Caterpillar’s hole: What’s it mean for the economy?

Jul 24, 2013
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Caterpillar’s hole: What’s it mean for the economy?

Jul 24, 2013
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COPY

Caterpillar isn’t just any company: It’s a bellwether, deeply interwoven with the global economy. And when it reported disappointing profits today, that scared a lot of people.

“We make engines, gas turbines, mining products, locomotives, forestry equipment, very large machines and very small ones,” says spokesman Jim Dugan. “The two big issues for the second quarter for Caterpillar were inventory reduction and slow mining business.”

Over the last year, Caterpillar’s independent dealers became more interested in reducing inventories rather than building them up.  That’s because customers weren’t buying as much as they or Caterpillar had expected.  So the company cut production while dealers let stockpiles shrink.

Mining in particular offers a good lens for how Caterpillar is connected to the global economy, according to Matthew Slaughter, head of Dartmouth’s Tuck School of Business. 

“Caterpillar’s weakness in mining reflects the weakness that a lot of mining companies themselves are seeing,” says Slaughter. “The reason a lot of prices are weakening for commodities is closely linked to a slowdown in growth in fast growth emerging markets like China.”

And it’s not just China.

“Automotive sales are down in India, Brazil is precarious, Russia is just barely cruising along,” says analyst Sandeep Kar with Frost & Sullivan.

Kar says Caterpillar’s buyers are construction and engineering firms. And if they are slowing down it could mean the global economy is just barely “crawling” along. 

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