Industrial Economic OutlookThis is the second 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. Read the first article here.

Manufacturing has been one of the economy’s brighter spots over the past several months. In fact, according to the Philly Fed Manufacturing Index, manufacturing growth strengthened significantly in January after two months of slower gains.

January saw the index’s highest reading since right before the onset of the COVID-19 pandemic early last year. Most importantly, however, “Much of the losses due to the pandemic have now been recouped,” said Chloe Parkins, senior economist with Oxford Economics in a recent market outlook webinar put on by AEM.

“Manufacturers have also grown more optimistic about the near-term,” Parkins 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.”

Some industries have not fared nearly as well as others. Aerospace, for instance, saw its real gross output reduced by 25.6% in 2020. Other industries have done much better. Electronics, for instance, saw a lift of 4.5% in 2020.

The construction industry also saw positive gains last year, with real gross output increasing by 1.8%. The forward-looking picture is even better — even for those construction industry segments that didn’t perform well in 2020.

The extraction industry, for example, took a 15.6% hit in 2020, but is now poised to slow its losses with a smaller 7% reduction in real gross output this year. Then, in 2022, the industry is expected to start growing again with a 2.2% gain.

The extraction industry’s struggles have been largely tied to struggles in the oil and gas industry.

“But when you look at a segment like metals, there has actually been a commodities rebound over the last several quarters, and there are pretty good prospects going forward,” says Mark Killion, CFA, director of U.S. Industry Services for Oxford Economics.

The utilities segment is also rebounding. After dipping 0.3% in 2020, modest growth of 1.2% is expected this year, with a stronger rebound of 3.1% forecasted for 2022.

“Construction segment growth has also started to accelerate,” Killion pointed out. Growth in real gross output is forecasted to be 3.5% this year and another 2.7% in 2022.

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Stability Amidst Uncertainty

Construction has been one of the more stable industries helping to support the recovering U.S. economy, and growth continues to be led by single-family housing.

The total number of single-family housing starts climbed rapidly on the back half of 2020. This year, more than $300 billion is forecasted to be spent on single-family homes. Another $200-plus billion is forecasted to be spent on home improvements. Nearly $100 billion is expected to be spent on multi-family starts.

The rebound in demand for single-family homes had led to further price appreciations. At the same time, there has been a steep decline in mortgage interest rates.

“Those two factors are at war to determine whether housing becomes more affordable or less affordable,” Killion said. “So far, home price inflation is winning out and housing affordability is deteriorating.”

Part of the reason for that deterioration is an insufficient supply of housing. Additionally, housing and infrastructure are ageing quickly. In fact, average home age is higher than it ever has been — which includes the World War II years. Housing’s average age is around 35 years, while housing infrastructure (water, sewage, safety, roads and conservation) sits at roughly 30 years.

“Clearly we need more of both (housing and infrastructure) in order to bring the age of U.S. capital stock down,” Killion said. “These two areas will be the biggest impetus for construction building over the next couple of years.”

Residential construction continues to lead total construction activity. It was up 5.9% in 2020, with another 5.9% jump expected this year. Roughly 2.3% growth is expected in 2022.

Non-residential construction is also headed in the right direction. Rebounding from a 1.9% dip last year, a 1.4% increase is anticipated this year, followed by an even stronger 2.4% bump in 2022.

Civil engineering is expected to grow 2.8% this year, building on its 2% growth in 2020. Then, as emphasis on infrastructure is expected to intensify, even more robust growth of 4.4% is forecast for 2022.

Growth Dispersed Across the U.S.

Killion pointed out the healthy construction activity has not been isolated to a given region. Several key metropolitan statistical areas (MSAs) across the country are expected to enjoy solid growth in both construction GDP and employment over the next two years: Boston, Detroit, New York, San Francisco, Seattle, Columbus, Buffalo, San Jose and Phoenix.

At the other end of the spectrum are a handful of MSAs that are expected to see relatively weak growth, including Birmingham, Chicago and Cleveland. MSAs including Charlotte, Dallas and Austin are expected to see strong construction GDP growth but weaker growth in employment.

Construction Equipment Investment

As various construction industry segments continue to recover, an increase in capital expenditures tends to follow. This bodes well for the sale of construction equipment, because 75% is sold into the industry as capex investment.

Construction firms account for roughly 43% of construction machinery capital expenditures. This segment saw a 1.8% increase in 2020. This year, growth of 3.5% is expected, followed by annual growth of 2.7% in 2022 and 2.6% in 2023.

Rental and leasing is the next largest segment (17%). This segment saw a 13.2% decline in 2020. Annual growth of roughly 2% is expected for the next several years.

Killion said it is useful to watch the relationship between construction equipment production levels and new orders. There was a significant dip in 2020 followed by a rapid rebound.

“The interesting thing is that production fell much faster than new orders, which led to the subsequent rebound later in the year,” Killion explained. “When looking at construction equipment shipments and inventory growth, you see some pretty strong momentum now.”

U.S. construction machinery production was down 11.1% in 2020. However, growth of 13.4% is expected this year, followed by another 5.6% bump in 2022.

The U.S. is making a major contribution to global construction machinery production. While the U.S. led the sharp decline in 2020, it is helping lead the recovery over the next several years.

This year, the U.S. is running neck-and-neck with both China and the Eurozone in terms of contribution to global growth in mining and construction machinery. In 2022-2023, the U.S. is poised to lead the pack, followed by China, Japan and the Eurozone. In 2024, global growth is expected to have slowed to 2-3%, and is now being led by the U.S. and China

Wherever growth is materializing, it is taking a little time to get there. Challenges and uncertainties remain, but the construction industry has proved resilient thus far. Key indicators and forecasts point to even stronger growth going forward, which is positive news given what the industry was facing just one year ago.

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