US recession unlikely this year, says Caterpillar

REUTERS

Workers walk out of the Caterpillar plant in Peoria, Illinois. The US economy would probably grow slightly more than 2 percent, down from an April forecast for about 3 percent, the company said. Picture: REUTERS.

Caterpillar, among the first companies to ring warning bells about the recession in 2007, isn’t subscribing to the pessimism of investors, such as Bill Gross, even while moderating its global growth projections.

A US recession this year is unlikely and the economy would probably grow slightly more than 2 percent, down from an April forecast for about 3 percent, Caterpillar said this week in its second-quarter earnings statement. The climate is different than in 2008, because short-term interest rates are lower, central banks are prepared to inject more liquidity and the US housing market is slowly improving rather than falling off a cliff, the company said.

Caterpillar has a track record of accurate forecasts. In October 2007 it said the US might fall into a recession, in contrast to the outlook of companies, including Ford, DuPont and Intel, at the time. Caterpillar – considered a US bellwether because it’s the world’s largest maker of construction and mining equipment – proved to be correct as the economy experienced a slump between December 2007 and June 2009.

Caterpillar’s projections this year are more in sync with the majority view of economists and contrast with comments made by Gross in a July 16 Twitter post.

Gross, who runs the world’s biggest bond fund at Pacific Investment Management, said the US was “approaching recession when measured by employment, retail sales, investment and corporate profits”.

Improvement in the US economy would produce a pick-up in world growth later this year and into 2013, Bob Baur, chief global economist for Principal Global Investors said.

Caterpillar, while lowering the upper end of its sales forecast partly on a “weaker” global economy, raised its 2012 profit outlook and said actions to spur growth had begun in several countries.

Brazil late last year began lowering interest rates and China’s investment initiatives should help growth later this year and into 2013, the company said. In Europe, the central bank’s monetary easing and a commitment to solving the debt crisis were improving the euro zone’s long-term outlook, the company said.

“We understand the world economic horizon is hazy,” Ed Rapp, chief financial officer of Peoria, Illinois-based Caterpillar, said on the company’s website. “We are encouraged by the pro-growth actions by governments and central bankers throughout the world that are intended to stimulate world economic growth prospects moving forward and out into 2013.”

Prospects for growth in the US would likely improve next year if there was more clarity on issues such as taxes and health care, Rapp said.

Global growth would average 2.5 percent this year, lower than the expansion of more than 3 percent it forecast in April, Caterpillar said.

A majority of economists forecast the world’s largest economy might avoid a recession even as growth decelerated amid a cooling job market.

Federal Reserve officials predict a US expansion of 1.9 percent to 2.4 percent this year, with unemployment stuck in a range of 8 percent to 8.2 percent. The probability of a US recession within the next 12 months held at 20 percent this month, according to the median forecast of economists in a Bloomberg News survey taken from July 6-10.

“We should see a little faster growth in the second half,” said Baur, who is based in Des Moines, Iowa. “The US is still on a healing path. I don’t see a recession imminent on the horizon.”

US housing, the industry that helped trigger the recession, is stabilising. Fed chairman Ben S Bernanke, in testimony to the Congress last week, said growth in construction and historically low mortgage rates were among “modest signs” of a housing recovery, even as some buyers showed concern about personal finances and the broader economy, and had difficulty meeting lending standards.

Caterpillar forecast housing starts would exceed 750 000 units this year. While down from its prior forecast of 800 000 units, the prediction represents the best level since 2008.

The motor industry – which remained a bright spot in US economic growth – was helping drive sales for Ford as more consumers traded in their older vehicles for newer models, said Alan Mulally, CEO of the Dearborn, Michigan-based carmaker. In the first half of the year, annualised US vehicle sales – including medium- and heavy-duty trucks – rose to 14.6 million from 12.8 million a year ago, said Ford.

“Even though it’s a slower recovery than we’ve had from past recessions, we’re seeing that expansion of around 2 percent to 2.5 percent,” Mulally said of the US economy.

FedEx, the world’s largest cargo airline, last month forecast 2.2 percent US economic growth this year, up from a projection of 2.1 percent in March.

The company said it expected the economy to accelerate to 2.4 percent in 2013, contingent on the US avoiding a significant tax increase. – Shruti Singh, and Shobhana Chandra Chicago and Washington from Bloomberg