TOTAL work truck industry shipments will reach $107.2 billion this y ear, up from $102.5 billion in 2012, according to figures compiled by the National Truck Equipment Association (NTEA), the US Department of Commerce, Bureau of the Census, Wards, and the Federal Reserve.

That includes an increase of 4.8% in commercial chassis shipments and 4% in truck equipment shipments.

“The good news is that we’re continuing to grow,” said Steve Latin-Kasper, the NTEA’s director of market data and research. “In normal years, the growth in the chassis part of the market is relatively close to the growth on the equipment side. It was better in 2011 and 2012, and we’re lined up at the same rate—around 5%. That’s probably going to get a little better. Some segments are dealing with negative numbers, but strip chassis and Class 3 are looking at substantial growth, so it depends on where you are looking.”

In his presentation, “Commercial Truck and Equipment Outlook: Foreign and Domestic,” Latin-Kasper said that strip chassis sales through June were up 35% and Class 3 sales were up 31% over the first half of 2012.

“We’re expecting that to continue,” he said. “Order numbers for June and July say that’s pretty good. There are differences by segment. Clearly LCOE is struggling (down 10.7%). But conventional is the one that really matters, and that’s up 2.1%.

“By segment, Class 2 hasn’t done well through the first six months (down 8.6%), but in June it was the highest of all weight classes. So it looks like we’re seeing some action in light duty beyond Class 3, which was up 31% for the first six months.”

 

Latin-Kasper said the growth rate for US/Mexico box-off chassis shipments in Classes 2–7 peaked in 2010 at almost 50% and has been slowly tapering off to a 7% rate this year.

“But it stabilized in the second half of 2012 and has been fairly stable in the first half,” he said. “We expect it to turn back up.”

The overall growth rate for the industry is being driven by medium-duty, because Class 8 shipments were down 16% through the first half of the year.

“We expect that to taper off at 20% and then start turning back in the right direction,” he said. “Class 8 sales actually were improving in the second quarter and should get progressively better as we move into 2014.”

Retail conventional truck sales peaked at 30,000 units a month in the first quarter of 2006, plunged to under 10,000 in 2009 and are now 17,000.

“We have a long way to go to get back to where we were, so there’s plenty of room for growth,” he said. “Capacity that was in place for that peak in 2006 is pretty much still in place, so it’s not going to require a huge amount of capital expenditures on the industry’s part. We pretty much have plants and equipment in place to make that growth happen. It’s just a matter of sales increasing, and we’re getting there slowly but surely.”

Based on a negative rate in the 12-month moving averages of North American factory shipments minus retail sales, he said that those responsible for getting conventional chassis into the sales channels “maybe have expectations lower than they should be as we head into the fourth quarter.”

Latin-Kasper said American Trucking Associations (ATA) freight shipments have always been a good leading indicator for trailer production, and in the past few months, the numbers have been very good coming out of the freight shipments survey. Based on conversations he has had with Bob Costello, the ATA’s chief economist, there is optimism about freight shipments going forward.

“Maybe not continuing to grow toward 5%, but staying in this 2-3% range, which means trailer production is likely to level off,” he said. “Trailers tend to track tractors going up and down. Tractors have not been looking too good in the last two or three quarters, but second-quarter data was looking better than the first. Expectations are that Class 8 should improve in the fourth quarter and get better in 2014, and we expect trailers to move in that direction as well.”

Latin-Kasper said there are issues in terms of state and local government spending on equipment, which typically accounts for 10-15% of total truck sales in the United States.

“State and local government spending tends to lag what’s going on in the rest of the economy,” he said. “It came back up in 2011, then got back to zero. Tax revenues are going up, so why are state and local government spending going down? The answer is very simple: Their costs were going up at the same time as revenues. Many state and local governments are in debt. They still haven’t paid off what they incurred from 2007 to 2010. And in almost all of their charters and state constitutions, they are required to pay off debt first before they can spend money on things they don’t already have.

“They won’t help pick up the pace of truck sales until 2015. If you’re heavily into state and local governments, that’s not something you want to continue to rely on the rest of this year and in 2014.”

The construction market accounts for 25% of total truck sales, and the scenario is the same there for state and local governments.

