GLG News by Gene Plavnik

Implications: Today's condition of the production of ethanol looks as it is not cost effective. Ethanol itself has some problems in the process of combustion in the internal combustion engine (ICE). But this is today. When the ethanol producers start providing market with desireable volumes of the fuel, the situation will be improved. Needless to say the USA and the rest of the world urgently need new sources of energy.

Analysis: If we recall development of any new products, we will see several stages: expensive, then affordable, then improved, then affordable and  improved.

Let us take microwave ovens as an example: it was around $1000.00 when it originally hit the market, then the profits allowed more R&D, new materials were developed and now we have a simle microwave under $100.00 a piece. Most fancy and big one (soon to be remote controlled via the internet) costs about $400.00

Any product goes through these transformations. With rapidly rising energy needs, new methods of ethanol production will be developed, new crops of the raw materials will be raised by the farmers (as of now the government pay farmers NOT to grow wheat, corn, and other agricultural products; a prime farming land is sold to developers to build residential communities), and new coatings for internal combustion engines will be developed. Let us add that car companies may modify the design of the above said engines to burn ethanol in a more efficient way, just low NOx burners, as an example. So let us welcome the efforts to have new fuel and support its further advancement.

Implications: Emerging economies demanding more and more natural resources such as oil, metal on one hand, and global climate change on the other hand demand diverisfied approach to the generation of energy, more advanced utilization of its natural sources. Several countries not only changed its standards of design and construction in regard to the utilization of alternative sources of energy, but proceed with utilization of solar energy on national scale by constructing solar power plants.

Analysis: Rapidly growing economies of Asia, Middle East, Russia, demand more and more fossil fuels. Our changing lifestyles with more and more highlight on convinience and comfort heavily depend on high usage of energy.  The envoronmenatl concern of climate change and growing public awareness of the carbon footprint reduction start influencing the changes in energy policy of both developed and developing worlds.


It is important to note that there are very few countries where itilzation of solar energy is mandatory: Israel, Spain, Australia, Germany.

Today we have several ways of generating electric energy from the sun: solar thermal, solar storage and solar photovoltaic. Various technologies have better applacations for different regions. Spain has chosen the thermal storage type of utlization, where a specially formulated fluid is preheated first, then it transfers its heat to water which becomes steam and steam rotates the turbine generating electricity. Australian and Israeli installations will use another method of utilization based on concentration of solar energy and deriving elecrtical direct current from it. German solar installations have a little bit of both ( it is remarkable, that about 40% of EU installations are German ones).

In the United States recent changes in the policy towards renewable resources in California  could be a good testing ground for the rest of the country.

What we need is a strong energy policy that would include changes in design requirements of residential dwelling and commercial buildings for utilization of the alternative sources of energy on one hand, and a strategic development on the solar power plants on the other hand. Let us not to forget that practically every residential dwelling can benefit from having a solar water heater as a part of hot water heating home system. THe percentage of utilization can vary georgaphically, but still, every family could use it.

On the larger and global scale of solar energy utilization construction of solar power plant in Negev has a strategic goal to supply 5% of the total electric energy with the energy derived from sun in Israel. Recent purchase order of solar assemblies for Australia's 350 MW solar power plant, construction of three solar thermal plants Andasol I, Andasol II, and Iberdola Renbables in Southern Spain are good examples of such policies.

Implications: Food equipment manufacturing is a growing market that several years ago was very fragmented. It is getting to be more consolidated now. Initially, a UK group Enodis was very carefully and successfully acuiring various European, UK, US and Asian based food equipment manufacturers. Now it is being purchased by a US based Manitowoc Company, part of which is manufacture commercial ice making machines and beverage systems. This fact is very interesting and deserves special analysis.

Analysis: Food equipment manufacturing market is being conolidated. If eight years ago we had Garland, Convotherm, Lincoln, Wellbuilt, Frymaster, Scotsman, Ice-O-Matic, Jackson, MerriChef, NewTon, etc., yesterday we had one consolidating name Enodis, which is being changed to Manitowoc.
On one hand, the food equipment manufacturing industry is labor and material intensive, it has very tough standards, warranties, and uses a lot of special grade stainless steel.

