The U.S. construction machinery market is the largest in the world. There are over 700 companies that manufacture construction equipment, with combined annual revenues in excess of $25 billion. The demand for construction machinery is highly dependent upon the health of residential and commercial construction, as well as public expenditures for highways and public works. As a result of weakness in residential construction (the housing market slump), domestic demand began decreasing in 2006 as new housing starts plummeted. The effect of the diminished housing market has been offset slightly by government regulations and increased global construction demand. While demand has been diminishing domestically, worldwide it has been increasing due to growing foreign economies, continued development of infrastructure and industrialization in the third world, and the buying power of foreign currencies given the weakening U.S. dollar.
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.
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.
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.
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.
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.
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.
After a strong sales year in 2006, total construction sales declined by 1.9% in 2007. The Association of Equipment Manufacturers (AEM) began the year projecting that sales in 2008 will increase a total of 2.8%. Caterpillar's North American machinery sales were down 11% last year, but its business with Latin America increased by 24% and with the Asia-Pacific region 31% leading the company to predict substantial growth again in 2008.
While it is not uncommon to see swings in value of between 10% and 15%, results vary due to a number of factors including geography of the sale, quantity of equipment sold, the quantity of like kind equipment sold, the number of purchasers buying for export, the destination of the equipment, the value of the dollar at the time of sale, and the specific condition of the equipment itself. Presently, the market is softest for the type of equipment used to support smaller construction projects like dozers, excavators, water trucks, graders, etc. Larger capacity equipment in this class is still in demand. Lifting equipment, including most types of cranes, is in strong demand on a global basis.
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