The Hidden Depression in the Global Economy


Caterpillar has announced its sales figures for the month ending to December. A word of warning: what the figures tell us about the state of the global economy isn’t for the faint hearted.

It’s become something of a guilty pleasure to sit back and await the release of Caterpillar’s sales. Nowhere are you going to find a better sign of what’s really happening in the global economy. Beneath the surface of market noise, Caterpillar’s sales rarely disappoint. Especially for those of us convinced the global economy is lurching towards a crisis. And, as sure as the sun rises in the morning, December proved no different.

First, a bit about the company.

Caterpillar [NYSE:CAT] is the leading producer of construction equipment worldwide. You’ve no doubt seen its iconic CAT logo dotted around construction sites. The company sits on roughly $130 billion worth of assets. Its profits are $20 billion higher than its nearest competitor. It manufactures everything from gas engines to electrical locomotives. It’s a big company…a global institution even.

For us bears, its sales figures are useful for a key reason. They make for an ideal predictor of economic performance.  Other popular metrics, like GDP growth, tell us about the past. But Caterpillar sales can point to trends that are unfolding as we speak. Machinery sales can tell you a lot about the global economy today. And they do a pretty darn good job of showing us how bad things really are, too.

As you’re no doubt aware, construction is a key component of economic activity. In a growing economy, construction activity tends to rise. Whether it’s in transport infrastructure, or housing, it doesn’t matter. You usually see building activity expand in line with a growing economy. Of course, building things requires tools. The kind of machinery that Caterpillar specialises in selling.

You can see what I’m getting at. If economies are expanding, then machinery sales rise in tow. If they’re not, then you can assume the opposite is true. When Caterpillar’s sales suffer, we know that demand for machinery is on the wane. As the leading industry player, that’s a safe assumption to make. Yet it also means that economic activity must be slowing too.

So with that in mind, let’s look at the how Caterpillar fared in December.

I should point out that it hasn’t been doing well for some time. Some 33 months in fact. Caterpillar has seen almost three years of consecutive year on year monthly sales declines. Let that seep in for a moment. It’s nothing short of horrific. It’s a sales depression that stretches back to 2013. However it nicely overlaps with the point at which fears over the global economy started to crop up. Coincidence? Maybe, or maybe not.

Either way, December didn’t buck the long term trend. In fact, things got much worse for the company. Caterpillar reported its single worst month since the financial crisis of 2008. Revenues were down a fifth, to US$11 billion. Profits fell 111%. The company suffered a US$114 million loss. Retail sales fell to the worst year on year decline this decade.

Make that 34 months and counting.

The cause for the woeful sales figures? There’s no single factor at play. Nor is it located to any particular part of the world. But the region Australia occupies, Asia Pacific, played a big role. Not surprisingly, China was at the centre of weaker sales. Construction activity remains weak in China, and they’re buying less machinery as a result.

Caterpillar also blamed unfavourable currency exchanges for poor sales. It included the Aussie dollar, which is down against the greenback, in its calculations.

Here’s Caterpillar’s take on 2015 (emphasis mine):

This past year was a difficult one for many of the industries and customers we serve. Sales and revenues for 2015 were nearly 15% lower than 2014 and 29% off from 2012 peak.

The two most significant reasons for the decline from 2014 were weakening economic growth and substantially lower commodity prices. The impact of weak economic growth was most pronounced in developing countries, such as China and Brazil.

Lower oil prices had a substantial negative impact on the portion of Energy & Transportation that supports oil drilling and well servicing, where new order rates in 2015 were down close to 90% from 2014.

We anticipated about $5 billion of the $8 billion sales and revenues decline in our January 2015 outlook as we started the year. Actual sales and revenues were about $3 billion below that $50 billion outlook because of steeper than expected declines in oil prices, a strong US dollar, weaker construction equipment sales and lower than expected mining-related sales in Resource Industries.’

And what of the year ahead in 2016? Well, the news doesn’t get any better.

The outlook for 2016 sales and revenues does not anticipate improvement in world economic growth or commodity prices. Sales and revenues are expected to be in a range of $40—44 billion; a mid-point of $42 billion.

The mid-point of the range reflects a decline of about $3.5 billion from last October’s preliminary outlook for 2016 sales and revenues and a year over year decline of about 10%. The decrease from last October’s preliminary outlook is largely a result of continued declines in commodity prices and economic weakness in developing countries.’

So, in other words, even more bad news on the horizon.

And it doesn’t look as if there’ll be anything that can stop the rot. Unless central banks keep the taps running, forget about any emerging market recovery. I don’t believe the Federal Reserve will keep hiking rates as many expect. In fact, they’re more likely to cut than raise. But if they do, say goodbye to any emerging market led rebound. Were rates to rise, capital outflows out of emerging markets would dampen any recovery.

As for the decline in commodity prices, there’s no light at the end of that tunnel. Crude oil is likely to fall to US$20 a barrel before it begins to rise. OPEC has no intention of cutting back on supply. And now Iran is readying itself to pump a million barrels more into the global economy.  As for iron ore, it’s still trading in a band around US$40 a tonne. Don’t bet on a commodity price boom anytime soon.

As for Caterpillar, one suspects it’ll be the same old story when we revisit this tale next month.

Mat Spasic,

Junior Analyst, The Daily Reckoning

PS: Industrial retail sales are a great indicator of economic activity. Weak demand for machinery is a clear sign that construction activity is on the wane.

But it’s not just China feeling the effects of this. It’s as true in Australia as it is around the globe. Retail sales in Asia Pacific fell quicker than almost everywhere else. But if economies aren’t expanding, they’re hurtling towards recession.

The Daily Reckoning’s Greg Canavan says a recession is unavoidable in 2016. In a free report, ‘Australian Recession 2016: Unavoidable’, Greg reveals how we’ve found ourselves in this position, and what you can do to shield yourself from it.

From declining growth rates, and terms of trade, all signs point to a major crash. Government revenues have sunk, while household debt is higher than it’s ever been. It all adds up to a recession that’s coming sooner than you think.

But there is a silver lining in all this. Provided you act now, you can protect yourself from the fallout of the coming recession. Download your free copy today to learn how to safeguard your wealth from the coming crash. To find out how to download Greg’s free report right now, click here.


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