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U.S. Economic, Industry and Gears Outlook: What’s in Store for 2012 and Beyond

U.S. Economic, Industry and Gears Outlook: What’s in Store for 2012 and Beyond. Gear Expo – Cincinnati November 2, 2011 Tom Runiewicz (Principal/Economist US Industry Practice). Gear bookings and the economy do not move in lock step…but. The Economic Outlook. Slower Growth Ahead.

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U.S. Economic, Industry and Gears Outlook: What’s in Store for 2012 and Beyond

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  1. U.S. Economic, Industry and Gears Outlook: What’s in Store for 2012 andBeyond Gear Expo – Cincinnati November 2, 2011 Tom Runiewicz (Principal/Economist US Industry Practice)

  2. Gear bookings and the economy do not move in lock step…but

  3. The Economic Outlook Slower Growth Ahead

  4. Diminished Expectations for the US Economy • Slow recoveries are typical in the aftermath of a financial crisis. • The US economy is dangerously close to stall speed; consumers and businesses are extremely cautious. • Confidence in US policy-making has hit new lows. • Business equipment investment, exports, and consumer durables will drive the economy’s modest near-term growth. • A recovery in housing markets will be the key to more robust economic growth in 2013-15. • The probability of a double-dip recession is 40%. 4

  5. Consumers are not happy Consumer Confidence Index (University of Michigan) 120 106 92 78 64 50 1979 1983 1987 1991 1995 1999 2003 2007 2011

  6. Housing continues to struggle…light vehicle sales are improving helped by incentives

  7. ISM Indexes Signal Slow Grow in the Economy

  8. Rail traffic slowdown confirms economic distress US Railroad Ton-Miles (3 month moving average) 20 15 10 5 0 -5 -10 -15 -20 -25 04 05 06 07 08 09 10 11

  9. Trucking company volumes have leveled off ATA Truck Tonnage Index (Index 2000 = 100) 130 118 106 94 82 70 1996 1998 2000 2002 2004 2006 2008 2010 (2000 = 100)

  10. Small businesses remain depressed Small Business Optimism Index 1987 = 100 110 104 98 92 86 80 1996 1998 2000 2002 2004 2006 2008 2010 Monthly 3-Month Moving Average

  11. Corporate America is becoming more cautious about CAPEX New Orders for Nondefense Capital Goods Excluding Aircraft Percent change from a year earlier 30 20 10 0 -10 -20 -30 -40 1998 2000 2002 2004 2006 2008 2010

  12. Equipment leasing companies have soured on the economy Equipment Finance Confidence Index Index begins in May 2009 75 69 63 57 51 45 2009 2009 2010 2010 2011

  13. Modest US Economic Growth Results in a Persistently High Unemployment Rate 13

  14. Interest Rates Will Stay Low for Several Years (Percent) 14

  15. Manufacturing Production Has Decelerated (Percent change, annual rate) 15

  16. Equipment and Software Lead the Recovery in Business Fixed Investment (Year-over-year percent change, 2005 dollars) 16

  17. The US Dollar Will Depreciate Against Currencies of Emerging Markets (Real trade-weighted dollar index, 2005=1.00) 17

  18. Destinations of US Merchandise Exports (Percent of total, 2010) China 7.2% Japan 4.7% 18

  19. Real Export and Import Growth Patterns Reflect the Business Cycle and Exchange Rates (Year-over-year percent change, 2005 dollars) 19

  20. Capital Goods Lead Growth in Real Exports (Annual percent change, 2005 dollars) 20

  21. US Economic Growth by Sector (Percent change) 21

  22. Other Key US Indicators (Percent change unless noted) 22

  23. Bottom Line • With US economic growth near “stall speed”, the risk of a return to recession is high (40%). • Consumers and businesses remain very cautious. • Pent-up demand for housing will eventually be the key to stronger economic growth. • The Federal Reserve powers to support growth are limited. • Fiscal tightening is coming, but the big issues (entitlements and taxes) will not be settled until after the 2012 elections. 23

  24. The Outlook for Key Gear Markets Some Opportunities, But An Overall Downshift

  25. The Outlook for Key Gear Industries(With Market Demand Percentage From the 2007 Economic Census) Industrial Machinery (27.4%) Construction Equipment (22.0%) Commercial Machinery (9.6%) Agricultural Equipment (9.4%) Shipbuilding (Including Offshore Rigs) (8.9%) Railroad Equipment Manufacturing (6.1%) Machine and Other Tool Manufacturing (5.8%) Power Generating Equipment (5.4%) Mining, Oil & Gas Field Equipment (3.7%) Aerospace (1.7%) 25

  26. Industrial Machinery YTD Jan-Aug = Orders +15%, Unfilled Orders +22%

  27. Industrial Machinery Overview: Slower growth ahead • New orders for industrial machinery face something of an uphill battle. • Traditional manufacturing is slowing down as the “soft patch” in the economy proves softer and longer-lasting. • The high-tech sector is not immune to the weakness in the economy. • CAPEX programs among traditional manufacturers are coming under increased scrutiny. • The semiconductor equipment spending spree is winding down. • Exports account for 40%-50% of U.S. industrial machinery shipments. • Export growth is likely to slow over the near-term

