Equipment shipments to climb through next year

After swings in demand in 2004, the outlook is for 9% growth in materials handling equipment in 2005.

By Jim Haughey, Ph.D., Director of Economics, Reed Business Research Group -- Modern Materials Handling, 12/1/2004

This has been a year of shifts in materials handling equipment shipments and orders. While strong early in the year, both dropped briefly during the summer when there was an economy-wide slowdown in spending. And now, equipment shipments and orders have revived briskly with strong follow through expected through 2005.

Meanwhile, there have been similar gyrations in inflationary pressures throughout 2004. Equipment price inflation fell from a 12% annual rate early in the year to 4% during the summer. The price relief came from the supply side of the equipment market. The inflation surge slowed for steel and other industrial materials. Meanwhile, the U.S. dollar temporarily strengthened in Japan, Canada and Europe, easing the price of imported machinery from our major foreign suppliers. As the year closes out, there are once again rising inflationary pressures from both the demand and supply sides of the equipment market.

The outlook for 2005 calls for a 9% growth rate for U.S. materials handling equipment shipments. The equipment inflation rate should be 3%.

Users and distributors can absorb this much more equipment through the rest of the business expansion cycle without causing significant surplus equipment inventories or price spikes due to long order backlogs. The chart of equipment consumption (shipments + imports - exports + or - inventory change) shows that the equipment market can expand at least 10% more, after inflation, before the start of price and inventory problems that often appear at the top of the cycle. If manufacturers are in as much denial about the next cyclical peak as they were the last time, equipment shipments could expand—and prices rise— an extra 5 to 8% through the end of 2006.

This scenario is the result of strong economic growth that returned this fall in most sectors of the economy as well as in key export markets. The U.S. economy is now back on pace to expand more than 4% a year; however, the growth rate will gradually subside to just over 3% as 2005 closes out.

At the same time, the dollar is depreciating significantly again, making U.S. manufactured products more price competitive both here and in export markets. This gives domestic materials handling equipment suppliers a small boost.

Of particular note will be higher world demand for steel, oil and other industrial commodities sensitive to the world demand-supply balance. The Chinese economy will also continue to have an impact on this balance. For instance, world commodity markets tightened in the fall when China let up on its most stringent administrative measures to rein in an overheated economy and began to let flexible prices ration materials shortages.