Contractors are freezing capital equipment spending amid a stagnating housing market, credit crunch and uncertainty over where the economy is headed, according to a report analysts released on Nov. 16.

Sales of heavy equipment will drop 12% this year and another 5% next year, according to New York-based market research firm SBI, which authored the report. It blames the slowdown on lower demand, coupled with higher production costs for manufacturers.

The firm predicts that long-term commercial construction projects will likely be "scaled down or even canceled" as owners' spending tightens.

Overall spending will come back, but demand for construction equipment is expected to grow "at relatively lower rates than those seen in previous years," says the report. Sales will grow only 1% per year between 2006 and 2011, the firm predicts, after posting 6% yearly increases from 1997-2006.

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Infrastructure spending and government contracts "may counter the drop in residential building," the report adds.

SBI studied nine main product categories, including power cranes, draglines, excavators, pavers and crawler tractors. It says the total U.S. market for construction machinery will bottom out at $20.6 billion next year before sales move up again 6% in 2009 to $21.9 billion.

Equipment makers will "grind gears" until they hit "pay dirt" in 2011, the report continues. Contractors will spend 10% and 8% more in 2010 and 2011, when demand will rise above high levels in 2006, to $26 billion.

The rollercoaster pattern follows another large upturn in heavy equipment spending. Domestic demand nearly doubled between 2002 and last year, when the market peaked at $24.8 billion.

The Milwaukee-based Association of Equipment Manufacturers takes a more conservative outlook. The trade group sees U.S. sales falling 1.9% this year, followed by a 2.8% uptick next year.

Global sales, however, will keep climbing, says AEM, with 9.9% growth this year and another 8% rise next year. The SBI report does not address global sales trends.

Caterpillar Inc. Chairman and CEO Jim Owens notes the importance of emerging markets like China, India, Russia and Latin America in the supplier's earnings report for the third quarter.

He forecasts a 5% to 10% sales growth next year after rising 6% this year, largely driven by global demand for heavy iron. Peoria, Ill.-based Cat expects to hit $44 billion in sales this year and $50 billion by 2010.

"The industries we serve are becoming increasingly global," says Owens.