This article initially appeared in the February 2020 issue of PowerTALK News.
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.”
The U.S. 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%. 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.
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.
The following segment level summaries describe some of the key drivers and factors we are we are evaluating by segment:
Note: The full report for the North America, with details on expected unit and percentage changes, is available to our subscription-based clients in our quarterly update bulletin.
AGRICULTURAL. The Agricultural segment suffered multiple setbacks in 2019, driven by several factors. The weather was not cooperative – with the 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 postpone 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 U.S. China Phase One trade agreement slated to be signed in January 2020, 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.
CONSTRUCTION EQUIPMENT. Recent market performance has been very good, but the first signs of a slowdown appeared in declining sales during the second part of 2019, especially with larger equipment.
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 the overall growth dynamics closely mirror 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 slightly positive in 2020 and then shifting into a slight downward trend towards 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.
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.
Overall, for 2020, we expect Passenger Car segment production volumes to drop as many consumers transition into the small SUV sector or drive their current car longer in taking advantage of today’s more reliable and durable car.
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 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.
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. Overall, the segment will follow overall economic conditions in the region.
For more information, please see our detailed analysis on the segment, published in September 2019 edition of Diesel Progress magazine.
RECREATIONAL VEHICLES This sector follows consumer sector trends and posted very good growth in 2019 vs. 2018. Furthermore, the prospects for growth in 2020 looks promising 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. PSR
Yosyf Sheremeta is Director of Product Management & Customer Experience at Power Systems Research
