Yosyf Sheremeta, PhD, Director of Product Management and Customer Experience, takes a look at what’s in store for the industry segments we follow for the rest of 2021 and beyond.
Transcript
Welcome to the PSR 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? The economic situation seems to be changing drastically almost daily as President Biden and the Democrats work to pass a spending bill.
00:39 Yosyf Sheremeta
The last three months have brought steady economic activities and strong economy overall in North America; however, we see many existing and new challenges have developed related to the pandemic: such as supply chain disruptions, logistics, backlogs, shortages within, within semiconductor products and new COVID related spikes.
Additional labor markets issues, such as shortages across service industry as well as skilled labor, inflation has increased significantly and corporate earnings are coming in actually mixed. For example, Apple and Amazon, as well as Polaris, some of the bigger, heavier industrial companies, greatly missed on quarterly expectations, uh, just that last week. For example, Polaris has missed 8% on revenue, and that is significant amount, a significant miss.
On the other hand, technology companies such as Microsoft showed pretty strong performance overall.
01:49 Joe Delmont
Well, given this situation, what do you see ahead?
01:53 Yosyf Sheremeta
With help of government support and targeted fiscal policies, U.S. economy has showed a pretty strong comeback in 2021, even though it has slowed a little bit during the last three to four months.
The next six months, in our opinion, will be defining moment for the US economy, as there are some early indicators already that U.S. economy may even slip into a recession. It is very unlikely at the moment and there are still many positive economic drivers supporting strong rebound; but, we want our database subscribers to consider all possible economic scenarios and developments rolling into next year.
02:34 Joe Delmont
Well, given the recent numbers released in October, why are you so optimistic?
02:42 Yosyf Sheremeta
Well, there are many reasons for optimism. We first look at the economic indicators overall and they are still pretty strong. GDP shows a great performance year to date, even though it’s, it’s slowed down a little bit during the past few months. Unemployment improved drastically and there is a shortage of qualified and skilled workers at the moment. Inflation has been on a significant rise; but it’s still under control at the moment, for both consumer and industrial products alike. In fact, inflation has been on the highest level since 1980s.
We also continue to see a return of demand for most markets, industrial markets in 2021. We expect the demand to remain strong going into next year.
03:29 Joe Delmont
Summarize for us, if you will Yosyf, the key changes that developed in the third quarter.
03:37 Yosyf Sheremeta
During last quarter we saw a rebound for many industries. New mandates and mask regulations, from local governments and federal government, will help workers to safely return to life as normal, whatever these new numbers may look like.
Post pandemic business and public have adjusted quite well. Service oriented industries are gaining traction. That translates to an overall increase of economic activities across many industries.
04:08 Joe Delmont
Are these changes going to be permanent moving forward, or are they a temporary result of COVID and the Biden administration’s reaction to the previous administration?
04:21 Yosyf Sheremeta
We believe current challenges and setbacks to the recovery are temporary. While the latest COVID variant spikes are expected to go down by end of the year, we also expect the logistics and supply chain challenges to improve significantly; but we do realize it will take some time to completely resolve it.
At this point we estimate supply chain issues may take 12, even 18, months to be fully resolved.
04:49 Joe Delmont
The supply chain problem seems to be a long-term international problem. It was set in motion by COVID, which caused plant shutdowns and labor shortages and which dramatically affected consumer demand in many sectors.
It seems as though resetting all of those factors, in all of those situations, to pre pandemic status will be difficult and will take quite some time.
What do you think?
05:18 Yosyf Sheremeta
While employment has significantly improved in the last few months, service oriented industry are still experiencing significant labor shortages. These same challenges have also impacted manufacturing industries where factories cannot find enough skilled workers to meet the current increased demand, which has been on the rise in 2021.
As we have mentioned in our previous publications, Power Systems Research remains optimistic in our projections. Many factors contribute to such an upbeat outlook, such as current strong macroeconomic data provide a solid foundation for future growth, the level of economic activities remain strong, low interest rates are not going anywhere just yet, positive trends in employment — even though we will experience most likely new setbacks due to the mandates that will take place in December.
A long overdue infrastructure bill, once or if passed, will also serve as a catalyst to generate new demand for both traditional industries as well as a green economy.
06:30 Joe Delmont
Yosyf, what about inflation? That seems to be a growing concern.
06:37 Yosyf Sheremeta
Well, increased inflation concerns have put a brake on stock market growth, especially for the growth oriented companies in the technology sector. However, given the current macroeconomic levels of activities, we do not expect any significant change to the fiscal policy, such as interest rates increases, until probably middle of next year.
Current conditions provide a solid outlook and reassurance for the future recovery and growth, at least for another 12 to 18 months. Across all market segments we have seen [an] overall total OEM equipment production numbers rebound in 2021 from last year losses. We expect growth this year to be at 4.7% versus last year. This estimate is slightly lower, by 3.3%, than our previous estimates of just three months ago, mainly due to the slower recovery pace in Q3, employment challenges, and supply chain issues.
07:40 Joe Delmont
Yosyf, what are the key drivers for growth in this year?
07:45 Yosyf Sheremeta
Well, we, we continue to see key drivers for this year to be a strong fiscal policy and high level of economic activities. However, the recovery and growth will really, will vary considerably among different market segments that we track. Overall economic conditions slightly deteriorated during the past three months, but they still remain quite high. Nevertheless, we expect the increase in demand for products to follow in most markets within the next three to nine months.
08:16 Joe Delmont
Well, OK.
Can you discuss some of the leading segments, such as agriculture?
