Editor’s note: The American Rental Associaton (ARA) and Rental Management partnered with IHS Global Insight, Lexington, Mass., more than six years ago to determine the size and scope of the equipment rental industry in North America. Today, as part of the partnership, IHS Global Insight compiles data for ARA’s Rental Market Monitor™, an online subscription service available to ARA members only. When the data is updated each quarter, Scott Hazelton, a senior partner with IHS Global Insight, exclusively speaks with Rental Management about the latest economic trends and their impact on the equipment rental industry. An edited version of that conversation follows.
RM: The latest ARA Rental Market Monitor™ quarterly forecast for the equipment rental industry is more positive than it was in February. Why?
Hazelton: First quarter performance for the economy and the rental industry was better than expected, so the new quarterly forecast starts from a higher base. Some of the gains were weather-related and may prove transitory. However, recent evidence suggests that manufacturing continues to gain speed and the transition from rising to falling oil prices is improving confidence. Consumer spending was stronger than expected in the first quarter and motor vehicle sales were notably high. Business investment growth weakened, but this was not unexpected given the partial elimination of tax incentives. While total GDP [gross domestic product] growth was only marginally better than expected, a key drag was defense spending, which is not heavily rental intensive. Another key to an improved outlook is that downside risks to the outlook have declined. The probability of a near-term recession for the U.S. economy has fallen from 25 percent to 20 percent and even international risks, such as a China hard landing — now at 15 percent from 20 percent — have retreated in the face of recent data.
Rental penetration also is likely to continue to increase. While we do not have firm quarterly data on penetration, the Federal Reserve Board indicated that credit markets continued a very slow thaw in the first quarter. The lending environment improved slightly, but the upside was particularly focused on large and midsize businesses. Meanwhile, within the commercial/industrial segment — and especially within the commercial real estate segment — loan applications were up from their 2011 lull. Taken together, the economy will be demanding equipment in coming months, but the ability of smaller contractors to expand fleet will be limited. The implication is that contractors will need to continue to expand their virtual fleet through rental to meet 2012 demand.
RM: American Rental Association (ARA) members responding to ARA’s voluntary economic survey in April continue to have a very positive outlook for the year, too. Why should they be so optimistic?
Hazelton: First, my expectation is the individual respondents are looking at revenues and utilization compared to a year ago and seeing improvement. They also are looking at their current agreements and reviewing local businesses, and seeing that either their equipment is increasingly booked or expect increased local demand.
While there remains unease with the strength of the recovery, there is growing acceptance as to its duration. What is interesting about the survey is that any one individual respondent indicates his or her feeling of a specific market, which tends to be relatively local. In the early stages of a recovery, surveys such as this tend to “flutter” — some areas will suggest strength while others are not yet affected or convinced that the effect is lasting. When you see a broad-based positive outlook from a survey of disparate individuals, the probability is that the turnaround is real and likely to be lasting. In a very real sense, ARA members should be optimistic because collectively, they have reason to be.
RM: How does each industry segment help drive the positive outlook?
Hazelton: The biggest gains are coming from the construction and industrial and general tool categories. Party and event certainly sees growth, but is held back by weak consumer spending growth. It also is the case that demographics also are holding back some growth as weak job growth and high levels of student debt are delaying household formation, including weddings and childbearing.
Within the construction and industrial segment, it is industrial that will supply the lion’s share of growth. Overall, industrial production will expand at about 5.5 percent in 2012, the same growth as construction. However, the industrial performance is coming off of a decent 2011, while construction had almost no growth last year. More importantly, the industrial expansion is focused in areas where equipment rental is strong — motor vehicles, fabricated metals, electrical equipment and appliances, and even furniture. The weakness in manufacturing comes from textiles and apparel, where equipment rental is less intensive. By contrast, the strongest growth in construction will come from the residential sector, which is not only at extremely low levels of activity, it is not particularly rental intensive. The more rental intensive public works projects and commercial construction will just hold their own in 2012. Within the construction sector, the top gainer will be construction of manufacturing facilities, with more modest gains in the energy and health care segments.
RM: What is the outlook for Canada?
Hazelton: Canada’s outlook is generally a little more positive in the near term, but a little weaker in the medium term. This year benefits from high energy prices, which have boosted demand in the western provinces and Newfoundland. Consumer spending also has been stronger than expected and some of that will find its way into the party and event space. However, Canada is not poised for the type of recovery anticipated for the U.S. and Canadian consumers are at historically high levels of debt, so absent additional impetus, growth will likely retreat in 2013. The result is still a solid growth profile, but one that looks better in 2012 and borrows from 2013.
More optimism for the future
The outlook for the equipment rental industry shows increased optimism as first quarter performance was better than expected, resulting in a more positive outlook for the full year, according to the latest data released by the American Rental Association (ARA).
ARA now expects overall North American equipment rental industry revenue to increase at least 8.6 percent in 2012 to total $34.1 billion at year end, nearly 2 percentage points greater than forecast in February.
The projections are based on new figures updated quarterly by IHS Global Insight, one of the world’s leading economic forecasting firms and a partner in providing data and analyses for the ARA Rental Market Monitor™ subscription service for ARA members.
The equipment rental industry’s forecasted revenue growth this year is now four times the 2.2 percent growth in gross domestic product (GDP) forecast for the United States in 2012.
The forecasted rental revenue total includes the three segments of the industry — construction and industrial, general tool, and party and event — in the United States and Canada combined. The ARA Rental Market Monitor current five-year forecast calls for continued annual growth in rental revenue to reach a total of $53.2 billion by 2016 in North America.
“Our growth can be attributed to many things, but first and foremost, we are a solutions-based industry. We are seeing a fundamental shift as customers realize the value of renting versus the challenges of ownership.,” says Christine Wehrman, ARA’s executive vice president and CEO.
“This trend was evident in the first quarter and those in the industry are focused on gaining further market penetration via new market segments and selling the value of equipment rental,” Wehrman says.
Investment in new equipment as a percentage of rental revenue also is on the rise and will reach 31.6 percent or $9.8 billion this year, according to IHS Global Insight, as equipment rental companies continue to rebuild, replenish and expand inventory to meet anticipated greater demand.