August 2020 Volume 2

COVER STORIES

ConstructionMachinery US Construction Machinery New Orders to date are faring better than they were in the 2013 or 2015 cycles. Monthly New Orders have contracted at double-digit rates for the last four months of data (February through May) relative to year-ago levels, but the contraction has not exceeded 20%, whereas in the 2013 and 2015 recessions we sawmultiplemonths withmore than 30%contraction. We expect annual New Orders to reach a low early next year, with milder severity of contraction than at the low points of the last three recessions (2013, 2015, and the Great Recession). Construction machinery used in the residential construction market is likely to be an area of relative opportunity in the coming years, as we expect growth in US Housing Starts in both 2021 and 2022. Very low mortgage rates combined with robust June rise in leading indicators such as the National Association of Home Builders’ Housing Market Index and in US Housing Permits bodes particularly well for the single-family side of the market moving into 2021. Target opportunities accordingly.

Production will decline into early 2021, with Great Recession esqe severity. While the recovery will be sharp, the low point we are calling for is so low that Production through year-end 2022 will remain well below the pre-pandemic level. If you are doing business in the auto industry, we recommend you take careful stock of whether your business is able to pivot to other markets and/or take steps to right-size your business. In the meantime, ensure you are continuously assessing your cash position – determine a set of financial thresholds that will trigger certain actions, such as layoffs, to enable your business to survive the downturn.

Definition: Passenger car and light-duty truck production (classes 1-3) in the US, Canada, and Mexico combined, including transplants. A passenger car is a road motor vehicle, other than a motorcycle, intended for the carriage of passengers and designed to seat no more than nine persons (including the driver). Source WardsAuto. Measured in millions of units, not seasonally adjusted. Oil and Gas While oil prices have recovered to around the $40-per-barrel price point, the severity of decline in the North American Rotary Rig Count has intensified. The 72.5% drop in the monthly Rig Count from June 2019 to June 2020 surpasses even the sharpest declines seen during the 2015-16 oil market collapse, or during any other Rig Count recession on record for that matter. The North American oil patch faces a tough road ahead given financial institutions’ wariness of extending credit to the beleaguered sector, oil prices still below the breakeven level for new wells, and global competition. We expect the Rig Count annual average and rates-of-change to reach lows in early 2021. However, the subsequent rising trend is unlikely to bring the Rig Count to the pre-pandemic level by the end of 2022.

Definition: New Orders for construction machinery in the United States. This industry comprises establishments primarily engaged in manufacturing construction machinery, surface mining machinery, and logging equipment. Source: US Census Bureau. NAICS Code: 33312. Measured in billions of dollars, not seasonally adjusted. Automotive – Light Vehicle The consumer side of the auto industry showed some resiliency in June, but only in the relative sense. US Light Vehicle Retail Sales for the month came in 26.9% below June of 2019, an improvement over the 45.8% decline in April relative to the year-ago level. On the production side, North America Light Vehicle Production in June was down 19.7% from one year ago after 84.1% and 99.2% declines in the respective prior two months. The unprecedented severity of decline in second-quarter Production led us to lower our already gloomy expectations for Production in the coming years, a notable downgrade since the publication of the April Forging Industry Association article. We expect annual

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FIA MAGAZINE | AUGUST 2020