Capital Goods Outlook What Goes UpMust Come Down

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Capital Goods OutlookWhat Goes UpMust Come Down

• Kenneth Kremar
• Principal, Industry Practices Group

March 15, 2007
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What Goes UpCapital Goods Have Had a Great Run

• Industrial Machinery 02-06 19
• Off-Highway Equipment 02-06 37
• Mining Oilfield Machinery 02-06 126
• Heavy Trucks 03-06 100
• Medium-Duty Trucks 02-06 48
• Truck Trailers 02-06 112
• Freight Cars 02-06 322

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Must Come Down

• Pent up demand has been largely satisfied.
• Major CAPEX programs are winding down.
• Energy/commodity prices have moderated.
• The economy is slowing down.
• Uncertainty about the economy is on the rise.
• 2007 EPA diesel engine regulations have distorted
  commercial truck buying.

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The U.S. Economy( Change in Real GDP)
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Summary of the U.S. Economy (Percent Change
unless otherwise indicated)
Note Housing Starts and Light Vehicle Sales
Millions of Units
6
Business Investment Outlook(Percent Change)
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U.S. Spending on Industrial Machinery(Billions
of 2000 Dollars)
8
New Orders for Industrial Machinery (Billions of
Dollars)
9
Unfilled Orders For Industrial Machinery
(Billions of Dollars)
10
Capacity Utilization Rates ()
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Industrial Machinery Outlook

• Major spending programs initiated during 2006 are
  winding down.
• Traditional manufacturing will slow to a crawl
  this year.
• Semiconductor Ind. CAPEX will not be robust.
• Uncertainty about the economy dampens enthusiasm
  to invest.
• A weaker U.S. dollar should keep export sales
  buoyant.

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Domestic Spending on Agricultural Machinery
(Billions of 2000 Dollars)
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Net Farm Income(Billions of Dollars)
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Agricultural Machinery Outlook

• Net farm income peaked back in 2004 at 85.4
  billion and will bottom out at 57.8 billion in
  2006a drop of 32.
• The farm sector capital spending boom will wind
  down as income returns to earth and pent-up
  demand is satisfiedbut 2007 will be another up
  year.
• Income is pegged at 61.3 billion in 2007 and
  55.1 billion in 2008.
• Healthy income levels and the ethanol play will
  prevent any dramatic fall off in equipment sales.
• The export outlook remains bright. Canadian farm
  income is improving.

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Domestic Spending on Construction Machinery -
(Billions of 2000 Dollars)
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Construction Machinery Orders(Millions of
Dollars)
17
Construction Machinery Order Backlog(Millions of
Dollars)
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Construction Machinery Outlook

• The domestic market for construction machinery
  will soften further over the near-term.
• The residential construction market is heading
  south.
• That will offset gains in the nonresidential and
  public construction markets.
• Logging and surface mining will provide little
  support this year.
• A weak dollar and expanding ROW construction and
  mining sector activity will allow exports to gain
  additional ground.

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Domestic Spending on Mining Oil and Gas Field
Machinery (Billions of 2000)
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Mining Oil and Gas Field Machinery Orders
(Millions of )
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Mining Oil and Gas Field Machinery Unfilled
Orders - (Millions of )
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World Oil Demand(Percent Change 2006-2011)
World 1.8 U.S. 1.2 China 5.4 India
2.6
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Mining Oilfield Machinery Outlook

• Supply/demand concerns on both the oil and
  natural gas fronts are not going to disappear.
• Oil and gas prices will remain at lofty levels.
• The prospects for exploration remain bright.
• Material shortages are having an impact on oil
  and gas exploration.
• Relatively high prices ensures continued growth
  in non-oil mining activitywhich bodes well for
  mining and mineral processing equipment.

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Machinery Production ( Change)
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Medium Heavy Trucks 2007 Is Shaping Up As An
Ugly Year

• Pent-up demand is no longer an issue.
• Payback for the 2006 pre-buy.
• New orders have come back down to earth.
• Lackluster economic performance.
• Sluggish growth in U.S. motor carrier traffic and
  vocational market activity.
• Major fleets are not expected to spend
  aggressively.
• The truck market should get back on track in
  2008.

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Class 4-8 Truck Fleet Age Indicator
(Ratio of retail sales - last 3 years/last 7
years)
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New Orders for Medium and Heavy Trucks
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U.S. Class 4-8 Retail Sales(000 Units)
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The Commercial Trailer Market

• Pent up demand is no longer a factor in
  determining where the market will end up in 2007.
  
• Complete trailer shipments emerged from the last
  recession and jumped from 135,000 units in 2003
  to almost 176,000 units in 2003.
• Shipments then exploded to 233,000 units in 2004
  and 256,500 units in 2005, and before advancing
  to 288,000 units last year.
• Slower growth in GDP and industrial output
  suggests slower growth in trailer traffic.
• With better economic conditions emerging in 2008,
  trailer demand should improve.

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Truck Trailer Fleet Age Indicator
(Ratio of Complete Trailer Shipments - last 3
years/last 7 years)
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Complete Trailer Shipments(000 Units)
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Freight Car Market Outlook

• The economy is slowing and we expect rail traffic
  to exhibit some weakness over the near-term.
• With traffic limping along, and over 143,000 new
  cars delivered over the past two years, the
  pressure to add additional capacity, and replace
  the older/smaller units in the fleet has eased.
• Ethanol-carrying tank cars and larger covered
  hoppers are the exception.
• A resumption of "healthy" traffic growth combined
  with pressure on the rail industry to improve
  productivity and efficiency spur the replacement
  of older/smaller cars in the fleet and some
  capacity expansion.

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Freight Car Order Backlog(000 Units)
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Freight Car Order Backlog(December 31, 2006)
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North American Freight Car Fleet
(Age Distribution as of January 2007)
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Freight Car Deliveries 1970 To 2008(000 Units)
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Class 4-8 U.S. Retail Sales, Truck Trailer
Shipments and Freight Car Deliveries
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Capital Goods What Goes UpMust Go DownThe
Bottom Line

• The most recent CAPEX cycle is getting a little
  long in the tooth.
• Many of the major capital spending programs
  launched in recent years are winding down.
• These programs will not be replaced with ones of
  equal vitality in the face of slower final demand
  growth, stable to declining operating rates, and
  lackluster profits growth.
• Stillthere is nothing in the cards to suggest
  that the bottom is about to fall out.
• Corporate America slashes capital spending when
  final demand is in a freefall, excess capacity
  abounds, business confidence hits the skids, and
  companies find themselves awash in red ink.
• That is not the picture we are painting.

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Thank you!
Kenneth Kremar Tel [phone]
Visit our website atwww.globalinsight.com