CAT cuts its Outlook: Not a Good Industrial Sign

Last week, industrial bellwether Caterpillar cut its future earnings outlook. The Wall Street Journal covered the news noting that the "heavy equipment manufacturer lowered its earnings outlook for the year and issued tepid guidance for 2008 ... [citing] weakness in several key U.S. industries it serves, including housing, non-residential construction, coal mining and trucking. It also pointed to the possibility of a recession for the U.S. economy." We should all pay attention to CAT's forecast given that the industrial giant not only has its pulse on the US and global economies -- it's run by an actual economist, which makes its forecasts particular insightful.

In the same report to the street, CAT noted that "the economic rebound that occurred in the U.S. in the second quarter should fade in the second half of 2007" and that “many of the U.S. industries that are important to its business are in recession [and might get worse in Q4] ... in part because of tighter credit conditions." What -- if anything -- might CAT's forecasts signal for direct materials sourcing strategies? For one, look for the potential for greater fluctuations in regional pricing for metals and other commodities based on local demand in specific countries. And look for capacity to open up in global markets supplying the US -- and with US suppliers as well.

Jason Busch

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