Yosyf Sheremeta, PhD, Dir. of Prod. Mgt. & Customer Experience, analyzes the North American economic outlook with special emphasis on the Administration’s efforts to control emissions.
Transcript
Welcome to the PSR PowerTALK podcast, produced by Power Systems Research.
00:06 Jim Downey:
Good morning and welcome to this podcast by Power Systems Research. Today we’ll be discussing the North American market outlook for.2021. I’m Jim Downey, Vice President of Global Data Products here at Power Systems Research. I’m joined by my colleague, Yosyf Sheremeta, who is the Director of Product Management and Customer Experience.
00:28 Yosyf Sheremeta:
Good morning Jim. Thanks for the introduction.
00:31 Jim Downey:
Yes, thank you, Yosyf, for doing this.
Yosyf is an economist by trade and he leads our forecasting and data modeling efforts. He works closely with our clients and industry stakeholders.
Now we’re just going to start with the current state of our economy. Looking at some of the macroeconomics behind that. I think that’s a good place to start Yosyf.
00:51 Yosyf Sheremeta:
Well, Jim, as people already mentioned to our database subscribers back in January, US economy is nicely positioned for a slow and steady recovery efforts in 2021. And I would specifically mention the second part of the of the current year. From the macroeconomic perspective, uhm, US has been able to manage the, the COVID lockdowns and pandemic fairly, fairly strong, I would say. And the macroeconomic factor is actually support that statement.
We continue to see favorable fiscal policy and stable economic situations for the next, uh, for this year for sure, and for the next few years. At this time we do expect the market to recover by end of 2022 or the first part of 2023. And at that time we think the GDP will probably reach the levels of Q4 of 2019, which was a pre, pre-COVID pandemic.
01:53 Jim Downey:
Yosyf ,quickly, when you mentioned, a, recovery by 2022-2023, I’m assuming you mean from, you know from the peak periods of 2018 and 2019, right?
02:06 Yosyf Sheremeta:
That’s, that’s correct.
Now, this is just the overall macroeconomic situation in GDP. I mean, some industries have suffered quite a bit, and they will not recover by that time. But this is just overall how the economy in the in the United States is going to perform.
As you can see right now, the housing starts, which actually, uh, we look at this, that, at this macro factor quite closely, it’s a key driver for many of our industries that we track. And housing has been very, very strong. While the key factor to this strong performance is the record low, historical low mortgage rates.
Uh, that will be #1 factor and #2 is temporarily shortage of inventory, right? So we do, uh, we do have a little bit of inflation in prices for the housing; but that’s different than what we’ve had back in the housing bubble in 2007, 2008. So I’m not really concerned with the pricing of the housing market at, at that point.
We do expect this market to continue to be strong this year. Or at least, or uh, as strong, as the interest rates, for as long as the interest rates will remain low. And we do expect them to do remain low for this year. US Federal Reserve really has assured the public and the businesses that the interest rates will stay low, at least for this year. And we actually do not expect any drastic hikes or change in policy in the fiscal policy for the next 12 to 18 months or so. And we believe that will be the key driver for the, for the, for the growth of the economy and it will propel the recovery efforts as we come out of the of the COVID.
And even if we will have 1/4 of a percent spike, maybe end of this year or maybe early next year, that will not have a big impact and will not slow down the growth or their recovery. The way we look at this: our inflation is still intact, so the, the, the readings are quite low from the macroeconomic perspective, and as long as the inflation will stay that same level, we do not expect any rate, rate increases coming, coming into the play. And so, as, as I said, just to reiterate, one more time, we do expect the rates to stay close to the same level this year.
In fact, I even was reading a lot of information about possibility of going with a negative rate as they’ve done it in Europe. So, it will be interesting to see. But definitely not, no increases.
04:53 Jim Downey:
One other point in terms of macroeconomic news, I mean. Unemployment still relatively high, you know due to the pandemic, I’m just, I’m just wondering if, if some industries are affected more than others that you’re seeing?
