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Fears of Craneless Recovery Continue As Machinery Sales Face Headwinds

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Terex Corp.
Market uncertainty dragged down sales of new cranes in the third quarter.
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A lack of confidence in non-residential construction activity slowed down equipment manufacturers' sales in the third quarter, renewing some analysts' fears the U.S. economy is suffering from a "craneless" recovery, or a scant amount of available infrastructure work requiring heavy earthmoving and lifting machines. Leading indicators, however, show that non-residential activity may soon pick up.

Equipment market leader Caterpillar Inc. is experiencing what it describes as a "painful" year, posting third-quarter revenue of $13.4 billion, down 18% over the same period last year, driven largely by mining companies holding off on major purchases. As such, Cat has lowered its full-year revenue outlook to $55 billion from $56 million to $58 billion, reflecting an overall 17% dip, with construction sales down about 5%. The firm expects revenue next year to benefit from global growth but still fall flat against 2013 sales.

"There are encouraging signs, but there is also a good deal of uncertainty worldwide as we look ahead into 2014," said Doug Oberhelman, Caterpillar chairman and CEO, in an Oct. 23 earnings statement.

Despite crane sales that increased in the third quarter to $612.6 million, a 10.4% increase since 2012, Manitowoc Inc. also is suffering from a slowdown in equipment orders. Backlogs in the third quarter declined to $568 million, a 2.2% drop over the second quarter, while new orders fell 23%. Crane sales are expected to rebound in the fourth quarter, as federal tax incentives are set to expire at year's end, manufacturers say.

"I don't think people are seeing things as a long-term negative, I just think people are uncertain," said Glen Tellock, Manitowoc's chairman and CEO, on an Oct. 25 earnings call with investors. Rental firms are increasing their equipment utilization and rates but are taking a wait-and-see approach to buying new cranes, he said. The company expects record turnout at next March's CONEXPO show in Las Vegas, where it will host a large exhibit with new products, he added. The "wild card," Tellock said, is whether or not fleet owners will be buying.

Residential construction has led much of the construction spending this year, but the health of other sectors is mixed. "We believe that the root cause of weakness in non-residential construction thus far has been a focus of current residential construction activity around areas with established infrastructure," said JP Morgan analyst Ann Duignan in an Oct. 28 note to investors. Government cutbacks, fighting in Congress over the federal debt ceiling and the possibility of rising interest rates pose risks to the public non-residential sector, which drives 65% of all non-residential spending, according to JP Morgan.

Leading indicators point to a healthier yet still mixed environment in 2014, according to Dodge, like ENR, a unit of McGraw Hill Construction. Dodge forecasts 9% overall growth in starts next year (see p. 7), while the Dodge Momentum Index, a 12-month outlook of non-residential projects as they enter the planning phase, grew 2.9% in September, when an 8.5% rise in commercial building offset a 2.5% drop in institutional projects.

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