On the other hand,  in the everyday world, the clockless living, lifestyle and career options are changing traditional eating patterns driving expansion to 24-hour operation to meet consumers’ needs with the knock-on effect on equipment usage levels and life cycles.
Health is becoming increasingly important, particularly with respect to issues such as trans-fats.

Consumer food safety concerns are requiring operators to update their equipment to meet stringent safety levels. In addition to these health and safety drivers, food and beverages must continue to appeal to our senses including sight, taste, smell and general ambience. 

Convenience – time pressured consumers rely on eating out as an alternative to cooking. Increasingly they are looking for faster service and the ability to “take-away” which require convenient and easy to find locations. It is estimated that with emerging economies of China, India, Russia and Middle East, production of food and beverages will reach US $3,000 Billon mark. It will require increase in production of the food service equipment.

Apparently, part of the Manitowoc Group, i.e. Manitowoc Crane Group operates in global environment and is familiar with the growth issues of emerging economies.

The potenial of commercial food equipment and its various derivatives is also known to its Food Service Group specializing in commercial ice makers and beverage system. With all of the technologies owned by Enodis and its subsidiaries on one hand, global market reach and cfatsmanship in manufacturing of Manitowoc products on the other hand, this acquisition makes Manitowoc Company one of the global leaders in Food Equipment Manufacturing field.

Implications: There are several major companies in commercial HVAC that take the lead in utilization of natural resources and advancing the automation and control. Apparently, along with major OEMs of HVAC, companies with strong background in controls also take serious postion in market place. Recent acquisition of EMSI shows that Carries has to be stronger to preserve its market share.    

Analysis: In the world of commercial HVAC there are several OEMs that take major market share in building controls and automation, as well as in utilization of natural resources in the design of commercial HVAC, such as, for example, as geothermal heat pumps. These are: Bosch, Carrier ( division of United Technologies Corp.), Lennox, Trane, McQay. Building automation and controls has several more players, such as Echelon Corp., Johnson Controls, Honeywell, Siemens. Apparently, in order to be competitive, an OEM must have most comprehensive array of both hardware, such as commercial HVAC, and software, if we can call it software: building automation systems, actual software, sensors, transmitters, receivers,microprocessors, and other controls. Apparently, that particular area was not a strong one of Carrier. Hopefully this recent acquisition will improve and strengthen Carries's position in this extremely important segment of HVAC market.

Implications: There are very few countries in the world that require mandatory utilization of solar energy in the form of solar water heating and electricity. Apparently, in our fractured times, when energy prices, especially oil, skyrocket, changes in governental regulations of energy efficiency become nrecessary. It is remarkable that emerging economies, such as economy of China take its time, attention and monetary resources to reduce its dependance on fossil fuels.

Analysis: Apparently,  in today's energy governmental policy of utilization of solar energy China takes one of the leading places in the world. Its installations of solar water heating systems exceed the ones in the US by the factor of ten. It has become a building code and a requirement of its national industrial standards to consider solar water heating installations on all of the commercial and new residential dwellings where it is economically viable. The notions of using solar energy for electrical needs are present in Israel, USA, Australia, Brazil, and now, in China. Solar installations grow in Europe: Germany, Spain, Austria. In the United States recent act of utilization of renewable resources, including solar energy in California, is seen as an act of progress in the energy policy of this state, which, in general, leads the US in terms of innovation. Hopefully, this notion will be spread throughout the country soon, as it was in case of energy efficiency for residential and commercial boilers, lower NOx emissions, etc. We do need a stronger energy policy and actual changes in building codes, stadards, and requirements to take into consideration solar energy, as a viable supplement to reduce dependance on the fossil fuels.

