Industrial Economic OutlookThis is the first of two articles based on a comprehensive 2021 forecast and scenarios of the timing and nature of economic recovery, provided by AEM and economics service provider Oxford Economics, and focused on agriculture and construction equipment sectors.

When the COVID-19 pandemic derailed the red-hot U.S. economy roughly one year ago, many economists hoped for what they referred to as a V-shaped recovery, meaning that the uptick would be as swift and sharp as the collapse that had preceded it. Early signs suggested that a V-recovery would indeed take shape.

However, over the past few months, the economic recovery has been tested once again. On a positive note, though, essential industries such as agriculture and construction have not been impacted nearly as much as many others. In fact, the ag and construction markets remain quite resilient — and several key indicators point to healthy growth both this year and next.

“This data is definitely pointing to a summer boom,” said Chloe Parkins, senior economist with Oxford Economics in a recent market outlook webinar put on by AEM.

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Building a Bridge to the Second Half of 2021

To understand where the economy could be headed, it’s important to understand where it has been.

From Q4-2019 to Q2-2020, U.S. GDP dropped 10%. Then GDP grew 7.5% in Q3, recouping much of the output it had just lost. Despite that strong immediate recovery, GDP for 2020 was still 3.4% smaller than where it ended 2019. Progress has been made, but more is necessary.

Consumer spending paints a similar picture, which stands to reason because consumer spending constitutes roughly 70% of GDP. Buoyed by fiscal stimulus, spending has held up fairly well throughout the pandemic. However, a late-2020 increase in COVID-19 cases followed by public health restrictions caused spending to fall for the first time in November. Additionally, many who had lost their jobs early in the pandemic began running out of spending money, as savings accounts were depleted. Overall, real consumer spending dropped 3.8% in 2020.

Consumer spending is expected to pick back up throughout 2021, however. Total growth of 6.4% is anticipated. Just 1.6% growth is expected in Q1, followed by much stronger quarters of 9.8%, 10.8% and 5.4%.

According to the Philly Fed Manufacturing Index, manufacturing growth strengthened in January after two months of slower gains. January actually posted the index’s highest reading since right before the pandemic. Most importantly, “Much of the losses due to the pandemic have now been recouped,” Parkins said.

“Manufacturers have also grown more optimistic about the near-term,” she continued. “A lot of that optimism, though, is tied to developments in the economy and public health, both of which have been very unpredictable thus far. But overall, the underlying components point to growth in the future.”

Looking to industrial activity, a slow but steady recovery has also been under way. Industrial activity actually ended 2020 on a strong note, with all key market groups (business equipment, consumer goods, construction supplies and materials) all remaining steady or rising.

“This was largely due to strong demand and the restocking of inventories,” said Parkins. “Higher oil prices also boosted mining activity.”

Business investment is gradually coming back, as well. Machinery has held up strongly, growing 2.1% since last February. Essential industries such as agriculture and construction have helped bolster that performance.

All in all, GDP growth of roughly 4.2% is anticipated this year. Of course, alternative forecasts also exist based on various developments with the COVID-19 pandemic.

If public health restrictions persist through this year, a financial crisis could ensue. Any prospects for GDP growth could be wiped out, and substantial long-term economic damage could be inflicted.

On the other hand, continued vaccine breakthroughs could cement a near-term recovery. With an added boost from additional fiscal stimulus, a rapid upturn of an additional 30% beyond baseline forecast could be realized.

In other words, the lead-up to spring is going to prove pivotal.

Parkins“Manufacturers have grown more optimistic about the near-term. A lot of that optimism, though, is tied to developments in the economy and public health, both of which have been very unpredictable thus far. But overall, the underlying components point to growth in the future.” -- Chloe Parkins, senior economist at Oxford Economics

 Ag Equipment is Poised for a Pop

As previously mentioned, manufacturing activity and business investment have each been gaining strength. The agriculture industry has been helping lead the resurgence.

“Agriculture implements have made up a lot of lost ground since the start of the pandemic,” Parkins said. Industrial production saw an 18% drop from Q4-2019 to the first half of 2020. But the second half of 2020 saw growth of 11%.

“All of this bodes well for the agriculture industry to actually see growth in 2021, as opposed to just returning to pre-pandemic levels,” Parkins added.

As growth is expected to return, some interesting shifts in consumer buying behavior have emerged.

Certain tractor types have rebounded more strongly than others. For instance, there has been a steep rise in four-wheel drive <40hp tractors and two-wheel drive tractors, while larger four-wheel drive tractors and self-propelled combines have lagged behind. During the few years prior to the pandemic, the opposite was true.

“But as a whole, there is an upward trend for all of the tractor categories, which is a good sign for production going into 2021,” Parkins said.

Another positive sign is that the Farm Equipment Sales Index is edging close to expansion territory. Farmland prices are also in expansion mode for the first time since 2013-14.

“This also bodes well for farm machinery demand into 2021,” Parkins said. “This suggests that farmers are expanding and/or replacing their existing capital. Rather than just spend money on repairing existing equipment, they must be feeling confident enough to start spending on new equipment again.”

Helping fuel the production of farm equipment is the fact that inventory levels continue to fall.

“This combination of increasing demand and falling inventories is a good sign for manufacturers of agricultural equipment,” Parkins said. “Manufacturers and dealers will want to ensure that they have a sufficient level of inventory to meet future demand from different types of farmers. This should lead to rising output in 2021.”

The credit backdrop also remains favorable heading into 2021. The corporate borrowing rate and long-term interest rate are expected to increase slightly this year, but they are still much lower than they were during the 2015-19 timeframe.

“Relatively speaking, purchasing farm equipment on credit is still going to be fairly inexpensive for farmers — and that gives them even more incentive to invest,” Parkins noted.

The demand base for agricultural products themselves (i.e. grocery sales) remains upbeat this year, further helping to bolster production activity and investment in new agricultural equipment.

While production of farm machinery and equipment was down 9.8% in 2020, growth of 8% is expected this year, followed by 3.8% in 2022 and 1.5% from 2023-27.

Lawn and garden equipment are rebounding especially well. Production was down 12.7% in 2020, but growth of 11.6% is expected this year, followed by 4.6% in 2022 and 2.2% from 2023-27.

The agriculture, forestry and fishing segment actually held its own in 2020, growing 3.8%. Even stronger growth of 4.5% is forecasted this year, with another 2.9% in 2022 and 1.8% from 2023-27.

“Even though the rebound will start to moderate as we move through 2021, you can expect a pretty solid rebound this year,” Parkins said.

Look for the next article, one focused on the 2021 forecast and scenarios of the timing and nature of economic recovery related to the construction equipment sector, this coming week in the AEM Industry Advisor.

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