The Three-Year Outlook, 2010-2012...
Positive Trends in the Forecast Despite a Weak Economy

The Three-Year Outlook, 2010-2012 for the Industrial Utility Vehicle and Mobile Equipment Industry:
Positive Trends in the Forecast Despite a Weak Economy

By Stephen Metzger, Sr. Editorial Advisor, IUV Magazine

The outlook for 2011 and 2012, as well as the final figures for 2010, have the customary list of uncertainties which qualify any economic forecast, but the upcoming year is encumbered by a heightened level of risk. Virtually all the added misgivings revolve around government legislation and the Federal Reserve’s monetary policy. Although the forecast for the industrial/utility vehicle and mobile equipment industry is positive, macroeconomic issues will overshadow future trends and outcomes.

The broad economic issues predominate, because, especially in the area of private sector investment, they drive the industrial/utility vehicle and mobile equipment market. This is easily confirmed by charting and comparing macro trends with industry specific trends, as is done below.

The outlook is divided into three parts. The first looks at important macroeconomic trends and projects these trends into final estimates for 2010 and forecasts for 2011 and 2012. The second section compares the key macro trends with the market for material handling equipment forklifts, and utility vehicles. Finally, based on the macroeconomic outlook, industry specific trends are projected to 2012.

Legislative Issues Cloud Outlook

Recoveries from recessionary downturns in the U.S. economy have been marked by relatively sharp quarterly gains in real gross domestic product and its components. This has typically led to gains in employment and substantial declines in unemployment. Recovery from the recent recession has been anything but typical. The most telling indicator that has failed to respond is unemployment.

Part of the reason for the still high unemployment levels is the fact that the economy has shown only mediocre growth in recent quarters despite a massive spending package passed in early 2009, called the American Recovery and Reinvestment Act (ARRA), along with a hodge-podge of pump-priming efforts, including “cash for clunkers” and mortgage rebates for first time homebuyers.

The increases in Federal government spending have also resulted in substantial increases in government debt, which are now projected to reach well over 60% of GDP by 2020. In fact, the Congressional Budget Office projects the figure to be approximately 75% of GDP, while the International Monetary Fund projects an astounding 100+% of GDP by 2020. Interest payments on such huge debt levels will be a constant drain on GDP and drag down economic growth for an extended period (well beyond the decade now included in current projections).

Slow economic growth aside, future periods are threatened by at least three legislative actions, or, as in the case of one issue, non-action. These are the following:

1. Expiration of the Bush tax cuts;

2. Cost of the Patient Protection and Affordable Care Act (otherwise known as Obamacare);

3. The American Clean Energy and Security Act—or Waxman-Markey, or better known as cap and trade legislation.

All these measures spell further trouble for the economy:

• Expiration of the Bush tax cuts means loss of disposable income for the vast majority of consumers, further inhibitions placed on investment with the repeal of Bush tax benefits for capital gains and dividend income, and reduction in the asset value of small businesses through increased inheritance taxes.
• Businesses across the board have voiced grave concerns over meeting the additional costs of health coverage under Obamacare. This translates into an additional cost of labor, which means reluctance to hire and a greater willingness to fire when and where the opportunity arises—not to speak of foreign labor becoming even more competitive.
• Cap and trade legislation, if passed, represents potential for significant new taxes on businesses and consumers. All hydrocarbons emit carbon dioxide; thus, all hydrocarbon conversion processes will participate in the market for pollution permits which at some point a market price will be established, representing increased costs of doing business. That cost will be passed on to consumers in the form of more restricted supplies of goods and higher prices.

Slow Growth in the Offing, But There are Bright Spots

Obamacare is in place, and there is a strong chance that the Bush tax cuts will be at least partially repealed. Cap and trade, however, is likely to experience difficulty passing in its present form. Even without the negatives of these government initiatives, the prospects for continuing slow growth would be substantial, given the job market.

