AGMAMay 2014

Economic and
Gear Industry
Outlook
Optimism is Gaining
May 2014
US & Global Economic Outlook

After a difficult winter, economic optimism has returned
The US economy on a moderate growth path

The expansion is regaining momentum this spring, after adverse
weather and an inventory correction stalled the economy in the first
quarter.
Consumer spending is supported by gains in employment, income,
and household net worth.
Homebuilding will rise through 2016, as supply catches up with
demand.
Capital spending will accelerate in 201415 in response to global
market growth, replacement needs, and technological advances.
Interest rates will rise significantly over the next four years as
monetary accommodation is withdrawn.
Long-term federal fiscal imbalances can be fixed, but the process will
be difficult and require entitlement reforms.
Copyright 2012 IHS Inc.
3
US Outlook/ may 2014
US economic growth by sector

Key indicators
(Percent change)
2013
2014
2015
2016
Real GDP
1.9
2.4
3.2
3.5
Consumption
2.0
2.7
3.0
3.4
12.2
4.0
19.8
11.4
2.7
4.2
7.3
7.3
Federal government
-5.2
-2.4
-0.5
-0.9
State & local government
-0.2
0.3
0.9
1.2
Exports
2.7
2.8
5.3
4.9
Imports
1.4
2.1
6.5
5.7
Residential investment
Business fixed investment

4
Other key US indicators

Key indicators
(Percent change)
2013
2014
2015
2016
Industrial production
2.9
3.7
3.7
3.8
Payroll employment
1.7
1.8
1.9
2.1
Light-vehicle sales (Millions)
15.5
16.0
16.4
16.7
Housing starts (Millions)
0.93
1.02
1.40
1.58
Consumer Price Index
1.5
1.9
1.5
1.5
Core CPI
1.8
1.8
2.0
1.8
Brent crude oil price ($/barrel)
109
107
101
103
Federal funds rate (%)
0.1
0.1
0.4
2.2
10-year Treasury yield (%)
2.4
2.9
3.3
3.9

5
US real GDP growth will be sufficient to

reduce the unemployment rate
6
10.0
8.8
7.6
-3
6.4
-6
5.2
-9
4.0
2005
2007
2009
2011
Real GDP growth (Left scale)
2013
2015
Percent
Annual percent change
Real GDP and unemployment
2017
Unemployment rate (Right scale)

6
Interest rates will rise from exceptionally low

levels
Interest rates
12
10
Percent
0
1990
1993
1996
Federal funds
1999
2002
10-year Treasury
2005
2008
30-year mortgage
2011
2014
2017
BAA corporate

7
US employment growth will remain strong

through 2016
Payroll employment
Percent change, annual rate
-2
-4
-6
-8
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018

8
Consumer price inflation will stay mild

Inflation
6
Year-over-year percent change
5
4
3
2
1
0
-1
-2
2000
2002
2004
2006
All-Urban CPI
2008
Core CPI
2010
2012
2014
2016
2018
Employment Cost Index

9
After a slowdown in 2013, labor compensation

and productivity will accelerate
Private nonfarm labor compensation, productivity, and unit labor costs
8
Percent change
-2
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Hourly compensation
Productivity
Unit labor costs

10
Industrial materials prices show no clear

direction
Industrial materials prices
IHS weekly indexes, 2002:1=1
0
2002
2004
2006
All industrial materials
2008
Chemicals
2010
2012
2014
Nonferrous metals

11
Healthcare will take a rising share of personal

consumption expenditures in the decade
ahead
Personal consumption by category
Percent of total consumption
30
25
20
15
10
0
1960
1968
1976
1984
1992
Food
Energy
Medical
2000
2008
2016
2024
Housing services

12
The dollars real exchange value will stay

competitive
Real trade-weighted dollar index
1.75
2009 = 1.00
1.50
1.25
1.00
0.75
0.50
1980
1984
1988
1992
1996
Major trading partners
2000
2004
2008
2012
2016
2020
Other important trading partners

13
Bottom line for the US economy

Real GDP growth is projected to pick up in 2014 and 2015, led
by strengthening private-sector investment.
Homebuilding will rise through 2016 as supply catches up with
demand.
Consumer spending will be supported by gains in employment,

personal income, and household wealth.
Net exports will support economic growth after 2016.
Interest rates will rise through 2017 as monetary

accommodation is withdrawn.
Long-term federal fiscal imbalances can be fixed, but the
process will be difficult.
14
An acceleration in the global economy

Global economic growth will gradually pick up in 2014-15, led
by better performances in North America and Western Europe.
The US expansion will gain momentum with improved
household finances, strengthening private investment, and
reduced fiscal drag.
Western Europes slow recovery will gain traction as credit
conditions ease and capital spending turns up.
Chinas growth will be restrained by excess capacity and

deleveraging.
Growth paths in emerging markets will depend on structural
reforms that raise productivity and allocate capital more
efficiently.
15
Asia-Pacific (excluding Japan) and Sub-Saharan Africa

will achieve the fastest growth in real GDP
Real GDP
8
Annual percent change
-2
NAFTA
Other
Americas
Western
Europe
2012
Emerging
Europe
2013
2014
Mideast-N. Sub-Saharan
Africa
Africa
2015
Japan
Other AsiaPacific
2016-20

16
Why has growth in emerging markets slowed?
Cyclical
forces
Structural
forces
Withdrawal of policy stimulus

Weak export markets
Capital rotation as US bond yields rise
Excess capacity after investment booms
Slower labor force growth

Slower pace of globalization
End of commodity price supercycle
Lack of market reforms

