Significant growth could be in the offing for the equipment manufacturing industry, according to market analysts from Robert W. Baird & Co., as long as steps are taken in Washington to stimulate U.S. infrastructure spending and address ballooning student loan debt.
Baird economist Mircea (Mig) Dobre told AEM’s recent Thinking Forward conference at Terex Genie headquarters in Redmond, Wash. that those two issues are the cork in the bottle, so to speak, dampening construction activity and stopping up demand for new construction equipment.
“It seems that demand for construction equipment in the U.S. is bit of a coiled spring,” Dobre says. “What you’re likely to see in the next three to four years, as hopefully some certainty emerges around these infrastructure and first-time homebuyer issues, is the release of this pent-up demand and some real growth in equipment volumes across the board.”
But he continued with a warning. “If we don’t see (infrastructure and student loans addressed), that’s where matters start getting a little more complicated.”
The need for a public infrastructure spending bill is certainly not news to those in the equipment manufacturing industry, though many had hoped to see some signs of follow-through by now from an administration that campaigned on a trillion-dollar infrastructure spending promise. The U.S. is being outspent in this area by many of its foreign competitors, and risks falling into an infrastructure disadvantage is something isn’t done.
With a low unemployment rate, Dobre says some contractors will look to make equipment purchases to augment the efficiency of their existing workforce. “You have a substitution, capital for labor, as contractors and others are looking to be more productive. They require more units of equipment per million square feet of buildings that they put up.”
In terms of residential construction, Dobre points to the sluggish housing market as an area that could soon see swift and strong demand. But first, he says something has to be done to change the demographic tendency of young “millennials” to delay family formation and homeownership.
The X-factor keeping young people from becoming first-time homebuyers and heating up the market, he says, is student loan debt, which has reached record levels in the U.S. Currently, Americans owe $1.4 trillion in student loan debt, or $15,000 for every person between the ages of 20 and 40, and it’s forcing them to put off the first-time home purchases that their parents would have made at a much younger age.
Dobre says that if something were done to alleviate that debt burden, equipment manufacturers would stand to benefit from the resulting boom in home construction—a “release of pent-up demand.”
“Watch in the press for anything that comes out on any potential for reforming the student loan system,” Dobre says. “Call it a bailout, call it whatever you want. The point is, when it happens, go buy yourself some housing stocks, because I think those are going to be a very good investment at that point.”
However, Dobre notes there are signs that the private, nonresidential construction market may be cooling, with vacancy rates reaching near pre-recession levels. He says this makes federal action on infrastructure and student loan debt all the more important in order to sustain and build upon the current momentum for equipment manufacturers.
As for agriculture equipment, Dobre says a glut of supply will continue to dampen commodity prices and therefore the demand for new equipment. In the short term, new purchases will be made mainly on an equipment replacement basis. But the good news, he says, is that low commodity prices are not sustainable in the long term, and a gradual increase in prices should begin in the near future, driving demand for agriculture equipment along with it.
Mircea Dobre was one of several speakers at AEM’s Thinking Forward conference in Redmond, Wash. at Terex Genie and Microsoft headquarters. The next event (all of which are free to AEM members) will be at Volvo in Eastern, Pa., and will feature author and globally-recognized authority on disruptive innovation Luke Williams, who will challenge participants to disrupt the norm in their markets and their businesses. LEARN MORE.