Implications: There is a fierce competition between major OEMs of HVAC.  JCI has positioned itself differently after acuiring York International. Its position strenghtened by offering to an end user a complete package of the equipment and controls. In addition, new, more advanced AC units came out as a product of synergy of advanced chemistry from traditinally strong part of JCI combined with knowledge in mechanical design of York.

Analysis: There are several major OEMs in residential and commercial HVAC, cush as Carrier, Lennox International, Trane (about to become division of Ingersoll Rand) Goodman Global LLC, Johnson Controls. On can add several more names known in the comercial and industrial subsectors of the industry. However, it is very interesting to note, that Johnson Controls positioned itself somehwat different, when it acquired York International, an HVAC equipment manufatcturer. Before the acqusition JCI was noticeably present in the field of building efficiency conrtols and automation; now, actually manfucaturing the mechanical equipment, as well as control systems and software to monitor and operate the complex HVAC equipment,  the company becomes one-stop-shopping for an end user.  Recent contracts awards of JCI in India and China do not come as a huge surprise. Diversification pays off. Synergy between chemical engineering of JCI and mechanical engineering of YI also brings new types of residential air conditionning units that start successfully compete with household names of Lennox, Trane, and Carrier. As a result, JCI may take away some accounts from the Big Three of the residential HVAC.

Implications: There are several major players in the field of heat exchangers: Alfa Laval, Global Engineering Alliance (GEA), Hisaka, SWEP. Most comprehensive range of heat exchangers is offered by Alfa Laval, GEA, and APV. Hisaka offers more industrial type of heat exchangers, while SWEP specializes in the brazed ones for most of the HVAC applications. Market in China, India and Middle East demand increase of heat exchanger relevant equipment for food and HVAC application at a rate of 12-20% per year. There is an issue of violating of intellectual property rights by some Chinese OEMs, but this is not a severe threat for the whole industry.

Analysis: With growing demand of heat tranfer/heat exchange equipment from Asia and Middle East, a threat of copying of some types of heat exchangers by Chinese manufacturers exists. Apparently, copying a product is only a part of the deal, one needs to know where and how to market it, and how to design it to begin with. So there is an  issue of violating of intellectual property rights , but it is not a severe threat to the major OEMs.

Apparently, growith of emerging economies demands more food  and, thus, more food production plants. Economic growth also demands more commercial and residential HVAC.

While it is not clear whehter slowdown in residential sector of US economy will affect commercial construction sector, commercial sales of HVAC and related heat exchange compoents were up in average by 12-17% and, in some cases, covered the losses of residential HVAC and heat exchangers production of particular OEMS of residential and commercial HVAC. Commercial HVAC is important and growing and that is why companies like GEA strehgthened its precence by acuiring US companies and setting up production of heat exchangers in the US vs. importing it from Europe. Another good example will be acuisition of APV by SPX corporation. Actually, the recent report shows that  this acquisition starts enhancing technologies portfolio offered by SPX.

With emerging economies growing at a rate of 12-20% a year, the market could be quite profitable for most of the participants. Food manufacturing and especially HVAC are two growing industries worldwide depsite of slowdown in the residential sector of the US.

Implications: In late 90's Invensys PLC, a UK based group, that specializes in providing control, automation for process industries, and control systems for rail type transportation network, had acquired APV, also a UK based company, that specializes in manufacturing of various type of technological equipment for dairies, breweries, wineries, and so on. While it was exciting to see the change, it looked like APV was not exactly a good fit in the Invensys's portfolio.

Analysis: Recent acquisition of APV by SPX Corporation is good for both APV and SPX.  SPX is well diversified group, that specializes in flow control technologies, test and measurement, some HVAC equipment that  includes Weil McLain, Marley Engineering Products, has also a division that makes various industrial equipment. The APV products could well fit into the flow technologies division, where APV's heat exchangers, homogenizers, pumps and valves could be a perfect fit and ground for expansion in the area of processing industries. In the world of processing, while it was noticeably present, APV was always in the fight with Alfa Laval, GEA, Tetra Pak  for the better market share. With the process of establishing new alternative fuels for autoimobiles, such as ethanol, and potential development of bio fuels, this outcome of this acquisition can offer processing industries new solutions  and deliver better share of the market to SPX.