08:24 Yosyf Sheremeta
Well, Joe, you know corn and soybeans are the most planted crops in the nation, accounting about for 55% of principle crop acreages across all other commodities. Supply and demand are the main price drivers in their agricultural markets, more so than any other commodity markets.
As of last month, October 2021, soybean prices continued to fall and currently are at about $12.40 per bushel, which is significantly down from its May peak at about $16.60 per bushel. Corn prices also fell from May highs and currently are at about $5.60 per bushel. In May those prices were at the historical highs at about $7.60.
09:19 Joe Delmont
What do you see as the post pandemic recovery continues then?
09:25 Yosyf Sheremeta
We certainly expect the ag segment to follow other industrial and heavy equipment industries.
In 2021, we project the growth of ag equipment and machinery market, in North America, to be at about 8.3%. Additionally, we expect growth next year to be at 11%, so quite quite a solid recovery.
09:50 Joe Delmont
Aren’t these estimates lower than your previous forecast?
09:55 Yosyf Sheremeta
Indeed, they are slightly lower than our previous forecast, mainly due to a slower rebound during the Q3 and the component supply chain challenges that we experience across all industries.
10:09 Joe Delmont
So, Yosyf, what’s your bottom line forecast for agriculture?
10:15 Yosyf Sheremeta
The ag 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 level, we expect levels of production in 2022 to reach those of 2018.
10:34 Joe Delmont
So much for agriculture.
What about the construction segment? Is that the same?
10:39 Yosyf Sheremeta
We expect the construction machinery segment to follow strong economic recovery patterns. As housing starts regain ground in the third quarter, the demand remained very strong, mainly due to the lack of inventory. Such conditions will drive the demand for new equipment in the construction and machinery segment.
Even higher levels of current and future infrastructure spending growth projections for the segments are certainly favorable.
11:07 Joe Delmont
But what about the huge price increases for construction materials, such as wood? Will this put a damper on housing construction or just cause prices to increase?
11:19 Yosyf Sheremeta
Absolutely. Materials pricing has certainly contributed to the slower growth than we would expect otherwise; but record low levels of housing inventory continue to drive demand and prices. Keep in mind the population in the US continues to grow too.
11:34 Joe Delmont
So, what effect will President Biden’s infrastructure bill have on this segment?
11:41 Yosyf Sheremeta
So, at this time, the government is still working on the new legislation and, for the future comprehensive infrastructure bill, is committed to support the demand in the sector by investing heavily in the infrastructure and green technology. When passed, we believe this will serve as a catalyst for the electrification of equipment and machinery and will create significant opportunities in this segment, supported by the government funding and subsidies.
Our most recent overall projection on construction equipment and machinery production is quite positive, at about 9.6% this year, which is slightly higher than the second quarter estimates. We expect additional growth of 7% going into 2022.
12:28 Joe Delmont
We should look at the industrial segment as well. What do you see here?
12:34 Yosyf Sheremeta
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 this year at 8.5%, with additional growth of 9% next year.
On the same note as ag and construction equipment market, we expect the rebalancing of distribution of market shares and supply chains.
The overall growth dynamic is close to mirroring construction segment.
The main drivers for the segment are small industrial equipment, material handling, and forklift applications, where demand remains strong. Additionally, material handling is supported by stronger levels of freight, and we expect this trend to continue into next year.
Furthermore, industrial segment applications, especially material handling and smaller types of equipment, stand ready to benefit from the trend to transition to electric drive type powertrain. This will create tremendous market opportunities, especially for new players and electric component suppliers. At the same time, existing OEMs and component suppliers have also been looking into innovation and new product development.
13:52 Joe Delmont
Yosyf, it seems as though there’s a shortage of passenger cars. The inventory seems almost non-existent. What’s going on here?
14:03 Yosyf Sheremeta
Well, at the moment, we expect this segment to finish quite strong in 2021. However, given the current trend, specifically in the market transition into SUVs and consumer preferences, the production volumes of passenger cars in North America will likely never fully come back to the levels of 2016 or 2017 levels.
14:26 Joe Delmont
So, what’s your outlook for this segment today?
14:29 Yosyf Sheremeta
Currently we, we estimate production of passenger cars in 2021 to be down about 11.1% versus last year. Most of the production decline comes from Ford exiting the passenger car market in the United States. And, at the same time, we expect the market growth of 9.1% this year and about 7.5% over the next two years.
14:54 Joe Delmont
The, the minivan and SUV segment has been growing over the last few years. Do you expect this trend to continue?
15:04 Yosyf Sheremeta
Yes, we do expect this trend to continue, and we estimate that this year the market will post about 3.3% gain versus last year. This is significantly lower than our estimate in the second quarter, and it’s mainly due to the slower economic recovery in Q3. We see continuous growth in this segment at about 6 to 8% over the next few years.
15:31 Joe Delmont
Now, what do you see for electric vehicles?
15:34 Yosyf Sheremeta
We have seen the introduction of electric vehicle technology across all major OEMs, and we expect this trend to significantly accelerate in the next two to four years. With the introduction of new and improved technologies, including fast charging, extended range, as well as infrastructure development, we estimate the significant improvements to the adoption rates of these new technologies, which will increase the transition rate from ICe powered models to non-fossil fuels.
Most major OEMs will introduce new electric models in 2022-2023 and will have the equal electric offerings across most model lines.
16:16 Joe Delmont
Yosyf, thanks for these insights, they’re always very helpful.
16:21 Joe Delmont
This data is pulled from two of the major Power Systems Research databases, OE Link — the database of OEM production and forecast data, and EnginLink — which provides engine production, forecasts, and specification data.
Look for Yosyf’s reports on LinkedIn and in our monthly PowerTALK news report.
Contact us for more regional production forecasts by industry segments.
16:48
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