“They’ve got to pay back debt,” he said. “They’re not getting money out of Fed the way they might have expected for matching expenditures on highway and road building, local and state. That won’t come back until 2015.

“Private spending has done well and will continue to do well. They aren’t buying trucks because they bought a lot of trucks prior to the recession. So utilization of those trucks remains an issue for us in 2013 and will probably remain a bit of an issue into 2014. They’re still running trucks they bought in 2006 with low miles on them, and that has allowed them to become profitable again and hold off on new capital expenditures. That will change, but it probably will be the second half of 2014 before we see construction fleets do anything other than replacement buying.”

The news from producer price indexes for metal ore, scrap, and products continues to be good. Hot-rolled sheet and strip were down 12.1% in June from a year ago, and aluminum sheet and strip were down 3.1%.

“You guys have a really good pricing environment for metals that will go through the end of this year and the first half of 2014,” Latin-Kasper said. “We’re beginning to see some movement in the EU and Asian economies. Japan is growing at a 3.8% clip, which is good news for the global economy. China reported growth in its exports rate. From a global economic perspective and seeing the business grow in general, that is good news.

“The global economy is continuing to pick up steam. Expectations remain high for 2.5%-3% global economic growth this year and 3.5%-4% next year. Unfortunately, the downside is that we’re growing slowly ourselves and we’re not getting huge price increases for the products we sell. The producer price index for truck trailers and chassis, 10,000 lbs per axle, was down 1.5% in June over a year ago. Dump bodies managed a 3.6% gain, but all over, truck and bus bodies were under 1%. That will probably change once we see demand for trucks from construction fleets kick into a higher gear in the second half of 2014.”

He said those who buy trucks will continue to be concerned about the cost of fuel in 2014.

“Even if that rising trend comes quite a ways back, we’re still looking at a situation where oil prices are growing faster than truck sales and freight shipments,” he said. “The rate of growth in oil prices will probably outpace everything else in this industry. Which means the trend toward green trucks or various pieces of equipment that make them green will continue as we go forward. That’s especially true for natural gas, as opposed to gas or diesel. If you’re not paying attention to that, it’s something you need to do.”

This industry’s exports to Canada are expected to jump from $12.9 billion to $14.4 billion, and those to Mexico will nearly double to $1.3 billion. That’s all part of an overall 14.1% gain.

“Diversify your customer base,” he said. “Look at other countries to sell to rather than the US or Canada. As Mexico’s economy continues to grow, our exports to Mexico are likely to grow. China is still a strong market for US products.

“Germany led the way with a 157% gain, which I can’t explain. Russia and Eastern Europe exceeded the rest of the world. Brazil was down 38%, but that doesn’t mean you should take your eyes off Latin America, because they are at $1 billion in imports. The rest of Latin America is continuing to look like a really good place to sell US product. And it’s not all that far away. The rest of the world does like our products. There are a lot of sales you could be a part of.”

Reacting to requests from attendees, Latin-Kasper re-introduced a snow-and-ice segment to his presentation, saying that the National Oceanic and Atmospheric Administration is forecasting that this winter will be a weak to moderate El Nino. What does that mean?

“They’re saying that the storms we do get are likely to be bigger and more ferocious,” he said. “And regardless of El Nino coming back into play, they are also forecasting there will be a moderation of that from Atlantic weather. They do expect more snowfall in the Northeast. It looks like this coming winter may be reason for more optimism on the part of the snow-and-ice guys, especially after the last two years. Last year was awful.”

He said the slow growth mode in the recovery from the recession can be explained by the falling rate in personal consumption and equipment/software expenditures.

 

 

“When you have incomes that are flat and stagnant, you have a very difficult time coming out of a recession,” he said. “So each bump got a little worse until capital expenditures increased. Consumers were going, ‘We’re not ready.’

“That almost has to improve in the future. But right now, it’s slow to stagnant growth, and that makes it difficult for consumers to help us move into a higher rate of growth. It’s not impossible. We are expecting to see improvement going forward.

“The percentage of debt as a percentage of total income has mostly been fixed. It has been improved substantially, but the fear remains. So consumers have lots of cash. Savings levels are historically pretty high. We can spend if we choose to. The cash is there.

