Issue link: http://read.dmtmag.com/i/330408
Construction Equipment Market Slowly Improving First five months disappoint, but T-4 final phase-in and oil/gas could bump demand later this year. The weak 1Q2014 economy took a toll on the construction sector. GDP in the U.S. was reported at up 0.1 percent and was probably negative after revisions. While the weather likely played a role, the overall momentum of the U.S. and global economies seemed to fade as we entered 2014 as evidenced by the weak economic reports in the U.S. and Euro-zone, the latter of which just reported GDP up 0.2 percent in the March quarter. Construction industry participants started 2014 with great expectations. However, activity during the first five months of the year has been some- what disappointing. In the housing sector, the recently released index of builders' confidence in the market for single family homes fell 1 point to a seasonally adjusted level of 45 in May, the lowest level in 12 months according to the National Association of Home Builders. After reaching a high of 58 in August 2013, the index has been below 50 for four months in a row, which signals unfavorable business conditions and is driven by builders' negative view of current sales conditions. Most attribute the weak- ness to the severe winter season and pressure from higher mortgage rates. While expectations are still for housing activity to improve over the next six months, the pace may be somewhat slower as evidenced by recent reduced projections for housing starts. The NAHB recently reduced its estimate for 2014 from 1.16 million to 1.086 million; John Deere virtually mirrored the NAHB reduction with their revised housing outlook of 1.050 million as part of their recent second quarter earnings report. Nonresidential spending has also been a mixed bag. In March, private nonresidential outlays rose 0.8 percent for the month and 8.6 percent compared to March 2013; public construction spending however slipped 0.6 percent and 0.8 percent respectively, reaching the lowest level since November 2006. Further, the Rockefeller Institute of Government reported that tax collections from 46 states increased by an insignificant 0.7 percent YOY in 1Q2014, the weakest growth in the first quarter of 2010. Most analysts already forecast sluggish federal outlays, and a slowdown in tax receipts could result in less money for state-funded construction. The weaker first quarter has resulted in a reduction of AGC's 2014 forecast for nonresi- dential construction growth from 6-10 percent down to between 4-8 percent. We believe the worst of the data is behind us. We note that the reduced housing forecasts are still up about 15 to 17 percent over the 929,000 reported in 2013. Further, the FW Dodge Momentum Index, a measure of initial nonresidential projects in plan- ning, rose 8.4 percent in April 2014. This index, which appears to lead construction spending for nonresiden- tial building by up to a year, retreated in early 2014 through March after showing steady gains during most of 2013. With the gains in April, the Momentum Index resumed its upward track and is up 17.8 percent compared to April 2013. Despite slower-than-expected construction outlays in the first part of the year, North American Free Trade Agreement (NAFTA) construction equipment spending rose 8 percent (light/small to medium equipment) to 10 percent (heavy/large equipment) according to CNH Global. Most dealers remain optimistic for activity in 2014 and readjusted inventory levels to meet anticipated demand. We believe it is now up to increased construction spending to drive equipment demand. Our low double-digit growth forecast for light equipment remains intact as spending improves and activity begins to normalize after the diffi- cult 1Q14 weather. We would also not be surprised to see some pre-buy of equipment toward the end of the year to beat the upcoming 4 to 6 percent price increases related to the introduction of Final Tier-4 (FT4) emissions, which will begin to be phased in this year and must be completed in 2015. For heavy equipment demand, weak mining activity is still taking its toll, with further reduction in coal mining in Appalachia. We also see uncer- tain activity in the highway sector, with federal funds operating on a continuing resolution that expires in September and the Highway Trust Fund projected to run out of money this summer. Demand may hold up, for a while, too, to beat expected FT4 price hikes. The key for increased activity for heavier equipment probably lies with the oil and gas sector, particularly if we could get needed pipeline and liquefied natural gas (LNG) project approvals such as the controversial Keystone XL Pipeline. Recent trade publications indicate that more than $21 billion in LNG production projects could begin production this year in the U.S. and Canada with government approval – and many more to come. ELI LUSTGARTEN (elustgarten@aol. com) is president of ESL Consultants, an industrial consulting firm. ELI LUSTGARTEN Business Outlook June 2014 | Construction Equipment Distribution | ZZZFHGPDJFRP| 55