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Business Outlook While Industrial Activity Begins to Sag, Construction Spending Bulb Burns ELI LUSTGARTEN Modestly Brighter Residential and private nonresidential are on positive paths. The summer of 2012 appears to have ended on a soft note for the indus- trial sector. The ISM PMI in the U.S. was 49.6 in August, the third straight month below 50. Europe remains mired in recession with the EU PMI at 45.1 and China continues to report weaker-than- expected economic activity with the HSBC PMI for China at 47.6. Politics continue to plague Europe, China, and the U.S., and we are now hearing that some industrial end market demand has begun to plateau or soften, particularly heavy trucks, farm equip- ment, and mining equipment – espe- cially coal. Even construction equipment rate of growth in 2H2012 has begun to ebb as rental company equipment purchases, which have accounted for more than half of industry demand this year, appear to have begun to trail off from the first half of the year. As we had previously speculated, we are now hearing anecdotal stories about manufacturers adopting a Wait- and-See attitude in the second half of the year. Industrial activity has held at about recent levels and most previ- ously announced capital spending programs have continued. There is a clear reluctance, however, to approve new programs of size, and programs in more cyclical sectors such as mining have been postponed or stretched. BHP Billiton, the largest mining company globally, recently announced that they have 20 major projects currently underway (production for 2015) implying that they are largely committed for F2013. But capital spending levels are likely to be flat to down modestly, and no new project approvals are expected over the next year. While the general outlook for indus- trial America may indeed be flat to down for the next several quarters as activity plateaus and inventories are modestly reduced, construction activity may be the one area in the U.S. where the bulb may be getting a bit brighter. Construction spending has been the most challenged sector within the U.S. economy since the current recovery began in mid-2009. However, residen- tial construction finally looks to be on a modest recovery path and private nonresidential spending also appears to be improving. The most recent blue-chip survey of economists targets 2012 housing starts at about 751,000, consistent with the most recent forecast of the National Association of Home Builders and 22.7 percent above the 612,000 reported in 2011. Further, housing is pegged by economists to rise nearly 20 percent to about 895,000 starts for 2013, (NAHB is at 903,000), indicating that as long as the domestic economy continues to muddle along, the recovery of housing should continue. We note that the level of housing starts likely in 2012, while up more than 22 percent, is still 50 percent below what most economists would consider to be a normal level of activity. The American Institute of Architects also recently revised its projection for nonresidential construction spending for 2012 to up 4.4 percent (original forecast in January 2012 was up 2.1 percent) with a further gain likely in 2013 of about 6.2 percent. The strength in spending is in private nonresiden- tial, led by commercial construction (up 5.7 percent in 2012 and 10.2 percent in 2013) and driven by: n Increased industrial spending (up 12.9 percent in 2012 and 8.1 percent in 2013) n Hotels (up 9.5 percent in 2012 and 18.2 percent in 2013) n Retail spending (up 6.2 percent, 9 percent) n Office (up 4.7 percent, 8.7 percent). Institutional spending will show much more modest growth of 0.7 percent in 2012 and about 3 percent next year with public nonresidential spending flat to down 5 percent in both years, with likely weak high spending (+/- 0 percent) during the same period. The AIA forecast parallels our published outlook of spending in 2013-2018 to rise at least 6-10 percent in the private sector. Our view is that there will be new drivers over the next few years such as shale-based gas and oil, Panama Canal widening, and more elderly and kid-related spending. It is conceivable that we are at a major turning point within the domestic economy. As the industrial sector sags somewhat under the pres- sure of global politics, the construc- tion sector level of activity may actually brighten somewhat. We are not arguing dramatic growth, but a more moderate, sustained upturn for the next few years. This is clearly critical for the health of construction equipment demand. The substantial recovery of U.S. construc- tion equipment sales from 2010 to 2012 has been far stronger than underlying activity and represented a recovery of sales back to a level more consis- tent with current construction activity after the dramatic two-thirds decline from its peak in 2006 to the trough in mid-2009, helped by favorable tax policy to help offset regulatory-driven price increases. ELI LUSTGARTEN (elustgarten@aol. com) is president of ESL Consultants, an industrial consulting firm. October 2012 | Construction Equipment Distribution | www.cedmag.com | 55