the outlook for construction machinery/media/others/events/2008/economic...the outlook for...

December 5, 20081

The Outlook for Construction

Machinery

Donald A. Johnson

Chief Economist

Caterpillar Inc.

December 5, 20082

Cautionary and Safe Harbor Statement

"The presentation contains certain assumptions, trends and projections

on the global economy, which may impact the construction, mining

and petroleum industries. The data used in this presentation are either

from Caterpillar’s public filings or from external sources outside of

Caterpillar, as indicated in the specific tables discussed in the

presentation. Audiences are cautioned not to place undue reliance on

projections in this presentation, as they are only relevant as of the date

of this presentation and as actual results of the global economy may

materially differ from the projections. All opinions or projections

expressed in this presentation are those of the presenter and not of

Caterpillar. Therefore, Caterpillar is not responsible for any

misstatements or omissions and undertakes no obligation to revise any

of such opinions or projections whether as a result of new information,

future events or otherwise."

December 5, 20083

Dealer Reported Retail Statistics - Machines

Source: Changes computed using dealer reported deliveries of machines to end users in

constant dollars; posted by Caterpillar Investor Relations on www.cat.com.

Weaknesses in

North America

and Europe

Latin America +35%

Asia/Pacific +16%

Europe/Africa ME/CIS -9%

North America -12%

World -2%

Change from

Year Earlier

December 5, 20084

Caterpillar Machinery Sales, 2007

Source: Caterpillar Inc. 2007 Annual report, p. 39.

North America 12,596

Europe/Africa Middle East/CIS 8,588

Asia/Pacific 4,026

Latin America 3,149

Outside North America 15,763

Million

Dollars

Over 55%

outside North

America.

December 5, 20085

New Machine Distribution to End Users, 2007

Heavy Construction 34

Mining 22

General Construction 20

Quarry & Aggregates 10

Industrial 5

Paving 4

Forestry / Other 5

% Share

Source: Caterpillar Inc. 2007 Annual report, p. 38.

Construction

and mining are

main drivers.

December 5, 20086

Preliminary Outlook for 2009

North America

• Recession in the United States

• Fed Funds rate to 1% or lower; substantial liquidity increases

• No improvement in the economy until late in the year

Other Developed Countries

• Recession in Europe

• Recession in Japan

Developing Economies

• Many positives of this cycle still in place

• Expect most to halt, or reverse, policy tightening

• Should fare better than developed economies

Source: Caterpillar Financial Release, October 21, 2008, pp. 14-15.

Unfavorable

environment ahead.

December 5, 20087

Housing – An Industry in Distress

2,073

1,812

1,341

950 1,000

2005 2006 2007 2008 2009

United States (000 units)

Source: Haver Analytics/Census Bureau/Business Economics

3 years of

decline

December 5, 20088

80

100

120

140

160

180

200

220

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Housing Problem: Declining PricesDown over 20%

from the peak

Source: Haver Analytics, S&P, Fiserv, and MacroMarkets LLC.

Case-Shiller Index, January 2000 = 100

Needed to match decline

in the Great Depression

December 5, 20089

Housing Problem – No One Wants to Buy

0

200

400

600

800

1,000

1,200

1,400

1990 1995 2000 2005

Approaching

1990s low

Source: Haver Analytics, Census Bureau.

New Single Family Homes Sold, Thousand Units

December 5, 200810

Housing Problem – Plenty for Sale

0

2

4

6

8

10

12

1990 1995 2000 2005

Not

decreasing


New Single Family Homes for Sale, Months of Sales

December 5, 200811

Housing Problem – Cautious Lenders

0

50

100

150

200

250

300

1990 1995 2000 2005

May need 5%

mortgage rate

Source: Haver Analytics, Federal Reserve Board.

Spread between 30-Year Mortgage Rate and 10-Year Treasury

(Basis Points)

December 5, 200812

Housing Problem – Bad Loans

0

1

2

3

4

5

6

1991 1993 1995 1997 1999 2001 2003 2005 2007

Further increase in

repossessions

Source: Haver Analytics, Federal Reserve Board.

