SUMMARY. The North American economy remained stable in 2019 and pure economic conditions as well as fundamentals in the region were favorable. Most industries performed very well, and the short-term outlook remains stable to flat for most market segments. However, we see many new developments that could suggest a shift in the trend.
Consumer confidence declined slightly in December, following a moderate increase in November. The Conference Board’s Consumer Confidence Index stood at 126.5 in December, 1.4 points higher than in September 2019.
Per Lynn Franco, Senior Director of Economic Indicators at The Conference Board: “While consumers’ assessment of current conditions improved, their expectations declined, driven primarily by a softening in their short-term outlook regarding jobs and financial prospects. While the economy hasn’t shown signs of further weakening, there is little to suggest that growth, and in particular consumer spending, will gain momentum in early 2020.”
Most major economic indicators–such as the earnings outlook, future revenue projections, capital spending, and technology spending –are flat or down in comparison to just 3-6 months ago. The Federal Reserve has made three interest rate cuts in 2019 but there are no indications of further cuts in the near term, unless the economy shows signs of a significant slowdown. Currently, we do not expect the Fed to make additional rate cuts in 2020.
While the overall economy is performing quite well in the near term, there are no significant economic accelerators on the horizon that would push economic activities to higher levels and support additional growth in the long run.
Trade-related issues continue to spook the markets and we expect this uncertainty to continue over the short to near term future. Furthermore, we do not expect any major trade deals to take place in 2020. Some minor agreements or temporary policy deals will keep the markets on their feet.
The US economy is still healthy and growing; however, job growth has been flat to steady. The reported number for December 2019 was 130,000. Government reports from January 10, 2020, showed a healthy unemployment rate at 3.7%. This rate has been steady for the past three months. Employment continued to show steady numbers in several industries, including mining, manufacturing and transportation. Job growth in these industries moderated in 2019 compared with 2018.
As of January 10, 2020, the labor force participation rate, at 63.2%, and the employment-population ratio, at 60.9%, were slightly higher than the previous quarter. We estimate the labor market to be stable for the remainder of 2020 with a projected unemployment rate of 3.7%.
The general economy in the U.S. is in its eleventh year of growth, and overall markets are still performing well. This has been an uncommon economic cycle with a very prolonged, low and slow recovery. At the same time, we see that some segments experienced a series of shorter cyclical growth patterns within a growth cycle.
Across all market segments, we expect overall total OEM equipment production numbers to be almost flat for 2020, slightly better than our estimates from Q3 2019. We project that production for Medium and Heavy Vehicle segment will be down 15% in 2020 compared to 2019.
Across all market segments, we expect overall total OEM equipment production numbers to be almost flat for 2020, which is slightly better than our estimates from Q3 2019 at 1.02%. The Medium and Heavy Vehicle segment is the only one that is significantly different among all 13 market segments that we track. We project that production for that segment will be down 15% in 2020 compared to 2019. We’ll discuss more about this later in this report.
We see an almost flat to slightly negative level of overall activity in 2021 at -1.5%, as the overall economy performs at its peak in productivity, and as demand levels decline going into 2020-2021.
Across other markets, we forecast that short-term growth is expected to be flat to slightly positive at low-single digits annually for some segments such as Construction and Industrial
The Agricultural segment experienced significant setbacks in 2019 and has not yet delivered the promised recovery, but we expect activities to improve in 2020-2022. Other segments, such as Passenger Cars, and Minivan/SUV, experienced a slowdown in 2018-2019 and will further turn into negative territory in 2020-2021.
AGRICULTURAL. The Agricultural segment suffered multiple setbacks in 2019, driven by several factors. The weather was not cooperative – with above average rain fall levels—and many fields in the Midwest remained too wet during planting season to be used; such conditions prevented farmers from replacing their equipment, and they postponed their capital spending and buying decisions.