17
Western Europe will achieve modest growth

The Eurozone economy is growing again, but full recovery in real GDP
will take until the beginning of 2016.
Rising consumer and business confidence, low interest rates,

improving export markets, and pent-up demand for durables will
support growth.
Extended fiscal austerity, still-significant banking sector problems, and
weak consumer finances will, however, restrain growth in several
countries.
The United Kingdom, Germany, Sweden, and Switzerland will lead the
regions growth, while Greece, Italy, Spain, and France will lag.
If consumer price inflation does not drop below Marchs 0.5% pace, we
expect the European Central Bank will avoid further policy stimulus.
18
Real GDP growth in Europes major

economies
Real GDP
6
Percent change
-2
-4
-6
2006
2007
2008
2009
2010
Germany
2011
UK
2012
France
2013
2014
Italy
2015
2016
2017
2018
Spain

19
World Outlook/ May 2014
Japans economy has limited growth potential

Real GDP
7.5
Percent change
5.0
2.5
0.0
-2.5
-5.0
-7.5
1986
1990
1994
1998
2002
2006
2010
2014
2018

20
Chinas economic growth is slowing

Real GDP slowed to 7.4% year on year in the fourth quarter,
restrained by weakening real estate activity, tepid investment, and a
sharp deceleration in output of state-owned enterprises.
The investment slowdown is part a necessary rebalancing of Chinas
economy; growth in retail sales and services activity remains strong.
Chinas central bank is maintaining a neutral-to-tight monetary policy
to rein in shadow-banking activities, which pose systemic risk.
Fiscal stimulus will be applied to keep growth above 7%, including
spending on railways, upgrades to low-income housing, and smallbusiness tax cuts.
The Third Plenum set the stage for economic reforms that will allow
markets to play a larger role in resource allocation. The pace of reform
will be gradual.
21
Chinas economic growth is downshifting

Real GDP and industrial production
25
Percent change
20
15
10
0
1980
1985
1990
1995
Real GDP
2000
2005
2010
2015
2020
2025
Industrial production

22
Global Economic Summary

The global economy will accelerate modestly in 2014-15.
The US expansion will gain momentum, sparked by a pickup in capital

spending, a housing market recovery, and an energy boom.
The Eurozone will continue its slow recovery, as credit conditions
improve.
Emerging markets will continue to disappoint. Growth paths will
depend on structural reforms that raise productivity and allocate
capital more efficiently.
Risks abound: Chinas rising debt, the Ukraine crisis, geopolitics,
another oil shock, central bank exit strategies, and other policy
mistakes.

23
Construction & Housing Outlook

Rapidly growing with spill-over to gear markets
A demand-led recovery in housing markets

Job growth has sparked a recovery in household formation.
Supply shortages are driving up home prices.

Rising mortgage rates and prices will slow the recovery in home
sales.
Multifamily units will account for about 30% of housing starts.
Young adults are delaying homeownership.
Baby boomers are starting to downsize.

25
A rebound in household formation will support

increases in housing starts through 2016
Housing starts and formation
2.1
1.8
Millions
1.5
1.2
0.9
0.6
0.3
0.0
1980
1985
1990
1995
2000
Housing starts
2005
2010
2015
2020
Household formation

26
Housing starts and home prices are rising

2.5
240
2.0
220
1.5
200
1.0
180
0.5
2003
160
2005
2007
2009
Housing starts (Left scale)
2011
2013
2015
1991Q1 = 100
Millions of units
Housing starts and home prices
2017
FHFA house price index* (Right scale)
* Purchase-only index
27
Opportunity vs. Risk: Largest countries cluster

near median growth
Top 15 Construction Markets
Total Construction, Real 2010 USD, 2013-18 CAGR, Percent
10
China
8
India
United States
6
Indonesia
UK
Median-GCO
Japan
Korea
Germany
Brazil
Russia
Canada
France
Australia
Italy
Spain
-2
0
10
15
20
25
Five Year Construction Risk Score
30
35
40
28
Opportunity vs. Risk: Qatar will see fastest

growth with risk near the global median
Top 15 Fastest Growing Construction Markets
Total Construction, Real 2010 USD, 2013-18 CAGR, Percent
12
10
China
Qatar
8
Bangladesh
United States
Vietnam
India
Panama
Kenya
6
UAE
Malaysia
Pakistan
Turkey
Indonesia
Jordan
Egypt
Median-GCO
2
0
-10
10
20
30
40
50
60
Five Year Construction Risk Score

29
US construction growth in 2014 will be 8.1%
US Construction Spending
(2009 US$)
$1,400,000
$1,200,000
10.0%
8.0%
6.0%
$1,000,000
$800,000
$600,000
$400,000
4.0%
2.0%
Infrastructure
0.0%
Nonresidential Building
-2.0%
Residential Building
-4.0%
Total Construction (%ch y/y)
-6.0%
$200,000
$0
-8.0%
-10.0%
30
Public construction will be the weak link
US Construction Spending
(2009 US$, %Ch y/y)
Commercial
Office
2013
2014
2015
Total Manufacturing
CAGR 2013-18
Government Buildings
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
31
Total construction spending outlook

There are wide variations in state-level construction spending over the next few
years, but growth will be driven primarily by the resurgent residential market.
The highest growth rates will be seen in those states that were hit hardest by the
housing bust and recession: Florida, California, Nevada, and Arizona. The middle
section of the nation is seeing lower levels of growth; they did not see the severe
fluctuations in economic activity that the coastal areas experienced.
New England is seeing slower growth since economic conditions are hampered
by their close export ties to Europe, which is still facing economic weakness. An
aging population is also keeping growth low.
Natural resource development, specifically unconventional oil and gas, has been
a factor for growth in North Dakota, Pennsylvania, Ohio, and Texas. Once the
base infrastructure is in place, spending levels on construction are expected to
return to more sustainable levels.
32
Total construction spending, 2013-18

(Compound annual growth, 2009 dollars)
Less than 0%
0% to 2%
2% to 5%
5% to 10%
Greater than 10%
Residential construction spending outlook

Residential construction spending continues to increase from historical lows in
the near-term outlook.

