Caterpillar Retail Sales and the Tale of a Global Depression

Assessing the state of the global economy is tricky at the best of times. Most indicators we rely on are snapshots of past performance, like GDP figures for example. But they’re less useful in predicting future performance.

That’s why I often look to other indicators. Clues that point to micro trends developing elsewhere. And what they can show us is often both telling, and worrying.

One measure I’m big on tracking is industrial machinery sales. It sounds bland, and might look an odd choice at first. But machinery sales are a window into the future. They tell us what direction the global economy is heading. How good — or bad — things will get.

Machinery sales are ideal long term trends. It’s rare to see them jump around from month to month. That makes them a consistent and reliable indicator.

Anytime we talk about machinery sales, we’re referring to one company — Caterpillar.

Caterpillar [NYSE:CAT] is the leading producer of construction equipment worldwide. It manufactures everything from gas engines to electrical locomotives. You’ll have seen its logo before. The iconic ‘CAT’ features in many construction sites. I focus on Caterpillar’s sales for a key reason. It’s the only manufacturer in its industry that truly matters.

The company’s total net assets amount to $130 billion. It’s sales are $16 billion higher than its nearest competitor. They’re $30 billion higher than the industry’s third largest producer. Making Caterpillar sales a key indicator of global demand.

What does all this have to do with the global economy? Why are machinery sales so important?

Construction is a key measure of economic activity. Expanding economies see construction growing too. Everything from infrastructure to housing construction ramps up. And capital expenditure is a key component of economic growth. This work requires equipment that Caterpillar sells to the world.

That’s what makes its sales so important.

Any time Caterpillar’s sales drop, it shows that demand is falling. That’s straightforward enough. But it implies something even more important. Falling sales proves that economic activity, and growth, is slowing.

That’s what makes Caterpillar’s sales figures such grim reading.

33 months and counting

Caterpillar’s year on year numbers (YOY) have fallen for 33 consecutive months. All across the world too. It’s a horror stretch spanning back to 2013.

No region is spared.

Latin American sales have tanked this year. The region’s seen 13 consecutive months of sales falling YOY by 30% or more. It’s the worst performing region by some distance.

Australia’s own region didn’t fare much better. Asian Pacific sales fell 30% in the year to September.

Meanwhile, things were positive in North America. Sales bucked the trend over the last 18 months and grew 11 months in 2014. Even this year, the region saw sales rise in May and June. That suggested demand was recovering. But the uptick didn’t last. Between July and September, sales declined YOY every month.

The Middle East had a better year than most regions. Though it’s not saying much. The Middle East saw only one month of rising YOY sales this year, in July.

The current 33 month stretch of falling sales is worse than the decline seen between 2009–10. Back then, at least Caterpillar could blame the GFC. Not this time.

The GFC forced sales down by an average of 20–30%. By contrast, since 2013 Caterpillar’s sales decline by an average of 10%. So the current weakness isn’t as sharp as the one during the GFC. But it’s more consistent and drawn out. And it shows little sign of improvement.

What does all this tell us about the state of the global economy? Nothing promising.

Three years of declining monthly YO Y sales says if the GFC was a global recession, we’re now in a global depression.

Caterpillar’s declining stock price

When I first covered Caterpillar’s sales in July, the company’s stock price was solid. Despite plunging sales, shares were trading above US$80.

At US$88 apiece in June, shares were up US$10 on a five year basis. Again, that’s even with sales comparable to those during the GFC.

The reason for this was straightforward.

Caterpillar had embarked on a series of buyback schemes. Since 2013, the company has spent over US$5 billion on this.

Of course, with sales declining, Caterpillar made up for this in other ways. It cut back by slashing capital expenditure. Buybacks outpaced capex by US$100 billion in Q1 2013. By Q4 2014, that difference blew out to US$2.1 billion.

But 33 months of falling sales is enough to test anyone’s patience. And so it proved with investors.

Since June, Caterpillar’s stock has taken a battering. From US$88, shares now trade at US$72.16 apiece. That’s a US$16 drop over the last three months.

And it’s a sign investors are catching on.

It wasn’t enough that sales were falling month to month for two and a half years. What they needed was proof. A sign that sales weren’t on a road to recovery. They’ve gotten that now.

The entire world is panicking about global growth. Both emerging and developed markets have turned bearish on growth prospects. Now that the message is sinking in, the share price is reflecting that.

No one likes making comparison to the Great Depression, but this one is apt. The 1929 Depression lasted 10 years. Caterpillar’s sales are almost a third of the way to matching that.

Mat Spasic,

Contributor, Markets and Money

PS: Industrial retail sales are a strong indicator of economic activity. Lower demand is a clear sign that construction activity is slowing.

But it’s not just China feeling the effects of this. It’s as true in Australia as it is around the globe. As we’ve seen, retail sales in Asia Pacific fell quicker than almost everywhere else.

It all points to one thing, according to Markets and Money’s Greg Canavan. He says Australia’s heading for recession in 2015.

Greg is one of Australia’s leading investment analysts. He believes we’re on course for our first recession in 23 years.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position. And the charts that show the RBA knew this was coming.

But there is a silver lining in all this for you. There are actions you can take now to lessen the blows of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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