SUMMARY. In our previous forecasts, we have discussed some hope for a V-shaped recovery, it did not materialize. Our conclusion was based on several factors, such as the current economic cycle, overall strength of the economy, fiscal policy, political landscape in the US and globally, etc. After managing through the early stages of the pandemic in H1 2020, we saw good trends in H2 2020 and we had reasons to be optimistic for a quick recovery.
However, the recovery took a slight pause during the last few months. Unemployment continued to increase, and regional lockdowns prevented the necessary demand for a significant year-end growth. Now that the elections are over, we’ll have yet to see what the new administration will be able to achieve during the next two years. Specifically, if the long awaited infrastructure reform can be passed. However, fiscal policy with near zero interest rates, which government has promised to keep in place for the near future, will provide a good platform for the economic recovery and allow us to look optimistically into 2021-2022.
The key factor and the foundation to the economic recovery is strong fiscal policy. Not only has the US Federal Reserve Bank slashed its interest rate to 0% since March 2020, it also promised to keep it at zero or near zero into 2021-2022.
We believe this is a critical factor as it re-assures both consumers and businesses of low interest rates and it helps drive demand for goods and services. To prove this point, take a look at US stock market: it hit its record high and it continues to stay at that level. The stock market may look overvalued at the moment, but that does not bother investors. As long as the interest rates remain low, there will be a room for new growth.
Inflation levels will be rising slightly in 2021 for consumer-oriented products, but that does not seem to influence economic recovery at the moment. Nevertheless, current conditions provide solid outlook and reassurance for future recovery and growth.
We have mentioned a slowdown in new employment during Q4 2020. The latest readings from Jan. 8, 2021 showed the unemployment rate at 6.7%. While the rate improved from Q3 2020, (September 2020) at 8.4%, it is still significantly higher than pre-pandemic rating in February 2020 of 3.5%. The number of unemployed persons currently was at 10.7 million in December 2020. vs. 5 million in February 2020. We do not expect any significant and rapid changes to the employment data in 2021; it will take another 18-24 months and a favorable economic situation to fully recover employment to the rate of 3.5%-4.5%.
Housing starts regained recovery speed during Q4 2020. The numbers for November were better than expected at 1.547 million. This was the highest reading since pre-pandemic February 2020. Low interest rates and low inventory propelled the growth. Going forward, we expect the housing starts to remain strong and steady, which will directly help drive growth in segments like Construction, Industrial and L&G.
Across all market segments, we expect overall total OEM equipment production numbers to rebound in 2021 from 2020 loses. Cumulatively, OEM production in the US experienced a decline of 19.3% in 2020 vs. 2019. We expect the growth in 2021 of 7.9% vs 2019. This estimate is higher by 1.2% from the previous estimates in Q3 2020 at 6.7%. The key driver of the growth in 2021 will be strong fiscal policy and accelerated growth in H2 2021. At the same time, the recovery and growth will vary considerably among segments.
As expected long before the pandemic, Medium and Heavy Vehicles was due for a slowdown and a reset. This segment in 2020 suffered the worst performance among all industry segments; however, it will also lead the recovery in 2021 and will post the highest growth rate at 13.6% vs significant loses in 2020. We continue to see significant improvements in this segment. Furthermore, we estimate an additional gain of 17.5% in 2022 vs 2021.
Consumer-oriented segments experienced significant market deterioration with the Passenger Car segment leading the decline at -30.2% in 2020 vs 2019. The next leading segment was Minivan/SUVs at -23.3% in 2020 vs 2019. We expect these two segments to regain ground in 2021 at 8.1% and 8.9%, respectively.
On the opposite side from consumer products, heavy industrial segments, such as Railway (at -9.4%) and Marine Auxiliary (at -12.3%) posted small losses in 2020 vs 2019. Their recover growth rate will also be in the single digits and will not be as high as for the consumer products.
Currently, we do not see a return to significant economic activities and rapid increase in demand for products in most markets until H2 2021. At this time, we forecast year 2021 growth to be in low single digit positive vs 2020 at 7.9%, and we see an 8.8% additional gain in 2022 vs 2021. Overall, for all OEM Equipment sectors, we expect it will be 2023 or 2024 before the total volume units produced in North America reaches pre-pandemic levels of Q4 2019.
AGRICULTURAL. Productionof agriculturalmachineryand equipment has been suffering for the past 5-6 years, where production levels have fallen significantly since 2015. Year 2020 looked promising due to many factors; however, the recovery was put on hold by the pandemic.
Corn and soybeans are the two most widely planted crops in the nation, accounting for 55% of principal crop acreage.
The prices for these two commodities improved drastically in 2020, mainly driven by increased demand. Since June 2020, both corn and soybean prices have continued to increase. As of January 2021, soybean prices are at $14 per bushel, which is highest level since March 2014. Key factors in driving prices to current levels were prolonged dryness in key crop-growing regions of South America, labor issues in Argentina, and strong demand from China. Expectations that the US will cut domestic supply forecast for the crops in its next crop report have also lifted prices.
Corn prices have also gained significantly since June 2020. Concerns about tight supplies in 2021 have pushed corn, soybean and wheat futures to multi-year peaks, hitting levels not seen since 2014.
As the recovery continues, we expect the Ag segment to follow other industrial and heavy equipment industries. In 2021, we project a growth of agricultural equipment and machinery in North America to be at 8% vs 2020. Additional growth is projected for 2022 at 11.8%. Agricultural segment has weathered the pandemic better than other industrial sectors. The recovery will be steady, and we expect levels of production in 2022 to reach those of 2016-2017.
