Orders Decline in Global Equipment Markets due to COVID-19

Orders for U.S. construction and farm machinery were both down through February compared to the previous year. Orders will likely remain low in the coming months due to the strained finances of many customers. Exports, particularly of agricultural equipment, will continue to be lower due to the global spread of COVID-19.

According to ITR Economics, the negative economic impact of COVID-19 will likely be more severe in Europe relative to the U.S. due to a higher per capita mortality rate in some countries and a slower re-opening of various regions. 

Defense is one of the few bright spots for the U.S. manufacturing sector. A 2.9% increase in defense spending will aid growth in this market due to the signing in late 2019 of the National Defense Authorization Act.    

NOTE: All data for charts supplied by ITR Economics

U.S. Total Industrial Production [return to nav]
  • Production declined 5.2% from February-March, a severity surpassed only by the 6.7% decline from February to March of 1933. Production in the first quarter came in 2.2% below the first quarter of 2019.
  • Our analysis suggests that decline in quarterly Production will extend into the second half of this year and likely be more severe than during the oil-driven recession of 2015-16 and the early 2000s recession but less severe than during the Great Recession.

Industrial



U.S. Leading Indicator [return to nav]

  • In March, The Conference Board’s U.S. Leading Indicator exhibited the largest one-month drop in the data history (dating back to 1959) due to the impact of COVID-19.
  • The Leading Indicator monthly rate-of-change suggests that cyclical decline in the U.S. industrial sector will likely persist into at least late this year.

Leading




U.S. Private Nonresidential New Construction [return to nav]
  • U.S. Private Nonresidential Construction totaled $110.5 billion during the three months through February, coming in 2.2% higher than the same period one year ago.
  • Many U.S. businesses will face cash flow difficulties, making them less likely to invest in new construction in the coming quarters. The U.S. Architecture Inquiries Index dropped by 57.9% from February to March, a negative sign for future Construction.

Nonres

Construction Machinery, New Orders: [return to nav]
  • February New Orders data (latest available) indicates annual decline of 9% predating the stay-at-home orders in the U.S. U.S. Construction Machinery Production data showed an abnormally weak, but not unprecedented, February-to-March change.
  • Companies may delay purchases of construction machinery due to strained finances and the high degree of uncertainty caused by the COVID-19 outbreak. This will likely hinder New Orders in the coming quarters. 

Machinery

U.S. Total Public New Construction [return to nav]
  • U.S. Total Public Construction during the 12 months through February totaled $332.8 billion, up 8% from one year ago. Construction is in an accelerating growth trend.
  • Funds for future Public Construction face competition from the more immediate needs created by the COVID-19 outbreak. This could pose a downside risk to Construction. 
    Public


U.S. Heavy-Duty Truck Production [return to nav]
  • Annual Production in March was 4.9% below the year-ago level. March monthly Production was 33.5% below the March 2019 level.
  • We expect contraction in retail spending and business-to-business activity in the coming quarters, which will likely reduce demand for freight transport. This will likely lower demand for new trucks – and consequently their Production – in the coming quarters. 

Trucks


April US Housing Starts Fall to Five-Year Low [return to nav]

U.S. housing starts plunged 30.2% in April to an 891,000-unit seasonally adjusted annual rate that outstripped economists’ forecasts in a Reuters poll who expected a fall to 927,000 units. The April result was the lowest level of housing construction since early 2015, according to U.S. Department of Commerce numbers released today.

April 2020 Us Regional Housing StartsMany states considered homebuilding as essential when they enforced lockdown orders in mid-March to curb the spread of COVID-19, the respiratory illness caused by the coronavirus. But disruptions to building material supply chains have likely weighed on activity since the pandemic response began. An Associated General Contractors survey from the first week of May adds context to the status of construction investment: 37% of contractors say their owners voluntarily halted work out of fears of the pandemic. Thirty-one percent report canceled projects because of a predicted drop in demand. And 21% report projects canceled as a result of lost private funding.

“April’s decline largely reflects plunges in building activity in large states, some of which did not deem home construction an essential business,” says Mark Vitner, senior economist with Wells Fargo Economics. “But activity also pulled back even in states where homebuilding was deemed essential, as builders grew cautious amidst a nearly complete lull in demand as well as growing concerns about apartment tenant demand and the ability to collect rents.”