“It’s more about uncertainty and fear than our ability to spend, despite stagnation in income. Over the last two or three years, the average American became a saver, which doesn’t happen a lot. The government still has issues and isn’t likely to help us grow out of it. Consumer spending is still not as good as before the recession. There’s still a lot of room for improvement, but there doesn’t appear to be any reason for consumer confidence to fall back.

“Not only do we not need to worry about a recession anytime soon, but it’s going to take us awhile. That’s why people are talking about this current economic situation leading to a pretty long period of economic growth going forward—three to five years. Most of the panelists are thinking of a recession not until 2017 at the earliest, and probably 2018 or 2019.”

 

NAFTA Economic and Truck Market Outlook 
Ken Kremar 
Principal 
Industry Practices Group

Kremar had some sobering news for anyone expecting a dramatic upswing in the economy.

“It will muddle along for the balance of this year and then slowly start to gain forward momentum,” he said. “This may not be the economy you would like to be selling into or operating in, but it’s the one we’ve got. There’s not too much I can see on the horizon where you will wake up tomorrow and the economy will be rip-roaring along. Our current forecast is for GDP to expand 2%.”

His keys:

  • Economic growth is expected to pick up, but federal policies present risks.
  • Consumers will cautiously increase spending in response to gains in employment, income, and asset values.
  • Home-building will surge through 2015, but then stall.
  • Business investment will be a driving force in US economic growth.
  • Interest rates will rise significantly over the next four years as monetary accommodation is withdrawn.
  • The energy boom is creating jobs, investment, and a competitive advantage.
  • Net exports will support growth after 2015.

He said the Institute for Supply Management’s indexes signal faster growth, but certainly not the kind of growth we had in 2011, although a little bit better than what we experienced earlier in 2013.

“When times are good for the overall economy, times are generally good for the truck business, whether that’s small commercial trucks or big trucks,” he said. “Once the economy loses momentum, then the truck business starts to falter and, in many cases, falter badly. We have had a mixed recovery. If we’re right about where the economic outlook is beyond 2013, we should see a continued expansion of truck sales in 2014 and 2015. There should be enough underlying strength in the economy and in a lot of key sectors of industries that go out and buy trucks to support continued gains on the truck side.”

His overview of the truck market:

  • About 10 million Class 1-2 vans, van cutaways, and conventional pickup trucks were sold from 2004 through 2007. “There are still a lot of old trucks out there,” he said.
  • Nearly 600,000 Class 3 trucks were sold from 2004-07.
  • Over one million Class 4-7 trucks were sold in the NAFTA region from 2004 through 2007.
  • Over 1.1 million Class 8 trucks were sold in the NAFTA region from 2004 through 2007.
  • Small commercial truck sales are doing well.
  • Medium-duty continues to gain ground.
  • Heavy-duty has had a pause that refreshes sales.
  • Stronger growth in the economy will support truck sales gains beyond 2013.

He said there has been a lot of volatility from month to month in Class 1-2 sales, but the trend has been pretty steadily up, with a sales increase of 15.6% in the first half of the year. Sales of Class 3 trucks were up 18%.

“There’s strength at the low end of the market,” he said.

Class 5-7 sales were up 22% despite a slippage in July.

“August tends to be a strong month, which suggests there’s continued strength in this market,” he said. “A lot of traditional medium-duty markets are driven by housing and construction, and that’s an area that has done well.”

Class 8 sales started to falter in April 2012 and were weak through September, then got a pick-up in October and held at 20,000 through May of this year. After faltering in June and July, August numbers were 19,500.

“Most of these markets should be doing better in 2014 than they did in 2013, and they should do better in 2015 than they will do in 2014, which would suggest demand for equipment is going to continue to move forward,” he said.

The fortunes of truck manufacturers are tied to the fortunes of key truck-buying markets:

  • Resource Sector (agriculture, oil and gas, mining, logging).

“Logging is going to rebound with housing starting to see some life, so that should be one of the stronger markets in terms of where it goes from where it is now. Oil products, we think, will head higher. We’re very optimistic about what domestic products and Canadian products and even Mexican products will be doing in the next few years. In natural gas, there’s a lull in action because of oversupply but expectations are still optimistic there. Coal will be the weak sister of this resource sector.”