Ongoing trade uncertainties with China left US farmers with excessive inventories of key commodity items such as soy and pork. Given the current rhetoric on the trade situation, particularly with China, we expect such conditions to be flat in 2020. According to a proposed US China Phase One trade agreement, China agreed it will import more U.S. wheat, rice, corn, energy, pharmaceuticals and financial services. Such moves should help the sector regain stability and return to growth.
The Agricultural equipment market in 2019 declined 3.8%. The agricultural machinery market will remain on the recovery trend going into 2020-2023 with a mid-single digit rate of expected growth. We forecast 2020 growth to be at 2.9% vs 2019. Global trade policies will play a major role in the long run and will define market growth over the next 3-5 years. Additionally, we believe the industry will be leading the way in the autonomous driving technology.
CONSTRUCTION EQUIPMENT. Recent market performance has been very good, but first signs of a slowdown appeared in declining sales during the second part of 2019, especially with larger equipment.
Our most recent overall projection on equipment and machinery production is flat to slightly positive at 0.2% in 2020, compared to 2019; this is slightly better than our projections from last quarter (at -1.5%). With future uncertainty in the economy, we project flat performance at 0-1% over the next few years. During the last year (2019) we have seen a stable and positive performance of smaller equipment. On the other hand, orders for large construction equipment were slowing during Q4 2019.
Extremely low housing inventory levels and high demand also helped drive the prices and the segment forward. A strong economy certainly has a major impact on the high level of demand. Latest government reports on housing starts from December 2019 look positive and stable.
Major OEMs in the Construction and Industrial segments reported significant increases in orders and activities in 2018 and 2019, but demand seems to be tapering off, mainly due to overall economic and market performance, as well as uncertainty.
As in the Agricultural sector, we have started to see the introduction of new technologies and electric drive types. We project this trend will rapidly increase over the next few years, and it may start gaining significant market share within 5-10 years.
INDUSTRIAL. We see very similar trends in growth for the Industrial segment as we did for Construction, with an overall gain of 1.4% in 2019 over 2018. Sector performance in 2019 was in line with our previous estimates. We expect the sector production growth rate to be flat in 2020 at 0.9% vs 2019.
The overall growth dynamic is closely mirroring the Construction segment. The main drivers for the segment are small construction equipment, material handling and forklift applications, where the demand remains strong.
Consumer sectors, including LAWN AND GARDEN, PASSENGER CARS, MINIVANS AND SUVs as well as RECREATIONAL PRODUCTS, continue to benefit from the strong economy and low Interest rates. These segments performed very well over the past few years (2016-2019).
LAWN AND GARDEN segment shows steady demand, and the growth trend will remain flat to positive in 2020 at 0.8%, shifting into a slight downward trend at -2% in 2021. The key drivers for this segment are solid housing starts and a strong economy; however, lower housing starts will slow the growth in this segment.
Furthermore, the key factors that pose risks to these segments come from a new generation of the population in North America that has a different lifestyle and a different set of values from older generations. For example, multi-unit buildings are gaining ground in new housing starts, which will require more commercial mowers instead of push-behind residential mowers.
The Lawn and Garden market is set to include one of the strongest adoption rates among all other segments in the introduction of new battery-powered models and technologies. During the past few quarters we have been gathering intelligence on these electric models, and we will be completing data and releasing them to our client databases over the next few quarters.
Passenger Cars and Minivan/SUVs segments have experienced a continuous slight slowdown in demand since late 2016. New vehicle sales as well as profits continued to decline in 2019. Production of Car and Minivan/SUVs is projected to decline 3.1% in 2020 in North America. Most of the drop has been caused by waning interest in compact cars, mid-size sedans and full-size cars. Consumer preferences are shifting to roomier rides, and steady, low gasoline prices have given consumers confidence in buying larger vehicles (SUVs).
