SUMMARY. The United States economy is facing several serious problems that don’t have simple solutions and are not likely to be solved for several years, reaching out to the presidential elections in 2024.
Take your pick of problems: Inflation. Stock Market. Climate Changes. Interest Rates. Housing Prices. Gasoline Prices. Food Prices. Social Unrest. Political Conflicts. Worker shortages. Supply Chain Shortages. Russia-Ukraine Conflict.
The bottom line here is that consumers, investors, businesses, and governments are uncertain about what the future holds for the next several years, and this uncertainty makes it difficult to build multiple-year action plans, whether it’s for purchases, manufacturing, marketing, or investing.
Uncertainty makes people nervous, and Uncertainty is the name of the game in the U.S. for the foreseeable future.
However, we’re still optimistic about the U.S. economy and we see 2022 production growing by 11.6% but that activity is likely to fall to 2.7% next year and drop again to 1.5% in 2024.
Inflation. This is a huge problem globally and in the U.S., and the Federal Reserve Bank (Fed) is taking very aggressive steps to control inflation even at the risk of creating a bumpy landing that could result in a recession.
The annual inflation rate in the US accelerated to 9.1% in June of 2022, the highest since November of 1981, from 8.6% in May and above market forecasts of 8.8%. Energy prices rose 41.6%, the most since April 1980, boosted by gasoline (59.9%, the largest increase since March 1980), fuel oil (98.5%), electricity (13.7%, the largest increase since April 2006), and natural gas (38.4%, the largest increase since October 2005).
Food costs surged 10.4%, the most since February 1981, with food at home jumping 12.2%, the most since April 1979. Core CPI which excludes food and energy increased 5.9%, slightly below 6% in May, but above forecasts of 5.7%.
This affects consumer’s check books, spending plans of businesses and decisions of governments and politicians.
Unfortunately, the causes are not easily remedied in the short-term.
Interest Rates. The Fed increased interest rates three-quarters of a percent in June aimed at bringing inflation back down to its target rate of about 2%. This will reduce demand and spending by increasing the cost of goods and services from gasoline to food and housing.
Russia-Ukraine. The war in Ukraine has impacted economies and companies worldwide. The conflict has reduced markets for companies wishing to sell components and finished goods into these markets or to buy grain and foodstuffs as well as oil and fertilizer and components and manufactured goods from Ukraine or Russia.
Countries from Japan to Brazil and the U.S. have been affected, either as an exporter or importer or, sometimes, both. No one knows how long this four-month conflict will continue and how long the ramifications will ripple across the global economy.
AGRICULTURAL. This segment in North America is expected to increase 6.5% this year, but then it will slip in succeeding years, dropping to 3.9% growth in 2023, flattening out in 2024, and declining 6.4% in 2025. This is lower than our Q4 2021 estimate of 8.4% growth compared to 2021, but better than our forecast in March, when we revised our forecast downward to 5.8%. The war in Ukraine is showing no signs of a conclusion. Ukrainian exports of wheat, other grains and fertilizer are a potential concern.
CONSTRUCTION. PSR is estimating that construction equipment production will increase in North America by 8.2% in 2022 versus 2021. That is up from our estimate of 7.5% last quarter, but down from our estimate of 10.3% in the fourth quarter of 2021. Government expenditures should help from pandemic recovery and construction equipment demand for new equipment will remain this year.
INDUSTRIAL. This segment typically follows the general economy and the Construction Segment, with some minor exceptions such as forklifts. We forecast this segment to grow 8.4% in 2022 but slip to only 4.9% next year and flattening out in 2024. We had previously forecast this segment to be more robust, at 10.3% this year and 12.8% in 2023. We will see similar market drivers as seen with construction equipment.
PASSENGER CARS & MINIVANs/SUVS. Strong demand and lack of inventory at the dealer level is driving up retail prices and pushing production. In 2022, we see the MINIVAN/SUV segment growing 18.1% this year, before slipping to 3% in 2023. It will be virtually flat at 1.7% in 2024. Passenger Cars will be up 6.2% based upon demand and lack of inventory but will drop to 2.5% in 2023 before rebounding to 4% in 2024.
LIGHT COMMERCIAL VEHICLES. This segment will grow 4.4% this year from 2021 but then will drop to 1.7% in 2023 and 0.9% in 2024. These growth rates are lower than the 9% growth rate posted 2020 to 2021. Rising fuel costs, interest rates, inflation, and economic downturn threats are causing the forecast for LCVs to be static for the next years.
MEDIUM & HEAVY VEHICLES. Medium and heavy commercial vehicle production is expected to increase by 4.7% this year over 2021 as the OEMs continue to struggle with supply chain disruptions that are expected to continue through at least the end of the year. However, the threat of an economic slowdown is greatly increasing primarily due to significantly higher fuel prices, increasing interest rates and overall inflation. Even with an impending economic slowdown, freight should remain strong through at least the first quarter of 2023 as the fleets continue to reduce the supply chain backlog. We see this segment growing 7% next year, before falling 8.9% in 2024.
POWER GENERATION. Our outlook on this segment remains fairly consistent from recent quarters. For this year, we see growth of 10.9% (slightly better than the 10.0% we forecast in the first quarter) but we see a drop next year to 3.1% next year before flattening to no growth in 2024. Key drivers for this segment are data centers, healthcare, and infrastructure development, all of which are seeing demand softening.
RECREATIONAL PRODUCTS. Recreational Products follow similar patterns to other consumer products. The pandemic provided a solid growth burst for motorcycles, ATVs, and other power toys as consumers had time on their hands—working reduced hours from home—and had extra cash in their pockets. We have been aggressive with this segment in recent quarters, predicting 15% growth in 2022 in our Q4 2021 forecast and 12.3% in the Q1 2022 forecast. We have throttled that back a bit this quarter, and we are looking at growth of 11.5% this year before dropping to 6.0% next year and -0.7% in 2024. Slowing demand will level off in this segment as inflation and fuel costs will hamper production in 2023 and 2024. PSR
Jim Downey is Vice President-Global Data Products for Power Systems Research
