It is interesting to observe the excitement the Street has with Caterpillar’s (CAT) earnings. They were better than company thought last quarter, but sales were still down 41%. I have to give CAT credit for cutting costs as much as they did. But here is what caught my attention in the quarter: the area that was doing less bad was Asia/Pacific, mainly China. Its sales were down only in the 20% range as opposed to other regions like the US and Europe where sales fell 40-50%.

Here is what management said about China: “Fixed asset investment in May was 38 percent above a year earlier. Our dealers reported significantly higher deliveries of machines in June of this year than a year ago.” So the company is doing less bad as it expected because China is doing well. But we know that all of Chinese growth was driven by government consumption and tremendous liquidity growth. China’s largest consumers – the US and Europe – are struggling. It’s exports are down 21% in June, while its economy posted almost 8% growth and money supply is up 28.5% in June.

I know I sound like a broken record. Growth that is completely predicated on government spending is not sustainable, even if it is taking place in China. I don’t know when and what will cause that growth to seize (we didn’t know what would cause housing bubble to bust in the US either, but we knew there was a bubble). But when the growth stops, it could get very ugly and the only bright spot in CAT’s picture will get a lot darker.