End Markets To Grow Residential markets offsetting dips in private nonres and public construction. Field reports indicate that demand for construction equipment at year-end 2013 was robust. The strength was likely driven by tax buying in anticipation of the expiration of the bonus depreciation and Section 179 incentives, and possibly to beat the Final Tier 4 emissions mid-single-digit price increases. Most of the inventory overhang in the channel has cleared, suggesting that any uptick in purchases will favorably impact manufacturers through increased production. Now it's up to construction spending to drive industry growth. Unfortunately, industry momentum is not on our side, as construction spending at the end of 2013 was far from impressive. December 2013 construction spending inched up to $930 billion, only 0.1 percent over November (which was revised down by $5 billion) and up 5.3 percent over December 2012. Full-year 2013 spending of $898 billion was up only 4.8 percent, a disappointment from the 5 to 8 percent consensus as we entered the last part of the year. The strength in residential markets continued offsetting a disappointing dip in private nonresidential and public construction. Private residential spending rose 2.6 percent in December and was up 18 percent for the full year, in line with forecasts of up 15 to 20 percent led by the multifamily sector (up 44 percent), single family (up 28 percent), and remodeling (up 3.8 percent). Private nonresidential spending dipped 0.7 percent in December, was down 1.7 percent from December 2012 and was down 0.4 percent for all of 2013. This was clearly a disappoint- ment compared to consensus fore- casts of up 4 to 7 percent for private nonresidential spending for 2013 as we entered the fourth quarter of the year. The largest private nonresiden- tial segment, power, fell 14 percent in 2013, principally reflecting very difficult comparisons due to a surge of wind projects at the end of 2012 to qualify for the expiring production tax credit. Public construction slumped 2.3 percent in December and was down 2.8 percent for the full year of 2013, slightly better than the down- ward projections of 3 to 5 percent. The two largest public segments, which account for more than half of spending, saw highway and street construction rise 1 percent and public educational spending fall 8.4 percent. Optimism still exists for 2014 with the expectation that contractors will find more projects to bid on in the coming year. Residential construction ended 2013 with strong momentum, which should carry it at least through the first half of 2014. We still expect residential spending to rise at least 10-plus percent, led by multifamily construction and somewhat less expansion in single family. Private nonresidential spending (55 percent of total nonresidential outlays) appears to be poised for a rebound in the mid- to upper-single digits in 2014. According to the Associated General Contractors of America, gains of 6 to 10 percent are possible, driven by double-digit gains in power – oil- and gas-related spending and associated projects such as pipelines, railroads, manufacturing plants, natural gas and oil storage facilities, and even refueling complexes for natural gas-powered vehicles, along with lodging and ware- house construction. Even office and retail should show modest gains. Public spending outlook, however, remains flat to slightly negative. We are holding to our low double- digit growth for small and medium (light) equipment in part to replenish inventory sold during the tax-driven surge at year-end 2013, and in part reflecting the continuing optimism by dealers that construction growth will continue, especially with housing starts generally projected to exceed 1.1 million in 2014. In addition, the Final Tier-4 (FT4) emissions schedule allows manufacturers of equipment at the lower end of the scale, under 174 hp, to phase in the new compliant engines all through 2014 and into 2015. We would not be surprised to see some purchases of equipment to beat the upcoming price increases (estimated at 4 to 6 percent) for the FT4 models. The outlook for larger equipment (over 174 HP) is more uncertain. FT4 compliant equipment will have to be introduced this year at higher prices. Unfortunately, mining equipment demand is still a disaster, off well over 50 percent, though the hope is that the marketplace stabilizes in 2014- 15, allowing demand to move toward a more normal replacement level (modest improvement in demand) next year. The key for increased activity probably lies with the oil and gas sector, particularly if we could get needed pipeline approvals such as the controversial Keystone XL Pipeline. Structurally, the construction sector is poised for multiple years of modest to moderate gains, hopefully meeting our targeted 6 to 10 percent annual growth projection. ELI LUSTGARTEN (elustgarten@aol. com) is president of ESL Consultants, an industrial consulting firm. ELI LUSTGARTEN Business Outlook March 2014 | Construction Equipment Distribution | www.cedmag.com | 49