2006 Will Be Another Good YearWritten By: Frank Manfredi
Article Date: 10-03-2005
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Expect equipment demand to be up 10 percent to 15 percent next year.
The question I'm hearing most these days is, "What's the market going to do in 2006?" Most distributors are having a good year - this year. Who wouldn't with product markets up 20 percent to 30 percent, again, on top of the same increases in 2004.
The TV news shows and financial press reports that the economy is weak belie what's really happening. Economic growth has been above the historic trend, the unemployment rate is lower than it was in the early 1990s, home ownership is at an all-time high and companies are reporting record profits.
Let's Review 2005 So Far
The mix of business this year is somewhat different than last year. This year the markets for all the big stuff, including mining trucks, large wheel loaders and hydraulic front shovels, has nearly doubled. The high price of oil has spurred investments by existing coal mine owners and encouraged development of new mines as well. In general, high commodity prices are causing mineral owners to spend money. The small-machine market has slowed somewhat (only up 5 percent this year) compared with the growth spurt in 2004 of 25 percent. I think some of the slower growth this year can be attributed to rental companies reaching an equilibrium between upgrading their existing fleets, selling used equipment and expanding fleets to meet higher demand for rentals.
Housing starts have held up miraculously, and in July, reached a 33- year high. By any measure, home interest rates are still a bargain. The direction of the housing market is determined by local demand. There is not a national market for housing like there is for stocks. We're not likely to see a sudden downturn, or bursting of the bubble with rapidly
declining home prices on a national basis. I believe it's true that some markets are too hot and have attracted speculators who have no intention of living in the houses or condos they buy but are gambling that the properties will appreciate. Those markets eventually will deflate. Non-residential building, construction of strip malls, office buildings,
industrial buildings, schools, etc., finally recovered early this year. Office vacancy rates have come down, which has encouraged property managers to add more office capacity. We are finally hearing about manufacturers making
brick and mortar investments to add capacity.
Spending to build more plants usually occurs later than housing starts in economic cycles. Up until this point, companies have invested to make their plants more efficient, usually within the existing facilities. It now appears management believes demand is going to stay robust a while and they've begun to spend.
Road building has been in the doldrums for almost two years because Congress couldn't agree on a new highway bill. States shelved lots of projects because of a lack of Federal support and low tax revenues during the recession. Road building will finally get a boost with passage of the new highway bill and higher tax revenues due to continued steady growth of the economy.
What About 2006?
At this point, I think we're going to see more of the same growth: an excellent market for mining machinery - up 20 percent to 30 percent, and steady growth for all other sizes of products.
If housing starts slow, demand for road building equipment will make up the shortfall. There are various estimates about how much more equipment road builders will buy when Federal funds become available, but I'm skeptical. When TEA-21 passed, we all thought it would boost equipment spending by a tremendous amount. The burst of demand never materialized because a lot of the TEA-21 money was spent to rebuild and upgrade bridges. That type of construction
doesn't require large amounts of earthmoving equipment.
I do believe there will be additional spending for construction equipment, perhaps as much as 10 percent to 15 percent more than we've seen in the past couple of years.
Overall, I believe 2006 will be another good year. Our equipment markets typically grow for four to six years after the bottom of a recession. While 2006 is the beginning of the fourth year, all indications are that we can expect equipment demand to be up in the range of 10 percent to 15 percent overall.
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