2005 should be a good year despite the Naysayers

Diesel Progress North American Edition, Dec, 2004 by Charles Yengst

It's an election year and the news has been how polarized the country seems to be politically. Well, when it comes to the economy, there appears to be a similar situation Half the population is hoping that the current economy will continue to prosper because they are having a great year in 2004 and they see further improvement to come. The other half--I'll call them "naysayers"--are fretful that the economy is weak, never has recovered despite all of the tax incentives, and may even get worse in days to come.

Despite all of the naysaiying, we've had two very positive years of GDP figures and for the past 18 months we've had over 3% growth every quarter. The most recent preliminary third quarter GDP figure indicated a 3.7% atomized growth rate. Not bad for an economy that is faltering. Corporate profits have been growing significantly every quarter and unemployment is 5.4%. which is better than it was for most of the '90s when we were having unprecedented successes on all fronts.

I looked back at the North American sales projections made here last year to see how close I came. I was too low in judging 2003 results for the most part. I was close for agricultural equipment, but I was just too low for everything else. For example, I had projected sales of earthmoving machinery, like dozers, loaders, excavators, etc., to be about 3.2% higher. When the year ended, sales were closer to 11% higher. For material handling machinery like industrial lift trucks, aerial work plat forms and cranes the gains were nearly 8%, compared to the 3.5% sales increase I had projected.

This pattern of being lower than the actual sales growth occurred because of tremendous retail demand during the second half of the year that was not being seen in higher OEM production levels for machines. Most OEMs were not reporting huge improvements in sales because a lot of sales were being taken from inventories in the field (at dealers) and from Factories without a correction in production of any sizeable nature.

I got caught looking at modest growth at a time when a sales bonanza was breaking loose at the retail level. OEMs were either sandbagging or they didn't know what was happening. I think they were afraid to say anything to anyone and slow to raise production levels for fear that everything would turn south again in a few months.

Early this year, I rarely heard anyone saying that they thought sales growth for 2004 would be off the charts. Here again, I was caught thinking we would get growth in sales that would make most people very happy, up at least 10% for the current year or better. It was a difficult call at the time (October 2003), but 10% improvement looked easy to me and I heard no one complaining or suggesting that it would be better. But by February and March 2004, the story was entirely different and changing by the minute. My own sales projections for 2004 had to be revised upward considerably. Not only had the 2003 sales been higher than my previous estimates, but 2004 estimates were entirely too low and had to be turbocharged upward.

As it turned out, 2003 sales of a number of items including excavators and mini-excavators were up by more than 20% during the year. Demand was higher as the housing industry was booming and new tax laws had been enacted to help buyers with tax incentives including higher depreciation rules for machinery. Second half buying was overwhelming, something that just carried over into 2004, and there were many looking around wondering when and if it might stop.

The good news is that demand has remained strong throughout 2004 and it will most likely carry on into 2005, although at somewhat more moderate rates of growth. Yes, the tax incentives will be gone at the end of 2004, but the pent-up demand at this time late in the year is looking strong through most of the next 12 months, perhaps slowing as next year progresses. The bad news is that we can't really tell just how much longer all this enthusiasm will continue.

The accompanying table summarizes my thoughts on where the machinery market is going for various types of equipment for the current year just ending and for 2005. As you can see, the sales levels are expanding quite rapidly in 2004 and continuing to show growth in 2005. In fact, unit sales are going to push overall composites higher than the previous peak for certain products such as for earthmoving machinery. Sales of small machines such as skid-steer loaders, compact track loaders and mini-excavators will be significantly higher than in the past, while sales of crawler excavators will be much higher in 2004 and 2005 than in the past. Some of these machines will experience better than 20% growth in 2004, which may be difficult to understand, but our estimates for some of these machines are actually looking conservative as we approach the end of the year.

A similar composite graph is shown for material handling machinery, which indicates strong growth this year and next, but sales over the next year will not be reaching the peak levels of 2000. Cranes are still selling slowly, although sales are improved over the depressed years in 2001 to 2003. Aerial work platform sales, for example, are not yet back to peak levels seen a number of years ago. I doubt that sales in this category of machines will reach the peak levels seen in the late '90s ,and 2000 during this cycle. Crane sales should improve further in 2005, as they are probably the last product to finally get moving after the slow years as they are very heavily tied to non-residential construction, which is still not growing with any gusto.