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Merrill Lynch: "Commercial construction boom turns bust" (pdf)
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 1 year 333 days ago (totalmerrill.com). Views: 382
Tags: housing bubble construction |
| Related Tags: credit crisis gold wall street peter schiff economics inflation banks |
Pasted below because I know you hate pdf...
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Merril Lynch, Weekly guidebook for the global investor
April 18, 2008
Macro viewpoint
Forecast update
Spring cleaning of our investment outlook
Decline in H1 GDP likely twice as deep
We did some spring cleaning of our GDP forecast this week, dusting off our assumptions about how well business sector spending is faring given the roiled financial markets and tighter credit conditions. The result was a four-tenths haircut to our 1H GDP forecast to -0.7% annualized from -0.3% previously, driven by a quicker downturn in nonresidential investment spending and a sizable inventory correction in the auto sector.
Shading down 2008 GDP to 0.7% from 0.9%
For the most part, the balance of our outlook is right on track: another 30% downleg in homebuilding, a deep consumer recession that probably lasts well into 2009 and a substantial turnaround in the current account, which helps cushion the blow. Our full-year GDP forecast falls to 0.7% for 2008, from 0.9% previously, and is slightly lower, at 0.5%, for 2009 (was 0.6% prior).
Expect earnings to come under pressure
We continue to expect an outright profit recession, with EPS operating earnings to decline by 9% in 2008, to $75.00 (was $75.50 previously) and then post only a small rebound to $77.50 in 2009 (was $78.00) a 3.3% increase over 2008.
Commercial construction boom turns bust
Commercial construction has rolled over, driven by the substantial tightening in credit conditions that started late last year. Banks materially tightened lending standards for commercial and industrial loans in the fourth quarter of last year, and by the first quarter they were at a historic high. The regression work we did earlier this year suggested that it took about 2-3 quarters for a tightening in credit to have an impact on building, and the rollover we’re now seeing is about right on cue.
Billings collapse, construction jobs disappear
What tells us that the construction rollover is not an event on the horizon but a present day reality is the massive slide in commercial site payrolls since the end of last year and the unprecedented rollover in architect billings. The nonresidential construction sector has shed 40,000 jobs since the end of 2007, the deepest cuts since 2002 when nonresidential building was posting double-digit quarterly declines. And, architect billings in the C&I space have been in free-fall since December – the three-month annualized rate was -77.4% as of February.
Capex outlook to remain sluggish
Our capex outlook is broadly the same as before, with just 2% growth expected in 2008 as a soft first half gives way to some capex cutbacks this summer. The 1Q CEO confidence survey from the Conference Board confirms that business confidence is at recession-type lows; and that always means trimming spending plans (see Chart 3).
Bonus depreciation will give 4Q boost and 1Q bust
The bonus depreciation will give capex a brief boost in the last three months of the year, but expect spending to pull back sharply early next year. Past dalliances with bonus depreciation for capital spending tells us that there is not much deviation from pre-set spending patterns. At best, there is a flurry of capex orders just ahead of expiration as businesses rush to get the full advantage of the tax break. What we invariably see in the quarter after the deadline is a sharp
pullback. We expect this latest round of capex incentives to produce a similar result.
Just-in-time axle strike
In the nick of time, as sales dwindle to the 15 million mark and fears mount of a drop to a 14-handle before too long, the motor vehicle sector finds itself in the midst of a protracted strike that has shuttered motor vehicle assembly plants across the Midwest. Even with this massive shutdown, the inventory-to-sales ratio is staying about unchanged at around two months. And, the scope for a rebuild after the strike’s resolution is probably limited.
Inventory investment to shave 1.6ppts from 2Q GDP
We expect the positive inventory swing in 1Q to be unwound (and then some) in 2Q. A large portion of this can be attributed to declining motor vehicle inventories. This is both a result of the weakened outlook for sales, discouraging inventory building throughout the pipeline, and a negative impact from the production plant idling that we have seen in March and April (due to the ongoing strike at American Axle). We estimate that the production shutdowns are subtracting about 670,000 annualized motor vehicle units from inventory in the second quarter.
Inflation still to trend lower
Crude oil topping $110 per barrel and gold prices hovering above $900 an ounce keeps markets participants in the grip of stagflation fear. But we remain convinced we are not in for a 1970s-style stagflation. Inflation expectations, be they survey based or derived from the bond market, are still well within recent norms. Productivity growth is strong, which will go a long way toward holding down labor costs. Perhaps most importantly, the consumer is on the precipice of the first downturn in 16 years, and the gathering forces tell us that we are not going to escape with just the brief pause we saw back then.
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