Economic uncertainty remains the prevailing sentiment in the first half of 2024 due to several factors, which is impacting the performance of the fluid power industry and its customer markets.
During the National Fluid Power Association’s (NFPA) spring economic webinar, Jim Meil, Principal, Industry Analysis at ACT Research said this has been a crazy decade to date with several economic ups and downs, due in part to the COVID-19 pandemic. Now, in 2024, there is a bit of a settling down as we enter a recession – nothing like that experienced in 2008 and 2009 but rather a period of slow to no growth. He described it as a rolling recession because there is weakness in some parts of the economy but extraordinary growth in others.
For instance, there is positive economic momentum for tech and other sectors benefitting from the Inflation Reduction Act noted Meil which is providing a boost for investments in semiconductor production and data centers.
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The biggest issue for many economic sectors is inflation, which Meil described as sticky because it is not going away. Several interest rate increases were made by the U.S. Federal Reserve (the Fed) over the past year in an effort to get inflation under control. However, this has hindered spending for many businesses who can no longer afford to make purchases due to the higher rates.
Once inflation reaches the Fed’s target of 2%, it will begin cutting interest rates and help to “spur on the good side of the economy which is important for capital expenditure and in turn important for the fluid power [industry],” said Meil.
When that will happen though remains unclear. Based on this uncertainty and current data trends, Meil said fluid power will have a down year as it and so many of its customer markets are being impacted by the ongoing inflationary economy.
Declining Order Activity for Hydraulics and Pneumatics
According to Meil, total fluid power orders have been on a downward trend over the past 2 years after a strong recovery in the immediate post-COVID era in late 2020 and early 2021. Shipments are also following this downward trend.
Financial reports from fluid power technology suppliers also demonstrate these trends. Helios Technologies, for instance, reported 2024 has started well for the company with it achieving sales growth of 10% in the first quarter. Although its hydraulics segment declined 4%, this was offset by 6% growth for the company’s electronics segment. In addition, it reports the hydraulic segment’s revenue in the first quarter grew 7% compared to the fourth quarter of 2023.
Growth in sales to customers in the Asia-Pacific region benefited Helios Technologies’ first quarter performance by offsetting weaker performance in other regions such as the Americas. The company also noted a decline in sales to mobile, industrial and agriculture end markets during the quarter but saw growth in sales to various niche markets which helped first quarter results.
The company saw strong growth for its electronics segment, up 17% from fourth quarter 2023, demonstrating the benefits of a diversified product portfolio. Many of these technologies are also used in conjunction with hydraulic systems, and as many sectors increase integration of electronic technologies this is likely to continue benefiting those supplying such products.
Companies such as Danfoss and Bosch Rexroth noted in their 2023 annual reports expectations for a more difficult 2024 as order intake began to slow toward the end of the year. But, again, diversification of product offerings to serve growing industry trends – such as electrification, hydrogen fueling, data center cooling and more – are expected to help with future growth potential.
Although 2024 is projected to be a down year, Meil said there is hope the Fed will ease rates in 2024 and into 2025 which will lead to a modest return to growth in 2025 for the fluid power industry. It will be more modest than typical recoveries – as seen in 2021 and 2022 – because we are in a period of correction, not recession and therefore the recovery will not be a springboard, he said.
Nonetheless, it will be a recovery which should benefit those in the hydraulics and pneumatics market.
How Customer Markets are Trending
The performance of various customer markets served by the fluid power sector is understandably playing a role in the industry’s current downward trend. During his presentation, Meil outlined what is happening in many of these key markets to help inform hydraulics and pneumatics suppliers’ own business plans, including which segments may be better than others to focus efforts.
Construction Equipment
The construction equipment industry, the largest customer segment for fluid power, has witnessed steady progress over the past 3 years in terms of shipments and orders, said Meil. Over the past 12 months shipments have been up 6.5%. However, he noted that equipment manufacturers’ first quarter earnings calls show many are less optimistic about the remainder of 2024.
In its second quarter agriculture and construction market outlook, the Association of Equipment Manufacturers (AEM) notes that many of its members are cautiously optimistic about growth for the construction equipment market in 2024. High interest rates, labor shortages, geopolitical risks and anticipated reductions in equipment demand are among the challenges they foresee impacting the industry.
