Caterpillar Echoing Wall Street Rebuts Gross’s Pessimism

Caterpillar Inc. (CAT), among the first companies to ring warning bells about the recession in 2007, isn’t subscribing to the pessimism of investors such as Bill Gross even while moderating its global growth projections.

A U.S. recession this year is unlikely and the economy will probably grow slightly more than 2 percent, down from an April forecast for about 3 percent, Caterpillar said yesterday in its second-quarter earnings statement. The climate is different than in 2008 because short-term interest rates are lower, central banks are prepared to inject more liquidity and the U.S. housing market is slowly improving rather than falling off a cliff, the company said.

“The good news is, this doesn’t feel like 2008,” Chief Executive Officer Doug Oberhelman said in the statement.

Caterpillar has a track record of accurate forecasts. In October 2007 it said the U.S. may fall into a recession, in contrast to the outlook of companies including Ford Motor Co., DuPont Co. and Intel Corp. at the time. Caterpillar, considered a U.S. bellwether because it’s the world’s largest maker of construction and mining equipment, proved to be correct as the economy experienced a slump that began in December 2007 and ended in June 2009.

Caterpillar’s projections this year are more in sync with the majority view of economists and contrast with comments made by Gross in a July 16 Twitter post. Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. is “approaching recession when measured by employment, retail sales, investment and corporate profits.”

‘Muddle Through’

Improvement in the U.S. economy, a “muddle through” scenario for Europe and China trying to ramp up investments with its slowdown bottoming will produce a pickup in world growth later this year and into 2013, Bob Baur, chief global economist for Principal Global Investors, which manages about $260 billion, said in a telephone interview.

Caterpillar, while lowering the upper end of its sales forecast partly on a “weaker” global economy, raised its 2012 profit outlook and said actions to spur growth have begun in several countries.

Brazil late last year began lowering interest rates and China’s investment initiatives should help growth later this year and into 2013, the company said. In Europe, the central bank’s monetary easing and a commitment to solving the debt crisis are improving the euro zone’s long-term outlook, the company said.

‘Growth Prospects’

“We understand the world economic horizon is hazy,” Ed Rapp, chief financial officer of Peoria, Illinois-based Caterpillar, said in a video posted on the company’s website. “We are encouraged by the pro-growth actions by governments and central bankers throughout the world that are intended to stimulate world economic growth prospects moving forward and out into 2013.”

Prospects for growth in the U.S. likely will improve next year if there is more clarity on issues such as taxes and health care, Rapp said yesterday in an telephone interview.

Global growth will average 2.5 percent this year, lower than the expansion of more than 3 percent it forecast in April, Caterpillar said.

“We are planning for a world that is growing anemically in the next 24 months,” Oberhelman said yesterday on a conference call to discuss his company’s earnings. “We are not planning for an implosion.”

‘Modest Signs’

A majority of economists forecast the world’s largest economy may avoid a recession even as growth decelerates amid a cooling job market.

Federal Reserve officials predict a U.S. expansion of 1.9 percent to 2.4 percent this year, with unemployment stuck in a range of 8 percent to 8.2 percent. The probability of a U.S. recession within the next 12 months held at 20 percent this month, according to the median forecast of economists in a Bloomberg News survey taken from July 6 to 10.

“We should see a little faster growth in the second half,” said Baur, who is based in Des Moines, Iowa. “The U.S. is still on a healing path. I don’t see a recession imminent on the horizon.”

U.S. housing, the industry that helped trigger the recession, is stabilizing. Fed Chairman Ben S. Bernanke, in testimony to Congress last week, said growth in construction and historically low mortgage rates are among “modest signs” of a housing recovery, even as some buyers show concern about personal finances and the broader economy and have difficulty meeting lending standards.

Bright Spot

Caterpillar forecast housing starts will exceed 750,000 units this year. While down from its prior forecast of 800,000 units, the prediction represents the best level since 2008.

The auto industry remains a bright spot in the U.S. Economic growth is helping drive sales for Ford as more consumers trade in their older vehicles for newer models, said Alan Mulally, chief executive officer of the Dearborn, Michigan- based carmaker. In the first half of the year, annualized U.S. vehicle sales rose to 14.6 million from 12.8 million a year ago, according to Ford (F), which includes medium- and heavy-duty trucks.

“Even though it’s a slower recovery than we’ve had from past recessions, we’re seeing that expansion of around 2 percent to 2.5 percent,” Mulally said of the U.S economy on a conference call yesterday.

‘Fragile’ World

FedEx Corp. (FDX), the world’s largest cargo airline, last month forecast 2.2 percent U.S. economic growth this year, up from a projection of 2.1 percent in March. The company, which carries everything from mobile devices to pharmaceuticals, said it expects the economy to accelerate to 2.4 percent in 2013, contingent on the U.S. avoiding a significant tax increase.

Boeing Co. (BA) Chief Executive Officer and Chairman Jim McNerney said yesterday “the world is a fragile one economically.”

“Despite slower global economic growth and a range of uncertainties, including the European sovereign debt crisis, we continue to see positive worldwide expansion in air traffic,” McNerney said on an earnings call with analysts.

Not all companies are sanguine. United Parcel Service Inc. (UPS), the world’s largest package-delivery company, said on July 24 that a gradual deceleration of business-to-business shipments reflects a softening of the U.S. economy in the second half of 2012 from earlier this year. UPS predicted the U.S. economy will slow to 1 percent growth in the last six months of the year.

‘Too Optimistic’

“Right now, the estimates are a little too optimistic,” UPS Chief Financial Officer Kurt Kuehn said July 24 in a telephone interview. “We’re not trying to ring the alarm bell, but we do think that there’s probably a little more likelihood that the numbers will turn lower than estimates.”

Caterpillar climbed as much as 4.9 percent earlier yesterday in New York trading after it posted record profit and sales in the second quarter.

Still, the stock dropped as much as 1.4 percent midday because investors were concerned about macroeconomic risks and that rising inventories may hurt the company if the situation worsens, Larry De Maria, a New York-based analyst for William Blair & Co. who has a buy rating on the company, said in an e- mail yesterday.

At the close yesterday, Caterpillar rose 1.4 percent to $82.60.

“Although we think that macroeconomic concerns could continue to be a driver of the stock in the near term, we think today’s results demonstrate the company’s ability to execute at a high level,” Barclays Capital analysts led by Andy Kaplowitz said yesterday in a note.

Slower Growth

Kaplowitz, based in New York, said in a telephone interview that Caterpillar has “tended to err on the side of optimism in its recent forecasts,” which has worried investors.

“The expectations around the U.S. economy were for slower growth and Caterpillar was going to have to moderate its comments,” said Kaplowitz, who has a buy rating on the shares. “That’s what Caterpillar has done.”

“Investors believe the U.S. economy is choppy and slower growing than we believed a few months ago,” Kaplowitz said. “But growth is not stopping. There are still some drivers of growth.”

To contact the reporters on this story: Shruti Singh in Chicago at ssingh28@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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