What Caterpillar Retail Sales Tells Us About the Global Economy

Economists use a number of different metrics when measuring the state of the global economy. GDP growth, for example, is a good indicator of past performance. But it’s less reliable as a guide for future economic trends.

That’s why economists often look to other micro trends as a reference point. These trends are often revealing because they seem so innocuous at first. But what they show us can often be both telling, and worrying.

One of these key global indicators economists refer to is industrial machinery sales. This might seem like an odd choice at first. But when we look at global sales, they tell us that something is seriously wrong with the world.

Thanks to Zerohedge, who have done some number crunching, we now know just how bad things really are.

Caterpillar’s retail sales: is the global economy in recession?

Caterpillar [NYSE:CAT] is the world’s leading manufacturer of mining and construction equipment. It leads the pack in everything from diesel and gas engines, to electric locomotives.

Its industry dominance explains why it currently sits on net assets of US$89 billion. That makes Caterpillar’s retail performance a fairly strong indicator of global demand.

What does this have to do with the global economy?

Well, economic activity, and prosperity, goes hand in hand with demand. A drop in sales of industrial goods suggests that demand is falling because economic activity is flat.

And how are Caterpillar’s retail figures faring? Not well. Year-on-year (YOY), sales are falling across the entire world.

Latin American sales declined by 50% YOY in the previous two quarters. In fact, Latin America has had nine consecutive quarters of YOY sales declines. Latin America is by far the worst performing region in the world. But it’s by no means the only one suffering from slumps in demand.

YOY sales in Asia Pacific — Australia’s region — dropped by 20% in the latest quarter. Asia Pacific has the unwanted distinction of being the only region with 31 consecutive YOY sales declines.

It just pipped Europe and the Middle East. Sales in the region have fallen for 30 consecutive quarters, dating back to 2012. The YOY decline in sales averaged between 5% and 15% over this stretch.

North America, on the other hand, bucked the global trend during 2014. Sales actually grew last year, briefly suggesting global demand was recovering.

But that uptick didn’t last.

Since the start of 2015, North American sales have re-joined the rest of the pack. It’s recorded declining YOY growth in three of the last six months.

From a global perspective, Caterpillar’s retail sales are plummeting out of control. The company is seeing YOY global declines of 15–20% every month.

If that sounds bad, it’s because it is.

Sales are worse than during the Global Financial Crisis

What’s most interesting about this is that Caterpillar’s global sales have declined every month for two and a half years. That’s longer than the 19 month stretch of poor sales between 2009 and 2010. The effects of the GFC forced sales down then by an average of 20–30%.

The current decline, while not as sharp as the GFC, is far more consistent and prolonged. And it shows no sign of improving.

This leads us to an important question. If sales are worse than they were during the GFC, what does that tell us about the state of the global economy?

It could be a sign that the world is inching towards recession, or worse.

Stock price remains solid despite worsening sales

Caterpillar’s plummeting sales figures should reflect badly on its stock price. Yet it’s doing no such thing. At least not to the extent it might otherwise.

Caterpillar’s YOY stock price is down by US$29 a share. Since March, however, shares have managed to keep their head above US$80.

Over a five year trend, Caterpillar’s stock is actually up by US$10. And it’s trading higher than the US$23 per share in March 2009. That’s a hard one to figure out at first glance.

Sales are arguably worse than they were during the GFC. So why are shares trading well above the low point in 2009?

The reason, as you might expect, is fairly straightforward. It’s the same story that’s developing across stock markets the world over.  Aussie investors are certainly no strangers to it.

What is it? Buyback schemes, of course.

Caterpillar has embarked on serious stock buybacks over the last couple of years. Since the first quarter of 2013, its buyback strategy has amounted to over US$5 billion. Meanwhile, capital expenditure has been slowly falling in that time.

Evidently, there’s a clear link between spending cuts and stock buybacks at Caterpillar.

Buybacks outpaced capital expenditures by only $100 billion in the first quarter of 2013. But by Q3 2014, that difference ballooned out to over US$2.1 billion.

This strategy is the only way the company manages to keep the stock price at its present level.

It’s worrying, because the share price is masking its struggles with declining sales. Equally, it’s concealing the fact that global demand is reaching new lows.

But it does explain why the stock price is rooted in place, even while sales and spending drops.

Where does all this leave us? I’ll let Zerohedge sum up where things stand:

If global demand for heavy industrial machineryis any indication of the true underlying economy, forget recession. The world is now in a second great depression which is getting worse by the month’.

The world would be wise to heed these warnings.

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 that’s 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 anywhere else.

Markets and Money’s Greg Canavan, one of Australia’s leading investment analysts, warns that the Aussie economy is heading for a recession this year. He sees the writing on the wall. But it’s not just declining industrial sales that are to blame.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why GDP growth rates will fall back into negative territory.

Falling mining revenues, and higher trade deficits, are already taking their toll on the economy. Government revenues are down and household debt is up. These factors will continue the drag on the economy over the next six months.

But there is hope for anyone who takes the effort to shield themselves from the recession. Greg will talk you through the steps you need to take to protect your portfolio and wealth. To find out how to download the 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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