Zacks.com releases the latest Analyst Interview. Today’s interview is with senior analyst Mario Ricchio, who discusses Caterpillar (NYSE: CAT).
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What effect, if any, do you expect the global economy to have on the machinery group as a whole?
We are becoming extremely concerned about the global economy, which is a marked change from the past. Let’s start with the United States, where we were pessimistic and remain so. There is nothing bullish about the domestic economy. The residential real estate market is in a severe downturn and the commercial construction market is right behind it. It looks like Sam Zell nailed the top of the cycle by selling Equity Office Properties to private equity.
We expect U.S. commercial construction activity to slow dramatically amid a weaker labor market, reduced discretionary spending, increased retail vacancy rates, and tighter credit conditions. The decline in U.S. construction spending is expected to negatively impact the companies in our coverage, such as Caterpillar (NYSE: CAT).
While we previously thought global decoupling would remain intact, our view has changed going into 2009. We believe the U.S. economic slowdown will spread to other parts of the world just as global central bankers raise interest rates to fight inflation. This is a potential recipe for a drop in industrial activity, production, job creation, and commodity demand. Investors must remember the top in prior economic cycles have been marked by repeated interest rate hikes to reign in soaring inflation. Just in the last few months, there have been interest rate hikes in Vietnam, Taiwan, Thailand, Australia, India, Mexico, the Philippines, the Euro Countries, Chile, Peru, and Brazil.
Monetary policy works with a lag, so we expect a global industrial slowdown to start sometime in the second quarter of 2009. As a result, we are turning extremely cautious on the machinery group.
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