% of Mortgage Loans Delinquent at Commercial Banks

December 5, 200813

Total Housing Supply

0

500

1,000

1,500

2,000

2,500

3,000

1945 1955 1965 1975 1985 1995 2005

Worst year

since 1945


New Housing Units Produced, Thousand Units

Housing Starts

Housing Starts + Mobile Homes

December 5, 200814

Households Drive Housing Stock

50,000

70,000

90,000

110,000

130,000

1965 1975 1985 1995 2005

Stock averages

13% higher than

households


Housing Stock and Household, Thousands

Households

Housing Stock

Second and

vacant homes

December 5, 200815

New Units and Stock Growth

0

20,000

40,000

60,000

80,000

1965 1975 1985 1995 2005

Units produced

exceeds growth

in stock

Housing Stock and New Homes, Thousand Units

Change in Housing Stock

Cumulative Housing Starts

(includes mobile homes)


Replacement of

Homes

December 5, 200816

U.S. Housing Needs

Primary

111

Million

Other

19

Million

Housing Stock

Increases 1%

yearly

1.1 million new

units yearly

Increases

1.5% yearly

0.3 million new

units yearly

0.4% of stock

yearly

0.5 million new

units yearly

Replacement Needs

Demand

Primary 1.1

Other 0.3

Replace 0.5

Total 1.9

Supply

Mobile 0.1

Starts 1.8

Total 1.9

Driven by

population

Source: Haver Analytics, Census Bureau, Business Economics.

December 5, 200817

Types of Housing

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1995 2000 2005

Likely to be more

apartments


New Housing Starts, Thousand Units

Single Family

Multi-Family

December 5, 200818

Building Construction – Heading for Trouble

3.4

-3.9 -4.2

2007 2008 2009

% Change in Building Orders

Source: McGraw-Hill/Business Economics

Orders are

declining

December 5, 200819

Recoveries in U. S. Nonresidential Structures

80

90

100

110

120

130

0 5 10 15 20 25 30 35

Re

ce

ssio

n E

nd

= 1

00

Decline

5 Quarters

Weak Growth

9 Quarters

1991:Q1 to

2000: Q4

2001:Q4 to

2008: Q3

Source: Data from Bureau of Economic Analysis, Haver Analytics

Recently moved ahead

of last recovery

December 5, 200820

30

40

50

60

70

1996 2001 2006

A Leading Indicator Is Down Signals worse

decline than in

last recession

Source: Haver Analytics, American Institute of Architects.

Architectural Billings Index (+50 = Increasing)

Signals future decline

December 5, 200821

Prices Are Dropping

50

100

150

200

250

300

1994 1996 1998 2000 2002 2004 2006 2008

Declined for

several quarters

Source: Haver Analytics, MIT Center for Real Estate.

Price Indices (1st Quarter 1994 = 100)

Offices

Retail

December 5, 200822

Delinquencies Are Rising

0

2

4

6

8

10

12

14

1991 1993 1995 1997 1999 2001 2003 2005 2007

Additional problems

for banks

Source: Haver Analytics, Federal Reserve.

% of Commercial Real Estate Loans Delinquent at Commercial Banks

December 5, 200823

Vacancy Rates Are Rising

0

5

10

15

20

25

1986 1989 1992 1995 1998 2001 2004 2007

Bottomed at higher

rates than in the

last cycle

Source: Haver Analytics, CB Richard Ellis.

Vacancy Rates (%)

Offices

Industrial

December 5, 200824

U. S. Growth and Construction since 1929

0

2,000

4,000

6,000

8,000

10,000

12,000

1929 1939 1949 1959 1969 1979 1989 1999

0

50

100

150

200

250

300

350

400

450

500

Billions of 2000 Dollars

GDP

Structures

Source: Haver Analytics, Bureau of Economic Analysis.

Construction lagging

the economy.

December 5, 200825

No Net Growth in U. S. Business Structures

-25

0

25

50

75

100

125

150

175

200

1929 1939 1949 1959 1969 1979 1989 1999

4.9%

-2.8%

Real Net Investment in Structures: Billion 2000 Dollars

Source: Bureau of Economic Analysis, Haver Analytics

Depreciating

the stock.

