SUMMARY. 2021 was a year of big hopes for economic recovery and pandemic management, and, overall, the economic rebound was strong. Looking at the state of the economy in general, and the key economic indicators such as GDP, interest rates, employment levels, etc., the North America market finished the year on a very high note. At the same time, development of new pandemic variants as well as ongoing issues with supply chains have led to manufacturing issues.
The second half of 2021 brought steady economic activities and strong economic recovery. Despite this strong performance, many existing and new challenges were seen. Problems from pandemic-related supply chain disruptions, logistics backlogs, and semiconductor shortages to new virus variations and labor market issues have contributed to slower growth in Q4 2021 than during the first half of last year.
Let’s break it down. The “Great Resignation” means companies must make themselves more attractive to new hires, and it provides those workers who remain more leverage to change corporate cultures from the inside.
With help of government support and targeted fiscal policies, the US economy showed a strong comeback in 2021. Furthermore, the growth trajectory is well positioned to continue to expand into the next few years, however, at much slower pace, than in 2021.
At the same time, there are many reasons for us to be optimistic about this trend. Our positive outlook is based on the reviews of key economic indicators, including GDP, unemployment, and inflation. In our previous forecasts, we discussed recovery trends for the post-pandemic period, and called for a return of demand for most markets in 2021. Last year, we witnessed a strong level of activities and an economic rebound for
Power Systems Research remains optimistic in our projections. Many factors contribute to such an upbeat outlook. Current strong macro-economic data provides a solid basis for future growth. The level of economic activities remains strong. Low interest rates and positive trends in employment help support the economic rebound. The Infrastructure bill will also serve as a catalyst to generate new demand for the next few years and will continue to help drive the economic expansion.
At the same time, the economic expansion in 2022 will be challenged by ongoing issues such as the employment situation and inflation. Low unemployment, coupled with rising inflation, provide prime conditions for the Federal Reserve bank to increase interest rates, which have been at near zero levels.
We believe the current challenges and setbacks to the recovery efforts carried over from last year will be present at least during the first half of 2022. While the latest spikes of COVID variants are expected to go down by the spring of 2022, we also expect the logistics and supply chain challenges to improve significantly, and employment shortages present serious potential disruptions to the recovery trend.
Vaccine mandates, that are being challenged in courts, have also added to the workforce shortages. Service-oriented industries have been severely impacted, and industrial and manufacturing sectors face the same phenomena, where factories cannot meet current demand levels. Strong demand is linked with healthy consumer and business balance sheets, helped by generous monetary and fiscal policies.
We believe inflation is likely to keep rising globally through Q1 2022, as demand remained high throughout the holiday period, and ongoing disruptions to supply chains maintains pressure on input and output prices. At the same time, we expect inflation to peak in H1 2022 as economic growth normalizes, demand eases off, and supply issues begin to dissipate. There is already evidence of this in lower backlogs of work and a gradual increase in finished goods inventories. Furthermore, inflation will most likely stabilize at higher levels than we experienced before the pandemic.
The era of near zero interest rates is about to be finished. Given the outlook for the economy, the labor market, and inflation, it may become necessary to increase the federal funds rate sooner or at a faster pace than anticipated earlier. The Federal Reserve has put the wheels in motion for balance sheet reduction.
In minutes from its December meeting, the Federal Reserve Bank revealed discussions about a balance sheet reduction in addition to signaling rate increases and confirming an accelerating tapering. Market expectations currently are for the Fed to start raising its benchmark interest rate in March 2022, which would mean that balance sheet reduction could start before summer.
We expect to see four interest rate hikes in 2022 and an additional 2-3 increases in 2023-24 until we reach the levels of 2-2.5%. Despite higher interest rates in 2022-2023, we believe fiscal policies will still provide a favorable and healthy environment to continue economic expansion, while keeping inflation levels at healthy levels. Current conditions provide a solid outlook and reassurance for future recovery and growth at least for another 12-18 months.
The energy market will play a significant role in 2022-2023, both globally and in North America. Energy demand, production, and investment will remain out of sync this year as the transition to a global economy powered by renewable energy sources gains traction. It’s an especially disruptive time in the global transition from fossil fuels to renewables.
In the short term, global economies are trying to squeeze fossil fuels out of their energy mixes without generating enough investment in renewable replacements or backup solutions. The economic impact will already be felt this year.
In North America, we are likely to experience continued high natural gas prices as investment in the unconventional sector is stymied by a combination of bearish investor sentiment and unclear current policy signals from the administration. The result will be both higher energy prices for consumers and a near-term policy collision with climate goals. The energy transition is already happening, but it certainly will not be smooth.
The housing market remains strong. Housing starts in the US surged 11.8% to an annualized rate of 1.679 million in November 2021, the highest level since March and well above the consensus market of 1.568 million. This number is also much improved (+64K units) from the previous report in August 2021.
The building materials market continued to experience pricing pressure as well as supply chain issues which impacted growth. Nevertheless, 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. The latest numbers on housing starts were much better than expected and we project the demand for housing to remain strong during H1 2022.
Across all market segments, we have seen overall total OEM equipment production numbers rebound in 2021 from 2020 losses. Cumulatively, OEM production within the 13 market segments we track in North America experienced a gain of 3.7% in 2021 vs. 2020. We expect the growth to continue to accelerate in 2022 at 12.3% vs 2021. This estimate is higher by 4.2% than the previous estimates in Q3 2021, mainly due to the much slower recover pace in H2 2021, employment challenges and supply chain issues.
