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Construction Industry Insight | Summer 2020

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This document focuses on a number of topics that affect the construction industry as a whole, including financial results recently reported by Caterpillar, the COVID-19 impact on construction starts, the Supreme Court’s recent decision to let the border wall construction continue, and an update on employment within the construction industry. It also includes a brief summary of trends in used equipment values.

Caterpillar Shares Drop 2.8% Following a 31% Decline in Revenue: On July 31, Caterpillar reported second-quarter 2020 adjusted per-share earnings of $1.03 on revenue of $10 billion, a 31% decrease from $14.4 billion earned in the second quarter of 2019. The decline in revenue was attributable to lower sales volume driven by a reduction in the demand for equipment stemming from the COVID-19 pandemic and the resulting decrease in dealer inventories. Dealers decreased machine and engine inventories about $1.4 billion during the second quarter of 2020, compared with an increase of approximately $500 million during the second quarter of last year. On the up side, Caterpillar’s revenue exceeded analysts’ expectations of $9.38 billion for the quarter, primarily due to cost-cutting initiatives and prioritized spending, which helped the company offset the decline in the demand for equipment.

Following reported earnings, Caterpillar’s stock fell 2.8%. and analysts have slashed expectations for Caterpillar’s top and bottom lines as the coronavirus continues to weigh on capital spending and the demand for equipment. Caterpillar’s shares have lost approximately 7.4% since the end of last year, compared with an increase of .5% for the S&P 500.

Caterpillar is not the only equipment manufacturer to feel the adverse effects of the pandemic. Across North America as a whole, construction sales have fallen 54% from a year earlier as many builders have postponed their projects. Conversely, in Asia and the Pacific, where the spread of the disease appears to be decelerating at a faster rate, construction sales fell just 10% on a year-over-year basis.

Commenting on Caterpillar’s outlook, CEO Jim Umpleby said, “We are well positioned for these challenging times because of the successful execution of our strategy. We are focused on employee safety and maintaining a competitive and flexible cost structure while continuing to invest in services and expanded offerings to better serve our customers. We will adjust production as conditions warrant and are prepared to respond quickly to any positive or negative changes in customer demand.”

COVID-19 Crushes Construction Starts: The COVID-19 pandemic and resulting recession have wreaked havoc on U.S. building markets. According to Dodge Data & Analytics, commercial and multifamily starts were healthy during January and February but stalled as the pandemic hit the nation in March. For the first three months of 2020, U.S. multifamily and commercial building starts rose just 1% from the same period in 2019. The commercial and multifamily group is comprised of office buildings, stores, hotels, warehouses, commercial garages, and multifamily housing.

The full force of the pandemic bore down on U.S. construction starts in April as economic activity virtually shut down and local restrictions on construction took effect. Construction resumed in some areas in May allowing starts to increase slightly from the prior month. Although things continued to improve in June, the damage to commercial and multifamily construction during the first half of the year was extensive. Starts plunged 22% below the first half of 2019, with only warehouse construction posting a very small improvement. Commercial and multifamily construction starts in the top 20 metropolitan areas posted a similar drop of 22% through the first six months of 2020. In the top 10 metropolitan areas, commercial and multifamily starts slid 21%. New York was the only one of those areas to post an increase despite falling 24% below year-ago levels.

“The COVID-19 pandemic and recession have devastated most local construction markets.”

“The COVID-19 pandemic and recession have devastated most local construction markets,” stated Richard Branch, Chief Economist for Dodge Data & Analytics. “Across the board, building projects have been halted or delayed with virtually no sector immune from damage. Construction starts have begun to increase from their April lows and there is cautious optimism that as the year progresses construction markets around the country will begin a modest recovery. However, the recent acceleration of COVID-19 cases in the South and West as well as the upcoming expiration of expanded unemployment insurance benefits puts the recovery at significant risk and could undermine the construction sector’s ability to grow.”

Supreme Court Allows Border Wall Construction to Continue: On July 31, the Supreme Court ruled that the Trump administration can proceed with plans to build a portion of the border wall while lawsuits over the use of Pentagon funds to do so plays out in court. The court voted 5-4 along partisan lines against a challenge by a group of environmental organizations represented by the American Civil Liberties Union. The group sued over the administration’s decision to divert $2.5 billion in military funds to carry out the construction of the border wall in Arizona, New Mexico and California. The July 31 decision keeps in place a year-old stay allowing construction to continue, pending a final decision on the funds.

