Cat Man Confident on Economy: No Double-Dip Disaster Ahead

Fears are increasing that the US economy is heading for a double-dip recession, but Caterpillar CEO Doug Oberhelman is upbeat. That’s good, because the construction and mining equipment group’s financial condition is considered an indicator for investor confidence on the industrial part of the economy. If anything, the chief Cat man says he is more upbeat now than he was at the start of the year.

“There won’t be a double-dip,” he recently told the Financial Times in an interview at the company’s headquarters in Peoria, Illinois. “I don’t see a return to high growth, but I think we’re going to bump along.”

Caterpillar’s optimism – it is predicting that the US economy will grow by 2.5 per cent this year – is important, both because of the size of the company and because it has a successful track record of economic forecasting. In fact, it was one of the first big US concerns in 2007 to warn that the US was walking into a major economic slump.

Oberhelman’s opinion comes from interaction with other companies that buy Caterpillar equipment.

“I’ve been meeting a customer a day for months,” he explains. “I haven’t found one this year that hasn’t said business is getting better, even if it’s a long way from what it was.”

Further, some of the problems at the start of the recession no longer look as dire.

“The US economy is performing at such a low rate and so many of the excesses have wrung out,” he says. “The banks have mostly been recapitalised. Housing is close to, if not at, the bottom. It’s hard for me to see how we could go over a cliff like in 2007-08 when this was all beginning.”

Caterpillar has been betting on the game with a variety of expansions. It just completed a $7.6bn acquisition of mining machinery giant Bucyrus International, which transformed Cat into the world’s biggest supplier of major mining equipment.

Further, it expects to spend $3bn this year in capital investment. For instance, the manufacturer has announced plans for new factories in Singapore, Thailand, China and Brazil, while in America it is constructing a new distribution centre in Washington State while expanding factories in North Dakota and Kansas.

It would seem the company is making hay before the sun shines on everyone else. In the past twenty months it has hired about 29,000 people worldwide – 13,000 in the US, the rest mainly in China, Brazil, Mexico and the UK. In the process, Caterpillar’s acceleration drew revenues to a record $14.2bn in the second quarter.

Investors may doubt, as the company’s shares have so far underperformed, partly because, in spite of strong sales, its second-quarter profit fell short of analysts’ estimates thanks to the Japanese earthquake, weaker Chinese demand, and a $4.5bn new debt on the Bucyrus acquisition.

Oberhelman thinks the company may have also suffered from its high profile, which makes it something of an indicator for investor attitudes on the industrial economy.

“Traditionally, we’ve been perceived as an indicator of the global economy,” he explains. “Investors are just nervous about the uncertainty of global economic growth.”

He thinks fears are unfounded, but the danger is that fear itself may cramp the recovery.

“We could all pull in our collective dollars because we’re all afraid of not what’s happening but what might be happening down the road,” he worries. “It could be a self-fulfilling prophecy.”

Two-thirds of Caterpillar’s revenues come from outside the US and China is its most important market. There, Oberhelman thinks concerns about slowing growth are exaggerated.

“There has been a slowdown in China, which is healthy,” he muses. “Thank God it happened, because we were all rushing in there, committing resources, growing at rates that couldn’t be sustained over time. So now we’ll see a lower growth rate but one that’s still pretty high by world standards.”

“We’ll see China reflate in the next few months, going into the Chinese New Year [in January],” he predicts. “That will remove a very large question mark in the world economy about what China’s going to do, which has been a big damper on sentiment.”

Elsewhere, he again sees little evidence of another downturn.

“Brazil is red-hot. We’ve not seen any breather down there,” he enthuses. “The Middle East is still doing well, the mining business is still strong. So far, it’s hard to paint a picture of a massive slowdown again. But we’re watching.”