Prospects for engines in 2004 better than last three years - North American Edition 2004 Forecast

Diesel Progress North American Edition, Dec, 2003 by George Zirnhelt

It is fair to say that prospects for 2004 are more optimistic than any of the annual forecasts in the last three years. Considering what has happened to most manufacturing industries in the U.S. during that period, though, that doesn't imply there is a lot of euphoria around. Things have been rough. Business has been slow and many companies have been forced to shrink to survive. Jobs have been lost, plants shut down. Many of us are still feeling too beat-up to even think about putting on those rose-colored glasses. The focus is on getting through this next week/month/quarter before we start thinking about what lies in store for the coming year. Yet for all that, the outlook for North America engine shipments in 2004 is improved and we could be in for some pleasant surprises.

The positive signs that are appearing indicate things are gradually improving and it is difficult to ignore them. On a macro scale, one signal has been the overall improvement in corporate earnings during the second half of 2003. While sales trends are typically showing only slight improvement, reduced operating costs mean profitability is significantly better. Throughout the ups and downs of the economic cycle, corporate earning trends tend to be one of the more reliable barometers of the economy's health. With the current upturn in earnings, business in most industry sectors should be expected to improve steadily during the course of 2004.

Business investment and private sector construction spending are looking like they will be up on the order of 9 percent for 2004. Interest rates, while starting to feel pressure from the rapidly growing U.S. money supply, should remain attractive for most of 2004. Also favorable is the fact that the U.S. dollar has fallen relative to other currencies.

So, the economic cycle is moving into a growth phase and manufacturers will be benefiting from a better competitive position in export markets. A bed of roses? Probably not. There are still a lot of U.S. companies in the business of producing parts and components for both highway vehicles and off-road equipment that are reeling from the combination punch of an economic downturn coupled with the ill-conceived tariff on steel imports that has sent their material costs rocketing upward over recent years. Some producers have found the best way to counter this has been by shifting production to facilities outside the U.S. Economic recovery and advantageous exchange rates will help make 2004 a better year but the benefits may not reach everyone, particularly on the parts/component-producing side. Some external changes to the business environment will be necessary to help that along.

Positive Prognosis

The optimism generally being sensed around the industry right now certainly seems to have more substance than we've become accustomed to over recent years. Besides, 2004 is a major election year in the U.S. It's a sure bet that any political intervention that can potentially improve the economy will be exercised. Some additional little boosts coming from that direction can't hurt prospects for a year of improvement.

We think engine shipments will be up by about 3.5 percent overall in the year ahead. That's pretty modest, but mostly because the big unit volume markets--light vehicles and lawn and garden equipment have been fairly robust even through the economic downturn. With a strong housing market the lawn and garden market has hung tough and with huge incentives, the light vehicle industry has continued to crank out units--if not profits.

Construction & Industrial

Markets for many commercial and industrial equipment products will be up on the order of 11 percent to 12 percent in 2004. There is some strong pent-up demand and many contractors have waited too long to update their equipment. Compact equipment sales have already picked up nicely and actually the strong housing market has helped keep the bottom from falling out. The capital investment incentives for small business allowing accelerated depreciation are making this a hot sector for 2004.

Agricultural Machinery

Farmers had a relatively good year in 2003 and with low interest rates and tax incentives, equipment sales will be good this year. The health of the market has been a bit inconsistent and somewhat regional. Big farmers are getting bigger and production agriculture is rewriting the old rules about replacement cycles. Intensity of equipment use is increasing and maintenance is being stretched. Combines that used to be operated 200 hours per year by individual owners are now being operated 1200 hours per year and more by contractors. Next year should be healthy but the long term trend continues toward fewer and bigger units.

On-Highway

Heavy truck sales--a key barometer--have been picking up steam for a couple of quarters now and 2004 will be a good year. Most encouraging are the more recent gains in the medium truck market. Most truck builders have been surprised by how nicely the market has come around and how quickly the fleet that is on the road has gotten old. The huge used truck inventories that weighed the market down two years ago have been dissipated and trucks are once again moving through the pipeline. The medium and heavy numbers get lost a bit in the large number of diesels now going into the light truck sector and that push will continue with new products going for even lighter trucks and sport utilities.