Positive equipment trends for US, especially construction, despite ‘headwinds’

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By Carl ChrappaSenior Managing Director - Asset Management, The Alta Group

Managers responsible for assets in the US are tracking positive equipment trends as the economy rebounds from the pandemic but also pressures affecting valuations and outlooks for certain types of equipment. How are different equipment types faring? Carl Chrappa’s presentation at the American Society of Appraisers (ASA) International Conference this fall provided answers and context.

In this article, I will look at the results from the 2021 What’s Hot/What’s Not Survey, conducted with the assistance of the Equipment Leasing and Finance Association, along with a review of economic conditions and how they impact the equipment markets surveyed.

The top five scores for expected 2021 volume were construction, truck/trailer, medical, high tech, and machine tools, with scores ranging from +75 to +48.

The three lowest scores were oil/gas/energy, printing, and furniture fixtures & equipment (FF&E), with net scores between -31 and -33. Overall, scores for volume were stronger than last year’s.

Respondents were also asked to select the three best and three worst leasing opportunities. It was a weighted question, with various points allotted for each choice.

The top four equipment types were construction (+199), followed by truck/trailer, medical and hi-tech/computer. The two lowest scores were aircraft (-146) and oil/gas/energy (-140).

The survey then asked about changes in residual values. The greatest number of respondents were found to have increased net residual value assumptions for construction (+30), and containers/chassis (+20), followed by machine tools and hi-tech/computer. On the low side, numbers of respondents decreasing residual value assumptions were greatest for oil/gas/energy (-52) and FF&E (-43).

Finally, the overall ranking of each equipment type was obtained by summing the equipment type’s weighted and unweighted ranking.

Construction ranked first in both weighted and unweighted questions. Next were medical, truck/trailer, hi-tech/computer, and machine tools, followed by containers/chassis, automobiles, plastics, telecom, rail, marine/intercoastal, and aircraft, then the three that tied for last – FF&E, oil/gas/energy, and printing.

Construction equipment is this year’s big winner in preference and also had the greatest number of respondents saying residual values were increasing.

Comparing 2020 with 2021, the largest improvements in overall score were for truck/trailer (+14 points) due to new truck chip and parts shortages, and automobiles (+6) for the same reason. The greatest year-over-year overall decreases in preference were seen for aircraft (-10 points) and rail (-6), both because of conditions associated with the pandemic.

Economic context

Economic considerations that may affect equipment values include the following:

  • The consensus US GDP is currently estimated at +5.5%, lowered from an estimate of 6.8% in January. This is the highest GDP growth in 14 years. The Federal Reserve Board is predicting +5.9% for 2021 and +3.8% for 2022.
  • The public’s top concerns, including inflation – not transitory but here to stay for a while; strength of the economy – 5.5% GDP growth; improving the job market – about 5 million new jobs have been added; immigration – particularly hardships for southern border states; and finally, the pandemic, with its effects waning.
  • The Consumer Price Index, which is currently +6.2% y-o-y, with +4.8% forecast for the entire year, decreasing somewhat in 2022. Inflation reduces consumers’ ability to spend and acts as an “invisible tax.” Examples include used cars (+36%), lumber (+274%), gasoline (+45%), steel (+317%), natural gas (+160%), cotton (+83%), ocean-going shipping (+500%), and producer prices (+8.3%).
  • Consumer demand, including retail sales & food services – up 15.8% from 2020; retail trade sales – up 13.3%; and clothing & accessories – up 43.4%.
  • The national debt, which has reached $28.5 trillion. Net interest payments on this debt are expected to total $303 billion in 2021 and double by 2028, all rate sensitive.
  • Home prices, which increased an average 19.7% in nineteen metropolitan areas in 2021, affected by low interest rates, pandemic payouts, etc. Delinquencies are listed at a very low 6%.
  • Commodities, which experienced sharp price increases over the past year. Within just the past three months, aluminum increased 6.2%, copper 7.8% and oil 10.3%.
  • The global economy, with a GDP forecast of +5.6% for 2021, and forecasts for developing and developed countries ranging from +2.2% to +8.5% GDP.

Equipment markets

In first place was construction equipment, supported by 2021 construction spending, which is rising about 8% y-o-y. Statista estimated new construction equipment sales will grow 5% in 2021. In general, for 2021, used equipment prices increased +5% to +40% at auction.

Truck/trailer scores tied for second place with medical. Truck/trailer sales plunged in 2020 about 30% and will increase about 20% this year. This would have been higher, if not suppressed by chip and parts shortages.

Average Class 8 (heavy duty) sleeper truck tractors showed very high retail prices in 2021 compared with 2020, bringing current prices to record levels, and the same was seen at auction venues. US trailer orders jumped by over 50%.

In the medical market, US healthcare spending increased 4.5% per capita last year and 5% this year. Imaging modalities saw growth, including MRI (increasing at a 6% CAGR through 2028), CT (5.6% CAGR), ultrasound (3.7% CAGR), digital mammography (9% CAGR); and the endoscopy market doubling by 2028.

High-tech/computer placed fourth, with PC shipments increasing nearly 14% in 2020 and 9.5% in 2021. PC monitor sales grew to record levels. One- to two-year old computers increased in price by around 10% over 2019, especially used laptops that sell for about twice the price of a used desktop with the same specs.

Machine tools scored fifth. US machine tool consumption fell sharply in 2020, but, as of August, year-to-date orders had increased to $3.3 billion. Thus, orders for 2021 were the highest since 1998. Brisk orders for retooling in auto and truck manufacturing plants account for this demand.

Containers/chassis placed sixth, with sales of new containers increasing 10% in 2020 and sharply by 75% in 2021. Prices for new 20-ft ISO containers continued to rise throughout the year, reaching a 105% increase by midyear. Similar increases occurred in 40-ft dry vans. New reefer container production increased nearly 15% in 2020, and even the tank container market grew 8% in 2020 and 5% in 2021.

Automotive, in seventh place, saw sales plunge more than 15% in 2020, with an expectation of a 10% to 12% increase in 2021, only to be stopped at about 4% due to chip and part shortages. Thus, 2021 light vehicle sales are expected to total about 15.2 million, not returning to 17 million until 2023. The price of the average used car increased by about 40% to $25,000.

Plastics scored in eighth place, with sales of just over 4,000 new injection molding machines in 2020, and 4,280 estimated to be sold in 2021. US blown film sales were down slightly. Extrusion sales were up but are experiencing supply chain problems.

In ninth place, global telecom equipment showed capex spending increased by 7% in 2020, and 5G-related spending is forecast to increase by 100% in 2021. US telecom capex was up 2.5% in 2020 and is forecast to be +7.5% in 2021.

Rail equipment finished in 10th place, down from fifth in 2020. The fall in popularity is due to effects of the pandemic. Coal cars, sand cars and some tank cars continued to encounter difficulty trading; most other cars continue to trade at reasonable but low levels. Scrapping has come into vogue. Railcar scrap prices, which were $4,000 to $6,000 a few years ago, are now $10,000 to $12,000 per car, thanks to the increased price of steel.
Other equipment markets discussed at the conference included marine/intercoastal, aircraft, oil/gas/energy, FF&E, and printing.

* Carl Chrappa is senior managing director of the asset management practice for The Alta Group and holds ASA, MRICS and IFA senior accreditations.