Big Bellwether Company Doubts Recession!

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Macroeconomics

No, this is not an April Fool’s joke. Crain’s Chicago reported yesterday that Caterpillar’s profits dropped in the third quarter but “doubts recession ahead.” You have to love headlines like that given the economic rollercoaster we have been riding for the past several weeks. Though Cat reported a 6.4% decline in profits, the company affirmed its ’08 forecast and stated that the “current crisis in credit markets would not pull the world into a full-blown economic collapse.” Sales increased in the third quarter by 13% over the same period a year ago.

Why care about Caterpillar’s earnings? Because of the industry they are in – mining and construction equipment – they tend to act as a leading economic indicator. Caterpillar achieved growth, according to CEO Jim Owens , who has a PhD in economics because, “demand in emerging markets and commodity prices at levels that encourage investment in mining and energy have helped offset negative economic conditions in much of the developed world.” Owens went on to explain where the increased revenue numbers came from including $833m from sales volume, $385m from price realization, $262m from the effects of currency (Caterpillar because of it’s size and number of global locations does not hedge currencies, rather it buys and sells in local currencies), and $59m from additional financial products revenues.

Also of interest, the reason profits were down: higher material costs including steel and freight. Though Cat’s outlook for 2009 is a bit more cautionary, they do expect strength in “global mining, energy markets and emerging market infrastructure….these will offset acute weakness in North America, Europe and Japan.” Readers might also get a kick out of what we said about Caterpillar back in July. And though I’d personally never go toe-to-toe with Jim Owens, it looks like MetalMiner called the oil and coal markets more accurately than our favorite bellwether company!

–Lisa Reisman

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