December 5, 200826

22.6

19.821.5

20.2

14.713.2

15.6

20.1

18.219.0

22.6

26.1

Commercial Hospitals Manufacturing Power

1945 1982 2007

Structures Have Aged About matching the

oldest on record

Average Age of Private Nonresidential Structures (Years)


December 5, 200827

Nonbuilding Construction – More Delays

-0.9

-4.8

0.6

2007 2008 2009

% Change in Nonbuilding Orders

Source: McGraw-Hill/Business Economics

But we will

probably try!

December 5, 200828

Government Structures

-25

0

25

50

75

100

125

150

1929 1939 1949 1959 1969 1979 1989 1999

1.3%

Real Net Investment in Structures: Billion 2000 Dollars


Inadequate

investment.

December 5, 200829

State Budget ProblemsWill impact

construction.

December 5, 200830

24.0

17.016.2 16.2

21.6

24.1

Schools Highways

1945 1969 2007

Government Structures Are Aging Back to WWII

ages

Average Age of Government Nonresidential Structures (Years)


December 5, 200831

U.S. Infrastructure Indicators

1. 25% of bridges are structurally deficient or obsolete

2. 50% of waterway locks are obsolete

3. 20% of airports have runways that are in poor to fair

condition

4. 30% of dams are at or over their designed lifespan

5. Traffic congestion costs $63 billion yearly

Source: Congressional Research Service, American

Society of Civil Engineers, Bureau of Transportation,

Federal Highway Administration

December 5, 200832

European Housing Permits

EU 27: Housing Permits

(SA, 2000 = 100)

80

90

100

110

120

130

140

Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Turning down

sharply

Source: Statistical Office of the European Communities, Haver Analytics

Jun. 2008

December 5, 200833

Developing Country Economic Indicators

1990s Latest

GDP growth (%) 3.5 6.9

Inflation (%) 51.4 9.4

Current account (Billion $) -65 785

Foreign Debt/GDP (%) 39 26

Liquid Assets (Trillion $) 1.1 8.5

Still looking better

than in the past

Source: IMF/World Bank/Business Economics Estimate

December 5, 200834

Construction in Developing Countries

-3.3

-0.6

1.6

1.9

6.9

7.6

9.4

11.2

12.4

14.5

14.7

17.7

Ukraine

S. Korea

Mexico

Turkey

Venezuela

Argentina

Brazil

India

Chile

S. Africa

Poland

Russia

Most still showing

good gains

Year-to-date Percent Changes

Source: Haver Analytics

December 5, 200835

Mining Is a Growing Industry

Source: U. S. Geological Survey

6.6

3.7

1.0

11.8

3.9

4.5

7.8

1.1

2.4

2.8

3.0

3.1

3.7

3.8

Coal

Zinc

Gold

Iron Ore

Copper

Nickel

Aluminum

Average Annual Percent Growth

Long-term

Current cycle

Strong growth

this cycle

December 5, 200836

Worldwide Metals Exploration Budgets

0

2

4

6

8

10

12

14

1989 1992 1995 1998 2001 2004 2007

Billions of Dollars

Source: Metals Economics Group/Business Economics’ estimate of real spending

6 years of double-digit

percentage increases

Actual

1989 Prices

December 5, 200837

Commodity Prices

Dollars per Market Unit

Threshold for new investment

Recent Peak Price

Latest Price

146

129

49

70

5041

WTI Crude Oil CA Coal

13.28

6.52 6.50

HH Natural Gas

4.07

1.631.30

Copper

Prices still

favorable for

investment

December 5, 200838

Key Points – 2009 Outlook

Most developed countries in recession

• Construction is already declining

• Some recovery in U.S. in last half year

• No recovery in Europe or Japan in 2009

• Likely to see new lows in interest rates

Developing countries to fare better

• Still retain strengths shown in the current recovery

• Have halted or reversed policy tightening

• Expect most will use reserves to combat serious difficulties

Source: Caterpillar Financial Release, October 21, 2008, pp. 14-15.

Cautious outlook;

significant risks

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