During the National Fluid Power Association’s (NFPA) Spring Economic Webinar, Jim Meil of ACT Research provided an overview of current market conditions and the potential impacts for the hydraulics and pneumatics industry.
Meil’s key takeaway throughout the webinar was that yes there is a recession, but it should be described as mild. Several markets are flat or down slightly, and the economy will be a bit of a mixed bag. Sectors such as technology and housing are seeing a sharper downturn after the positive market conditions experienced in 2020 and 2021 while others, such as automotive, have a more positive outlook due to pent up consumer demand.
He also emphasized this recession will be nothing like what was experienced in 2008-2009.
Factors Impacting the Economy
Meil began the webinar by outlining the factors from 2022 which set the stage for 2023’s economic outlook – two of the most impactful being Russia’s invasion of Ukraine and the U.S. Federal Reserve starting its series of interest rate hikes. The latter he said really set the economic tone for the year while the Russia and Ukraine conflict led to higher oil prices, impacting a variety of sectors and consumers, and contributed to inflation.
In conjunction, there remains the supply chain constraints and impacts of COVID-19 which began in 2020. Labor challenges, inflation, the current recession, and the potential for a banking crisis – it is too early to tell if this will occur – are also in the mix, making 2023 the fourth consecutive year of shock as Meil described it.
Overall, the global and U.S. economy is in a good news/bad news situation. Factors such as the labor market and high industrial commodity prices are negatively influencing it while energy prices are down from their peak and both consumers and businesses continue to spend on big ticket items despite expressing concerns about the economy.
As such, he said crisis management and flexible responses will be critical over the course of this decade. He also said it is important to remember we are in an inflationary era and that must be kept in mind when looking at any economic data or forecasts.
Expectations for Hydraulics and Pneumatics
According to Meil, shipments for fluid power components trended up through the end of 2022 at about a double-digit pace (around 10.7%). But at the same time, orders were coming down when adjusting for inflation – which is necessary to do in the current inflationary environment.
Deflated figures for fluid power orders show they were flat to down over the last 15-18 months. This indicates some of the pent-up demand over the past couple of years is starting to slow said Meil.
Pneumatic orders and shipments in 2022 also experienced a relatively flat year when looking at deflated data. Over the past 12 months he said the orders and shipments trend has been up about 2%, but down compared to the past 2-3 years and not as strong as it was in the middle of 2021.
For total hydraulics, Meil said there is a lot of volatility in this segment but the key takeaway is orders, once deflated, have been slipping and a turnaround is coming for overall shipments. This is likely due in part to backlogs now being worked off by hydraulics manufacturers and the cushion provided by pent-up demand disappearing.
Mobile hydraulics are experiencing a similar story with orders, on a volume basis, peaking in late 2021, early 2022 while shipments rose. Again, this indicates backlogs are declining and pent-up demand is waning which could lead to a turnaround for this segment in the near future.
READ MORE: Mobile Hydraulics Market Rebound in 2021 Leads to Positive Future
However, the story for industrial hydraulics is slightly different. Orders for this segment have been flatlining for the past 2 years. Shipments are going up, so there could be more opportunity for manufacturers of hydraulics for industrial applications.
Other hydraulics has been on a more positive trend with both orders and shipments trending up, and the short-term outlook is promising. Meanwhile, other fluid power is flatlining, but as Meil pointed out, given the current economic environment this is not necessarily a bad thing.
Although many of the fluid power segments have been flat to down over the past year, forecasts for 2023 are relatively positive, especially given the current economic situation. On a volume basis, and stripping out inflation, Meil provided the following shipment forecasts for 2023:
- Total fluid power – up 3%
- Hydraulics – up 5%
- Mobile hydraulics – up 5%
- Industrial hydraulics – up 4%
- Other hydraulics – up 6%
- Pneumatics – down 2%
- Other fluid power – 0%
READ MORE: Hydraulic and Pneumatic Shipments Start 2023 on Positive Note
Fluid power shipments in 2024, again on a volume basis with inflation stripped out, is forecast to be similarly positive though slightly down from 2023:
- Total fluid power – up 5%
- Hydraulics – up 3%
- Mobile hydraulics – up 1%
- Industrial hydraulics – up 4%
- Other hydraulics – up 3%
- Pneumatics – up 4%
- Other fluid power – 0%
Positivity in Customer Markets
In general, the customer markets served by hydraulics and pneumatics are forecast to be relatively positive in 2023 which will benefit the fluid power industry.
Mobile Equipment
Construction equipment – one of the largest customer markets for fluid power, particularly hydraulics – is on a positive trend. Despite higher interest rates, demand is strong likely due in part to the prospect of investments coming down the pipeline from the infrastructure bill.
On a volume basis, with inflation accounted for, U.S. construction equipment shipments are currently forecast to grow 3% in 2023 and 7% in 2024 which should benefit the mobile hydraulics market.
The mining, oilfield and gas equipment market is not experiencing the glory days of 10-14 years ago, said Meil, but is currently aided by somewhat higher oil and gas prices. However, the volatility of these prices is also a hinderance because it is handicapping investment in the oil patch he said.
