Manufacturers increase international capacity

The expansion of international markets is expected to spur manufacturers of construction equipment to increase capacity and establish or expand operations in foreign markets. Although North America is still the largest single market for construction equipment, U.S. manufacturers are relying on expanding markets oversees to offset domestic revenue losses.

Large quantity of used equipment

The economic slowdown and subprime loan crisis are two factors contributing to the decline in residential construction. Fortunately for the industry, commercial construction was up during the same period, helping to offset some of the overall decline. The current housing market troubles are the largest factor currently affecting demand for building products, appliances, and home furnishings. It is also sapping consumer confidence to levels not seen since 1992. New housing starts continued to decline in the first four months of 2008 and are 25% to 33% lower than one year ago. This has had a direct, negative impact on the construction equipment market. Though the commercial and government sectors are predicted to remain steady, the direct effect the housing market has on the overall industry is impossible to overlook.

T21 Transportation Equity Act

The impact that the T21 Transportation Equity Act will have on future construction is still unclear since many states do not have the matching funds necessary to qualify for this funding. Rising fuel prices and stiffening environmental standards are both factors expected to affect overall profitability.

Global industrialization

The growing economies and infrastructure development in China, India, Mexico, and Russia are increasing the demand for construction machinery. Sales in these countries are stimulated by ongoing industrialization efforts to improve living standards. As they become more industrialized, the expansion of construction operations into mining, energy, infrastructure, and private sector building will further increase the global demand for construction machinery. According to a recent report published by The Freedonia Group, China alone is expected to increase its demand for construction equipment 31% percent by 2011. Overall, the global market is expected to grow 6% annually, or $131 billion, over the next three years. The Asia-Pacific region is expected to account for 36% of the worldwide market share at this point, surpassing North America.

Economic Stimulus Act of 2008

The economic stimulus package passed by Congress and signed into law by President Bush in February 2008 is expected to have a positive impact on the construction equipment industry. One provision of the law provides a temporary bonus of depreciation. Businesses will be allowed to deduct 50% of the cost of new equipment purchased and placed into service in 2008. A similar temporary bonus depreciation provision was enacted in 2003 and resulted in increased spending on construction machinery by 4% in the six months following its enactment.

Foreign currency exchange rates

Sales abroad have been boosted by favorable foreign currency exchange rates as a result of the weakening U.S. dollar. This has made domestically produced equipment more attractive to overseas customers. During 2007, U.S. exports increased 12.7% to a record high of $14 trillion. Exports are expected to continue to grow even further in 2008. This growth results in increased sales and profitability for U.S. manufacturers. Caterpillar, the world market leader of construction machinery, was able to post record first quarter earnings in 2008 by taking advantage of expanding operations into international markets. American companies that operate abroad and collect revenues in foreign currencies will also realize currency translation gains due to the weak U.S. dollar from operations in these markets.