The real estate market across the nation is continuing to benefit from pent-up
demand flowing into it, although prices are rising and inventories are still tight. In
recent months, growth has been dampened by weak permits, rising materials
prices, and reduced investor demand due to lower inventories of distressed
properties.
States that were hit hardest through the downturn (Florida, Arizona, Nevada, and
California) will see the highest rates of growth, as they rebound from years of
stagnant spending.
Natural resource states, such as Wyoming and North Dakota, will see lower
levels of spending in the outlook, as they return to more normal patterns after a
significant buildup related to resource development.
34
Residential construction spending, 2013-18

(Compound annual growth, 2009 dollars)
Less than 0%
0% to 2%
2% to 5%
5% to 10%
Greater than 10%
35
Nonresidential construction spending outlook

Nonresidential construction spending will be driven by the structures segment, as
infrastructure spending continues to be held back by funding uncertainties.

Spending on nonresidential structures construction will be fueled by the
resurgence in the residential market, the improving labor market, and a return to
growth in the nations export markets in Europe beginning this year.
The strongest growth will be seen in the commercial segment, comprised of
office, lodging, retail, and auto.

Infrastructure spending remains hindered by flat or reduced funding. Budget
restraint is still ongoing at all levels of government. The Federal Transportation

Act (MAP-21) is set to expire in September 2014, and talks have yet to begin in
earnest on extending this funding.
Public-sector spending will be hampered through the near term, because fiscal
restraint is still in place.

36
Total nonresidential construction spending,

2013-18 (Compound annual growth, 2009
dollars)
Less than 0%
0% to 2%
2% to 5%
5% to 10%
Greater than 10%
37
US Industry Markets
Industry drivers supporting the gear industry
should improve slowly though 2014 and
accelerate during 2015 and beyond
The Latest News in Manufacturing

Manufacturing output grew by 2.9% during 2013. Growth in 2014 is
expected to improve to 3.5%. During 2015 over 4% growth is anticipated.

Durable goods orders increased 4.9% during 2013 compared to a year
ago. They are up 3.9% year to date through March 2014 despite difficult
winter.
The Institute of Supply Managements purchasing managers index (PMI)
was as 54.9 for April (the 50 threshold is an indication a manufacturing

contraction or expansion). It has consistently increased since the
beginning of the year.
Construction and spending on capital equipment are set to heat up.
The Institute for Supply Managements

indexes signal faster growth in manufacturing
and services
ISM indexes
(Index, over 50 indicates expansion)
65
60
55
50
45
40
35
30
2000
2002
2004
2006
Manufacturing index
2008
2010
2012
2014
Nonmanufacturing index
Source: Institute for Supply Management (ISM)

40
US durable goods orders were up 5% during 2013 and up 4%

year to date through March
(Billion US dollars)
260
240
220
200
180
160
140
2003
Source:
Census Bureau
2005
2007
2009
2011
2013
41
Production of US Durable Goods

Grew only 4.4% during 2013, but look for 2014 and 2015 to pick-up
(Percent change)
15
10
5
0
-5
-10
-15
-20
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
42
Industrial Machinery Overview

Includes:
Sawmill & Woodworking Machinery

Food Processing Machinery
Plastics & Rubber Industry Machinery
Semiconductor Mfg Machinery
Textile Machinery
Printing Machinery
Petroleum Refining Machinery
Chemical Processing Machinery
Capital spending programs on industrial equipment increased only 3.3% during
2013. This was lower than originally anticipated. However orders were up 20% for
the year.
We look for spending on for industrial equipment to expand 8% during 2014 and
11% in 2015. The growth potential is there, last year was just a lull.
Exports account for over 30% of US industrial machinery shipments. A competitive
US dollar will be beneficial.

US industrial equipment orders were up 20% during 2013 and

6.4% year to date through March
(Million US dollars)
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
2003
Source:
Census Bureau
2005
2007
2009
2011
2013
44
Production of US Industrial Machinery

Grew only 2% during 2013, but look for 2014 to increase nearly 10%
(Percent change)
30
25
20
15
10
5
0
-5
-10
-15
-20
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
45
Construction Machinery Overview

Includes:
Construction Machinery
(backhoes, bulldozers, off-highway trucks, construction tractors , road graders)
Surface Mining Machinery (except drilling)
Logging Equipment
The recovery in housing and construction will hit its stride from 2014 through 2016.
Recovery in residential construction and logging/wood products is providing some support to
domestic sales but mining remains a drag.

Coal mining faces stiff competition from natural gas and environmental pressures.
Shale gas, tight oil, and tar sand projects will provide support beyond 2014. Higher energy
price will be a stimulus.

Nonresidential construction is expected to pick up sharply during 2015 and 2016, especially
from the commercial building side.