U.S. mining & oilfield equipment shipments are forecast to rise 3% in 2023 and 6% in 2024, again on a volume basis with inflation stripped out.
Agricultural machinery, another large customer segment for hydraulics, will benefit from the currently high row crop prices – which are due in part to the Russia and Ukraine conflict. Higher crop prices equate to more money for farmers, enabling them to spend on new farm equipment. Meil noted there is some vulnerability for this market depending on the outcome of the Russia and Ukraine conflict, the direction of the U.S. dollar and potentially higher interest rates but in general, the agricultural equipment industry is fairing well.
The Association of Equipment Manufacturers’ (AEM) most recent data on tractor and combine sales in the U.S. and Canada, released March 13, shows tractor sales in the U.S. have declined, other than gains in the 100+ hp and four-wheel drive segments. Combine sales in both countries continue to climb.
Forecasts for U.S. farm machinery shipments, on a deflated volume basis, is growth of 7% in 2023 and 5% in 2024.
READ MORE: Equipment Manufacturers Plugged in for Growth in 2023
Manufacturing
Over the past 24 months, the trend for material handling equipment has been generally positive said Meil. It is likely to remain strong with the continued investments in warehousing, distribution and e-commerce as well as some strength in the manufacturing industry.
U.S. material handling shipments are forecast to rise 4% in 2023 and 5% in 2024, on a deflated volume basis.
Industrial machinery and metal working equipment are the two fluid power customer segments with a less positive outlook in the coming year. For the latter, the aerospace and automotive markets are those which are having an impact.
This is due in large part to changes in tooling being made to accommodate production of electric vehicles. There is a reinvestment away from metalworking machinery toward electrical which is where most of the capital budgets are being spent said Meil.
As such, U.S. industrial machinery shipments are forecast to be down 1% in 2023 but up 3% in 2024. U.S. metalworking equipment shipments will decline 4% in 2023 and be flat in 2024. Both segments’ figures are volume based and deflated.
Light- and Heavy-Duty Vehicles
The automotive and truck segments are among the most positive for the fluid power sector in the coming years.
Between 2013 and 2020, roughly 17 million cars were sold in the U.S. Unfortunately, the COVID-19 pandemic hit the market hard as fewer people were leaving the house and thus did not need a car. As a sense of normalcy returned, vehicle sales began to increase but production issues – due to supply chain constraints – made it difficult to purchase a car.
The automotive industry has started to work its way out of these issues and in 2022 achieved sales of 13.8 million said Meil. Pent up demand from the past few years is expected to help further drive sales, with a 7-8% increase currently forecasted.
Class 8 trucks are prospering unusually well right now said Meil. Although data may indicate orders are slipping, he said orders in the backlog are quite strong. They are so strong that commercial vehicle OEMs are limiting orders as the backlog is already stretched out to the end of 2023 and into 2024. As such, orders appear to be going down, but customer demand remains; it is just a factor of OEMs controlling order intake so they can ensure delivery to customers.
North American Class 8 truck production is forecast to be in the range of 304,000 units in 2023 and 278,000 units in 2024. As Meil explained, because these figures are actual unit volume numbers, they do not need to be adjusted for inflation like those in the other customer markets. He also noted the standard production volume in a good year is typically about 260,000 units, so anything close to that is positive.
Medium-duty trucks (Classes 5-7) are facing a similar scenario. Backlogs are at record levels and production continues to be strained said Meil. However, those constraints are gradually being lifted. This segment is forecast to see production volumes of 242,000 in 2023 and 250,000 in 2024.
Key Takeaways for Future Business Planning
While Meil said it makes sense to consider the economy in a recession, it is different from the average recession as it is mild compared to others in history. He anticipates it will have a very light touch on the fluid power and machinery markets, unlike ordinary recessions which typically impact all sectors and people. Instead, this recession will impact some businesses, like technology and housing, but not others.
As Power & Motion has previously reported, the economy is slowing after the strong demand experienced over the past 2 years. But there will still be growth, just not at the levels previously experienced.
Meil said the weakest parts of 2023 should be reached by summer and fall with economic improvements anticipated late in the year. Although the recession is currently forecast to be mild, there are risks to monitor in 2023 which could further impact the economy and various market sectors, such as fluid power:
- global security
- accelerating inflation and even higher interest rates
- another black swan event
- the three C’s of China, COVID and cyber warfare.
Regarding inflation and interest rates, there are signs progress is being made and further hikes will not occur. Inflation is at 6%, down from its original high of 9%, indicating the Federal Reserve’s interest rate increases have helped. The goal is to reach an inflation rate of around 2%. Barring any unforeseen shocks to the economic system, Meil said there is optimism victory on overcoming inflation could be declared in late 2023, early 2024 which could lead to an easing of interest rate increases.
As far as another black swan event, he said this could come in the form of a banking crisis or if the debt ceiling debate in Washington D.C. goes unresolved, either of which could cause major issues for the broader economy. None of this is for certain, but are factors to monitor over the coming months.
He said if a business can manage through the varied issues which arise throughout the decade and be prosperous, it should be in a good position and pat itself on the back – but then be ready for the economic challenges to continue.