The key drivers of the growth in 2022 will be the strong economy with healthy fiscal policy as well as high demand from consumers and business. We also expect employment levels to normalize along with significant improvements to the supply chains challenges we have experienced in 2020-2021.
While strong economic expansion was impacted by supply chain issues, manufacturing, and employment challenges, we continue to see strong demand across all sectors. However, the recovery and growth will vary considerably among market segments. Currently, we expect double digit growth in all segments except Agricultural equipment, which we estimate will gain 8.4% in 2022 vs 2021. Furthermore, the growth will continue into 2023-2024, however at slower pace than in 2022.
AGRICULTURAL. As the post-pandemic recovery continues, we expect the Ag segment to follow other industrial and heavy equipment industries. In 2022, we project the growth of agricultural equipment and machinery in North America to be at 8.4% vs 2021.
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 2018.
CONSTRUCTION EQUIPMENT. We expect the Construction machinery segment to follow strong economic recovery patterns. As housing starts regained ground in H2 2021 (after a temporary slowdown in Q2 2021), the demand remains very strong, mainly due to lack of inventory. Such conditions will drive the demand for new equipment. Given high levels of current and ongoing infrastructure spending, growth projections for the segment are favorable.
Our most recent overall projection on construction equipment and machinery production is positive at 10% in 2022 vs 2021, which is slightly higher than Q3 2021 estimates. Furthermore, we expect additional growth of 11.2% in 2023 vs 2022.
INDUSTRIAL. This segment typically follows the general economy, and the construction industry trends, with some minor equipment exceptions, such as forklifts. Currently, we expect an overall growth in production numbers at 10.3% in 2022 vs 2021 with additional growth of 12.8% in 2023.
Furthermore, industrial segment applications, especially material handling and smaller types of equipment stand ready to benefit from the trend to electric drive type power trains. This creates tremendous market opportunities, especially for new players and electric components suppliers. At the same time, existing OEMs and component suppliers have also been emphasizing innovation and new product development.
Consumer sectors, including LAWN AND GARDEN, PASSENGER CARS, MINIVANS AND SUVs as well as RECREATIONAL PRODUCTS, look very promising for the next few years. Not only have these segments entered a new cyclical uptrend, but they will also benefit from favorable fiscal policy (still low interest rates) and increased demand driven by the electrification trend within these segments.
LAWN AND GARDEN. The L&G segment continued its strong performance in 2021, driven by healthy demand and we estimate this trend will carry over into 2022-2023. Currently, we project 13.5% growth in 2022 vs. 2021 with additional growth of 6.6% in 2023. Despite many challenges, the 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 & Garden equipment.
During the past few quarters, Power Systems Research has been gathering intelligence on these electric models, and we will complete data collection and release this information 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. Government regulations towards zero emissions in smaller equipment certainly helps drive the electrification trend and improve adoption rates.
PASSENGER CARS and MINIVAN/SUVS. Strong demand supported by low interest rates and a re-opening of the economy will help these segments regain ground in 2022. At the moment, we expect the segment to post a solid year, mainly due to very strong demand for personal transportation.
However, given the current trend, specifically the market transitioning to SUVs and consumer preferences, the production volumes of passenger cars will likely never fully come back to the levels of 2016-2017. Not only has the segment been severely impacted by the pandemic and lockdowns, but ongoing supply chain issues and semiconductor shortages slowed recovery efforts. Currently, we estimate production for passenger cars in 2022 to be up 10.1%. This is a good rebound after the double digit decline the past two years. Furthermore, we expect the market to continue to grow at 5.5-6.8% in 2023-2024, respectively.
2022 promises to be great year as the strong demand carried over from last year and supply chain issues have started to ease. We project the Minivan/SUVs segment will gain 12.7% in 2022 vs. 2021 and 8.2% in 2023, respectively.
We have already started to witness introduction of EV technology across all major OEMs, and we expect this trend to significantly accelerate in the next few years. With the introduction of new and improved technologies, including fast charging, extended range, and infrastructure development, we estimate significant improvements to adoption rates of these technologies, which will increase the transition rate from ICE powered models to non-fossil fuels.
POWER GENERATION. This segment will mainly follow other industrial segments and will gain 12.9% in 2022 vs. 2021 which also performed well at 10% last year vs 2020. The recovery is supported by healthy demand and a strong level of economic activities. We expect the segment to continue to improve in 2023 at 6.5% vs. 2022. Key demand drivers for the segment come from data centers, healthcare, and infrastructure development.
In line with the electrification trend in other segments, we expect the market of stored energy to rapidly accelerate in the coming years, which will significantly impact established product lines powered by ICE units. This transition will start to disturb the current market preferences; at the same time, it will help create new products and new opportunities in the markets of backup power and portable power as well.
RECREATIONAL VEHICLES. Recreational Products follow similar patterns to other consumer products; however, the pandemic provided a solid growth boost for the segment. We project another strong year at 15.3% growth in 2022 vs 2021, and 11.6% in 2023 vs 2022.
We believe the strong demand for recreational vehicles (motorcycles) will fall in the next few years and the industry will mainly focus 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 and electric powertrain technologies, as they hunt for increased market share. PSR
Yosyf Sheremeta, PhD, is Director of Product Management and Customer Experience at Power Systems Research