05:06 Yosyf Sheremeta:
Well, absolutely. I mean, as I mentioned that already, not every industry is is going to be the same, or is the same. We’ve we’ve seen a drastic impact on hospitality industry, travel, uh, consumer spending went down a little bit. Uhm, so the restaurant business is down.
At the same time, there are industries that we, we closely track, like recreational vehicles and powersports industries, they actually benefited from, from this lock down because the inventory that was on hand basically disappeared at the dealerships and, uh, it was overall very, very strong year for those markets.
05:51 Jim Downey:
So could you just tell me how, maybe, some of those segments or sectors would have been positively affected. You know, I’m thinking things like some of the powersports, you know, motorcycles, ATV’s, uh, you know, personal watercraft, utility vehicles, seemingly those have done really well, uhm, and I’m assuming that has a lot to do with, you know, people discretionary income. And, and maybe you could explain some of that to us?
06:18 Yosyf Sheremeta:
Absolutely. And you’ve actually made a very good point about discretionary income.
A, look, when people had to stay home because they couldn’t travel, they couldn’t go out and dine, they, overall, found themselves with extra cash. Now that extra cash is not a common phenomena for every single household; but, for the most part, people wanted to do those activities that they were used to do: to go out and travel. And the, the choice that was available in front of them was to go and do it by themselves.
So that’s, that’s why the RV market, recreational vehicles, was skyrocketing. And the news we, we are we’re getting from the from the dealerships that there were some, uhm, wait times when you for the new product, was as long, as long as six months and eight months for some really hot models, right? And the same, the same is true for the uh, for the powersports, motorcycles and ATV’s and UTVs and so on. We do expect this trend to continue this year, so in 2021.
However we do, we also expect once will be through COVID that trend will, will disappear. That, that high demand will, will kind of fade out a little bit in 2023. I mean it will still be strong but it will not be in double digits as we’ve seen in this year.
07:42 Jim Downey:
That’s really good information to, to start looking at the macroeconomics. And now I’d like to ask you about how this relates to, you know, our PSR forecast and the, the market segments or sectors that we track?
07:58 Yosyf Sheremeta:
Sure, no, that’s a very good point.
And before I I dive into segments, all you would have to do is take a look at the stock market. I mean every, pretty much, day it’s hitting record highs. And that’s one indication of a strong economy. And if you look at, even, the companies that we track closely in the engine and machinery business, all of their stocks have been, have been performing quite well. Whether it’s a big engine companies or equipment manufacturers pretty much across the board, those companies have, have done fairly well. When, when we look at 2021 or this year per say, we actually see a high single digit growth across all 13 market segments that we track. From smaller equipment, lawn and garden equipment, all the way to locomotives.
On road and off road market segments. Uh, the one exception we see, actually, that shows a lot stronger growth is medium heavy vehicle segment. And this is really due to the new cycle and reset of the cycle for the medium heavy-duty vehicle segment that actually has suffered close to a 40% decline in 2020, uh, or last year.
Now, I have to mention that the decline of 40% in medium heavy Vehicle segment was not really due to the COVID alone, but really due to the end of the previous cycle. As you recall 2018 and 2019, way before, pre-COVID, they were high years in terms of production capacities and so on. So we did expect the slowdown in that segment. Actually a few years back we were saying that the market is going to slow down and COVID, kind of, just made that slow down really quick, deepened, and restart the cycle going forward.
So we do expect, expect a 14,15, 17 percent growth over the, you know, next, uh, this year and next year as well. Some segments, well actually, will not get to 2019 levels until, you know, 3-4 years out, right?
We do know that the consumer oriented products will, have already started the recovery efforts and will actually lead the market recovery from COVID, COVID impact. But we do expect that the off-road market, stationary markets, more commercial ones, will actually follow, follow that same trend.
And there will be a lot of new drivers that will kind of help propel that. Not just the recovery, but the new growth.
10:50 Jim Downey:
That’s a really good summary looking at North America. I would imagine it’s quite similar globally as well; maybe with the exception of China, where they’ve got a little different cycle, is my understanding.