But public projects are likely to limp along over the next few years.
US construction machinery orders were up 21% in 2013, but

most of the strength was during the beginning of the year.
Year to date through March it is still up 4%
6,500
5,500
4,500
3,500
2,500
1,500
500
2003
Source:
Census Bureau
2005
2007
2009
2011
2013
47
For the past three years US construction machinery production

has been driven by the energy market and exports. Look for it to
pick-up again in 2015 and beyond
(Percent change)
40.0
30.0
20.0
10.0
0.0
-10.0
-20.0
-30.0
-40.0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
48
Farm Machinery Overview

Includes:
Farm Machinery (combines, tractors, plows, planters, feed processing equipment)

Lawn & Garden Tractor Mfg (includes home use)
Despite falling from 2012 US farm income, the key driver of equipment spending, was still
near a record.
As farmers bought equipment farm machinery production was up 4 during 2013.
Canadian market has also been robust in terms of equipment purchases.
Despite a strong harvest, weaker commodity prices should bring farm incomes close to
$100 billion in 2014 after a record $130 billion last year. Look for declines in the US farm
equipment market.
Canada will mirror the US market and exports should improve along with ROW economy.
Commercial turf business improves with the economy. Lawn and garden equipment demand
will rally with housing.

Farm incomes in 2014 and 2015 will be off record levels,

but still relatively high compared to history.
US Net Farm Income

140
Billion Dollars
120
100
80
60
40
20
0
50
Production of US Agricultural Machinery

After last years growth, look for farm machinery output to decline
during 2014
(Percent change)
15
10
5
0
-5
-10
-15
-20
-25
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
51
Metalworking Machinery Overview

Includes:
Industrial Mold Mfg
Machine Tool Mfg (cutting types)
Special Die & Tool, Die Set, Jig & Fixture Mfg
Cutting & Machine Tool Accessory Mfg
Rolling Mill Machinery
The rebound in metalworking industry activity and pent-up demand has allowed capital
spending programs to proceed.

The motor vehicle industry has become profitable and long-delayed CAPEX programs are
moving forward.
The Boeing and Airbus finally ramp-up of commercial air transport production should provide
additional support.
Growth in metal working should continue, beyond 2014 as many delayed capital projects
finally become realized.

US metalworking machinery orders were 12% higher

during 2013 and 13% higher year to date through March
3,500
3,000
2,500
2,000
1,500
1,000
500
2003
Source:
Census Bureau
2005
2007
2009
2011
2013
53
US Metalworking Machinery Production

Output will need to ramp up during 2014 to fill orders.
(Percent change)
20
15
10
5
0
-5
-10
-15
-20
-25
-30
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
54
Engine, Transmission & Power Equipment Overview

Includes:
Turbine & Turbine Generator Set Units (includes steam, hydraulic, gas, wind, excludes
aircraft)
Speed Changers, Industrial High-Speed Drive & Gear Mfg
Mechanical Power Transmission Equipment Mfg
Other Engine Equipment Mfg (internal combustion engines except auto & aircraft)
Electric utility operating rates suggest slow growth in total capacity.
Revival of domestic energy industry will provide support. Rebound in building construction
will be supportive.
Following a sluggish 2013 heavy truck demand will expand through 2015.
Wind energy projects are anticipated to improve.
Exports have reflected weakness in Europe and slower growth in developing economies,
but US turbine manufacturers are very internationally competitive.
US engine, transmission and power equipment orders were

4% higher during 2013 and 3% higher year to date through
March
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
2003
Source:
Census Bureau
2005
2007
2009
2011
2013
56
Replacement demand will drive power sector

investment
Electric Utilities Have Adequate
Generating Capacity
(Percent, electric utility operating rate)
110
100
90
80
70
1998 2000
2002
2004 2006
2008 2010
2012
57
US Utility Capacity Additions

(Megawatts)
Gas
Coal
2012
8906
4320
947
13041
2624
2013
6938
1555
248
1430
3921
2014
4778
600
6631
4215
777 17001
2015
5664
1582
7246
3835
761 19088
2016
11141
482
131
1512
4728
396 18390
2017
3198
483
2939
2001
364
2018
6453
1332
3676
2445
411 14317
Nuclear Wind
Solar
Other
Total
718 30556
1082
15174
8985
Natural gas leads the way

US Utility Generating Capacity: Additions
by Fuel Type
(Percen t in crease 2013-18)
45
30
15
0
Natural
Gas
Win d
So lar
Oth er
59
North American Engine, Transmission and Power Equipment

Production, slight improvements are likely beyond the lull in 2013
(Percent change)
35
25
15
5
-5
-15
-25
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
60
Oil and Gas Field Machinery Overview

Includes:
Oil & Gas Field Drilling Equipment
Oil & Gas Field Production Machinery
Derricks (excludes offshore & floating platforms)
Water Well Drilling Machinery
Global mining and energy industry capital spending has suffered as a result of soft prices.
Over supply in the shale gas regions has limited additional drilling.
The outlook for tight oil projects remains bright.
Canadian tar sands production will continue to gain ground.
Competition from cheap natural gas and environmental pressured will continue to take a toll
on coal.
Global economic growth will improve starting in 2014. Rising demand and an upward drift in
commodity prices will eventually trigger a recovery in rest-of-world mining and energy
industry capital spending.
Crude oil and natural gas prices on different

paths
140
14
120
12
100
10
80
60
40
20
0
2000
Dollars/million Btu
Dollars/barrel
Crude oil and natural gas prices
0
2002
2004
2006
2008
Crude oil, Brent (Left scale)
2010
2012
2014
2016
2018
2020
Natural gas, Henry Hub (Right scale)

62
Rising North American production will restrain oil prices

Supply growth should be more than sufficient to meet rising
global demand, putting downward pressure on prices in 201415.
IHS Energy projects US liquids production will increase from 7.5
million barrels per day (mbd) in 2013 to 8.5 mbd in 2014 and 9.0
mbd in 2015.
The long-term path for global oil prices has been raised
significantly. Higher prices will be needed to generate the
required investment in future tight oil, deepwater, and frontier
offshore fields.
Global spare capacity will remain tight, with little cushion to
absorb major supply disruptions.