CONSTRUCTION EQUIPMENT. At the onset of the pandemic, the outlook for construction machinery was not optimistic at all. However, given the strong housing starts and high levels of infrastructure spending, the growth projections for the segment are favorable. Furthermore, government is working on the new Infrastructure bill and is committed to support the demand in the sector by investing heavily in infrastructure and green technology. We have yet to see if this bill will make it to the top of the agenda for the new administration and what it will look like if it gets there, but we believe the chances of positive developments are quite high.
Our most recent overall projection on construction equipment and machinery production is positive at 7.4% in 2021 vs 2020, with additional growth of 8.6% in 2022.
INDUSTRIAL. This segment typically follows the general economy, and the construction industry trends, with some minor exceptions, such as forklifts. Currently, we expect an overall growth in production numbers at 7% in 2021 vs 2020 with additional growth of 8.6% in 2022.
On the same note as in Agricultural and Construction, we expect new rebalancing of distribution of market shares and supply chains. The overall growth dynamic is closely mirroring the Construction segment. The main drivers for the segment are small industrial equipment, material handling and forklift applications, where the demand remains strong. Furthermore, material handling is supported by stronger levels of freight, which greatly improved in H2 2020 in comparison to April-May of 2020.
Consumer sectors, including LAWN AND GARDEN, PASSENGER CARS, MINIVANS AND SUVs as well as RECREATIONAL PRODUCTS, will need to adapt to a new economy. As mentioned earlier, consumer-oriented segments suffered the greatest decline in 2020. This is mainly due to market saturation in previous years and almost complete lack of demand in Q2 2020, which was mainly caused by high unemployment and future uncertainty. During H2 2020, we saw demand come back and we project this trend to continue and regain ground.
LAWN AND GARDEN. The segment is following a similar pattern to other consumer products, but the declines in 2020 were not as steep (at -13.25) as in the personal transportation segments. We estimate L&G to regain ground and grow at 7.6% in 2021 vs. 2020 with additional growth of 8.6% in 2022
The Lawn and Garden market is set to establish one of the strongest adoption rates among all other segments in the introduction of battery-powered models and technologies. In addition to the consumer side, we also see this trend sparking a significant interest among commercial buyers for Lawn & Garden equipment.
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. Given current market circumstances and the trend in the industry, we believe electric models will follow similar growth rates to its ICE units and will greatly gain market share at the expense of ICE powered equipment.
PASSENGER CARS and MINIVAN/SUVS. The passenger car segment was already experiencing a slowing of demand over the past few years, mainly due to the market transition to SUVs as well as a younger population transitioning to an urban lifestyle and an increase in the popularity of mass transit, etc. However, the pandemic pushed the segment into a virtual halt during Q2 2020. The demand for passenger cars started to return in H2 2020. We have seen passenger car production decline the most among consumer-oriented products and the second largest decline (after Medium and Heavy Vehicles) among all sectors we track. The decline in production in 2020 was almost at 30% vs 2019.
At the moment, we expect the segment to regain ground in 2021, at +8.1% vs. 2020, mainly due to a low base in 2020. However, given the current trend, specifically the market transitioning to SUVs, the production volumes of passenger cars may never fully come back to the levels of 2016-2017. Additional growth of 10.3% and 8.6% is expected in 2022 and 2023, respectively.
Over the past few years, the Minivans/SUVs segment has been enjoying growth and taking share from passenger cars. Nevertheless, the overall production has declined at 23.3% in 2020 vs 2019. We estimate the rebound in 2021 to be at 8.96% vs 2019. Steady recovery next year is estimated to continue in the following years at 9.2 and 5.1% in 2022 and 2023, respectively.
MEDIUM AND HEAVY VEHICLES. Commercial truck demand rebounded in the fourth quarter of 2020, particularly in the class 8 segment. Order rates for class 8 came in stronger than expected which bodes well for production through at least the first half of 2021. Freight rates remain relatively high and this trend is expected to continue throughout the year. Congress passed another round of economic stimulus which also bodes well for commercial vehicle adoption. While the Coronavirus continues to negatively impact the economy overall, PSR does not believe the effects will cause a significant slowdown in demand in this segment in 2021.
Last year (2020) the production dropped about 35% vs 2019 peak year. While down significantly, the final overall performance in the segment was much better than initially expected. The market rebound started in H2 2020, and we expect that trend to continue well into 2021-2023. We project a healthy growth in 2021 at 13.6% vs 2020, following by 17.5% and 5.7% in 2022 and 2023, respectively. However, the market will not return to pre-decline levels for at least a few years.
POWER GENERATION. This segment will mainly follow other industrial segments and will gain 7.4% in 2021 after losing 11.1% in 2020 vs. 2019. The recovery will mainly depend on improved economic conditions in the region and worldwide. We expect the segment to continue to improve in 2022 at 7.9% vs. 2021. Key demand drivers for the segment come from data centers and infrastructure development.
RECREATIONAL VEHICLES. Recreational Products follow similar patterns to other consumer products, but the 2020 declines were not as steep as in the passenger car segment. In 2021, the overall production for all products declined at 19% vs 2019. Going forward, we project 6.7% growth in 2021 vs 2020, and 7.6% in 2022 vs 2021.
We believe the demand for recreational vehicles (motorcycles) will significantly fall in the next few years, unless economic conditions prove better than expected. Furthermore, we expect continuous redistribution of power and balance among industry OEMs as demand for products changes with demographics. Most likely, we will see OEMs entering the market with new products, aimed at niche markets, as they hunt for increased market share.
RAILWAY. This segment follows economic conditions in the region, and we expect it to gain 6.7% in 2021 vs. 2020. This segment mainly follows the natural (organic) rate of replacements. In 2022, we will see growth at 8.5% vs 2021. PSR
Yosyf Sheremeta, PhD, is Director of Product Management & Customer Experience at Power Systems Research
