blog post photo
Mike Mack, president of Deere & Co.'s construction and forestry group, spoke about economic recession and recovery on March 21 in Las Vegas. Photo by Tudor Van Hampton for ENR.

Why does CONEXPO matter?

This week's show in Las Vegas is all about big, capital goods. Few people are buying machines displayed at CONEXPO without a means to put them to work.

"All the focus is on CONEXPO as investors look to see whether the pending recovery on the U.S. construction equipment is real," said Credit Suisse analyst Jamie Cook in an investor note on March 18.

Machinery manufacturers were hit especially hard by the recession, with some product categories seeing more than 70% sales declines. With the fallout in housing came a depression in manufacturing.

Indeed, the plummeting demand from 2006-10 was "from peak to trough about twice as severe as previous cycles," said Mike Mack, president of Moline, Ill.-based Deere & Co.'s construction and forestry group, at a pre-show press conference March 21.

The recovery still has a way to go, too. Although manufacturers saw sales increases of about 21% last year and expect another 14% this year, equipment sales are still stuck at around 1993 levels, notes Frank Manfredi, an equipment analyst in Mundelein, Ill.

Some wild cards are in the air, threatening to prolong the doldrums. Unrest in Libya and the Middle East is one, and it could send oil prices skyward.

Machine prices, too, are rising, driven partially by federal clean-air regulations—the cost of machines are going up as much as 10% to pay for the new clean-diesel engines, and they will rise again in two years as another round of clean-air rules hit.

The fallout in Japan—both from the tsunami and nuclear crisis—threatens to strain the supply chain and put new nukes on hold.

Global machine competitors are entering the market, potentially upsetting the traditional suppliers. You can't yet buy a Chinese car in America, but at CONEXPO, you can buy a Chinese crane.

At the same time, established players are scurrying to enter emerging markets to grow new revenue. The volume of construction machines sold in China outweighs most other world markets combined—Last year, manufacturers sold about 9,300 wheel loaders in the U.S. In China, it was about 187,000, Manfredi says.

In the face of all these factors and others, optimism going into the show is strong.

"Despite a stubbornly soft housing market, the construction equipment channel has turned sharply positive," said Mack. "Customers are voting for Deere with their wallets."

Follow me on Twitter @DoctorDiesel.