63
Tight oil and shale gas projects will provide the

support
US Oil and Natural Gas Production

8.5
80
7.7
73
6.9
66
6.1
59
5.3
52
4.5
45
2005
2008
Oil (MBD)
2011
2014
2017
Gas (TCF)
64
Rising demand for North American natural gas

Extremely cold weather and resultant storage withdrawals have left natural gas
inventories below their five-year average, driving up near-term prices.

Production from the Marcellus/Utica region has surged as new pipeline
takeaway capacity has come into service.

Overall, US lower-48 dry gas production will hold steady in 2014, while
Canadian production will likely bottom out.

Industrial gas demand will continue to grow, with significant investments in new
ammonia, methanol, and ethylene facilities under way.

Mandated coal-fired power generation retirements by 2015 and the advent of
liquefied natural gas exports in 2016 will lead to price strength for a short period,
but this will incentivize faster production growth.

65
Shale gas productive capacity expands 42% through

2017
North American Natural Gas Productive
Capacity
(Billions of Cubic Feet)
60
48
36
24
12
0
45
40
35
30
25
20
2011 2012 2013 2014 2015 2016 2017
Shale Gas
Other
Shale %
US oil and gas field and mining machinery orders were 6%

higher in 2013 and 4% higher year to date through March
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
2003
Source:
Census Bureau
2005
2007
2009
2011
2013
67
North American Gas and Oil Field Equipment

Production growth has slowed from 2011 and 2012, but should be
steady over the next five years
(Percent change)
35
25
15
5
-5
-15
-25
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
68
The Auto Market Hits a Speed Bump

Bad weather was largely responsible for dropping the
SAAR into the low 15mm range

Sales snapped back in March and April, 16mm.
Pent-up demand has been reduced but is still a strong
factor supporting sales.
The market is shifting from a needs based recovery to a
wants driven market.
The cyclical recovery phase is coming to a close, sales
gains will moderate.
Inventory has gotten a bit heavy.
Incentives will clean house, not production cuts.
Auto credit availability is getting better.
Credit and jobs will bring the younger generation into the
showrooms.
North America
- Light Vehicle Sales & Production
Millions
NA becoming an export hub
20
18
16
14
12
10
8
2000
2002
2004
SALES
2006
2008
2010
2012
2014
2016
2018
PRODUCTION
2020
North America
- Light Vehicle Production
(Share of NA Prod.)
Millions
(Units in millions)
18
26%
24%
22%
16
20%
14
18%
16%
12
14%
12%
10
10%
8
8%
2000
2002
2004
2006
Volume - L
2008
2010
2012
Canada- R
2014
2016
2018
2020
Mexico - R

71
US Light Vehicle Sales

- Factors Impacting the total industry volume
Trade Winds
Acceleration in economic growth
Incremental impact of government
sequester reduced
FED to keep interest rates low until late
2015
Jobs growth picks up
Easing in auto credit conditions
Continued recovery in the housing
market
Wage gains outpacing price increases
Business confidence to invest strong
despite rhetoric.
Non-US economic growth to
accelerate.
Head Winds
The Fiscal Fiasco in Washington,
government gets shut down again

because of the debt ceiling
Unintended consequences of FED
tapering
Problems in the emerging market hurt
the export sector
Student loan debt crisis
Job market has yet to develop traction
Low fertility rates and population
growth rates
The auto market is nearing the end of
the cyclical recovery phase
Bottom Line Risk are low, trade winds stronger than heads winds,
there is a 200-300k upside potential in total industry volume
72
Average Age
Cars and Light Trucks on the Road
(Years)
11.5
11.0
10.5
10.0
2008
CARS
2010
LT. TRUCKS
2012
LT. VEHICLES

73
Autos - The Bottom Line

The auto market has been a stellar performer, in an otherwise lackluster
economy.
Performance has snapped back nicely in the Spring.

Pent-up demand remains considerable, consumer buying attitudes and
finally the economy will support sales.
The auto credit cycle has turned, availability has improved considerably.
Industry transactions prices will remain high, the current round of
incentives will be temporary.
Growth in higher income brackets makes the potential good for luxury.
Gen Y will become a factor in the auto market, although it might be a
harder sell.
Copyright
Higher
fuel economy standards are the new big challenge and opportunity.
2012 IHS Inc.
74
Autos - The Bottom Line

The auto industry is in its best shape to withstand economic adversity.
Auto credit quality is outstanding, availability will improve this year.
Industry pricing power will continue to strengthen.
Small cars will gain market share but crossovers will remain very popular.
Higher fuel economy standards are the next big challenge (opportunity).
The industry has done a great job reducing capacity and cost, but we cant rest on
our laurels.
Initially replacement demand drives volume, longer term demographics sustain
sales.
Eventually the economy will support volume levels that are more normal for the
auto industry.
The industry has become more profitable and once volume returns profits will
further improve.
75
Commercial Vehicle and Trailer Outlook

Medium-duty truck production continues to gain significant ground.
Up 2% during 2013
Up over 24% during 2014
Up 12 in 2015
Heavy-duty truck production, a turnaround is anticipated.
Down 11% during 2013
Up 10% during 2014
Up 10% in 2015
Truck trailer recovery should also advance as equipments gets old