  • Manufacturing, retail and wholesale trade.

“The manufacturing sector is showing signs of life. Robust new orders suggest a brightening economic outlook. Buoyed by rising domestic demand and an improving export outlook, growth in the manufacturing sector will accelerate beyond 2013. Rising net worth, steady, albeit modest employment gains, and pent-up demand will support real consumption growth of 2%-3% in the medium-term. Our outlook on the auto front remains healthy and improvements in the housing market should have a positive impact on retail sales. As housing values increase, the wealth effect helps to improve consumer spending. Moreover, as Americans move into new homes, they tend to buy white goods and furniture. With inflation in check, the backdrop for consumer spending and retail sector activity is looking brighter. Wholesalers and distributors will reap the benefit of increased manufacturing, retail, construction, farm and trade sector activity.”

  • Construction and special trade contractor employment.

“We’re in the very early stages of recovery in housing. We think housing starts will pick up and peak in 2015 and then stabilize at 1.5 million units a year. Housing demand currently exceeds supply by a wide margin, driving up prices and encouraging new construction. Despite rising home prices and interest rates, housing affordability remains favorable. We’re also in the initial stages of non-residential construction. There’s a lot of anecdotal evidence that there is a rebound in non-residential construction, and this has a positive impact on equipment of all different types. Public projects are still being impacted by very tight budgets and will not turn positive until 2015. Special-trades employment growth will reflect new construction spending as well as increased repair and remodeling activity. Recovery in construction bodes well for building material suppliers. Carpenters, electricians, plumbers, painters, masons, etc, will benefit from the construction revival. You’re going to see significant improvement in employment. A lot of these guys have been out of work for some time. These are guys who buy pickup trucks with the toolboxes on them. You’re also going to see a lot of renovation activity, which will have a positive impact.”

 

 

  • For-hire carriers.

“The top 250 for-hire trucking companies operate 175,000 trucks and 435,000 tractors. They’re major movers of truck sales. The ATA Truck Tonnage Index was hit very strong during the recession: 2009, down 8.5%; 2010, up 5.7%; 2011, up 5.8%, 2012, up 2.4%. First-half 2013 tonnage was up 4.5% at a time when the economy has been limping along. Freight tied to housing and construction, light vehicles, and oil and gas production is doing well. Other general freight is limping along. TL rates have been subdued. Diesel fuel prices have been tame. Hours of Service and other regulations will limit new entrants to the market and put pressure on the weak sisters in the business. New model 2014 trucks offer better miles per gallon at a higher price: $6000-$6500 per vehicle. Renewed strength in manufacturing coupled with an acceleration of housing/construction activity will bolster trucking industry freight-flow growth.”

Other markets:

  • Utilities and Telecoms have been replacing older units in their fleets. CAPEX will improve as housing and construction activity stages a comeback.
  • Service industries will benefit from employment and income gains and increased business activities.
  • Small businesses remain cautious but optimism and capital spending plans will improve along with the overall economy.
  • Budget issues have taken a toll on state and local government equipment acquisition programs. An improving economy will lift receipts and support equipment buying.
  • Equipment lease/finance optimism has been improving with expectations of modest growth in business over the near-term.

Kremar’s overview of the Canadian truck market:

  • Sales at the low end of the market have been the strongest.
  • The traditional medium-duty market has been lackluster.
  • Class 8 truck sales have softened.
  • On average, truck-buying end markets expanded by 1.5% in 2012 but growth will slow to 1% in 2013, which is not doing truck sales any good.
  • Looking further out, the economic climate develops a more favorable tilt allowing truck-buying end markets to expand by 2.7% in 2014, 2.9% in 2015, 2.8% in 2016, and 2.8% in 2017.

His overview of the Canadian economy:

  • Canada is gearing its economic strategy towards Asia.
  • The Canadian real estate market is poised for a soft landing.
  • There is an ambitious target for elimination of the deficit.
  • Resource sector will be the bright spot.
  • Growth is sluggish.
  • The rate of expansion for the Canadian economy slowed to a disappointing 1.7% in 2012 after managing to grow 2.6% in 2011. In light of the ongoing global economic uncertainties and slowing residential construction, IHS expects growth of 1.6% in 2013.
  • Industrial production grew by 3.8% in 2011 and then slowed to 0.9% in 2012. IP growth is pegged at 1.3% in 2013, 2.3% in 2014, and 3.0% per year through 2017.

