Wells Fargo releases Construction Industry Quarterly Report for Q1, 2010

Climate improves but many industry executives still feel 2010 will be a replay of 2009.

"The overall economy felt a slight but distinct lift near the end of 2009, but so far this
year, we’re still waiting for that pick-me-up to really take hold," says John Crum,
National Sales Manager, Wells Fargo Construction, in his opening remarks of the Q1 2010 Wells Fargo Construction Quarterly newsletter. "Here are a few thoughts
on why we expect another challenging year for contractors and distributors but why
we think the construction industry is starting to turn the corner.

"Executive optimism is up, moderately. In January we released the results of our
annual Construction Industry Survey and its Optimism Quotient* (OQ). After coming
off a record low OQ of 38 in 2009, the measurement bounced back to a 66 for 2010.
So while sentiment may not be considered overly optimistic, it is definitely up from
last year. More executives than in 2009 said they plan on acquiring new and/or used

"Equipment values are stabilizing, mostly. As construction activity peaked in 2006
equipment manufacturers produced large quantities of machines to meet demand.
Domestic activity then trailed off, but international demand propped up prices. When
global construction activity dried up, demand for new and used machines fell and
equipment values slid along with it. Recently we’ve seen a stabilization of equipment
values. A turnaround might be afoot but numbers of new pieces sold will remain at
low levels through this year.

"Construction spending is holding on, barely. Our research shows that overall
residential spending appears to have bottomed out and should grow, albeit at a
moderate pace. However, non-residential construction activity is down almost
50% from 2008 through 2009 and we expect another slight drop in 2010. Highway
spending is likely to remain flat in 2010, but may be helped by the recently passed
bill that extends funding for the Nation’s surface transportation system until the end
of the year. The budget problems of many States may hamper any resurgence of the
construction industry."

Report highlights:

Construction spending — The U.S. Census Bureau October 2009 construction spending in the US grew 1.5% from September to a seasonally adjusted annual rate (SAAR) of $923.9 billion, 13.2 % below the October 2008 estimate of $1,064.1 billion. November 2009 construction spending fell 2.5% to a SAAR of $900.7 billion, down
13.2% from the November 2008 total of $1,037.3 billion.

December 2009 construction spending slipped 1.2% to an estimated SAAR of $889.6
billion, 9.9% below the December 2008 estimate of $1,002.1 billion.

January 2010 construction spending dipped 0.6% to an estimated SAAR of $884.1 billion, 9.3% below the estimate for January 2009.

Equipment Rentals — United Rentals Q4 and annual 2009 report United Rentals reported a $26 million net loss for Q4-2009 compared to an $853 million loss in the same period a year ago. Net losses for the full year were $62 million compared to a net loss of $704 million for full-year 2008. Q4 rental revenue was $450 million, down 26% from $606 million in Q4-2008. Rental revenue for the full year was $1.83 billion compared with $2.50 billion in 2008, a decrease of 26.7%.

RSC reported Q4-2009 rental revenues were $244 million, down 34% from $371 million in Q4-2008. Rental volume declined 24.6% and fleet utilization averaged 56.3% vs. 67.8% in Q4-2008. The company realized a Q4 net loss of $29 million compared with net income of $18 million in the year-ago period. Rental revenues were $1,073 million for full-year 2009, versus $1,567 million in 2008.

Heavy equipment sales and exports — Lower Q4 and full-year 2009 sales for CAT
Caterpillar reported sales and revenues of $32.4 billion for full-year 2009, a 37% decrease compared with $51.3 billion in 2008. Q4-2009 sales and revenue were $7.9 billion, a 39% decrease compared with Q4-2008 revenues of $12.9 billion. CAT expects sales to rebound in 2010 as the economy improves and dealers replace inventory. Leading the way will be China and other developing countries.

U.S. construction equipment exports in Q4-2009 improved 26% over Q3 totals, according to the Association of Equipment Manufacturers (AEM). Equipment exports to other nations totaled $12.8 billion worth of machinery for full-year 2009 representing a 38% drop compared to the roughly $21 billion in 2008.

The Wells Fargo Construction Optimism Quotient — The Optimism Quotient (OQ) is this survey’s primary metric for assessing respondents’ expectations of local construction activity for the coming calendar year compared to the previous year. The OQ going into calendar year 2010 is a decidedly cool 66. Although this is an improvement over the 2009 score of 42 – which was an alltime low – construction executives are saying they are not
very optimistic that local construction activity will show much of an improvement over 2009.

Although almost 1 in 4 construction executives say they anticipate an increase in local construction activity, perhaps the more telling number is that almost half believe activity levels will remain at the overall depressed levels experienced in 2009.

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