The second shoe drops for construction
Caterpillar, the undisputed heavyweight champion of construction equipment, released its Q3 earnings report today. And it may be the canary in the coal mine for the U.S. economy:
The company said several key U.S. industries it serves, including trucking and nonmetal mining, are "in recession," and its machinery sales to nonresidential builders are declining as fast as sales to the residential building industry, which it said was in "severe recession."
Caterpillar is the worlds largest manufacturer of construction equipment. If Caterpillar is saying that it can't sell its stuff to nonresidential builders here in the U.S., it is a strong signal that nonresidential builders are expecting to build less. That would be very bad for the economy, since nonresidential construction has remained strong in the past year even as residential construction has collapsed.
In fact, as bad as it has been for residential construction over the past year, it's been almost that good for non-residential builders. Non-residential construction has risen from a $555 billion (seasonally adjusted annual rate) as of August of last year, to $636 billion this year-- a 14.7% annual increase. Meanwhile, residential construction fell 16.5% over the same period, $625 billion to $522 billion. (stats here ) Overall, construction only fell 1.7% year over year.
Construction represents only 4.9% of U.S. GDP (2006), but its importance to the economy is really much larger than that. Sluggish non-residential construction likely means that business and government are pulling in their sails regarding expansion plans, which means fewer new jobs, not just in construction but across the economy as a whole.
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Comments :
Is there an underlying reason for the drop?
Do you suppose companies are just looking ahead and seeing little reason to expand, or is this related to outsourcing (unlikely, I realize, given the timing), or some new regulations?
I wonder if mining is on the way out.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
If you look at the stats...
...a lot of non-residential construction spending is government spending-- education construction, for instance, is the single largest line item. Government, especially at the federal level, is stretched now, even as tax receipts are still rising-- there also may be worries that government infrastructure spending is going to get crowded out of the budget, especially at the federal level, due to the triple threat of flattening or declining tax receipts, ever-increasing spending on entitlements due to the baby boomers who begin to retire Jan 1, 2008, and debt and deficits already in place.
It's hard to believe that mining wouldn't be going strong, considering record commodity prices for just about anything that you can think of that is mined.
skymutt: wise and powerful... enlightened...
I see
Thanks. With respect to mining, I meant non-metal as per your quote -- the increased production increased fatal accidents
and I was wondering if the costs were starting to add up.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
Brendan, this is an example
of the "broken window" fallacy., ie thinking we need to do something by forcing resources somewhere that isn't in high demand without considering forgone opportunities from draining resources from unseen activity that won't happen.
You're gonna have to spell that out for me
I recall the example but don't immediately see how it applies to my comment here.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
it's not to your comment
it's to the possible inclination that some might have to put resources into this sector because it's lagging.
But this dumping of resources would come at the expense of other activity where those resources would be better spent.
that's all.
Ah, I see
and I agree. Nice reference in that case =)
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
I see no reason
to build less McDonalds' and other non-residential high quality stuff. Economy is actually not doing too horribly when you take out the price of oil and the housing slump so I wonder what the reasons are as well.
"To discuss evil in a manner implying neutrality, is to sanction it." AR
Could be partly that Caterpillar...
...may be getting its butt kicked by competitors. By itself, I may be reading too much into Caterpillar's warning, and I'll be keeping an eye out for what the other big construction equipment vendors have to say when their earnings come out. But I think that Caterpillar's warning was a big part of why the market sold off today, Dow -360+ points.
skymutt: wise and powerful... enlightened...
Is it time
to stop relying on construction as a means to grow the economy.
Building homes that people can't afford to pay for, and then handing out second mortgages and ARM loans like candy, to stimulate the economy might not be the soundest economic policy.
I expect a new 'green' industries will be surfacing soon to help pick up the slack.
Our infrastructure needs some sprucing up which could help provide jobs also.
It is the economy, stupid.
Gee, I think I agree with you. We are
overbuilt, especially in residential markets. The new construction has got to stop (or slow) or the existing homes won't get sold.
name the enemy, win the war
Well, that's already happened
Check out the graph of housing starts and housing permits here.
Both housing starts and housing permits are already down about 50% from the beginning from last year, and both measures are still falling sharply.
skymutt: wise and powerful... enlightened...
Well, I have a slightly different idea
I'd like to see construction on grand public works such as my pet project, the Bering Strait bridge/tunnel to Russia :-) I think we've been missing these kind of huge scale public works projects in our domestic construction mix.
But yes, I agree on the run-of the-mill housing and even office and retail space. We are way overbuilt.
skymutt: wise and powerful... enlightened...
It's a sign
but not necessarily a sign to do something about it.
If such demand is dropping, it must simply drop. It's a sign (a further sign I might add) that resources are misallocated.
Resources must be allowed to liquidate so they can be reallocated to emerging opportunities. We shouldn't be trying to dictate where that growth happens....especially in sectors that have less demand.
I don't think there's much that can be done about it
Normally, I would advocate that the government start looking at ramping up spending on its own construction needs during the downturn, when demand for construction is lower and government could get a better price. This would also help to soften the blow to the construction companies and the people who work for them. To me, this is a good use of government "make work" policy.
But amazingly, our government has continued to lavishly spend during the latest upturn, running up huge deficits and debt, so that really isn't feasible.
So i foresee a very rough ride ahead in all likelihood.
skymutt: wise and powerful... enlightened...
Anecdotally
In the local commercial/state government/institutional there is more work out for bid than the contractors can keep up with. This is partly why construction costs are so high in my region (PNW) although fuel and material costs are also a factor.
Also, all of the mechanical and electrical design firms I've heard from have to turn work away for lack of design staff to keep up with the work.