CATERPILLAR: This Is What The World Will Look Like For The Rest Of The Year

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Global capital goods manufacturer Caterpillar just announced record profits for the second quarter, with revenues up more than 22 per cent to $17.4 billion.But the company also updated its full-year 2012 guidance, which goes substantially farther than most company’s — Caterpillar goes so far to project GDP growth rates for countries and action from central banks.

The next six months look substantially bleaker than in the company’s original forecast at the start of the year. Nonetheless, Caterpillar does not expect the U.S. to fall into recession — even as other countries do.

The company is an important bellwether, as many of the world’s largest manufacturers depend on it for equipment and other goods.

Economic growth will support demand for commodities, but prices will fall

'Key price assumptions for the full year of 2012 are that Brent crude oil will average $105 per barrel; copper, $3.50 per pound; and Chinese iron ore, $145 per metric ton. We believe prices for most commodities will remain sufficiently attractive to encourage production and investment.'

Source: Caterpillar Company Filings

Mining customers are seeing permitting delays in developed countries

'Mining customers are extending their investments as a result of permitting delays in developed countries and uncertainty about world economic growth over the next few years.'

Source: Caterpillar Company Filings

Low coal prices are forcing some miners to cut production and investment

'U.S. coal prices declined enough to cause coal mines to reduce both production and investment. Producers have increased exports to record highs, which is contributing to softer coal prices in Asia. However, we do not expect that Asian coal prices will decline enough to cause Asian mines to reduce production or investment.'

Source: Caterpillar Company Filings

Businesses conditions remain weak across the developed world as Europe heads deeper into recession

'Recoveries in developed countries remain weak, with some countries returning to recession. Most central banks are maintaining record low interest rates and are expanding balance sheets to improve the functioning of financial markets. Over the past year, the dollar value of central bank balance sheets increased about 18 per cent, or about $1.4 trillion.'

Source: Caterpillar Company Filings

The U.S. recovery is weaker than what Caterpillar originally forecast, but the company does not expect a recession

'The U.S. economy slowed sharply in the first quarter of 2012, and employment data suggest second-quarter growth will also be weak. However, historically reliable leading indicators suggest a recession is unlikely in 2012.'

Source: Caterpillar Company Filings

Massive government spending cuts in the first half should ease into the back half of 2012

'Declines in U.S. federal, state and local government spending reduced first-quarter economic growth by more than a half percentage point. State and local investments, which include infrastructure, were the lowest since the fourth quarter of 2008. We expect total U.S. government spending to decline at a slower rate in the second half of 2012.'

Source: Caterpillar Company Filings

Recent monetary action from the Fed is not having any meaningful impact on the economy

'The U.S. Federal Reserve's balance sheet expansion in the first half of 2010 benefited the economy, but those gains seem to be slowing. Banks are expanding credit at a moderate rate, but money growth is slowing. We have not detected much benefit to economic growth from the central bank's policy of lengthening the maturity of its securities.'

Source: Caterpillar Company Filings

U.S. growth will slow to a rate slightly above 2%

'We expect the U.S. Federal Reserve will resume expanding its balance sheet, but not soon enough to benefit growth in 2012. We believe modest recovery will continue in the United States, with economic growth slowing to slightly more than 2 per cent in 2012.'

Source: Caterpillar Company Filings

Housing starts in the U.S. will exceed 750K, below original forecasts for as much as 800K

'Some industries important to our sales in the United States are beginning to recover. Housing starts are increasing in response to rising apartment demand, low mortgage rates and more than four years of
depressed activity. We forecast housing starts will exceed 750 thousand units this year. Although this
represents the best level of housing starts since 2008, it is a decline from our prior forecast of 800 thousand
units. Nonresidential construction is also expected to increase, although highway construction will likely
remain weak.'

Source: Caterpillar Company Filings

Eurozone issues are spreading beyond countries plagued by debt

'Budget austerity and monetary tightening in 2011 pushed the Eurozone economies near a recession in the first quarter of 2012. Problems are spreading beyond those countries struggling with debt problems; in the majority of Eurozone countries, unemployment is rising and business confidence is deteriorating.'

Source: Caterpillar Company Filings

The European economy will contract this year, regardless of ECB policy

'The European Central Bank offered two liquidity programs and cut interest rates for the third time since October of 2011, and rates are at a record low. We anticipate additional actions this year, but we now expect overall Eurozone economic growth will likely be negative in 2012.'

Source: Caterpillar Company Filings

Japan's economy will expand by +2% this year

'The Bank of Japan pushed bank liquidity to a record high, and construction will benefit from reconstruction programs. We expect the Japanese economy will grow more than 2 per cent in 2012.'

Source: Caterpillar Company Filings

Australian central bank action will boost GDP growth above 3%

'Four recent interest rate cuts and continued growth in mining will likely lead to more than 3 per cent economic growth in Australia. Although mining profits in Australia started declining in the fourth quarter of 2011, we expect mining capital expenditures will be higher in 2012 than in 2011.'

Source: Caterpillar Company Filings

Emerging market economies were hampered by rate increases, and central banks are adjusting to reverse action

'Developing economies slowed in response to interest rate increases in 2011, and central banks have begun reversing policies. The larger economies of Brazil, Russia, Indonesia, South Africa and Turkey all have lower short-term interest rates than at the depth of the financial crisis in 2009.'

Source: Caterpillar Company Filings

China will offer increased stimulus

'The Chinese government has accelerated policy easing, with its second consecutive interest rate cut in July 2012. Infrastructure spending is running behind the government's target, and we expect the government will introduce supplemental investment programs.'

Source: Caterpillar Company Filings

But Chinese GDP will still slow to 8%

'With this expected easing, we believe China's economic growth will slow to about 8 per cent in 2012. Data through May suggest infrastructure spending is improving. Year-to-date imports of key commodities increased compared with 2011.'

Source: Caterpillar Company Filings

Growth in the rest of Asia will likely follow 2011 trends

'Most other developing countries in Asia also cut interest rates. Economic growth, except in India, which is struggling with inflation, will likely be close to that in 2011 rather than improve as previously expected.'

Source: Caterpillar Company Filings

Latin American growth will slow to 3% from earlier projections as high as 4%

'Brazil reduced its short-term interest rate to a record low, and at least one more cut is likely this year. Other Latin American countries are likely to maintain current low interest rates. We project regional economic growth of more than 3 per cent in 2012, which is lower than the 4 per cent previously expected. We also expect faster growth in construction than the overall economy.'

Source: Caterpillar Company Filings

Construction in the Middle East and Africa will likely top 10%

'We expect economic growth in both Africa/Middle East and CIS will exceed 4.5 per cent, slightly higher than in 2011. Construction activity, which is growing faster, will likely be up more than 10 per cent this year. Positives are low interest rates, attractive oil prices and increased oil production.'

Source: Caterpillar Company Filings

Caterpillar now expects it will have sales between $68 and $70 billion, after the strong dollar weighs on results

'From the time the previous outlook was first established in January of 2012, the U.S. dollar has strengthened versus most currencies around the world. That has negatively impacted the full-year outlook by about $1 billion as sales in currencies other than the U.S. dollar are translating into fewer U.S. dollars.'

Source: Caterpillar Company Filings

But Caterpillar isn't the only one telling us about the state of the economy...

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