His overview of the Mexican truck market:

  • Sales of Class 4-8 trucks rose 26.4% in 2012 to 32,192 units.
  • Thus far in 2013, the traditional medium-duty market has been soft, while heavy-duty sales have continued to gain ground.
  • On average, truck-buying end markets expanded by roughly 3.5% in 2011-12 but growth will slow to 2%-2.5% in 2013.
  • Beyond this year, GDP and industrial-sector growth accelerates, which will bolster activity in key truck-buying markets.
  • Truck-buying end markets will expand by 4.1% in 2014, 3.7% in 2015-16, and 3.6% in 2017.
  • Class 4-8 truck sales will gain considerable ground in the years ahead.

His overview of the Mexican economy:

  • Stability of the cross-party pact will determine the success of reform agenda.
  • Violent crime remains a key challenge—the Mexican government’s ability to make a positive impact will be a key measure of its credibility.
  • A high-quality policy framework increases resilience to external shocks.
  • A brighter picture for the United States improves Mexico’s outlook in 2014.
  • The outlook for manufacturing looks promising.
  • Vehicle production is on the rise.
  • Credit to the private sector will continue to expand and support domestic demand.
  • Positive business sentiment about the new administration may drive investment.
  • Sweeping reforms could reinvigorate the oil sector.

 

Industrial Outlook: Where Are We Now?

Eli Lustgarten 
Senior Vice President 
Longbow Securities

Lustgarten estimated Class 8 sales at 257,000 this year, a dropoff from 275,000 in 2012, but said they should hit 280,000 next year.

“Economic growth and industrial production are key drivers of truck demand; driver shortage is also a key to the level of future demand,” he said. “Slower economic growth … usually means stabilization and modest growth of truck fleets rather than expansion of fleets.

“Manufacturing IP grew 3.6% in 2011 and 4.2% in 2012, but was flat after a big weather-driven first quarter of 2012. It’s estimated at 2.8% in 2013 and around 3.3% in 2014.

 

 

“Truck manufacturers overproduced in the first half of 2012 at a 310,000 annual rate. Truck sector demand is likely to remain around the replacement rate after inventory liquidation is over. Six months trailing orders were at 195,000 in the second half of 2012 and first half of 2013. Production cuts of 15% to 20% were implemented in the second half of 2012 and continued through the first half of this year. The 2013 outlook is down, possibly helped by Hours of Service. New orders are only sufficient for a modest upturn in the second half of this year. Modest growth is likely in 2014-15 in line with modest improvement in economic activity.”

He said regulatory and structural changes could spur future truck/trailer demand in 2013-2015. New regulations such as CSA2010 and HOS could eventually require more trucks on the road (about 3%) to service freight to offset reduced hours of work.

The re-shoring/near-shoring effect can sharply increase North American manufacturing.

Lustgarten said global companies are endeavoring to reduce and diversify supply chains after a series of factors:

  • Difficulties in 2007-08, when the freight rate surged, ports were clogged, and containers were in short supply.
  • They were required to take product in the first quarter of 2009 that was on the water despite global recession.
  • There was a supply-chain disruption from the Japanese Tsunami and earthquake, and Thailand flooding.

“They’re running out of capacity in emerging markets and moving production back toward end markets.”

The first-ever heavy-duty truck fuel-efficiency standards will reduce fuel consumption and greenhouse gases by up to 23% by MY2018, with regulation beginning in MY2014, he said.

Trucks are divided into three broad groups: Combination tractor trailers will reduce fuel consumption and CO2 gases by up to 23% by MY2018 starting in MY2014; gas-powered HD trucks and vans will cut fuel consumption and CO2 by 10% (or 15% if they’re run on diesel fuel) by MY2018; and vocational/work trucks will reduce fuel consumption and CO2 by 9%-10% by MY2018.

“That could raise the average truck cost by $6200 or more,” he said.

He said there is a very optimistic three- to five-year outlook.