Nonetheless, there are bright spots in the current situation and moving forward. First, business investment has been picking up, and this is a major market driver for industrial/utility vehicles and mobile equipment. Double digit gains in gross private domestic investment have been experienced the last five quarters through 3Q10, as companies rebuild a depleted capital base. Moreover, business profits and cash flow positions are quite substantially improved over 2009. Profits of nonfinancial corporations show four consecutive quarters of gains over previous years’ quarters ranging from 23% to 213%. Corporate cash flows have improved over the past five quarters through the second quarter 2010, according to the Bureau of Economic Analysis (BEA). (The most recent tallies of cash flow available at the writing of this report were as of the second quarter of 2010.)

These positive trends bode well for continued gains in investment in plant and equipment, which, in turn, should bolster the industrial/utility vehicle and mobile equipment market. The negatives with respect to Obamacare and increased taxes, however, will burden the economy, and, as noted, the employment picture remains gloomy.

Therefore, the general economic outlook will see:

• Real economic growth of between 2.1-2.3% for 2010 and 2011, and growth of 2.8-2.9% for 2012;
• Real gross private domestic investment should gain 10-12% for 2010, decreasing to an 8.0-8.5% increase in 2011. For 2012 growth in investment is likely to decline to the range of 2.0-2.5%, reflecting the end of catch-up and refurbishment expenditures on plant and equipment.

Material Handling Equipment Shipments Gain, Following Investment Outlays

The recent steady increases in business investment have spurred gains in material handling equipment. The close correlation between these two expenditures may be seen in the chart below.

According to Department of Commerce data, third quarter increases in the value of manufacturers’ shipments of material handling equipment increased from $1.65 billion in June to $1.74 billion in August, and year-to-date (as of August) showed a 5% gain over the same period in 2009.

The forecast for material handling equipment is for a slow recovery from 2009, following closely the outlook for business investment. Growth should average 2.1-2.2%, bringing the value of sales to $22.5 billion by 2012. While the growth is not spectacular, it is a 10% increase over 2009. It is still quite short of the peak period of 2008 when sales hit over $29 billion.

Forklift Markets Begin Recovery from a Difficult 2009

Forklifts are an important component of material handling equipment and unit shipment figures are collected by the Industrial Truck Association. Forklift unit shipments are closely correlated to shipment value of the overall material handling equipment industry, as the following chart indicates.

Overall forklift unit shipments declined from 190,000 units in 2006 to only 85,700 in 2009, a percentage drop of 55%. The percentage decrease from 2008 to 2009 alone was 43%. A difficult year indeed.

There will be a partial recovery in 2010, in the neighborhood of 100,000 units, based on optimistic reports in various trade journals, and this is consistent with the expected recovery in the overall material handling equipment market.

Outlook for Forklifts

The outlook to 2011 should increase by about 10% to 110,000 units. This is somewhat better than the overall material handling equipment market on the strength of more replacement units and stronger demand for electric powered forklifts. In 2012, the gains should again be positive but slowing to 6% for the year with units shipments moving to 117,000.

Utility Vehicles Show Gains

The utility vehicle market, including off-road utility vehicles, heavy duty utility vehicles, burden carriers, and light portage and transport vehicles should also recover from a substantial decline in 2009 to 124,000 units to 130,300 units in 2010.

Off-road utility vehicles, known also as UTVs, have become a dominant player in the heavy duty utility market. (The trend figures and forecasts do not included side-by-side models used primarily in recreational pursuits.) The off-road market peaked in 2007 at 132,000 units, declining to 105,000 units in 2009. The combined heavy duty market (off-road vehicles plus other heavy duty vehicles) should recover in 2010, reaching 130,000 units

The market for utility vehicles should continue to move up in 2011 and 2012, taking advantage, in part, of government purchases, particularly in the defense establishment. Expect to see also, the introduction and marketing of many more electric powered models, as well as hybrid-electrics with extended range.

The combined unit market for heavy duty utility vehicles should move to just under 140,000 units by 2012, while light utility vehicles will recover to 39,000 units, up from 34,000 in 2009.

Overall, the message of the forecast is one of steady, albeit slow recovery from the recessionary depths of 2009. While it is highly unlikely that the industrial utility and mobile equipment market will regain pre-recession peak levels by 2012, the movement is certainly in the right direction.

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.

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.