Shipments down up 3% during 2013
Shipments up 9% during 2014
Potential to increase 14% in 2015
Stronger growth in the economy will support equipment sales

Replacement demand is driving sales.
Expect Big Trucking to get bigger
ATA Truck Tonnage Index

6
% Change From a Year Ago
4
2
0
-2
-4
-6
-8
-10
-12
-14
77
North American Medium and Heavy Duty Truck Production

Replacement of old equipment and a pick-up of freight activity should drive
truck production over 11% in 2014 and 9% in 2015
(Percent change)
35
25
15
5
-5
-15
-25
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
78
Aerospace Outlook
Includes:
Aircraft Mfg (commercial & military)
Aircraft Engine & Engine Parts Mfg
Other Aircraft Parts Mfg
Despite some cancellations commercial aircraft orders remain strong. The airline industry
looks to replace older aircraft with updated, fuel-efficient models.

Orders for defense aircraft face headwinds due to lower overall US defense spending. For
Boeing, commercial market (BCA) accounts for 60% of revenues. Boeing defense, space
and security (BDS) accounts for the remaining 40%.
Even though defense aircraft orders have decline total aircraft orders, combined, still rose
over 10% during 2013.

Despite strong orders, production in aerospace was flat during 2013 as manufacturers
remained cautions about ramping up schedules. However, schedules will need increase
substantially over the next three years to fill the order pipeline.
US nondefense aircraft orders were up 24% during 2013

and 12% higher year to date through March
(Million dollars)
30,000
25,000
20,000
15,000
10,000
5,000
0
-5,000
2003
2005
Source:
Census Bureau
2007
2009
2011
2013
80
US defense aircraft orders down 23% during 2013, but

is up 24% year to date through March
(Million dollars)
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
2003
Source:
Census Bureau
2005
2007
2009
2011
2013
81
North American Aircraft and Parts

Production will need to ramp-up to fill orders
(Percent change)
20
15
10
5
0
-5
-10
-15
-20
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
82
Ships, Boats, and Offshore Rigs Overview

Includes:
Barge & Ship Building
Boat Yards, Ship Repair & Dry Docks
Drilling & Production Floating Platforms
Budget constraints will limit the defense side of the business.

US shipbuilding industry order backlog has shrunk over the past year, but
production still needs to increase to fill existing orders. Especially energy carrying
retrofits on existing ships and barges.
With the emphasis on shale gas, tight oil and tar sands, Can/Am investment in
shallow and deepwater rigs will take a back seat.

The demand for rigs outside of the US should remain strong.
Unconventional energy revolution and expansion of domestic chemical capacity
will bolster US vessel production.

After some big deals in 2012 US ship and boat orders were
off 27% during 2013, but up 55% year to date through March
(Million dollars)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2003
2005
Source:
Census Bureau
2007
2009
2011
2013
84
A number of commercial ship conversions to carry energy products

are underway. This should still support production increases over the
next two years
(Percent change)
12
10
8
6
4
2
0
-2
-4
-6
-8
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
85
Bottom line for the gear industries

The stage is being set for growth in the capital equipment markets. Moderate increases this
year and stronger growth peaking in 2015. This will be the principal driver behind a 5%
increase in US gear demand in 2014 and a chance for double digit growth in 2015.
Replacement demand remains the principal driver behind light vehicle sales and higher
production, but growing employment and incomes are making the growth sustainable .
The outlook for commercial vehicle market is positive as replacement demand continues and
freight activity expands.

Energy markets offer strong long-term, opportunities, but near-term potential is limited.
Non defense aircraft and parts production was a disappointment in 2013. But with its long
pipeline of orders, production will need to ramp-up substantially.

Despite manufacturers caution about CapEx, the machinery & equipment view over the next
three years still looks very promising.

86
US Gear Industry
Outlook
2013
Even though bookings and shipments were disappointing,
improvements toward the end of the year were encouraging.
2014
Despite a weak January and February, bookings and shipments will
turn a corner gathering steam as the year continues.
2015
Best chance for growth to be near double digits
US Gear Bookings, Shipments, Demand,

Exports & Imports
US Gear Bookings, Shipments, Demand, Imports & Exports

...History Forecast
May 2014
2011
2012
2013
2014
2015
2016
2017
2018
3,813.336
3,025.807
2,886.944
3,497.695
3,958.019
4,096.746
28.4
-20.7
-4.6
21.2
13.2
3.5
3,321.540
3,490.188
3,277.238
3,438.046
3,823.021
4,112.394
19.5
5.1
-6.1
4.9
11.2
7.6
3.5
3.4
4,899.970
5,243.856
4,788.727
5,016.154
5,530.035
5,932.391
6,177.463
6,332.118
28.3
7.0
-8.7
4.7
10.2
7.3
4.1
2.5
1,926.420
2,139.938
2,080.121
2,050.633
2,174.472
2,276.042
2,372.572
2,438.652
21.8
11.1
-2.8
-1.4
6.0
4.7
4.2
2.8
3,504.850
3,893.606
3,591.610
3,628.740
3,881.486
4,096.039
4,294.970
4,371.919
33.6
11.1
-7.8
1.0
7.0
5.5
4.9
1.8
Millions of Dollars
Total Bookings
% Year Ago
Total Shipments
% Year Ago
Domestic Consumption
% Year Ago
US Exports
% Year Ago
US Imports
% Year Ago
4,133.822 4,167.509
0.9
0.8
4,255.066 4,398.852
88
US gear demand fell nearly 9% in 2013. This year, look for a

small demand turnaround with much stronger growth anticipated
during 2015 and 2016
US Gear Bookings, Shipments & Demand