Implications: Today's HVAC equipment experiences unprecedent need for delivering more efficient and original solutions for residential and commercial applications due to the sharp increase of energy costs, even though, all of the eqiupment sold in North America is guided by standards set and enforced by the US Department of Energy. There are three most known names to the commerical and residential HVAC users: Carrier, a division of United Technologies, Corp., (UTX), Lennox International, Inc. (LII) and Trane (TT) former American Standard Company. Right behind them go  Goodman Global, and York International, a division of JOhnson Controls, Inc. In order to make a leap in the market share, one must market the equipment which will make a consumer happy, will exceed current standards, and manufacture it efficiently cost wise.

Analysis: Not too long ago a surprise chain of acquisitions was made in the field of HVAC, engineering and construction: Johnson Controls, Inc. (JCI) a well known company that makes various batteries for automotive industry, including batteries for hybrid cars, that also makes various controls for for heating and air conditioning, has acquired York International, a residential and commercial OEM  HVAC. Another interesting thing was acquisition of Georgia Pacific by Koch Industries, and now Ingersoll Rand is acquiring Trane, one of the leading (actually one of the big three by market share) OEM of residential and commercial HVAC. If one ask an architect, or a mechanical HVAC specifier, which brands are leading in the US, most likely, the answer will be: Carrier, Lennox, and Trane. The companies, who manufacture these brands, compete fiercely by innovation, ability to attract appropriate market segment, and, subtly, by  improving manufacturing costs that reflects on the price of a product. Upcoming acquisition, most likely, will mean more advanced and better cost competitive equipment coming from Trane, given good history of design and manufacturing of the Ingersoll Rand. Needless to say, that HVAC remains a very dynamic and continuously evolving industry despite of deteriorating conditions of the residential real estate. Emerging economies, development of commercial site of the real estate market actually now help cover the losses in sales in residential real estate segment.

Implications: As of last ten years, HVAC industry has proven to be very dynamic. Water heaters segment of the industry experiences changes that go along with industry major drivers and real estate trends. In the segment of water heaters it is tank type and tankless type units. Noritz is known in North America as an OEM of tankless type water heaters, but it is market position could be improved.

Analysis: In general, HVAC market in North America is about 20-25% of the world market. HVAC market in general is divided by potential applications: residential and commercial. Its residential side is affected by the trends in residential real estate. While in residential real estate sales of single family homes still dominate, rate of growth of the condominiums and apartment buildings exceeds rate of growth of single family homes by the factor of two. Cost of prime land becomes more and more expensive. That means all appliances, especially outdoor ones, need to be more compact. That is why (of course, there are some other contributing factors and industry drivers), over last ten years, sales of tankless water heaters went up from 0.1% to 10% of the total water heater sales. Noritz is known is the US and Canada as an OEM of tankless type water heaters (it markets other residential appliances in other parts of the world). However, the leaders in the field of tankless water heaters is Rheem/Paloma Industries. It looks like Noritz has all of the potential to successfully compete with Paloma/Rheem, because it offers similar products with competitive warranties, within similar range of thermal inputs. And that is why it is logical to assume that Noritz could enter in a major arrangement with one of the US based water heater manufacturers, other than Rheem. The best potential candidates for such arrangement are AO Smith Corporation (AOS), Bradford -White Corporation, an employee-owned company and Johnson Controls (JCI). As if today Johnson Controls does not own a water heater manufacturer company, but it recently acquired York International, an OEM of residential and commercial air conditioning equipment. Of course the could be someone else.

Implications: It is known that there are two major comprehensive competitors in the world of processing industries: Global Engineering Alliance (GEA) based in Germany, and Swedish based Alfa Laval. While GEA is stronger, more comprehensive, and rolls out red carpet to its prospect, Alfa Laval uses different leverages to compete successfully.