Overall, for 2020, we expect Passenger Car segment production volumes to be negative at -4.1%, as many consumers transition into the small SUV sector. Additionally, the average lifespan of a vehicle remains above 11.6 years and that does not add to the demand for new cars. The key drivers for longer average vehicle life are improved overall quality and durability of the products.
Many consumers have switched from a car to an SUV, and that has helped to drive demand for the segment even further. The production rate for 2019 was positive at 1.4%, a very healthy overall production number in comparison to record high levels and demand in previous years.
We project that this trend for Minivan/SUVs will slow down in 2020 at -2% vs 2019. We see high replacement rates playing an important role that will help sustain and drive overall trend. The smaller size SUV market is rapidly gaining momentum vs. large SUVs with many products coming from major global OEMs. We expect this niche market to continue to develop and be solid in the next few years with many more new product offerings from major OEMs.
Another point worth mentioning is the adoption of electric vehicles, which has been gaining ground very rapidly. Most OEMs have–or will have–solid electric product offerings within a couple of years, and we expect to see a more rapid increase in sales of electric vehicles.
At this point, the overall share of electric vehicles is still insignificant, but it is growing very rapidly; we expect this trend will accelerate much faster over the next five years. While we expect electric cars to gain in popularity, they will not gain any significant share of the total market in the near term.
Due to the factors discussed earlier, such as interest rates and low unemployment, we believe the local market will remain healthy, but there will be no significant growth in the next few years.
Considering the rise of public transportation during the last decade, we believe the personal transportation segment reached its peak in 2018, but that it will remain healthy to slightly negative over the next couple of years. We forecast production levels in North America for Cars and SUVs together will continue to decline 3% in 2020-2021.
MEDIUM AND HEAVY VEHICLES. After very strong demand for class 8 trucks during the past few years, the market has started to cool, primarily due to an overcapacity of trucks in the market. While freight demand is expected to be relatively strong in 2020, tonnage started to slow toward the end of 2019.
Continued uncertainty surrounding the Chinese tariffs along with an overall slowdown in global economic growth is weighing on the freight segment. While a slowdown in the medium duty truck segment is also expected in 2020, truck demand is not expected to decline as significantly as the class 8 segment.
POWER GENERATION. Things look good for the segment but underlying weaker global economic conditions will put pressure on the power generation markets. Sector performance in terms of production volume was flat in 2019 at 0.9% vs 2018. Going forward, we project production activities to remain flat at -0.3% in 2020 vs 2019. Overall, the segment will follow overall economic conditions in the region.
For more information, please review our detailed analysis on the segment. This report also was published in September 2019 edition of Diesel Progress magazine.
RECREATIONAL VEHICLES This sector follows consumer sector trends and posted very good growth in 2019 at 4.4% vs 2018. Furthermore, 2020 looks promising with an expected growth rate of 1.1% vs 2019. The key drivers for the segment are a peak in the economic cycle, higher interest rates as well as a change in demographics.
One of the applications we would like to feature this quarter is Off-Road Motorcycles & 3-Wheelers in North America. From 2017-2018 production of Off-Road Motorcycles & 3-Wheelers in North America increased nearly 6%. This trend continued into 2019 and will carry over into 2020 with the expected gain of 3% vs. 2019. The increase is attributed to the demand for current models for recreational and competitive sporting needs, along with the massive demand for off-road motorcycle recreation opportunities in many areas that have hard pack and loose dry dirt, sand dunes and endless rolling hills.
Since 3-wheel motorcycles entered the market, these motorbikes have grown in popularity. They are easier to maneuver than a traditional motorcycle, they are fun to drive and stylish. Production will steadily increase as new models are introduced. Expect up to a 5% gain over the next 3-5 years. Dominating the Off-Road Motorcycle market is Mexico based Italika with 55.5% of total units produced. In second position is BRP-Valcourt with 19.5%; third, Polaris with 13.5% of the total market. PSR
Yosyf Sheremeta is Director of Product Management & Customer Experience at Power Systems Research.