A federal appeals court had recently ruled that the movement of funds violated the Appropriations Clause of the Constitution because Congress originally designated the funds for defense spending, not the Department of Homeland Security. The Justice Department plans to appeal the case to the Supreme Court in August.

Responding to the Supreme Court’s decision the White House stated, “The Supreme Court reaffirmed today that it meant what it said a year ago: special interest groups likely lack any cause of action to sue the Department of Defense from transferring funds, and the Trump Administration should be allowed to build the wall and protect our country while litigation proceeds. Borders are a non-controversial reality of every sovereign nation, and we plan to defend ours.”

Construction Industry Adds 158,000 Jobs in June, But Infrastructure Jobs Decline: According to an analysis by the Associated General Contractors of America, construction employment increased by 158,000 jobs in June, but employment related to infrastructure slipped. Association officials cautioned that additional infrastructure-building job losses are inevitable unless the federal government replenishes depleted state and local budgets for roads and other public works. The rise in construction employment in June was concentrated in homebuilding, with scattered increases in nonresidential building, while heavy and civil engineering construction employment, the category that includes many highway and other infrastructure workers, shrank by nearly 10,000 jobs. The Association’s June survey found that almost one out of three contractors reported that a project that was scheduled to start in June or later had been canceled.

Despite adding 158,000 jobs in June and 453,000 jobs in May, construction jobs in June were still 330,000, or 4.4% below the June 2019 level. The industry’s unemployment rate in June 2020 was 10.1%, with 962,000 former construction workers idled. These figures were two and one-half times as high as in June 2019 and were the highest June levels since 2012. Association officials said the best way to avoid the expected future construction job losses is for federal officials to quickly enact and implement funding for infrastructure, including highways, bridges, waterways and airports. They noted that the Moving Forward Act, $1.5 trillion infrastructure package passed by the U.S. House of Representatives on July 1, is a first step in that direction but that a more bipartisan approach is needed for funding to become law. “We urge officials of both parties, both sides of Capitol Hill, and the Administration to come together promptly on meaningful increases in infrastructure funding,” said Stephen E. Sandherr, the Association’s chief executive officer. “Without quick action, the job gains of the past two months will be lost, along with the opportunity to start on improving the nation’s infrastructure at a time when labor availability is high and materials and borrowing costs are low.”


Trends in Used Equipment Values
COVID-19 has impacted the heavy equipment industry in numerous ways, from manufacturers having to temporarily shut down to others shifting their efforts to produce needed medical supplies. Through April 20, orders for construction machinery in the U.S. were down 12.2% compared to the previous year. Although market influences continue to fluctuate, the overall consensus seems to be that equipment sales will be down for the foreseeable future, and recoveries won’t occur until late in the year or possibly not until next year.

As OEMs have reduced their production levels in response to the decreased demand for new equipment, used equipment sales and the rental equipment market have reaped the benefits. At the same time, the current circumstances have bolstered the trend toward adding technological advancements such as digital services for automated service enhancements, equipment service tracking, and mapping features to used equipment. Consequently, prices for most used equipment have remained stable. In the current market, equipment in good condition with lower hours of service is often priced at a premium, while prices for equipment in lessor condition with higher service hours continue to decline. In either case, the age of the equipment is not always a critical factor in determining its value.

The equipment rental market has held up well for a number of reasons. The emergence of new technologies such as those previously described, come at a high price. Thus, many contractors prefer rental construction machinery. Renting equipment not only saves the cost of buying new equipment but reduces costs incurred for labor, maintenance and operations. Construction equipment rental companies also perform all these tasks on a regular basis to reap long-term profit from the machinery. As a result, the US equipment rental market increased significantly during the years 2016-2019 and is projected to rise significantly over the 2020-2024 period.

While both used equipment sales and the rental equipment market have benefitted from the decreased demand for new equipment, both have been adversely impacted by the COVID-19 pandemic headwind. Restrictions on construction activities and bans on social gatherings/parties has dampened demand for equipment like earthmoving machinery, road and bridge construction equipment, light and sound systems, etc. Nonetheless, it is expected that as the impact of COVID-19 subsides and lockdowns are relaxed, economic activities will restart throughout the U.S. and reinvigorate the demand for various types of equipment.