Analysis: In the world of processing industries, such as food and beverage making (beer, wine, juices, and so on), dairy, pharmaceutical, etc. there are two big players: GEA and Alfa Laval. GEA is very well known for its top quality equipment, comprehensiveness of the technology (one stop shopping approach, starting with initial research for a prospect), Alfa Laval finds its niche among educated customers and takes "slices of pie" by offering most cost affordable equipment. Its recent commitments in India, and purchase of a Finnish cooling equipment maker show that this company successfully competes in emerging markets such as Russia, China and India. Its recent aggressive sales provided company with needed cash and much needed increased industrial capacities for the above said markets. Apparently, it was a win-win situation for both Carrier (division of United Technologies Corporation) and Alfa Laval.

Implications: Deteriorating situation with subprime rate and loans that are based on it created a precedent when both segments of residential real estate market (new and existing sales) are deteriorating. That, in turns affect markets of HVAC and major appliances. However, when company products are marketed to the crosscut of the industry ( t hat is residential and commercial HVAC), total performance is still in good shape.

Analysis: Turbotec Products ois one of the HVAC components type of  company that manufactures and sells its products (heat exchangers) to both new and existing installations. Additionally, it manufactures heat exchangers for commercial and light industrial HVAC. Since commmercial market is still in good conditions, total performance of the company is in good shape. As it is sometimes in the world of manufacturing, careful versatility and appropriate focusing on the market pays off.

Implications:  There are few major players in the world of electric motors for household appliances and HVAC(commercial and residential) systems. The market in Asia growth at an average rate of 15%. This creates an opportunity for components OEM to provide appliances with electrical motors and that is where recent acquisitions of Regal Beloit perfectly fit in.

Analysis:  There are few fairly large companies that provide electric motors for various residential and commercial HVAC systems, as well as household appliances: Regal Beloit, AO Smith Electric Products Company (both US based), EBM PAPST (German based, with strong Swedish connections), Ocean-Broad-Motor Co., Ecectric Core & Motor Co. Ltd, and Gold Effort Electric Motor Mfg Ltd. ( all are People's Republic Of China based). On the other side, if one can take a good look at the appliance and HVAC market development, he can clearly see that HVAC and appliance market in Asia grows by the rate of 10-20% per year depending on a particular segment. This growth needs to be supported by avaialbility of needed and vital components, such as electric motors. And that is where recent acquisition of Alstom motors fits in. It looks like Regal Beloit works very hard to appropriately position itself in the growing markets. With recent acquisitions of GE HVAC electric motors division, FASCO motors (formerly part of Tecumseh Products Co.) and now most recent of Alstom motors and fans in India the company enhances its present in emerging fast growing Asian market.

Implications: Staggering conditions of residential real estate market somewhat take its toll on the manufacturers of HVAC equipment. On the other side, conditions of the commercial real estate are good, and, in addition, necessity to deal with contininiously rising costs of energy forces facilities management to look at new available high efficient technologies (so-called green technologies), which creates healthy demand for retrofits in the operations of commercial HVAC.

Analysis: While most of the HVAC companies report flat sales, Johnson Controls International reported its sales of the HVAC equipment up 15% comparing to the same period of the last year. Why? 
Much of that is due to higher demand for systems to increase energy efficiency and cut operating costs in commercial buildings, especially in schools, health care, and office buildings.
Johnson Controls managed to focus its efforts on a particular segment of the HVAC market that is good shape, yet demanding for more "bang" for its "buck". The company showed that right concentration of the effort on right segment of the market, and availablity of the equipment of appropriate efficiency are important parameters for successful sales. It also extremely important to note, that HVAC is relatively new market for Johnson controls/. JCI acquired it with acquisitions of York International couple years ago. Now it proved that right management and marketing efforts  are paid off (quarterly).

