Ag Equipment Economic OutlookThe U.S. economy has been on a bit of a roll…

Oxford Economics' Recovery Tracker — which factors in things like demand, production, employment and public health — posted its 18th consecutive weekly gain at the end of June. The growth has been broad-based, too. Toward the end of June, 44 states posted a weekly increase, and all five regions posted a synchronized gain.

"U.S. GDP growth is expected to move towards a summer boom and gain momentum from the spring bloom that was just experienced," said Chloe Parkins, senior economist at Oxford Economics. Q2 GDP is expected to land somewhere between what was reported in Q4 2019 and the growth path the economy was on prior to the pandemic.

“Looking at Q3 onward, we are expecting the path of GDP to remain consistently above its pre-virus path,” Parkins added.

The Canadian market is recovering similarly. Canada’s economy just returned to pre-pandemic levels for the first time in June. According to Parkins, strong consumer sentiment and excess savings are playing a big factor in the recovery.

Consumer savings is a big factor in the U.S. recovery, as well. Parkins pointed to even more reasons for the positive economic outlook:

  • Improving health situation (though still some uncertainty)
  • Private sector business optimism bolstered by fiscal stimulus
  • Strong corporate profits
  • Strong consumer demand

With respect to improving business confidence, Parkins cited two key manufacturing indices: The Philly Fed Index and ISM Manufacturing Index. Both show that manufacturing has maintained a steady course in July despite a modest dip from the previous month.

“Although supply side challenges are constraining growth, they are not fully derailing it,” said Parkins.

Agriculture and construction equipment manufacturers are particularly upbeat. Results from AEM’s Q2 member survey were just as strong as the first quarter.

“Member perceptions showed a bit more stability in some spots and perhaps a slight decline in other areas of our industries, but overall they showed great progress,” said Benjamin Duyck, AEM director of market intelligence.

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Parkins

 

"U.S. GDP growth is expected to move towards a summer boom and gain momentum from the spring bloom that was just experienced. Looking at Q3 onward, we are expecting the path of GDP to remain consistently above its pre-virus path." -- Chloe Parkins, senior economist at Oxford Economics

4 Ways The Economic Recovery Could Go

As consistently as the economy has clawed back, there have been some ups and downs. There are also some unknowns moving forward. As a result, Parkins said there are four overarching economic scenarios that could play out in coming months and years.

  • Persistent inflation. If inflation persists, bond yields will surge and equities will fall, resulting in a slowdown of global growth. This scenario could swing U.S. GDP nearly 2%. The impact would be expected to be short-lived, however, lasting through 2023.
  • Variants dodge vaccines. In July, all the talk was about the Delta variant of COVID-19. If the current vaccines show limited efficacy in controlling Delta and other variants, Parkins said more restrictions could be on the horizon. That would lead to global economic stagnation, resulting in a slower recovery. However, the recovery would only be delayed by one year. “When considering the possible rebound in 2023, you could almost view this scenario as more of an upside risk,” Parkins said.
  • Consumer hesitancy. With the U.S. vaccination rate somewhat stalled, Parkins said many consumers could be hesitant to embrace a full return to normalcy. “Once consumer confidence returns in full, a solid recovery ensues and long-term economic damage is contained,” Parkins said.
  • Consumer boom. On the other hand, if the health situation continues to improve and consumer confidence is restored more quickly, Parkins said a spending boom could be on the near horizon. This scenario could swing GDP by 2.5%. However, a sudden burst of spending in 2022 could subdue spending in 2023 and 2024.

Ag Equipment Expectations

Agriculture equipment manufacturers aren’t concerned about the recovery being thrown off track. Roughly 76% of the Q2 survey respondents reported growth compared to the previous quarter. An even stronger 87% reported growth compared to the previous year. Looking forward, 90% think growth will continue for the next 12 months.

“Those are great numbers,” Duyck added.

