Yosyf Sheremeta, PhD, Director of Product Management and Customer Experience, analyzes the North American economic outlook by industry segment.
Transcript
Welcome to the PowerTALK podcast produced by Power Systems Research.
00:06 Joe Delmont
From Power Systems Research, I’m Joe Delmont, editor of PSR PowerTALK.
Today, we’ll talk with Yosyf Sheremeta about the economic outlook for North America. Yosyf is Director of Product Management and Customer Experience for Power Systems Research.
Bottom line, Yosyf, what do you see for the North American economy? It’s certainly been a chaotic situation the last several years with the pandemic and the changes in the White House causing major changes in economic priorities.
00:41 Yosyf Sheremeta
Thanks Joe. In one sentence, we expect strong post pandemic growth into 2022 and 2023.
00:51 Joe Delmont
That’s a very bold statement. What do you see from a 30,000-foot level considering macroeconomics?
00:59 Yosyf Sheremeta
The GDP declined 3.5% last year and that was the worst performance in almost 75 years; but, coming off that poor performance, the US economy is set for a strong comeback that should run for several years.
01:15 Joe Delmont
Why such optimism?
01:18 Yosyf Sheremeta
There are many reasons to be optimistic. Our forecast for 2021 and beyond are based on the strong gradients of macroeconomic factors combined with the economic cycle reset driven by government initiatives and fiscal policies.
GDP, unemployment, and inflation numbers all look good and we see a return of demand from most markets during the during the rest of 2021.
01:44 Joe Delmont
OK, 2021 seems to be looking pretty good, especially from the demand side. Consumers saved lots of money during the pandemic, and now they’re willing to spend that money.
01:56 Yosyf Sheremeta
So far this year we have witnessed a strong level of activities and rebound in many industries. As local governments are easing lockdown restrictions, service-oriented industries are gaining traction and that translates to an overall increase of economic activities across many industries.
We expect this level of rebound to continue and strengthen for the rest of 2021. The US economy is on track to reach or even surpass the growth level of 1984, the highest one since 1950s.
02:31 Joe Delmont
Let’s dig down a little bit. Specifically, what are the key factors you’re considering in your projections?
02:38 Yosyf Sheremeta
There are many factors. This is a broad-based recovery. Strong macroeconomic data provides a solid basis for future growth. Government stimulus money for consumers and businesses combined with investments and technology development will continue to drive demand in the near term. The current infrastructure bill being negotiated will also serve as the catalyst to generate new demand and continue the economic expansion for several years.
03:09 Joe Delmont
Yosyf, does the trend of vehicle electrification enter into your calculations?
03:16 Yosyf Sheremeta
We expect the trend toward electrification of vehicles to accelerate in the near future. In particular, we expect new developments with battery technology and also with hydrogen power. The impact of this trend will touch a majority of the applications and products we track in our databases. We already see viable alternatives to IC powered products entering the market during the next 12 to 36 months and this trend will accelerate in the mid-term.
03:43 Joe Delmont
The US political situation is unsettled at best. What do you see coming out of Washington that would help the economy?
03:54 Yosyf Sheremeta
We continue to see favorable fiscal policy and stable economic situation in the US. However, we expect it will take at least until 2022-2023 before GDP surpasses its fourth quarter 2019 peak.
Fiscal policy with near 0 interest rates, which government has promised to keep in place for the next 12 months, will provide a good platform for the economic recovery. We believe this is a critical factor, as it reassures both consumers and businesses of low interest rates and it will help drive demand for goods and services. Even then, once the interest rates are lifted from the flat 0 levels, we believe they will still provide favorable conditions to continue economic expansion.
04:40 Joe Delmont
What about inflation? Is inflation a concern? The Fed doesn’t seem to be too concerned about this.
04:49 Yosyf Sheremeta
Inflation concerns have resurfaced this year. The current annual inflation rate for the 12 months ending in May was at 4.99%. In just one month the inflation rate increased by 0.83% from 4.16 as of April 2021. Increased inflation concerns have put a brake on stock market growth, especially for 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 rates increases this year.
05:26 Joe Delmont
You sound quite confident about the US economy into 2022.
05:32 Yosyf Sheremeta
Yes, we are. Current conditions provide the solid outlook and reassurance for future recovery and growth, at least for another 12 to 18 months.
05:41 Joe Delmont
How do you see the employment picture?
05:43 Yosyf Sheremeta
We have seen significant improvements in the employment market during the last six to nine months. However, there was a slowdown in early spring 2021. The latest ratings from June 4th, 2021, showed the unemployment rate at 5.8%. While the rate improved from the first quarter, at 6.2%, it is still significantly higher than pre pandemic rating in February 2020, at 3.5%. We expect the employment market to continue to improve through the end of 2021. It may take at least another year and a favorable economic situation to fully recover employment rate to the range of 3.5 – 4.5%.
06:26 Joe Delmont
The housing market is hot, hot, hot. Do you see it cooling off?
06:32 Yosyf Sheremeta
Housing starts statistics experienced a slowdown in the first quarter this year; however, they rebounded during the second quarter of 2021; at 1.572 million in May of 2021. The building materials market continued to experience pricing pressure and coupled with supply chain issues slowed down the growth. We expect this trend to continue in the near future.
Another factor that contributed to the slowdown was rising mortgage, mortgage rates, primarily driven by the 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 lawn and garden.
07:18 Joe Delmont
Summarize your overall outlook for the US.
07:23 Yosyf Sheremeta
Across all market segments we do expect overall total OEM equipment production numbers to rebound in 2021 from 2020 losses.
07:33 Joe Delmont
Specifically, what are you talking about here?