7.0
6.0
Billion Dollars
5.0
4.0
3.0
2.0
Bookings
Shipments
1.0
Demand
0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
89
Import penetration increased slightly last year and should see

limited growth over the next five years as US manufacturers
remain competitive
US Gear Imports & Exports

5.0
4.5
4.0
Billion Dollars
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Exports
Imports
0.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
90
Regions which had the largest market share of

imports to the US
(Market Share by Major Region)
Region
2013
Asia
44%
Europe
43%
North America
11%
Other
2%
91
Imports from Asia by country (Total 44%)

(Market Share by Major Country)
Country
2013
China
24%
Japan
13%
India
3%
Taiwan
2%
Other
2%
92
Imports from Europe by country (Total 43%)

Country
2013
Germany
16%
Italy
11%
UK
2%
Belgium
2%
France
2%
Spain
2%
Other
8%
93
Imports from North America by country (Total 11%)

Country
2013
Canada
6%
Mexico
5%
94
Regions which have the largest market share of exports

from the US
Region
2013
North America
34%
Asia
26%
Europe
18%
Latin America
12%
Other
11%
95
Exports to North America by country (Total 34%)

Country
2013
Canada
19%
Mexico
15%
96
Exports to Asia by country (Total 26%)

Country
2013
China
8%
Japan
8%
Australia
3%
Singapore
3%
Other
4%
97
Exports to Europe by country (Total 18%)

Country
2013
Belgium
5%
Germany
3%
UK
3%
France
2%
Italy
2%
Other
3%
98
Exports to Latin America by country (Total 12%)

Country
2013
Brazil
7%
Chile
3%
Peru
1%
Other
1%
99
After revisions during early 2013, our US gear

demand forecasts have been consistent
US Gear Demand Forecasts
7000
May 2013
6500
August 2013
October 2013
Million Dollars
February 2014
6000
May 2014
5500
5000
4500
2011
2012
2013
2014
2015
2016
2017
100
Our US gear shipment projections have also

been relatively close
5000
US Gear Shipment Forecasts

May 2013
August 2013
4500
October 2013
Million Dollars
February 2014
May 2014
4000
3500
3000
2011
2012
2013
2014
2015
2016
2017
101
And we remain confident in our US gear

bookings projections
US Gear Bookings Forecasts
5000
May 2013
August 2013
4500
October 2013
Million Dollars
February 2014
4000
May 2014
3500
3000
2500
2011
2012
2013
2014
2015
2016
2017
102
US Market Demand Forecast

...History Forecast
May 2014
2011
2012
2013
2014
2015
2016
2017
2018
4,899.970
5,243.856
4,788.727
5,016.154
5,530.035
5,932.391
28.3
7.0
-8.7
4.7
10.2
7.3
4.1
2.5
1,180.928
1,129.257
1,027.593
1,094.246
1,263.049
1,395.119
1,488.633
1,561.999
25.4
-4.4
-9.0
6.5
15.4
10.5
6.7
4.9
1,105.469
1,358.146
1,198.510
1,266.845
1,403.295
1,542.746
1,635.161
1,691.744
37.6
22.9
-11.8
5.7
10.8
9.9
6.0
3.5
554.540
541.144
533.716
514.899
508.189
519.709
533.019
544.409
20.5
-2.4
-1.4
-3.5
-1.3
2.3
2.6
2.1
459.158
464.959
422.550
448.648
515.440
557.389
580.397
597.940
19.9
1.3
-9.1
6.2
14.9
8.1
4.1
3.0
279.373
293.375
263.044
274.493
309.428
338.060
354.591
366.410
29.9
5.0
-10.3
4.4
12.7
9.3
4.9
3.3
266.686
304.860
274.287
287.872
330.112
364.296
384.182
396.959
31.5
14.3
-10.0
5.0
14.7
10.4
5.5
3.3
203.842
232.095
218.876
227.839
243.110
257.532
270.889
279.369
34.7
13.9
-5.7
4.1
6.7
5.9
5.2
3.1
415.102
430.717
439.630
463.928
497.479
510.427
503.421
486.230
6.8
3.8
2.1
5.5
7.2
2.6
-1.4
-3.4
352.363
400.913
322.669
346.443
356.974
334.078
308.332
284.771
76.5
13.8
-19.5
7.4
3.0
-6.4
-7.7
-7.6
82.507
88.390
87.853
90.942
102.959
113.035
118.839
122.289
10.8
7.1
-0.6
3.5
13.2
9.8
5.1
Millions of Dollars
Total US Domestic Demand

% Year Ago
Industrial Machinery Mfg

% Year Ago
Construction Equipment Mfg

% Year Ago
Farm Machinery Mfg

% Year Ago
Material Handling & Service Equip Mfg

% Year Ago
Machine & Other Tools Mfg

% Year Ago
Turbines & Power Transmission Equip Mfg

% Year Ago
Mining, Oil & Gas Field Equip Mfg

% Year Ago
Shipbuilding
% Year Ago
Railroad Equipment Mfg

% Year Ago
10 Aerospace

% Year Ago
6,177.463 6,332.118
103 2.9
Gear demand by market comparison between

2013 and 2014
Slowest Falling in 2013
Fastest Growing in 2014

Total US Demand 4.7%
Total US Demand -8.7%

1
2
3
4
5
6
7
8
9
10
Shipbuilding, 2.1%
Aerospace, -0.6%
Farm Machinery, -1.4%
Mining & Oilfield Equipment, -5.7%
Industrial Machinery, -9.0%
Material Handling Equipment, -9.1%
Power Equipment, -10.0%
Machinery & Other Tools, -10.3%
Construction Machinery, -11.8%
Railroad Equipment, -19.5%
1
2
3
4
5
6
7
8
9
10
Railroad Equipment, 7.4%