Energy and utilities as well as infrastructure are the sectors currently offering the most growth potential, aided in large part by government investments such as the Infrastructure Bill. Many members also expect the move toward zero-emissions technologies will aid growth because of the need to invest in the technologies enabling
Given construction equipment manufacturers’ less optimistic outlook for 2024, Meil said ACT Research has tightened its forecast for the year but does anticipate higher growth potential in 2025. He said the firm is pretty optimistic about the construction equipment market in 2025.
Agricultural Machinery
Sales of agricultural machinery have been off to a slow start in 2024 and are below the 5-year average. It is likely to be a tough year for this sector due to lower row crop prices and thus lower cashflows for farmers. In addition, export prospects are expected to be weaker.
AEM’s agriculture and construction market outlook confirms these factors impacting the farm machinery sector. The association also noted that farmers are having to deal with higher costs for equipment and other farm inputs which is hindering demand currently.
May 2024 sales reported by AEM show the 4-Wheel Drive segment is fairing slightly better with increases in sales compared to the same period in 2023 and year-to-date. However, total U.S. agricultural tractor and combine sales are down.
AEM Senior Vice President Curt Blades said larger equipment is a strong portion of the sector but the subcompact tractor market is struggling more.
Meil said it will be a down year in 2024 for agricultural machinery but in 2025 the sector might stage a recovery. The eventual easing of inflation and interest rates will play a role in this recovery.
Mining, Oilfield & Gas Equipment
For the mining, oilfield and gas equipment market, Meil said there is not a lot of positive traction at the moment, noting that high oil prices are needed to trigger a resumption of an investment boom in the oil patch.
In 2025, ACT Research is calling for mid-single digit growth for this fluid power customer market.
The long-term outlook though for mining equipment is positive based on the continued need for materials, especially as electrification increases which requires the mining of various materials for batteries and electric motors. A recent report from Allied Market Research is forecasting the global mining equipment market will grow 4.1% through 2032.
Underground mining equipment specifically is anticipated to grow 4.9%. While advanced mining equipment designs are expected to help drive growth for this market, including electric-powered machines, there will still be a strong use of hydraulics and pneumatics in this sector. Allied Market Research’s report specific to the underground mining equipment market indicates hydraulic excavators and haulers will account for the highest growth potential in this segment.
Material Handling
The U.S. Material Handling market has experienced a strong order and shipment trajectory over the last 3-4 years. Much of its strength is due to the build out of warehouses and distribution centers, said Meil.
However, that strength began to fade in the second half of 2023. Orders and shipments have begun to decline and so he said ACT Research is less positive about the prospects of the material handling sector in 2024.
But in 2025 this industry is anticipated to return to modest growth levels.
Metalworking
Orders and shipments for U.S. Metalworking Machinery are currently trending downward due in part to the shift taking place in automative, aerospace and other sectors to alternative materials and powertrains.
Meil said the big strategic challenge is the increasing development of electric vehicles (EV). For motor vehicles, he said this brings into question whether manufacturers continue to invest in metalworking machinery “in a world that is undergoing some degree of regulation-driven transition to EVs.”
Business sentiments in this sector have become less optimistic in recent months. In the May Precision Metalforming Association (PMA) Business Conditions Report, metalforming manufacturers’ outlook fell for the first time in 2024. Those expecting a decline in business activity grew from the previous month.
The metalworking machinery segment is expected to be down in 2024 and again in 2025.
Light and Heavy-Duty On-Road Vehicles
Commercial vehicles, particularly Class 8 trucks, will be down in 2024 on a year-over-year basis said Meil but the levels of production in this sector remain extraordinarily strong and supply chains are still under pressure.
He noted 2025 and 2026 will continue to be strong as many look to buy new trucks before stringent emissions requirements go into effect in 2027 and cause a substantial downturn.
The medium-duty trucks (Classes 5-7) market remains steady and will continue to be into 2025. Meil explained this segment of the truck industry typically has a closer link to final customers and services which leads to more gentle order trends than Class 8.
For the automotive market, steady gains are expected in 2024 and 2025. This sector should get back up to the normal sales volume levels seen in the last decade, said Meil. Pent-up demand for car purchases is driving much of this market, and once there is an easing in interest rates the industry could further benefit.
Overall, 2024 is expected to be a flat year for much of the global economy and the sectors which feed into it, including fluid power. Eventual easing of inflation and interest rates will play a key role in future spending and growth opportunities for hydraulics, pneumatics and the markets they serve.