07:39 Yosyf Sheremeta
Cumulatively, OEM production in the US experience a decline of 13.1% in 2020 versus 2019. We expect growth in 2021 at 8% versus 2020. As economic conditions continue to improve, we expect an increase in demand for products to follow in most markets in the second half of 2021.
At this time, we forecast the year 2021 growth to be in high single digit versus 2020 at 8% and we see an additional 9.7% gain in 2022 versus 2021. Overall, for all OEM equipment sectors, we expect it will be 2023 or even 2024 before the total volume units produced in North America reaches pre pandemic levels of the fourth quarter of 2019.
The key driver of growth in 2021 will be strong fiscal policy and a strong last six months of the year. Growth will vary considerably among segments.
08:47 Joe Delmont
Can you give us some examples of what’s going to happen in in these segments?
08:53 Yosyf Sheremeta
The medium and heavy vehicle 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 30.5% versus significant losses in 2020. We continue to see significant improvements in this segment with sustainable demand over the next 18 to 24 months. Furthermore, we estimate an additional gain of 6% in 2022 versus 2021.
Consumer-oriented segments experienced significant market deterioration, with passenger car segment leading the decline at roughly 25% in 2020 versus 2019. The next leading segment was minivans/SUVs at minus 16% in 2020. We expect passenger car production this year to remain flat in North America, while minivans and SUVs to regain ground in 2021 at 10.1%.
09:53 Joe Delmont
Let’s look at some other specific segments, like agriculture. What do you see there?
09:59 Yosyf Sheremeta
In 2021 we project the growth of ag equipment and machinery in North America to be at 9.8% versus 2020. Additional growth is projected for 2022 at 13%. The agricultural segment has weathered the pandemic better than other industrial sectors and is well positioned to continue its growth pattern in the next few years. The recovery will be steady and we expect levels of production in 2022 to reach those of 2016, 2017 years.
10:32 Joe Delmont
That’s a pretty optimistic outlook for agriculture. Uhm, does the same apply to construction?
10:40 Yosyf Sheremeta
As housing starts, uh, regained ground in the second quarter, the demand remains very strong, mainly due to the lack of inventory. Such condition will drive demand for new equipment. Given the high level of current and future infrastructure spending, growth projections for the segment are favorable. Our most recent overall projections on construction equipment and machinery production is positive at 8.9% in 2021 versus 2020. Furthermore, we expect additional growth of 9.7% in 2022.
11:15 Joe Delmont
The industrial segment pretty much follows construction, doesn’t it?
11:20 Yosyf Sheremeta
Yeah, that’s generally true. Currently we expect an overall growth in production numbers at 9.6% this year over the last year, with additional growth of 12.4% in 2022.
11:35 Joe Delmont
Since consumers have been saving money during the pandemic and employment figures look pretty good, I suppose the outlook for consumer products must be very favorable.
11:49 Yosyf Sheremeta
Consumer sectors, including lawn and garden, passenger cars, minivans and SUVs, as well as rec products, look very promising for the next few years. These segments will benefit from favorable fiscal policy and increased demand, mainly driven by (the) economy reopening.
12:07 Joe Delmont
And this is a big topic, but can you briefly summarize some of the leading consumer segments?
12:17 Yosyf Sheremeta
Let’s look at a few. The lawn and garden sector performed quite well in 2020. Production was flat in comparison to 2019. We estimate lawn and garden segment to continue strong performance driven by healthy demand, at 6.8% in 2021 versus 2020, with additional growth of 9.9% in 2022.
Lawn and garden market is set to establish one of the strongest adoption rates, among all 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 and garden equipment.
13:00 Joe Delmont
Yosyf, the lawn and garden segment, I guess it’s not surprising that that is looking very good. Those, uh, unit costs aren’t very high. But on the passenger car and the minivan side, where consumers have to spend more money, what are we seeing there?
13:25 Yosyf Sheremeta
Passenger cars and the minivan/SUV segment have shown strong demand, supported by low interest rates and reopening of the economy. At the moment, we expect the segment to show healthy growth in 2021, mainly due to the low base in 2020.
We estimate production for passenger cars to be flat in 2021. Additional growth of 10%-10.7% and 7.8% is expected in 2022 and 2023, respectively.
Over the past few years, minivan and SUV segment has been enjoying growth and taking share from passenger car segment. Nevertheless, the overall production has declined at 16.3% last year. We estimate the rebound in 2021 to be at 10.1% versus last year. Steady recovery next year is estimated to continue in the following years at 10.9 and 6% in 2022 and 2023, respectively.
14:28 Joe Delmont
Rec products must be showing a strong performance too, with consumers anxious to get outside now that the pandemic has subsided.
14:38 Yosyf Sheremeta
Recreational products follow similar patterns to other consumer products. However, pandemic provided a solid growth boost for the segment. We project a strong year, at 9.8% growth in 2021 versus 2020, and additional 8.5% next year. We don’t see this performance to continue, though, or this demand to continue in the next few years. We believe the strong demand for rec products, especially motorcycles, will fall in the next few years and the industry will mainly be focused on the recreational end use and purpose.
Furthermore, we expect continuous redistribution of power and balance among industry OEMs as demand for products changes with demographics. We will see new OEMs entering the market with new products aimed at the niche markets as they hunt for increased market share.
15:34 Joe Delmont
Yosyf, thanks for these insights. They are very helpful.
15:37 Joe Delmont
This data is pulled from two of the major Power Systems Research databases, OE Link — which is the database of OEM production forecast information, and EnginLink — which provides engine production forecasts and specification data.
Look for Yosyf’s reports on LinkedIn and in our monthly PSR PowerTALK news report.
And contact us for more regional production forecasts by industry segment.
To read a transcript of this podcast, visit our website at powersys.com and click on the podcast archive.
16:17
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