Implications: 1) Cement manufacturing is one of the most fuel consuming industrial processes. 2) Fuel is one of the major operating expenses in the production of cement. 3) Most of the cement thermal reactors (rotary kilns or vertical cacliners) use whether refuse fuels or low cost fossil fuels. 4) As a result, additional emissions of NOx and CO2 are derived. 5)The latter creates urgent need whether: a) in having more efficient post production environmental equipment or b) new environementally friendly methods of production.

Analysis: Cement clinker technology is a high temperature processes based technology.
 
Nowadays most of the cement clinker is manufactured in two types of thermal reactors: cement rotary kilns or vertical calciners.

It is important to note, that fuel is one of the biggest operating expenses of cement production. That is why vast majority of the cement industry uses in its thermal reactors whether refuse fuel in its gaseous, liquid or solid form (e.g. landfill gas, refuse oils, solvents, other combustible high calorific value mixes, or shredded tires), or low cost fossil fuel, such as pulverized coal. I have to add that it is valid, when environmental authorities of a region, state, or a country allow to burn these fuels (it is typical to see rotary kilns and vertical cement calciners operating on refuse fuels or pulverized coal in the United States. It will be fair to say that solid fuel based rotary kilns are common for Russia, China and India).

Combustion gases of such fuel contain high concentration of various oxides,such as SO2, SO3, that need to be caught by environmental equipment, as well as NOx, and CO2.

That is why a need in new more efficient environmentally friendly technologies relevant to the cement production is very urgent, acute and strong.

Implications: It is not a big secret that today there are two major HVAC related electric motor manufacturers in North America: Regal Beloit and AO Smith Electrical Products (AO Smith Corporation).   There are also several competitors from SE Asia, such as Chinese Broad Ocean Motor and Shenzen Power Motor Ltd, and German EBM-PAPST. Current standards of HVAC require OEM to reconsider efficiency of its components in order to manufacture appropriately SEER rated residential, light commercial HVAC equipment, that needs to actually exceed current SEER to stay on the market longer. It is also important not to forget economical (cost) factor to be competitive. Last but not least: the rate of growth and demand of HVAC equipment in SE Asia exceeds 10% annually, comparing to fluctuating 3-6% in North America, and average 10% in Europe. 

Analysis: Regal Beloit acquisitions of :1) GE HVAC electrical products division, 2)Fasco Motors of Tekumseh Products Co., and most recent 3) of Morril Motors show that Regal Beloit has very agressive goals of becoming #1 electric motor supplier in the world of HVAC and appliances.

It is also important to note, that its biggest competitor, AO Smith Electrical Products (a division of AO Smith Corporation) is not going to give in easily.

AO Smith is known for its diligence in developing new low cost high quality products. It recent successes in developing most quiet electrical arrangement for Broan kitchen hoods, as well as its new line patented PAX Fans speak for itself. Also, it is important to say that AO Smith is better suited to compete with industrial scale motors OEMs than anyone else from the HVAC group.

It is logial to expect something new coming from their competitors.

Implications: Sales of PVF products to commercial contractors at HD were considerable to noitice that PVF distribution business deserves a good look. As a result chain of acquisition was made by major Do-It-Yourself Warehouses. In turn, specifics of the PFV and relevant HVAC distributing showed that it could deviate the business of retail Do-It-Youself warehouse into the commercial PVF - HVAC distributing, and as a result started showing on the revenues. It was normal to sell these good assets timely and everybody has benefited from that, both buyers and sellers. It is also normal retain some ownership of sold business as a proof that the business is profitable.

Analysis:  HVAC, as any other industry has the same trends and events.

It was noted by the Home Depot, that sales of plumbing supplies to light commercial contractors exceeded the expectations. Special sections in every store started cater to contractors by setting up dedicated sales support, sections in a warehouse, as well as dedicated checkout lines. As a result, the management started looking at PVF and HVAC distributing companies as at potentially valuable assets, which resulted in chain-reaction type acquisitions of major pumbing supply houses by Do-It-yourself chains, like Home Depot and Loews.
The operation of these valuable assest is quite different, than the one of a Do-It-Yourself warehouse, and it was incompatible with the targets of the retail stores.

