Caterpillar Shows Worry's Role in Recession

Brooke Sutherland

24 Oct 2019, 10:47 AM IST

(Bloomberg Opinion) -- Caterpillar Inc.’s results show how worry itself can bring on a recession.

The industrial bellwether reported its first quarterly earnings decline in nearly three years on Wednesday and cut its full-year profit guidance. It had warned in July that earnings per share were likely to come in at the low end of its previous range, but that was based on an expectation for modest sales growth that seemed overly optimistic. Instead, third-quarter revenue declined in all of Caterpillar’s major business units, including the mining-equipment division that had been a rare bright spot this year amid weakness in its construction machinery operations. The slowdown in shale production as producers prioritize shareholder returns and cost control continued to weigh on sales of fracking pumps. But more than a reflection on any one of those particular markets, this was a macroeconomic story, and a poor one at that.

Caterpillar Shows Worry's Role in Recession

Caterpillar blamed its slumping sales and earnings on customers holding off on equipment purchases. With the trade war, Brexit and increased signs of manufacturing malaise, no one wants to get stuck with a glut of expensive machinery that they can’t sell. So inventories shrank by about $400 million in the third quarter as dealers sold off stockpiles of equipment, rather than replenishing them. Industrial companies ranging from CSX Corp. to United Parcel Service Inc. have offered similar warnings about the extent to which uncertainty is weighing on their businesses, even as parts of the economy remain relatively healthy. This adds to evidence that a trade war resolution may still be able to pull the manufacturing sector back from the brink. Achieving that is, of course, easier said than done.

For now, you’d be hard-pressed to find much news worth celebrating in Caterpillar’s release. The order backlog continued to shrink. Sales for the construction business in Asia declined a whopping 29%, suggesting the competitive pricing that’s eroding Caterpillar’s market share in the area hasn’t abated. At least in the short term, Caterpillar isn’t counting on a turnaround: It expects dealers to continue to wind down their inventory in the fourth quarter amid “global economic uncertainty” and flat demand from the end users of its equipment. In its news release, Caterpillar raised the prospect of curbing production and reducing costs if the weakness persists, which likely indicates job cuts. Such cutbacks, while necessary to respond to declining demand, may only lead to more economic weakness.

As has been common this industrial earnings season, investors seemed content to take their hits and keep on chugging along, hoping the worst will soon be behind them. After dipping as much as 7.7% on the 6:30 a.m. earnings release, Caterpillar was actually up slightly by 8 a.m. But such broad-based weakness at Caterpillar should be a reminder that all is not well in the global economy.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.