Outlook for Industrial Utility Vehicles in 2010 and Beyond

Outlook for Industrial Utility Vehicles in 2010 and Beyond
Forecast Positive, but a High Risk Environment

By Stephen Metzger, PhD, Senior Editorial Advisor

The industrial utility vehicle industry is highly sensitive to general economic trends and investment outlays (gross domestic real investment) in particular.  That was certainly the case in 2008, beginning in the second half.  Second half shipment values for overall materials handling equipment dropped by 6.3% over the first half.

Last year’s forecast (for 2009) for the industrial/utility vehicle industry did,  however, look for low to moderate gains in the second half of the year, which should be the case once final tabulations for the year are in.

The positive gains for the general economy in third quarter 2009 reversed what had been four consecutive quarterly declines in real GDP, dating from the third quarter of 2008.  The Bureau of Economic Activity (BEA) in its advance tabulation of economic activity showed a 3.5% gain in GDP, which offered some hope for an overall gain for the year, despite first and second quarter recorded declines of  6.4% and 0.7%, respectively.

Near term favorable, but probable low growth outlook for 2010

In the near term, through the first half of 2010, the outlook could be termed favorable.  The fourth quarter of 2009 should see an increase in GDP of 4.2%, building off third quarter momentum, the continuation of the first time buyer program, and increases in inventories.  Consumption may taper off slightly to a gain of 3.2%.

The first half of the new year, is likely to see a continuation of low, but at least positive growth, with GDP increasing by 2.8% and 2.3% in the first and second quarters, respectively.  The reason for the slackening growth lies primarily in the drag of high unemployment and the many uncertainties created by the Obama Administration’s ambitious programs in health care and the environment (cap and trade).

Another source of uncertainty is the direction of interest rates.  It is highly probable that the Fed will raise interest rates at some point in the coming months—this to give some lift to the sinking dollar and corresponding relief to commodity prices, including oil, and to head off inflationary pressures which may develop in the wake of the run-up in liquidity. 

Risks cloud the picture for 2010

While the outlook for 2010 is improving, the economy continues to be hampered by significant risks relating to unemployment, record federal budgetary deficits, a weak dollar, and on-going trade deficits.  The difficulty for both fiscal and monetary policy is that expansionary measures to reduce unemployment, or simply to keep it from getting worse, are counterproductive to reducing the federal deficit or strengthening the dollar.  Failure to correct the latter problems could result in substantial inflation.  On the other hand, policies which reduce the federal deficit and/or strengthen the dollar, would be likely to increase unemployment and keep the economy at zero growth.

At the heart of this conundrum are fiscal policies which emphasize massive government spending and monetary policies aimed at maintaining liquidity (and viability) of the nation’s financial system in the aftermath of the credit meltdown of 2008.  Increases in government spending via the American Recovery and Reinvestment Act (ARRA), signed into law in February 2009, has resulted in (and will in future years result in) massive federal deficits—and these will have to be financed in one way or another.

For its part, the Federal Reserve Bank has taken on a whole range of unconventional asset acquisitions to forestall bank and financial institution failures and will have to find a way to “exit” these positions without substantially driving up interest rates.  The Fed has also taken on huge volumes of short and long term treasury issues, which now comprise 22% of its total assets.  With heavy Treasury financings looming, the Fed may have to step in even further to maintain low interest rates, especially if the economy does not meet the growth projections of the Obama administration.  Thus, the Fed may end up surrendering its independence to the needs of the U.S. Treasury—and play only a marginal role in countercyclical economic policy.

Longer term growth also beset by uncertainties

The longer term picture is clouded by the fact that the Bush tax cuts are due to expire at the end of 2010, and the Obama administration has already strongly signaled its intentions to, in fact, allow the expiration.

Given higher taxes and interest rates, GDP growth will moderate to gains of 2.5% and 2.6% for 2010 and 2011, respectively.  Gross private domestic investment will be negative for the year, 2009; increase in 2010 to 6.6% then retrench under the pressure of higher interest rates, taxes, and relatively weak consumer demand.  Government expenditures are likely to continue at near double-digit rates.

Investment outlays are key to the industrial utility vehicle industry

Business spending in the form of investment in plant and equipment and residential housing is the dominant factor driving the market for the industrial/utility vehicle industry.   Historically, the trends in gross domestic investment and forklift sales have closely followed one another.

The broader category of material handling equipment, the sales for which are compiled by the BEA on a monthly basis, and which include virtually all categories of industrial/utility vehicles, also follow trends in gross private domestic investment quite closely. 

The forecast for 2010-1012 for the forklift market and the market for material handling equipment may be seen in the accompanying table.

The forklift market has been depressed for a number of periods, with replacement put on hold.  It is likely that after the down year of 2009 replacement cannot be avoided in 2010.  Beyond 2010 the gains should be better relative to overall investment trends.

Utility vehicles should recover in step with investment

Utility vehicles can be segmented into three product groups:  Light utility vehicles, including golf car derivatives, turf and grounds maintenance vehicles, and UTV/off-road vehicles.  The first two categories are familiar ones with many shapes, sizes, and purposes.  The last category is a crossover from the recreational vehicle market, capable of many utility/work activities.  They are typified by side-by-side seating and are differentiated from the purely recreational ATV, or all terrain vehicle.

All three categories saw declines in sales in the 2008-2009 period, but should see a rebound from 2010 on.  Light utility vehicles are likely to show good growth due to certain specific factors:  First, more and more of these vehicles will be classified as roadworthy under NHTSA’s rule 500; that is, they are LSV-qualified.  Added to this increased versatility, they are now primarily electric and will benefit from tax credits, private and public fleet conversions, and new markets such as the military.

To sum up, the industry appears ready to put the bad times aside and venture into a future that should bring at least moderate growth, and in some cases, better than average growth.

About the Author:

Stephen Metzger, PhD, is Managing Director of International Market Solutions, LLC, an internationally-based market research firm. He is also Principal of International Competitive Assessments, the market research arm of IMS. ICA has produced four major studies of the small, task-oriented vehicle market since 2000. Mr. Metzger is Senior Editorial Advisor for Industrial Utility Vehicle Magazine.