Caterpillar Inc., (CAT) predicted zero economic growth worldwide in 2009 and announced it will shed 20,000 jobs over the next few months.
The world's largest maker of construction and mining machines issued its gloomy forecast after a downturn that began in the United States grew into a full-blown global recession, gutting orders for its equipment.
"If this comes to fruition, it says a lot of bad things not just for Caterpillar but for the economy as a whole," Morningstar Inc. (MORN) analyst John Kearney told Reuters.
Because Caterpillar is viewed as an economic bellwether for its connections to the construction and mining industries, its forecast focuses even more attention on the details of President Barack Obama's $825 billion economic stimulus plan and, in particular, what it might hold for infrastructure spending.
As Money Morning reported yesterday (Monday), the President's giant stimulus plan heads to the floor of the House of Representatives this week, with House Minority Leader John A. Boehner, R-Ohio, saying many in his party will vote against the package unless significant changes are made.
Grim Forecast for Global Economies
Caterpillar's forecast takes a dimmer view of 2009 than the company outlined in October, when it predicted world growth of less than 2.5%.
"We expect 2009 will be the weakest year for economic growth in the postwar period," the company said.
In a wide-ranging statement, Caterpillar predicted 30-year mortgage rates could fall below 4.5%, and U.S. housing starts will top out at 900,000 units, about equal with 2008.
U.S. housing will continue its slide in the first half and then begin to improve later in 2009, the company predicted.
The U.S. should pull out of the recession in the second half of 2009, while the Eurozone and other developed economies will likely experience negative growth for the entire year. Emerging economies will only grow by 3%, with China expected to grow about 7.5% in 2009, down from 9% last year, Caterpillar projected.
"It's just a very pessimistic outlook in terms of the world economy," Tim Ghriskey, chief investment officer of Solaris Asset Management told Reuters. "Clearly the building of global infrastructure has come to a grinding halt."
After shrugging off the downturn in U.S. housing that sparked the worldwide crisis, Caterpillar and other makers of bulldozers, dump trucks and excavators suddenly face a world of challenges. The Peoria, Ill., company said earnings slid as their well-heeled energy and mining customers scaled back purchases amid slumping commodity prices, the credit freeze and tough market conditions.
Caterpillar, a component of the Dow Jones industrial average, earned $661 million, or $1.08 per share, during the three months ended Dec. 31, down 32% from $975 million, or $1.50 per share, in the same period a year earlier. Revenue rose 6% to $12.92 billion. Analysts, on average, expected Caterpillar to report earnings of $1.31 per share on revenue of $12.84 billion, according to a survey by Thomson Reuters.
"We knew Caterpillar was going to be a disaster," said Eli Lustgarten, an analyst at Longbow Research. "We just didn't know the magnitude of it. And it's ugly."
Stimulus Plan Under Scrutiny
Analysts have continued to forecast weak earnings for Caterpillar and other U.S.-based machinery firms until global economies can execute a turnaround – which policymakers are finding both elusive and difficult.
The news from Caterpillar comes amid rising criticism from Republicans about a spending plan proposed by President Barack Obama that may not boost equipment demand from infrastructure improvements anytime soon.
The stimulus package calls for massive infusions of funding for public works projects, reminiscent of efforts following the Great Depression. But the bill may get bogged down in Congress, as concerns are raised about its effectiveness in creating jobs. A lobbying spree by potential recipients extolling the advantages of specific projects in their region or state, could also slow the process.
Obama spent most of his Saturday radio address trying to build public support for his plan and put pressure on recalcitrant lawmakers.
"If we do not act boldly and swiftly, a bad situation could become dramatically worse," he said.
But Republicans contend the devil is in the details.
"You go through a whole host of issues in this bill that have nothing to do with growing jobs in America and helping people keep their jobs," said Boehner.
Boehner led a chorus of critics concerned about how long it will take for the money to actually be spent.
As Charles Krauthammer, a conservative syndicated columnist told Fox News, "More than half of the infrastructure stuff with the bridges and roads will not be spent until two years hence…and it will only add to inflation, not jobs."
News and Related Story Links:
- Money Morning:
The Obama Blueprint for Solving the U.S. Financial Crisis
- Money Morning:
Financial Crisis Challenges Escalate as Republicans Announce Plans to Oppose $825 Billion Obama Stimulus