With industrial customers cutting back on capital spending worldwide, equipment orders are decelerating in a number of end markets, from construction machinery to base metals.

In 2007, the United States sold more than $200 billion worth of aircraft, missiles and space-related equipment, and $80 billion worth of automobiles and auto parts. John Deere sold $16.5 billion worth of farming equipment last year, much of it to other countries, and among the largest manufacturers by revenue, The Boeing Company, General Electric and Lockheed Martin are household names.

“The United States remains by far the world’s leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 — nearly double the $811 billion of 1987,” a recent Associated Press report points out.

Yet the recession that began in December 2007 intensified in the fourth quarter of 2008, driving these and other U.S. manufacturers to slash production and payrolls, while the ensuing credit squeeze has driven consumer and business confidence to generational lows.

“Big industry production throttled back in January due partly to auto shutdowns, and housing construction tumbled to a record low, weaker-than-expected performances that show the country caught in a worsening economic tailspin,” another Associated Press report claims.

According to the U.S. Federal Reserve last month, production at the nation’s factories, mines and utilities fell 1.8 percent in January. Manufacturing output dropped 2.5 percent and was 12.9 percent below the year-earlier level, with broad-based declines among its components. A plunge in motor vehicle and parts production that resulted from extended plant shutdowns subtracted more than 1 percentage point from the change in manufacturing production. The output of mines fell 1.3 percent, and a swing to below-average temperatures contributed to an increase of 2.7 percent in the output of utilities.

Total industrial output was 10 percent below its year-earlier level. The capacity utilization rate for total industry fell 8.9 percentage points below its average 1972 to 2008 rate. With more plants going idle, operating capacity at all industrial outlets dropped to 72 percent in January. That was the lowest reading since February 1983.

“When looking at the macro backdrop for industrial production and machinery orders,” investment research firm Zacks expects to see a continued slowdown in capital spending.

In fact, sharp fourth-quarter declines in investment, consumer spending and exports drove U.S. gross domestic product (GDP) to fall at the fastest pace since 1982, the Department of Commerce said last week. GDP fell at a 6.2 percent seasonally adjusted annualized rate in the final three months of 2008, revised from the initial estimate of a 3.8 percent drop.

The largest contributors to the decline were a downturn in exports and a much deeper drop in equipment and software. The recession has clearly hit the machinery industry, and machine makers are taking drastic steps to control costs and limit losses.

Deere & Co., the world’s biggest maker of tractors and other farm machinery, slashed its 2009 earnings outlook by 21 percent, saying it had been hit in the three months to the end of January by plummeting sales in central and eastern Europe. The agricultural equipment maker posted an earnings fall of nearly 45 percent in its fiscal first quarter, which ended on Jan. 31, and didn’t provide a quarterly forecast. Deere expects overall equipment sales to drop about 8 percent for the full year, and approximately 9 percent during the second quarter, Forbes reports.

After worldwide agricultural equipment sales — Deere’s biggest operation — jumped 18 percent during the fourth quarter, the manufacturer last month said that demand for agricultural equipment would “fall by up to 25 percent this year in emerging economies as farmers find it increasingly difficult to access credit,” the Financial Times reports (subscription required).

“Deere had been weathering the housing slump by offsetting a drop in construction equipment sales with strong sales of farming machinery,” the Associated Press reports. “High steel costs also continued to drag down company results. Prices for the metal soared to historic highs last year, and orders from companies like Deere may be based on those prices.”

In fact, the collapse of the U.S. housing market has especially pinched demand for all kinds of equipment and building materials, as well as a range of consumer goods, including furniture, carpet and household appliances.

Another recent report from the Commerce Department said construction of new homes and apartments plummeted 16.8 percent in January from the previous month, to a record-low annual rate.

“Builders are slashing home construction as skyrocketing home foreclosures dump more empty properties on an already glutted market,” the Associated Press noted. “Applications for building permits, a barometer of future activity, also sank to a record low pace [...] in January, a 4.8 percent drop from the prior month.”

Overall market conditions worldwide remained weak in January, as highlighted by the dropping level of incoming new business reported by the latest JPMorgan Global All-Industry Output Index for the eighth month in a row.

In February, Europe’s manufacturing industry contracted at a record pace, as producers continued to scale back output and cut jobs. MAN AG, Europe’s third-largest truck maker, said last month it would cut costs further and extend reductions in working hours. The announcement came after declining sales caused fourth-quarter profit to plunge by almost half, Bloomberg News reports.

“Germany is being hardest hit because of the collapse in export markets and a lack of support from consumers,” Anders Matzen, chief analyst at Nordea Economic Research in Copenhagen, told the New York Times.

According to the VDMA machine makers association, German plant and machinery orders fell in October, with a decline in export orders. Data from VDMA indicates that the six-year boom period for construction machinery sales has ended. Orders fell by 30 percent for the October-December 2008 period, compared to the same period in 2007. This sales drop hit construction-equipment manufacturers hard. Meanwhile, difficulty sourcing funding for construction projects worldwide is having a major effect on heavy industry.

“Never before have we seen such a sudden and drastic decrease in incoming orders happening at so many companies, in so many different sectors and markets at the same time as in the last quarter of 2008,” a VDMA representative said in a recent statement.

In January, the Federal Statistical Office in Germany offered a preliminary estimate that the national economy shrank by 1.5 to 2 percent in the fourth quarter. An optimistic outcome is expected for Germany, however, due to strong infrastructure spending.

Now countries are infusing their respective economies through various economic plans, many of which pay special attention to infrastructure and construction investment. Whether these stimulus packages around the world gain traction may be a key factor in determining the near- and long-term viability of current heavy industry strategies.

Resources

Is Anything Made in the U.S.A. Anymore? You’d be Surprised
by Stephen Manning
The Associated Press, Feb. 20, 2009

Industrial Production, Housing Starts Plunge
by Jeannine Aversa
The Associated Press, Feb. 18, 2009

Industrial Production and Capacity Utilization
U.S. Federal Reserve, Feb. 18, 2009

Industry Outlook: Machinery & Industrials
by Mario Ricchio
Zacks.com, Dec. 31, 2009

Gross Domestic Product: Fourth Quarter 2008
Bureau of Economic Analysis, Feb. 27, 2009

Unclear Deere
by Carl Gutierrez
Forbes, Feb. 18, 2009

Deere Warns on Sales in Emerging Countries
by Hal Weitzman
The Financial Times, Feb. 18, 2009

Deer 1Q Profits Falls 45 Percent, Outlook Weak
by Daniel Lovering
The Associated Press, Feb. 18, 2009

New Residential Construction in January 2009
U.S. Census Bureau / Dept. of Housing and Urban Development, Feb. 18, 2009

Global Economic Activity and Employment Fell Further
JPMorgan Global Manufacturing & Services PMI, Feb. 4, 2009

Europe Services, Manufacturing Shrink at Record Pace
by Jurjen van de Pol
Bloomberg News, Feb. 20, 2009

Deepening Slump Seen in European Output
by Matthew Saltmarsh
The New York Times, Feb. 10, 2009

2008 Indicates the End of the Boom for Construction Equipment and Building Material Machinery
VDMA, Feb. 24, 2009

Signed, Sealed, Delivered: ARRA
WhiteHouse.gov, Feb. 17, 2009