“In the second half of this year, US industrial markets will likely show modest to moderate growth after a sluggish 12-month period,” he said. If we can survive the next 12 to 18 months, the US potentially has one of the most favorable three- to five-year outlooks. The US can become a net energy exporter with low-cost energy supplies in the form of natural gas and low-cost feedstock for industrial products.

“Shale has a major direct and indirect impact on the infrastructure: pipes, pipelines, water, roads, site prep, fracking sand, drills, compressors, pumps, tanks, downstream facilities. There will be growth of energy markets and energy efficiency through motors, lighting led by LED, and the smart grid.”

He said the re-shoring/near-shoring phenomenon is “real,” enhancing a renaissance of American manufacturing.

“It means a shortening of global supply chains and regionalizing manufacturing: America for America, Asia for Asia,” he said. “Most manufacturers ran out of capacity in emerging markets due to strong growth and recognized that supply chains were too long. There will be a big shift to Mexico and the US over the next three to five years as global manufacturing costs equalize in mid-decade. Component suppliers will be the big winners.”

Lustgarten said construction equipment spending has been far stronger than underlying activity.

“While construction expenditures have seen only modest recovery, spending on new construction machinery accelerated in 2010 to 2012 and was far stronger than originally anticipated,” he said. “Gains of 38% in 2011 were driven by several factors spurring more intense buying, particularly in the second half of 2011: the more generous 100% bonus depreciation that expired at the end of 2011; price increases for new equipment being driven by higher input costs in steel, copper, and aluminum, raising prices by about 3%-5%, and regulatory-driven cost increases such as the implementation of Interim Tier 4 over the next several years, which we believe will ultimately drive up equipment prices by about 12%. These higher prices will likely be phased in about 4%-5% increments.

“With rising, albeit modestly, construction outlays, the need for normal replacement will occur as most construction equipment fleets have aged and shrunk, particularly in the rental sector.

“The key to the strength in equipment demand is fleet replacement. The level of equipment sales were well below replacement levels even at current levels of construction activity. Construction equipment sales fell over 66% from its peak in 2006 to the trough in mid-2009. Most construction equipment fleets have aged and shrunk during the downturn.

“Total private construction expenditures fell 45% peak to trough between 2006 and 2010 and were still down over 40% through 2011. We are witnessing a bounce in construction equipment sales back towards a level more consistent with current construction activity depressed as it may be, and still 35% or more below prior level peaks.”

He said there were two key factors that enhanced construction equipment demand in 2011: ongoing price increases for the foreseeable future driven by rising input costs and the roll-out of new IT4 emission-compliant equipment; and the tax incentive for 2011 allowing a 100% write-off of new equipment purchases.

“Every time an equipment buyer looks at buying a new piece of equipment, they are likely to see higher price—a phenomenon that accelerated in the second half of 2011 and carried through as manufacturers used up emission credits; requirements for IT4-compliant equipment expanded from over 174 HP in 2011 to all equipment in 2012; prices in 2012 were up 7% to 10% or more; and 2012 IT4-compliant equipment was phased in,” he said.

“With equipment prices on the rise, the tax benefits of equipment write-offs of 50% is enough to keep momentum going as domestic economic growth remains on a reasonable growth track. The bonus depreciation was extended for 2013. The Section 179 enhancement helps small business and used equipment markets.”

The 2013 forecast is for a 5% increase for light equipment and 5%-10% decrease for heavy equipment.

Construction activity should continue to improve in 2014, he said, driven by further growth in housing and higher spending in private non-residential markets.

“Rental companies are reassessing current relatively flat spending plans to date in 2013 due to continued good utilization rates, improving outlook for construction spending, and the implementation of Final Tier 4—big equipment in 2014 and all equipment in 2015,” he said.

“We look for double-digit growth in light-equipment demand next year, but a 5% to 10% decline in larger equipment led by continued soft mining demand. Global demand for construction equipment should improve in Brazil, Europe, and China.”

Private non-residential construction is expected to rise 10%-15% (after rising 18% in 2012), led by power, pipeline, manufacturing, warehouses, higher education, data centers, hotels, and hospitals.

Public non-residential construction will be down 2%-5% (after being down 3% in 2012). Residential will be up at least 10%-15% (after rising 17% in 2012), led by the multi-family sector.

