Wednesday, July 25, 2012

Caterpillar's General Economic Outlook ... More Muddling Through

Caterpillar posted strong earnings this morning and also provided details about the economic outlook. It's worth reading and although not overly optimistic, it suggests that we'll muddle through our present difficulties and get better over time.

Caterpillar Details Economic Outlook, Sees Housing Bottom has the story:

"Caterpillar earnings are out today. They were strong, and the company sounds upbeat. With the earnings, the construction-equipment maker’s published its latest economic outlook, one of the most detailed that any big company offers.
Associated Press
Some highlights:

–Slow growth, no recession in the U.S. “The U.S. economy slowed sharply in the first quarter of 2012, and employment data suggest second-quarter growth will also be weak. However, historically reliable leading indicators suggest a recession is unlikely in 2012.” Cat expects the U.S. economy is to grow “slightly more than 2%” this year, which implies a somewhat better second half for growth than recorded in the first half.

–Housing has turned. “Recent data suggest that housing starts have bottomed and activity is beginning to improve. Housing starts are increasing in response to rising apartment demand, low mortgage rates and more than four years of depressed activity. As a result, for 2012, we expect housing starts will exceed 750,000 units. Although a decline from our prior forecast of 800,000 units, this would be the best since 2008. Nonresidential construction is expected to increase as well.”

–The Fed will do more, but it won’t help much soon. “We have not detected much benefit to economic growth from the central bank’s policy of lengthening the maturity of its securities… We expect the U.S. Federal Reserve will resume expanding its balance sheet, but not soon enough to benefit growth in 2012.”

–Commodity prices are soft. “Worldwide demand for most commodities has increased so far this year, but prices have generally declined. We expect economic growth will support demand for most commodities but average prices will probably be lower than in 2011. Key price assumptions for the full year of 2012 are that Brent crude oil will average $105 per barrel; copper, $3.50 per pound; and Chinese iron ore, $145 per metric ton. We believe prices for most commodities will remain sufficiently attractive to encourage production and investment….[S]ome mining customers are extending their investments as a result of permitting delays in developed countries and uncertainty about world economic growth over the next few years. U.S. coal prices declined enough to cause coal mines to reduce both production and investment”

–Global economic growth is slowing. “World economic growth will likely average about 2.5 percent in 2012, slightly less than in 2011 and more than a percentage point lower than in 2010.”

–Europe is in recession. “Problems are spreading beyond those countries struggling with debt problems; in the majority of Eurozone countries, unemployment is rising and business confidence is deteriorating…. We anticipate additional [European Central Bank] actions this year, but we now expect overall Eurozone economic growth will likely be negative in 2012.”

–Policy makers in major emerging markets are responding to slower growth. “The larger economies of Brazil, Russia, Indonesia, South Africa and Turkey all have lower short-term interest rates than at the depth of the financial crisis in 2009…. We project regional [Latin America] economic growth of more than 3% in 2012, which is lower than the 4% previously expected…. expect economic growth in both Africa/Middle East and CIS will exceed 4.5%, slightly higher than in 2011.

–China’s government is on the case. “The Chinese government has accelerated policy easing… Infrastructure spending is running behind the government’s target, and we expect the government will introduce supplemental investment programs. With this expected easing, we believe China’s economic growth will slow to about 8% in 2012.”

–Governments pose the two big risks:
One: “Central banks, particularly in developed countries, have repeatedly overestimated inflation risks and underestimated growth and employment problems. These miscalculations have contributed to the weakest economic recovery in decades and persistent high unemployment. If central banks remain too cautious, such actions may prolong the weak recovery and risk another downturn.”
And two: “A continued emphasis on austerity, without other actions to drive growth, threatens modest recoveries. In addition, budget cuts have tended to fall heavily on already poorly-funded infrastructure programs.”"

My Take

Caterpillar's economic forecast is pretty middle-of-the-roadish but nevertheless provides a good synopsis of the overall global picture.

My own view is a bit more pessimistic, but not materially different than that expressed by Caterpillar.

Specifically, I believe Europe's outlook is a bit scary and that could bode ill for economies worldwide, including ours, depending on how scary the situation in Spain, Italy, Greece and elsewhere becomes.

I also believe things may be worse that Cat forecasts in the U.S. The reason for our differing views is likely due to my opinion about the potentially large negative impact of growing national debt and trillion dollar deficits on U.S. consumer spending and business investment.

As we continue to incur huge deficits and keep piling on additional debt, the ability of our economy to grow into what economists refer to as "escape velocity" from the present "stall speed" situation will be severely challenged.

Maybe by 2014 or so things will look significantly better than they do today.

Let's hope so.

Thanks. Bob.

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