The Recession is Likely Over – Now What?By Eli Lustgarten
Article Date: 10-01-2009
Copyright(C) 2009 Associated Equipment Distributors. All Rights Reserved.
The slow climb back to equipment demand and dealer profitability
The recession is likely over, but what’s next? The issue of U, V or W shape will probably give way to a statistical V shape upturn; but economic statistics lie and what is being reported as a stronger economic recovery won’t be initially felt by the greater part of the industrial economy.
While 2010 is likely a transition year for most industrial end markets with modest volume gains, most production increases will be stronger than expected and reflect the end of inventory liquidation. Companies need to focus on 2010 to 2012, when the below average, muted recovery of 2010 gains strength and end market demand begins to grow sharply, albeit from a depressed base. The new normal level of demand reached over the next several years will likely be below the recent 2006-2008 experience, but profitability should recover in what should be a lower interest rate, lower inflation environment. The risks to economic recovery stem from what government policies emanate from Washington.
For 2008, North American sales of machines were off about 22 to 24 percent with light equipment down 24 percent and heavy equipment down 22 percent. Our forecast remains for a further 50 percent or more decline in 2009 for small, medium and large equipment. Mining trucks and shovels were higher in 2008 (low double-digits) but likely to decline 35 to 50 percent in 2009 and at least another 15 percent to 20 percent in 2010.
We should note that end market demand in 2009 appears to be off about 36 percent. However, inventories, both new and used, which dealers built up rapidly at year-end 2008 and F2009, have been put on major reduction programs by both OEMs and dealers, causing the greater drop in OEM sales this year. Compounding the inventory problem, used equipment prices have fallen at least 20 percent or more, with financing difficult.
The environment for construction activity in 2010 and 2011 will improve over 2009, but will be less than robust. The key is financing availability – financial institutions will likely be reluctant to rapidly expand availability. Defining government rules for stimulus programs will also determine the success of getting stimulus dollars into this sector.
Construction equipment end market demand is expected to be flat or up modestly in 2010. Production, however, will increase 15 to 20 percent or more due to the end of inventory liquidation, which will allow OEMs to produce at- or near-retail demand.
- Housing will likely show improvement over the next two years, rising from about 550,000 starts in 2009 to perhaps 750,000 to 800,000 in 2010 and perhaps 800,000 to a million or more in 2011.
- Nonresidential construction is expected to fall 5 to 15 percent in both 2009 and 2010 and perhaps stabilize in 2011 before resuming growth sometime that year.
- Infrastructure spending will likely be relatively flat into 2011 or at least until a new Highway Bill is passed. (Note: The Obama position is to extend the current highway legislation via a continuing resolution until March 2011). History suggests that growth will resume about a year after the new highway bill has been funded.
- Only about 35 percent of the stimulus funding for the construction sector is expected to be available through 2010, which will limit its impact on activity in this sector.
We perceive 2012 to be a more normal level of demand for most types of industrial equipment including construction equipment. However, we believe construction and mining equipment, engines and turbines, and other heavy equipment face a slow recovery through 2012 to levels likely below 2006 to 2008.
- The upturn will favor smaller to medium equipment (more units, less dollars), which has been declining for the past three to four years.
- Equipment for rental companies will likely see an upturn in demand as contractors may favor rental rather than outright purchases.
- Heavy equipment demand will likely be soft, declining 10 percent or more in F2010.
- F2011 will likely be a better year for all classes of machines with sales and production rising at least double-digits, assuming sustained growth in the economy.
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