11:04 Yosyf Sheremeta:
China is definitely on a different cycle, but when we look at global growth for our industries and as well as global impact from COVID, I have to mention that US actually fared the pandemic quite nicely. Now, I know many people will probably not agree or like to hear this, but when we compare US versus even Europe, how you know the how we manage the, the business activities and business growth and even before pandemic going into 2020. So, like, exactly one year ago, US economy was very, very strong. And that strong economy actually allowed to weather the pandemic impact quite nicely.
11:56 Jim Downey:
You know when you have a new administration in the White House and, you know, we’re going to look some changes with green energy agenda and also like the future infrastructure bills. So if you could comment on those, that would be, that would be great.
12:09 Yosyf Sheremeta:
Sure. Well you’ve just mentioned two of the key factors that we think will propel the industry going forward. The future infrastructure spending and the green energy initiatives. Now, there are a lot of discussion about those two topics on the Hill and, uh, among economists.
So far we, what we have seen to date is, with the new administration, is return to the Paris Agreement, right? And there were a lot of future proposals discussed as far as what will that new future infrastructure spending bill will look like. However, at this point there is nothing really on the table. Is, there are just a lot of proposals, but not a single solid bill on the table.
Just because there is no new regulations right now already in place, that doesn’t mean that the industry is not looking towards those, towards those regulations, right? When you look at non internal combustion engine, uh, industries and companies that play in that space, the stock market alone for the alternative energy ETF’s basically doubled over the past, you know, 6 to 8 months period. So what we are, what we are seeing is really a huge demand for, for that new technology that is about to take place. And we believe that trend will, will, will for sure continue, right?
So I mean right now when we look at our 13 market segments that we track, we pretty much have a battery, electric, or plug in, or hybrid, uh, equivalent models in pretty much all of these segments and applications and products that we that we track. Now, granted, the volume is very low so far outside of consumer products; like passenger cars, and, and powersports, but that, that, that is about to change, right?
So we know that every, pretty much, major OEM in powertrain component company is looking forward to the electrified new era. So they are working on new technologies, new models. Uh, there are a lot of prototypes in place as we speak. And we do expect those models, those, these new models will actually end, to start to enter the market this year and for the next few years for sure. So that will be, really, a big key driver for the new technology going forward.
14:49 Jim Downey:
So we’re looking at adoption rates going out five years, and then ten years. Our understanding is that, you know, there’s going to be somewhat significant over the next five years, but really, in 10 years is where we’re going to see a real a real adoption.
And, you know, seeing some pretty good volume coming out of the IC engines and I just wondered if you could comment on that?
15:08 Yosyf Sheremeta:
Sure. So, you know, so far today we’ve seen a really good adoption for electric vehicles, especially for the premium set in the premium segment for, and Tesla is a standard that is, as we’ve discussed this many, many times, and we also see a trend in the powersports. So in other words, that’s smaller type equipment that you can put a battery and it doesn’t require you to have that, that vehicle or equipment in operation non-stop throughout the day, right? So This is why the passenger car markets and the powersports have been kind of leading the trend.
However we already see that the, on the commercial side, especially the smaller equipment, already going through electrification. We’re talking about lawn and garden applications pretty much across the entire segment. Small construction equipment, small industrial equipment, all going through rapid electrification.
Now the, the, the heavier equipment, so heavier trucks, heavier construction equipment, actually is not that far behind. Sure there is not many models are in operation or in testing right now; but we know that every, pretty much, product category is working on the replacement to go towards the carbon neutral future and zero-emission, so to speak.
16:45 Jim Downey:
I wonder, Yosyf, uhm, with, you’d mentioned, you know, when some of the larger off-road equipment and some of the long haul trucks, I’m wondering if, if fuel cell might be a better opportunity for those in terms of an alternative drive type?
17:05 Yosyf Sheremeta:
Yeah, so you’re bringing a good point.
Uh, I mean, over the past ten years or so, we’ve been also focused on Tesla and battery technology. But we know that in order for us to achieve that carbon neutral state, a better technology is not going to do or replace internal combustion engines alone. It will require a new technologies and new developments. And fuel cell is, for sure, a good option or feasible option for some of those are off-road equipment and the long haul commercial vehicles that (are) required to be in operation, pretty much, non-stop, right? So a lot will have to take place in order for that technology to kind of mature and get adopted.