While most AEM members expect growth to continue, the general consensus is that the rate of growth will slow a bit. In looking at the total of all ag equipment categories, 6-10% growth is expected over the next 12 months, whereas 11-15% growth was experienced over the past year.

Here’s a closer look at the individual ag equipment categories:

  • Trailers and transportation equipment grew more than 20% (16-20% expected)
  • Components grew 16-20% (11-15% expected)
  • Equipment for working soil, seeding, fertilizing and plant protecting grew 16-20% (6-10% expected)
  • Loaders and material handlers grew 11-15% (6-10% expected)
  • Tractors grew 11-15% (6-10% expected)
  • Harvesting equipment grew 11-15% (11-15% expected)
  • Lawn and garden equipment grew 11-15% (stability expected)
  • Irrigation and sprayers grew 6-10% (1-5% expected)
  • Livestock equipment grew 6-10% (1-5% expected)

Even while enjoying this widespread growth, agriculture equipment manufacturers are facing some challenges. Finding skilled labor is the biggest. Keeping up with demand has also been daunting. More than half of survey respondents said inventory levels have declined mid-year, and roughly 60% now report levels that are too low.

“While production has been up, I feel this can cause issues as the backlog is getting bigger, as well,” Duyck explained.

In looking specifically at agriculture wholegoods:

  • 46% said Q2 production rose
  • 92% said new orders rose
  • 100% said the backlog continued to grow

In looking specifically at agriculture components and/or attachments:

  • 92% said Q2 production rose
  • 96% said new orders rose
  • 96% said the backlog continued to grow

While much remains to be seen as to which economic scenario ultimately plays out over the next several months, the agriculture equipment industry has a few things working in its favor.

Duyck

 

“Member perceptions showed a bit more stability in some spots and perhaps a slight decline in other areas of our industries, but overall they showed great progress.” -- Benjamin Duyck, AEM director of market intelligence

 

Farm income and capital spending have each risen sharply since mid-2020. Each have moderated to some degree, and income is now surpassing capital spending.

“Perhaps farmers have a sufficient level of capital for the rest of this season,” Parkins speculated. “Perhaps farmers are now postponing purchases until after the winter season when economic growth and demand start to firm up.”

Healthy farm incomes are being fueled by healthy farm prices. “The 2021 prices farmers have been seeing are the highest since around 2014-15,” Parkins pointed out.

U.S. Market Remains Strong

Global MarketsThe U.S. market has been a real hotspot for ag machinery activity, particularly when compared to other developed countries.

  • United States: 27% growth this year, 3% next year
  • Japan: 5% this year, 2.8% next year
  • United Kingdom:3% this year, 6.3% next year
  • Eurozone: 1% this year, 4.1% next year

It’s equally important to look at what has been happening in emerging markets:

  • Brazil: 4% growth this year, 3.3% next year
  • Russia: 9% this year, -2% next year
  • Eastern Europe: 8% this year, 8% next year
  • India: 1% this year, 4.1% next year
  • China: -41.5% this year, 26.9% next year

This year’s explosive growth in the U.S. has allowed ag equipment sales to reach their highest point since around 2012. “From 2022 onward, however, growth in the U.S. will begin to moderate,” Parkins pointed out. “That doesn’t reflect a change in sentiment, just a return to normal.”

Despite some serious headwinds, U.S. ag equipment manufacturers have held their own on the global stage, as well. High export prices have been a big challenge.

“The last few quarters have pretty much been flat with respect to trade,” Parkins pointed out. “Trade prices are largely to blame because they rose sharply through 2020. But import prices have also been increasing at a steady pace, and they are now back up to where they were a few years ago. Export pricing continues to climb, though, and could be making U.S. manufacturers less competitive.”

Regardless, farm machinery and equipment has been leading the overall global ag machinery industry. Growth of 10% is expected this year followed by 0.8% in 2022. Conversely, lawn and garden equipment is contracting by 3.8% this year and another 0.5% next year.

Look for the next article, one focused on various construction equipment categories and markets have been performing coming soon in the AEM Industry Advisor.

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