The purchased assets, however, remained valuable and were sold quickly, still at a profit to HD. It is also normal, when a business is sold, the previous owner retains some ownership, as a proof that sold part is still valuable. This is common for various industries, from software to automotive.

What is most important, HD still concentrate its effort on a end user/consumer, and PVF HVAC distributors now can return to its normal care of full-time plumbing and HVAC contractors. This was simply wrong marriage that did not last long and ended without major problems.

Implications: HVAC is a very healthy industry, it always grows, and does not greatly depend on real estate market. In general HVAC still grows when economy slows down, but the rate of the growth is lower.

Analysis: Rheem Manufacturing Co. is one of the leaders OEM in HVAC residential and commercial equipment. It is one of the big three in water heaters business, along with AO Smith Water Products, and Bradford-White Corporation.

In the division of Air Conditioning, it has relatively small market share. As it is shown from the recent events (see below) moves aggressively to have its market share in the New World, where these AC units are most applicable. I believed it is caused by aggressiveness of York International (division of Johnson Controls), recent changes in Goodman, and new trends in Lennox International, Carrier, and Trane.

Implications: There are four major OEMs in residential HVAC: Carrier, Trane, Lennox, and Goodman. The first "big three" produce mose advanced and most expensive type of equipment. HVAC equipment manufactured byt York International is on the lower side costwise, but in the near future could offer a lot of innovation due to the infusion of knowledge of JCI into the design and manufacturing,

Analysis: The fact that Johnson Controls sealed off an exclusive agreement with largest HVAC distributor shall not come as a surprise.

Johnson Controls recently acuired York International and carefully conducted "crowl, walk, and run" approach of its re-engineering  The extensive expertise in chemical and mechanical engineering of JCI will contribute more innovation in the design, application of new materials, and so on, which ultimately will resultin more efficient HVAC equipment and create conditions for gaining better market share ,than York International had prior to the sale.

I believe the management of US Air Conditionining Distributors realize the potential of its new vendor-OEM relationship.

Implications: 1. US Economy is not in recession 2. Housing market is improving 3. Other US companies that provide residential construction industry with equipment and materials, report record profit. 4. Actions of USG Corp are irrelevant to the residential housing market.

Analysis:  

The outlook for the US economy improved on Thursday, May 24 2007,  after signs of a rebound in the housing market and in business investment.

Sales of new homes rose by the most in 14 years last month with an increase of 16.2 per cent, according to a government report.

The unexpected increase in sales is a sign the US housing market could be emerging from an 18-month slump, though many builders were more cautious and said there remained poor visibility about sales ­patterns in the short term.

The rise in sales follows three consecutive monthly declines and the steepest quarterly drop yet seen during the current housing downturn.

This could translate into a revival in residential construction in the second half of the year that would lift economic growth.

Improved sales are seen as a necessary ingredient to clear an excess supply in new homes that has weighed on prices and inhibited building activity.

The improvement in April helped to reduce the inventory of unsold homes to 6.5 months’ worth of sales, close to the six-month level of supply that is seen as an economically healthy balance. The increase in purchases was accompanied by a fall in the median sales price for a new home to less than $300,000, an 11 per cent drop from a year ago.

It may also be seen that another improvement could be seen: improvement in sales of homes costing less than $200,000, where transactions had been most sluggish.

Prices of existing homes are expected luto have fallen last month, with data published today reflecting a rise in “forced sales” by owners hit by the fallout from the crisis in the subprime lending market.

Other companies, whose business is relevant to the residenatial construction, for example AO Smith Corporation provides 1/3 or residential water heaters to the US residential homes and condos, has reported record profit.

The above stated suggests that recent actions of USG Corp to reduce its staff is a way to get out of the Chapter 11, and it has nothing to do with todays conditions of residential real estate.