I mean there are a lot of obstacles that still need to be worked out. For example, the vehicle range needs to increase, the charging technology you need need to develop and improve. That would include the charging speed, the rate of the charge, and so on. Charging stations for the hydrogen fuel cell needs to be kind of developed. And we know state of California is literally working on that. So I mean, over the next, you know, two or three years we will see a rapid development in that space for sure.
18:25 Jim Downey:
Yeah, absolutely.
And I know that we understand that regulation, you know, will drive the adoption of of the zero-emissions, and I wonder if you could just touch on some of that — in terms of admissions and some of the regulations that will affect this as well.
18:39 Yosyf Sheremeta:
Sure. Well you bring a good point because we cannot go to carbon neutral state without limiting the current technologies, so to speak. So if we do not have if we will not have stricter emission regulations in place, uh, the fossil fuel will will be really kind of hard to hurt to die and will, uh, that will slow down the electrification of the industry.
19:09 Jim Downey:
Sure.
19:11 Yosyf Sheremeta:
So what we look at when we look at the regulations specifically what we, what we see is that the industry will, will still heavily depend on subsidies from the government, right? In order to go 100% fossil fuel free in, let’s say 10 to 15, to 20 years for some of those products, right?
We know that, that, you know, that a lot of developments happen in just over the last month or so. Like announcement of GM to go 100% electric by 2035. It’s all still long road, you know, before that will be achieved, but they have some aggressive timelines ahead of them. For example, by 2025 they stated that they will have up to 30 new models in place and that would actually be equivalent to 40% of their product line that they currently offer.
We see the similar, uh, announcements from Ford and Jaguar and all other major, major players in the on-road and off-road as well.
But again we, we believe the technology still need to evolve, infrastructure needs to be developed. And of course, any help from the government that they will get will help, will help all of us together.
20:36 Jim Downey:
No that’s, that’s very good.
I just wonder if you could tell me a little bit more in terms of my understanding is that you know California is leading the way, and a lot of the emission standards. So I’m just wondering if, if you see that as California moves the needle, so will the rest of the country, Is that, does that sound, like, logical?
20:55 Yosyf Sheremeta:
You know it, it, it, you would, you would think yes, it is logical.
However, for some, uh, some various product, the, the industry may take a different turn, right? So like fuel cell technology and infrastructure, uh, infrastructure development in state of California is already underway. However, it’s not in, in most of other states in the US, right? But we look at California as a testing ground for some of the kind of other heavier equipment, uh, new technologies development. But for sure there is a lot to take from, from the state of California in terms of cutting out emissions and helping us to go to that 030 emission and then carbon neutral state of the economy.
21:51 Jim Downey:
Yeah, so it, it’s a very interesting time now as we, as we recover from COVID. As we move forward with vaccinations coming in and the changes there. Also with, you know, like you said, a new administration. And then, also, the move to alternative power drives and power sources. So all that makes for an exciting time in our industry and the next few years will, will be really exciting to watch what happens. Is it, won’t it?
22:16 Yosyf Sheremeta:
No, absolutely and honestly, when we look at, you know the next few years of our industries and how they are going to evolve. And one may, may want to do a comparison with the COVID recovery. But from my perspective, from, from, the way we look at the industry, right, we see this trend coming long time ago, right? I mean, we’ve seen the new, new electric technologies developing, you know, 10, 15 years ago.
The question comes down to the adoption, adoption rate, right? And we know that adoption will, will come once the total, total cost of ownership will be, will be there, right? I mean, it’s one thing to buy an electric car to go, you know, 5 miles from home to work. But if you need to drive that car 8 hours nonstop, that’s a little bit different story, right?
A lot of technologies will need to kind of catch up, and that’s when we will see the adoption of, of those new products to skyrocket. And actually, you know, to completely replace the fossil fuel products.
23:23 Jim Downey:
Well, thank you, Yosyf, for your time today. We really appreciate it.
Hopefully we can do this again soon.
23:28 Yosyf Sheremeta:
Absolutely thanks for having me.
23:30
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