Forecast For 2006 - market lines
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Forecast For 2006

Written By: Frank Manfredi

Article Date: 12-01-2005
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Sunny with a few puffy clouds on the horizon.

2005 was some year. Most markets were up, and manufacturers' order books were at historic highs with some product categories sold out until 2007. That all makes prospects for 2006 look pretty good. Does it sound too good to be true? It may be, which makes me a little uneasy. Forecasting market peaks is a difficult forecasting task.

In the mid-1990s I watched the market go up year after year. At the end of each year, the markets looked as if they had peaked. My calls to manufacturers confirmed they too "felt" the market was near the top. Many of them were planning lower unit sales in the coming 12 months. January sales were usually lower than the year before and plans were being made to cut production. Then March and April came around, sales were higher than expected, and manufacturers started scrambling to ramp up production.

This year looks different from the mid-1990s in some ways, but similar in others. Year-over-year gains for small product categories, such as skidsteers, have peaked through August. Others categories, such as compact excavators (under 6 metric tons), are still growing like gangbusters, up 35 percent. Smaller equipment has benefited from continued high levels of housing construction and rental fleet purchases. Rental companies are refleeting due to increased demand from the non-residential markets.

Medium-sized machine sales are a mixed bag. Year-to-date bulldozer sales are up 18 percent, and mid-size wheel loader sales are up 10 percent.

Products that are sold out include many of the large mining machine categories, such as mining trucks, large wheel loaders, large excavators and articulated trucks. These product categories are benefiting from very high prices for commodities, such as iron ore and copper, and high oil prices that in turn have more than doubled steam coal prices.

So what's the worry? The worry is that the Federal Reserve is increasing interest rates and has indicated it will continue to do so because of inflation fears.

Those fears are real. Just think about how much equipment prices have gone up in the past year. Observers expect the Fed to continue increasing short-term interest rates until they approach the level of long-term rates; which will narrow bank margins and cause banks to reduce their lending - which will cause housing starts to decline, albeit a small decline, from their current record levels.

Housing starts are a major driver of demand for construction equipment. Besides having a strong influence on housing starts, interest rates have been an accurate predictor of the direction of the general economy. (Watch short- and long-term interest rates closely: Every time short-term rates have exceeded long-term rates, the economy has entered a recession within six to 12 months.)

Offsetting a probable housing construction decline is the growth of non-residential construction. Non-residential construction finally recovered earlier this year and is expected to be up about 6 percent in 2005. I think it will grow 12 percent in 2006, which will put it back near pre-recession levels.

Highway construction has suffered from the lack of a highway bill for two years. As you know, Congress finally passed - and the president signed - SAFETEA-LU. The bill promises funding that exceeds the previous bill by 20 percent to 30 percent.

When the last highway bill was passed many analysts said the impact it had on equipment demand was much less that expected because a lot of the money spent was for mass transit and bridges. Bridge reconstruction is not as equipment intensive as new road construction and many types of road repair projects.

The contents of the new bill have not been unraveled enough to make a forecast about its effect on new equipment purchases. I assume the impact will be positive, but I'm not sure by how much.

So I'd say the market will be up next year. It's not likely we will see the same huge gains we've seen during the last three years, and I think small product categories will decline slightly, probably less than 5 percent. Large mine equipment categories will continue their huge gains of up to 100 percent at least another year. Predicting how medium categories will fair is more difficult. I think they will be up slightly, maybe 3 percent to 5 percent.

Overall, I expect the 2006 market to be up between 5 percent and 10 percent.

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Article Categories:  Economic Outlooks