Read the complete report in April PowerTALK™ News.
(April 1, 2021)–After the GDP declined 3.5% last year, the worst performance in almost 75 years, the US economy is set for a strong comeback. In fact, we could see GDP growth exceeding 6% this year.
There are many reasons to be optimistic about 2021. Strong readings of macro-economic factors combined with the economic cycle reset backed by the government initiatives and policies support our estimates for the current year and beyond.
Our positive outlook is based on the reviews of the key economic indicators, including GDP, unemployment, and inflation. In our previous forecasts, we discussed recovery trends for the post-pandemic period, stating a return of demand for most markets in 2021, especially during H2 2021.
Based on our analysis of the expected growth trend and the economic reviews in major publications, we think US growth can surpass the growth level from 1984 – the highest one since 1950s.
Yes, it is a long stretch to reach the levels of 7.2% GDP growth we saw in 1984; however, it is not that far from the major economic consensus of 6.8% growth in 2021 vs 2020.
Furthermore, with the additional stimulus support provided by the American Rescue Plan Act of 2021, US economic growth could rival China’s for the first time in decades. Should the US reach the growth levels of 1984 (at 7.2%), this will outpace Chinese government’s growth of 6%. Should this growth pattern materialize, this would be a remarkable achievement because the US economy is a much more mature economy — and was blown away by China’s explosive growth out of the Great Recession.
Other legislation related to government policies that is worth mentioning is the future proposed new spending on infrastructure, green energy, and education. This future proposed combined spending would be in the area of US$3 trillion and would certainly serve as a catalyst to prolonged growth supported by major investments from the government.
If passed, this would certainly create new markets and new opportunities for our industry. We will continue to monitor these developments, as they could drive profound changes to this industry.
We have mentioned the electrification trend of vehicles and equipment in the past. We expect these developments and trends to accelerate in the near future. The impact of this trend will touch a majority of the applications/products that we track in our databases. We already see viable alternatives to ICE powered products entering the market during the next 12-36 months, and this trend will accelerate in the mid-term.
Gradual re-opening of the economy should unleash enormous pent-up demand among Americans to purchase consumer equipment, eat at restaurants, go to the movies, stay in hotels, and use air travel. Many consumers have stocked up cash waiting for just this moment. Based on a few estimates, consumers in the US have built up $2.3 trillion in excess savings — money that can be drawn down as the economy reopens. Consumer spending will help drive the demand and support strong growth trend.
We continue to see a favorable fiscal policy and a stable economic situation in the US. At this time, we expect it will take at least until 2022-2023 before GDP surpasses its Q4 2019 peak. 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. 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.
The key factor and the foundation to the economic recovery is strong fiscal policy. With extra cash in hands of US consumers, combined with low interest rates, and strong growth expectations, the inflation concerns have re-surfaced. This was particularly reflected by the rise of Treasuries during the months of February and March.
Increased inflation concerns have put a break on stock market growth, especially to the growth-oriented companies such as the technology sector. However, given the current macroeconomic levels, we do not expect any significant change to fiscal policy (such as interest rate increases) this year. Current conditions provide a solid outlook and reassurance for future recovery and growth.
We have mentioned a slowdown in new employment during Q4 2020, but the trend did not hold true during Q1 2021. The latest readings from March 5, 2021, showed the unemployment rate at 6.2%. While the rate improved from Q4 2020, (January 2020) at 6.7%, it is still significantly higher than pre-pandemic rating in February 2020 of 3.5%.
The number of unemployed persons currently was at 10 million in February 2021. vs. 5.7 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 statistics experienced a slowdown in Q1 2021, which was a shift in the growth trend from Q4 2020. Housing starts in the US sank 10.3% month-over-month to an annualized rate of 1.421 million in February of 2021, which was the lowest reading in six months and well below forecasts of 1.56 million.
Housing starts reached the highest rate in 14 years in December as people moved away from the big cities due to the coronavirus pandemic. Another factor that contributed to the slowdown was rising mortgage rates, primarily driven by a rise in Treasuries. However, given the strong outlook for the economy, we expect the housing market to remain strong, 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 losses. Cumulatively, OEM production in the US experienced a decline of 10.5% in 2020 vs. 2019. We expect growth in 2021 of 8.1% vs 2019. This estimate is higher by 0.2% than the previous estimates in Q4 2020 at 7.9%. 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, the Medium and Heavy Vehicles Segment 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 24.5% vs significant loses in 2020. We continue to see significant improvements in this segment with sustainable demand over the next 18-24 months. Furthermore, we estimate an additional gain of 11.4% in 2022 vs 2021.
Consumer-oriented segments experienced significant market deterioration with the Passenger Car segment leading the decline at -25.1% in 2020 vs 2019. The next leading segment was Minivan/SUVs at -16.3% in 2020 vs 2019. We expect these two segments to regain ground in 2021 at 3.1% and 8.8%, respectively.
As economic conditions improve during the next three months, we expect a rapid increase in demand for products in most markets, starting in H2 2021. At this time, we forecast year 2021 growth to be in the low single digits vs 2020 at 8.1%, 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. PSR
Yosyf Sheremeta, PhD, is Director of Product Management & Customer Experience at Power Systems Research