Industrial Machinery, 6.5%
Material Handling Equipment, 6.2%
Construction Machinery, 5.7%
Shipbuilding, 5.5%
Power Equipment, 5.0%
Machinery & Other Tools, 4.4%
Mining & Oilfield Equipment, 4.1%
Aerospace, 3.5%
104
Industrial and construction machinery industries are the largest

gear markets, but they saw significant declines, along with other
capital equipment industries, last year.
Demand Growth Rate, (Percent Change From a Year Ago)
Total Demand For Gears Fell Near 9% During 2013

10%
5%
Shipbuilding
0%
Aerospace
Farm Machinery
Mining, Oil & Gas Field
Industrial Machinery
-5%
Turbines & Power
Transmission
-10%
Material Handling
Machine Tools
-15%
-20%
Railroad Equipment
-25%
0%
5%
10%
15%
20%
25%
30%
Industry Market Share of Total US Gear Demand
105
A pick-up in capital equipment spending during 2014

should improve gear demand for most machinery
markets
Total Demand For Gears Expected to Have Growth of 4.7%

During 2014
10%
Railroad Equipment
8%
Material Handling
Turbines & Power

Transmission
6%
Shipbuilding
4%
Machine Tools
Aerospace
2%

0%
-2%
Farm Machinery
-4%
-6%
0%
5%
10%
15%
20%
25%
30%
106
Gear market demand will change during

2015 and 2016

1
2
3
4
5
6
7
8
9
10

Aerospace, 13.2%
Shipbuilding, 7.2%
Railroad Equipment, 3.0%

1
2
3
4
5
6
7
8
9
10

Aerospace, 9.8%
Shipbuilding, 2.6%
Farm Machinery, 2.3%
Railroad Equipment, -6.4%
107
Double digit growth in capital spending will lift the traditional

capital equipment markets such as industrial and construction
machinery and material handling industries.
Total Demand For Gears Expected to Have Growth of 10.2%

During 2015
20%
Machine Tools
Material Handling
15%
Aerospace
Turbines & Power

Transmission
10%
Shipbuilding
5%

Railroad Equipment
0%
Farm Machinery
-5%
0%
5%
10%
15%
20%
25%
30%
108
The Gear Markets Bottom Line

US gear demand declined approximately 9% last year. But shipments fell
only 6% indicating US gear manufacturers gained market share.
Optimism is beginning to surface. Fall 2013 saw bookings finally increase

from year ago levels. Jan-Feb 2014 numbers were off, but a recovery
from difficult winter is anticipated.
As growth in most markets improve this year bookings will need to

increase substantially. Increases in shipments and demand growth,
however, should remain moderate, (below 5%) suggesting rising backlogs.
US gear manufacturers will also remain competitive internationally.
The true strength of the gear industry recovery is expected to occur

during 2015 and 2016 when growth in many capital equipment industries
hit full stride.
109
Thank you!
For more information on these slides and IHS Inc. please
contact your IHS Account Manager or the following
members of the Industry Practices team:
brendan.oneil@ihs.com
scott.hazelton@ihs.com
tom.runiewicz@ihs.com

AGMAMay 2014

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Economic and

US & Global Economic Outlook

The US economy on a moderate growth path

US Outlook/ may 2014

US economic growth by sector

State & local government

Copyright 2012 IHS Inc.

Other key US indicators

Light-vehicle sales (Millions)

Housing starts (Millions)

Consumer Price Index

Brent crude oil price ($/barrel)

Federal funds rate (%)

10-year Treasury yield (%)

Copyright 2012 IHS Inc.

US real GDP growth will be sufficient to

Real GDP growth (Left scale)

Annual percent change

Real GDP and unemployment

Unemployment rate (Right scale)

Copyright 2012 IHS Inc.

Interest rates will rise from exceptionally low

Copyright 2012 IHS Inc.

US employment growth will remain strong

Percent change, annual rate

Copyright 2012 IHS Inc.

Consumer price inflation will stay mild

Year-over-year percent change

Employment Cost Index

Copyright 2012 IHS Inc.

After a slowdown in 2013, labor compensation

Unit labor costs

Copyright 2012 IHS Inc.

Industrial materials prices show no clear

IHS weekly indexes, 2002:1=1

All industrial materials

Copyright 2012 IHS Inc.

Healthcare will take a rising share of personal

Percent of total consumption

Copyright 2012 IHS Inc.

The dollars real exchange value will stay

Major trading partners

Other important trading partners

Copyright 2012 IHS Inc.

Bottom line for the US economy

Consumer spending will be supported by gains in employment,

Interest rates will rise through 2017 as monetary

An acceleration in the global economy

Chinas growth will be restrained by excess capacity and

Asia-Pacific (excluding Japan) and Sub-Saharan Africa

Annual percent change

Copyright 2012 IHS Inc.

Why has growth in emerging markets slowed?

Withdrawal of policy stimulus

Slower labor force growth

Copyright 2012 IHS Inc.

Western Europe will achieve modest growth

Rising consumer and business confidence, low interest rates,

Real GDP growth in Europes major

Copyright 2012 IHS Inc.

World Outlook/ May 2014

Japans economy has limited growth potential

Copyright 2012 IHS Inc.