Equipment Type

Can an Economy That Doesn't Glitter Be Golden?

The economy is recovering, but Giant fleets are still wrestling with discouraging construction sectors

September 01, 2002

 

Going with the flow.
The percentage of Giants forecasting a booming business year is lower than it was in 1994—12 points below the 2002 forecast. But fleets are conditioned to work lean, and the economy should provide some relief before year's end.
Underestimating a Flat Year?
Volume forecasts for 2002 mimic those of last year. Spending trends suggest that heavy construction will remain flat this year, but Giants underestimated similar conditions in 2001. Some should be pleasantly surprised again in 2002.
Rental Proving Durable?
Use of rental equipment continues to drop, but perhaps not so steeply as purchases. A trend should emerge with next year's survey results.
Repair Costs Dropping
Many mining Giants were surprised in 2001 by increases in work volume and repaired existing machines to handle the unexpected demand.
Fleet-Spending History
Giants have not been so reserved about equipment replacement since 1993, but they do tend to underestimate fleet spending. Still, nearly half of Giant firms are holding equipment spending unchanged.

 

Firms that own and operate the largest fleets of heavy, mobile equipment in North America, the Construction Equipment Giants, have reason to be discouraged by this year's business prospects. But the outlook is probably not as dark as their forecasts.

Being plunged into recession last fall left a pall of thick smoke that clouded this year's outlook. But many Giants firms—representing industries such as heavy construction, materials production, mining, and others—finished 2001 in better shape than they expected early last year. Given improvements in the general economy since the first of the year, it seems likely that 2002 will hold some pleasant surprises as well.

When the Construction Equipment Giants survey was conducted in May, Giant firms expected work volumes and equipment spending in 2002 would fall to levels that we haven't seen since 1993. The recession was over by then, but the economy was only very slowly beginning to recover. And heavy construction recovers more slowly than other segments of the economy.

"Although the U.S. construction sector came through the past recession in pretty good shape—it's now clear that overall activity will grow at its slowest pace in the past five years during 2002," says Daryl Delano, director of economics with Reed Business Information.

According to U.S. Commerce Department figures, spending in the nonbuilding (heavy-construction) sector grew, but at a slower rate in the first five months of 2002 (January through May) than the same period last year. Government spending on nonbuilding projects was virtually unchanged in the first five months of the year, compared to the January-through-June period in 2001. Unfortunately, spending on highways and streets is down, and is expected to fall 3.3 percent for the year.

The nonresidential building sector's malaise (spending fell 7.5 percent compared to the first five months of 2001), has also dampened Giants' spirits.

The percentage of contractor Giants expecting work volume to grow fell precipitously in 2001, more than 20 points, from levels recorded in 2000. But many of those forecasts were wrong. The 2002 Giants survey indicates that the percentage of firms that actually logged more work volume in 2001 was 10 points higher than forecast—most certainly down, but not so dramatically.

The parallels between 2002 and 1993—the one Giants forecasts seem to be revisiting—should not be overlooked. The economy had been recovering from the recession that ended in 1991, but employment rates had still not picked up. Job production lags behind economic recovery, but historically it has followed within nine to 14 months. Even while the economy—measured by gross domestic product (GDP)—grows, consumer confidence tends to waver before new jobs are created. Job growth resumed extremely late, waiting until the middle of 1993.

This year parallels 1993 in that GDP has grown consistently since the beginning of 2002, but employment remained down until May. In fact, GDP astounded some economists with more than 6 percent growth in the first three months of the year. There's no question that the recession is over, but the jobless rate didn't stabilize until March and had not diminished as of August.

Perhaps one of the important distinctions between 1993 and 2002 is that we're much earlier in the recovery process now, and unemployment is already stabilizing.

Most economists agree that current conditions will force businesses to start replacing inventory and making capital investments by the end of the year. That's the kind of spending that drives nonresidential building construction.

Public-sector spending is already leading the recovery. Educational construction is flying high. Both water and sewer spending increased (2.7 percent and 6.7 percent, respectively) in the first five months of the year. Concerns voiced late in 2001 about highway spending being diverted into homeland security appear to have been exaggerated.

There is encouraging spending in privately funded sectors such as health and religious buildings. Preliminary estimates show privately funded nonbuilding construction expanded at 9.3 percent through May of this year, despite a plunge in telecommunication work.

Residential construction has remained on a high, hard curve. The first five months of this year delivered a 6.4 percent increase in the total value of home construction put in place. Total permit volume was 1.7 percent above the remarkable January-through-May total for 2001.

Those who follow housing starts, however, may have been shaken in March and April, which is when Giants were making this year's forecasts. Total housing starts surged by 11.6 percent during May, making up for steep declines in March and April. Starts finished the first five months of the year 4.4 percent higher than the same period in 2001.

With heavy-construction growth slowing, and spending on nonresidential buildings shrinking, it's a good time to be conservative with forecasts. But Giant fleets are in good shape to deal with a moderate year after several years of generous spending, and 18 months to move out the most costly, least productive units. Economists say the odds against combining all the negative factors necessary to derail this economy's recovery are immense. We appear to have come through the bottom and a double-dip recession is all but impossible. There are good reasons to be optimistic about recovery this year.

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