 Total construction will be up 6%-10% or more in the next five years, driven by shale-based oil and gas, the Panama Canal widening, and more elderly and kids.

Analyzing the overall economy, he said industrial activity peaked globally in the summer of 2012 as global politics froze virtually all major markets. Industrial companies reacted by completing major projects under way, while approving very few new programs. In response to weakening industrial activity, most global manufacturers opted for inventory liquidation in the second half of 2012 and first half of this year, led by the two sectors that overproduced more than any other: trucks and construction equipment.

“The March through June results this year point to a bottoming of inventory destocking, greater than expected strength in AWPs, sluggish crane demand, and weak mining markets likely through 2014,” he said.

“US markets have been stronger, Europe weaker than expected but now stabilizing, and emerging markets somewhat disappointing, but they’re beginning to improve at rates below recent norms.

“The Japanese Yen decline will affect competitive positions, but US companies will likely fare better than their European counterparts as US markets will have far stronger demand than Europe.

“China’s 2013 growth plans are more muted. The priority is to remake its economy to be domestic-demand-driven with less reliance on exports and investments in capital-intensive state owned companies. Beijing is willing to tolerate slower growth short term to revamp its economy for the future.”

Lustgarten said global themes will dictate slow economies for the foreseeable future.

“US government actions have not mattered—we have survived everything from the payroll tax hike to early sequestering,” he said. “We have a record stock market, better jobs, and rising rates. In Europe, the recession is signaling an end, but economic activity is generally weaker than expected. In China, there’s evidence of a turnaround but it’s disappointing to date. In Brazil and Latin America, it’s two steps forward, one step back. Overall, ‘muddle through’ remains the theme. There will be slow global economic growth in 2013.”

He said there was changing leadership in the US economy in 2012 and 2013. The aftermath of the financial crisis economy was supported by government and then manufacturing. Manufacturing inventory liquidation was under way in the fourth quarter of last year through the first half of this year.

Consumers somewhat picked up the slack when industry and exports slowed. The housing revival is under way and the “economy is waiting to grow—just give us some normalcy.”

He said corporate earnings have flourished and increased productivity is evident in strong operating margin rebound for most companies. Margins for most have approached or exceeded 2008 levels. In 2009, temporary measures (zero bonus payouts, furloughs, pay reductions, travel restrictions, no overtime) and structural measures (layoffs, plant consolidations and closings, increased automation) were used to reduce costs.

“Structural measures will continue to offset the return of temporary costs savings,” he said. “Employee compensation—base wages, healthcare—likely outpaces inflation, and hiring will be kept in check.”

He said there are two types of pressures driving equipment prices higher:

  • Type I. “Manufacturing input costs increased as commodity prices surge from strong global demand and a weak dollar from 2009 to the first half of 2011. The pricing effect is mostly low to mid single-digit increases. Most commodity prices have moderated, including oil.”
  • Type II. “Regulatory-driven price increases. There are new emission regulations for off-road equipment: interim Tier 4 effective January 2011 for equipment over 174 hp, and all other equipment effective January 2012. It’s similar to 2007 truck emissions, but regulations will be phased into the off-road sector for multiple years. Final Tier 4 is effective January 2014. It’s similar to 2010 truck emissions but there’s no phase-in; it’s big equipment in 2014 and all equipment in 2015. The price impact of IT4-regulatory-driven changes appear to be low to mid double digits.”

Lustgarten said there is optimism for 2014 because a global role reversal is under way.

“The US is the best house in a lousy neighborhood, the economy is on the mend, housing is bouncing back, home prices are on the rise, and construction activity is picking up,” he said. “Job growth has somewhat stabilized at what appears to be a revised 200,000 plus per month. America is enjoying an oil boom, and a natural gas boom is also on the horizon.

“The Eurozone recession could end in the third quarter. The manufacturing PMI rose to 50.3 in July. It’s up in all nations except Spain. Job losses were the weakest in 16 months in France, Italy and Spain, and Germany’s jobs are up.

“Japan’s economy is growing 2% in 2013, and 1.2%-plus in 2014. China, India, and Brazil are growing but at rates well below the norms of 2002-2008. China’s PMI was at 47.7 in July.” ♦