  28. Much Slower Production Growth Anticipated for Industrial Machinery over the Next Few Years, But Still No Decline 28

  29. Construction Machinery YTD Jan-Aug = Orders +43.5%, Unfilled Orders +45%

  30. US Construction Growth by Sector (Percent change, 2005 dollars) 30

  31. Construction Machinery: Slower growth in the near-term…faster growth as US market snaps back • New orders for construction machinery have exhibited considerable strength. • Recent pick up in domestic demand tied to dealer and leasing company replacement buying. • U.S. exports of construction and related equipment have staged an impressive comeback since the recession. • Domestic sales growth stabilizes in the near-term and then accelerates in 2013 as construction recovers • Exports will gain additional ground but growth slows in the near-term

  32. Farm Machinery Farm Machinery Shipments (Millions of Dollars) 4000 3000 2000 1000 0 1999 2001 2003 2005 2007 2009 2011 YTD Jan-Aug = Shipments +17%

  33. When farmers have money they buy equipment

  34. Farm Machinery: Still going strong for now • U.S. Farm income came in at $79 billion in 2010, an increase of 27%. Healthy demand and lofty prices push farm income to $92 billion in 2011 and $105 billion in 2012 before drifting off to $91 billion by 2016. • U.S. farm tractor and combine sales and production will hold up in the near term...but the farm sector CAPEX cycle is maturing. • Following a sharp falloff in 2009, U.S. exports of farm machinery rose 12% last year and have accelerated in 2011. • Export prospects remain bright, with the Canadian and Latin American markets providing the most support.

  35. Much Slower Production Growth Anticipated for Off-Highway Equipment over the Next Few Years Ag equipment index also includes lawn & garden equipment 35

  36. Commercial & Service Equipment (Material Handling Equipment) YTD Jan-Aug = Orders +16%, Unfilled Orders +19%

  37. Material Handling Equipment: Domestic demand will be hurt by slowdown in manufacturing • New orders for material handling equipment surged 24% last year and have gained additional ground in 2011. • Industrial trucks have led the way but future demand for this equipment will taper off as activity and capital expenditures for manufacturers and wholesale and retail trade weaken. • Leasing has become a big option for many users of equipment during this recovery. • With the recovery in industrial, warehouse, retail, and office construction delayed, the second leg of the recovery in material handling equipment—more spending on big-ticket items—will also be postponed. • The prospects for exports remain bright but growth will slow from the 20%-plus rate we have seen in 2010–11. • Asia-Pacific and Latin America remain the most fertile markets for U.S. manufacturers, while European sales will continue to struggle.

  38. Much Slower Production Growth is Expected 38

  39. Metalworking Machinery YTD Jan-Aug = Orders +10%, Unfilled Orders +37%

  40. Slower growth in metalworking industry activity will be reflected in equipment demand Metalworking Industry Orders & Metalworking Machinery Orders (Millions of Dollars) 200000 3000 170000 2600 140000 2200 110000 1800 80000 1400 1999 2001 2003 2005 2007 2009 2011 Metalworking Industry Orders (Left) Metalworking Machinery Orders (Right)

  41. Metalworking Machinery: Slower growth ahead • The rebound in metalworking industry activity and pent-up demand has allowed CAPEX programs to proceed to the benefit of U.S. metalworking machinery manufacturers. • Metalworking industry activity and CAPEX in the rest-of-the world—and in developing economies in particular—has also strengthened. • The "soft patch" in the economy is proving softer and longer-lasting, which is not good news for the metalworking industries. • Consumers and businesses are becoming more cautious with their financial resources. At the same time, the prospects for exports have been toned down. • Motor vehicle industry capital spending is expected to provide support, as will the Boeing and Airbus ramp-up of production.

  42. Much Slower Growth is Expected for Metalworking Machinery Output Over the Next Few Years 42

  43. Power Generation & Transmission Equipment YTD Jan-Aug = Orders +19%, Unfilled Orders +33.5%

  44. Generating capacity additions will come slowly Electric Utilities Have Adequate Generating Capacity (Percent, electric utility operating rate) 105 95 85 75 1998 2000 2002 2004 2006 2008 2010

  45. Capacity additions remain modest Total Gross Electric Power Generating Capacity Additions (MW) 30000 20000 10000 0 2009 2011 2013 2015

  46. Power Equipment: Modest growth ahead • Power equipment manufacturers posted a 10% increase in shipments last year. Business has continued to improve in 2011, with year-to-date shipments up 19% versus a year ago, while new orders are up 33.5% and unfilled orders are up 66%. • There remains little pressure on electric utilities to aggressively boost generating capacity. • New additions for power generating equipment were actually off 19% last year, but should be up over 8% this year and close to 4% in 2012. • Electrical generating capacity should grow over the long-term, but the growth will come in bunches. • The domestic commercial and industrial markets will not rebound until 2013. • U.S. exports of turbines and generators fall 1.5% last year and this year they are on track to decline 1.0%. • The demand for power equipment in developing economies will expand further as investment in industrial and power sectors continues. Growth in the economies of China, India, Brazil, and other developing nations is expected to taper off.

  47. The Turbine Industry is on Track to See the Best Growth in Years, Following Two Years of Substantial Decline 47

  48. Mining, Gas Field & Oil Field Machinery & Equipment YTD Jan-Aug = Orders +25%, Unfilled Orders +58%

  49. Oil prices/demand will remain favorable for investment…Shale gas gale continues

  50. Shale gas related investment will continue North American Natural Gas Production Capacity (Billions of cubic feet per day) 82.0 79.5 77.0 74.5 72.0 2010 2011 2012 2013 2014 2015 2016

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