CHICAGO (Reuters) - An ongoing downturn in the U.S. housing industry is not about to reverse anytime soon, industrial executives told the Reuters Manufacturing Summit in Chicago this week.
For U.S. industrial companies, whose products go into new homes or are used to build them, the depth and timing of the downturn depends on the markets they serve.
“It’s going to be a pretty tough year for new housing starts,” said Caterpillar Inc (CAT.N) Chief Executive Jim Owens. Owens’ estimate of 1.1 million new housing starts in 2008 is near the high end of current expectations, he said.
The U.S. construction equipment industry peaked in 2005, Owens said.
“Something as basic as housing touches a lot of the market segments that we serve,” Owens said in Chicago. “But for our sales of capital equipment, related to housing and to a lesser extent nonresidential construction, (that) was heavily impacted in 2006.”
The company’s global reach means that domestic weakness is offset with strength elsewhere.
Railroads and other transport companies, who often get an early view of economic activity, report weaker demand at West Coast ports, reflecting lower shipments of furniture and retail goods.
“The housing thing is here to stay,” Norfolk Southern Corp(NSC.N) CEO Wick Moorman said.
Another transport CEO, YRC Worldwide Inc’s (YRCW.O) Bill Zollars, said shipments of plumbing and electrical fixtures were down, as well as furniture and appliances
And General Electric Co (GE.N) Vice Chairman John Rice, who heads its huge infrastructure units, said: “If you look at our U.S. consumer-oriented businesses, which is really down to lighting and appliances on the equipment side, there’s no question they’ll have a tough 2008.”
“The good news is that’s only a small part of total revenue,” Rice added.
Ingersoll-Rand Co Ltd (IR.N) reduced its exposure to U.S. construction markets when it sold its Bobcat compact machinery division last year.
The company, which is buying Trane Inc TT.N for about $9.5 billion, will still have housing exposure through sales of locks and air conditioning units, but there is “not significant downside,” CEO Herb Henkel told the Reuters Summit, in part because much of its business is tied to service and replacement sales.
Henkel estimates U.S. housing starts will drop by up to 25 percent this year, to an 800,000-unit annual rate.
While some parts of the nonresidential market are soft, Henkel said, others are doing fine, including hospitals and education facilities.
A key question during the current crisis has been how soon -- and how badly -- housing drags on adjacent types of construction, such as the office parks, shopping malls, restaurants and medical clinics that spring up near where people live.
According to this week’s summit guests, evidence that housing is spilling over into nonresidential construction is scarce for the time being.
Some companies, like diversified manufacturer Honeywell International Inc (HON.N) whose products include the round thermostats found in many American homes, say there’s no evidence of housing “contagion” spreading to other types of construction.
“We don’t see it yet,” Honeywell CEO Dave Cote said.
Manitowoc Co (MTW.N), whose main business is cranes, but which also makes freezers and icemakers used in food service, agreed.
Any slowdown in nonresidential construction is limited to “pockets” like South Florida and parts of the U.S. Southwest, Manitowoc CEO Glen Tellock told the summit.
Tellock said about construction projects: “There’s a lull in the timing between approval and starts, but we look at applications and submittals to architecture firms, and it’s still a decent amount of activity.”
But change can be abrupt.
When diversified manufacturer Illinois Tool Works Inc (ITW.N) met with analysts in December, its executives thought housing starts would bottom in the 1 million to 1.1 million range. Now, a few weeks later, its forecast is for 900,000 starts, reflecting weak recent government data on the sector.
“We thought we found the bottom on two different occasions, but obviously we haven‘t,” ITW CEO David Speer said.
(For summit blog: summitnotebook.reuters.com/)
Editing by Jeffrey Benkoe