Permits for new construction fell 20.8%, but remain at a 1.074 million-unit pace that suggests builders are still planning construction.

Housing demand derives from underlying economic growth and the economy turned steeply into recession in April. Initial unemployment claims suggest more than 30 million jobs have been eliminated since early March. Fewer people are going to be interested in committing to a new mortgage when they are concerned about their job and income prospects.

Reuters reports economists expect the housing market downturn, together with a collapse in consumer spending, business investment and manufacturing, will result in gross domestic product (GDP) shrinking at as much as a 40% pace in the second quarter, the deepest since the 1930s. The economy contracted at a 4.8% rate in the January-March quarter.

Vitner's analysis points out that the just over half of job losses so far have been concentrated in the leisure, hospitality and retailing sectors, where part-time employment tends to be more common. Those losses are being felt most heavily by apartment owners. Recent wage gains had been pushing rent increases, but now they’re likely seeing the most delinquent rents and rising vacancies. Luxury and lifestyle communities appear to have dodged a bullet, as many of their tenants are now working from home. The wave of new construction currently underway that will likely be delivered in a weak job market.

“Demand for single-family homes has proven surprisingly resilient,” according Vitner. “While showings of existing homes were largely forbidden during April, buyers apparently returned later in the month. Mortgage applications for the purchase of a home have rebounded solidly and searches for new homes on Google have rebounded back to pre-shutdown level.

“April’s drop in starts also reflects some payback from the strong start to the year. Even with April’s drop, single-family starts through the first four months of this year are running 1.3% ahead of their year-ago level, and are up in every region except the Northeast, where they are down 25.5%."

A signal that the housing market is showing signs of stabilizing in the wake of the COVID-19 pandemic comes from builder confidence for newly-built single-family homes increasing seven points to 37 in May, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI). The rise in builder sentiment follows April’s largest single monthly decline in the history of the index.April 2020 Us Housing Starts

        

Marcum: Infrastructure Spending Drives Strong Q4 Commercial Construction Index [return to nav]

The Marcum Commercial Construction Index for the fourth quarter of 2019 reports healthy levels of construction spending in large part due to ongoing strength in infrastructure-related categories. Nonresidential construction spending stood at an annualized rate of $779.6 billion in December 2019, down 1.2% from the previous month but up 4.4% year-over-year. 

The index is produced by Marcum’s National Construction Services group.

Eleven of the 16 nonresidential construction sectors expanded year-over-year, including massive upticks in publicly funded categories like water supply (+33.6%), conservation and development (+16.9%), highway and street (+14.1%), and public safety (+10.1%).  Spending decreased from the same time last year in predominately privately funded categories like commercial (-4%), lodging (-3.9%), and amusement and recreation (-3%).

“The ongoing strength in infrastructure-related spending is a result of state and local finances being at their healthiest levels in quite some time as consumer spending, ongoing staffing expansions, and elevated assessed values drive tax collections higher,” wrote Anirban Basu, author of the report and Marcum’s chief construction economist.

Mr. Basu points to inflated property values as a possible explanation for stagnation in privately funded segments. “Investors and developers are becoming increasingly concerned that property values are speculatively high and that the pace of new project deliveries is outpacing the economy’s capacity to neatly absorb them,” he said.

Construction employment increased at a faster pace than the national nonfarm economy on both a monthly (+0.6%) and yearly (+1.9%) basis.  Nonresidential specialty trade contractors added jobs at an impressive rate throughout 2019, while the nonresidential building category exhibited the slowest pace of growth of any of the construction subsegments. 

Despite ongoing hiring, construction labor shortages remain problematic. “Throughout 2019, 4.2% of all available construction jobs were unfilled, the highest proportion on record.  Between 2001 and 2015, the proportion of construction jobs that went unfilled was just 1.8%,” wrote Basu.  

A reduction in trade-related uncertainty – the USMCA trade agreement was ratified, BREXIT is finally proceeding, and the U.S. and China have reached a phase I trade deal – along with a healthy residential sector and a labor market that exceeds expectations all represent economic tailwinds going into 2020.

Basu cites rising levels of debt across the economy, heightened political uncertainty as the November presidential election nears, and the effects of the coronavirus on world markets as tailwinds that could limit economic growth in 2020.