Equipment rental revenue, comprised of the construction/industrial and general tool segments, is expected to grow by 3.4 percent in 2023 to reach a record total of nearly $57.7 billion, topping the nearly $55.8 billion recorded in 2022, according to the latest forecast released in early November by the American Rental Association (ARA).
To better understand the economic factors leading to this forecast, Rental Management questioned Scott Hazelton, director, S&P Global Market Intelligence, the international forecasting firm that compiles data and analysis for the ARA forecast and ARA Rentalytics™ members-only subscription service as part of a research partnership with ARA.
Rental Management: Did anything surprise you in the latest ARA forecast?
Scott Hazelton: There were no surprises to the forecast itself. We had been forecasting something perilously close to a recession last quarter, and the evolution to a mild recession was not unexpected. What has been surprising is the resilience of the equipment rental industry in an economy that is not particularly strong, particularly in traditionally rental-intensive markets, such as nonresidential construction. There are solid reasons for rental to be doing well — it’s not necessarily a surprise. However, one would normally expect a bleaker outcome from a recessionary environment than is currently being experienced. The rather unique confluence of events that are enabling that are something of a surprise.
Rental Management: The latest forecast calls for continued growth in 2023, but at a slightly slower rate than what was anticipated in the previous quarterly forecast. What has changed?
Hazelton: The most significant change to the forecast is the expectation of a mild recession beginning in the fourth quarter of this year and extending through the first half of next year. We anticipate three quarters of real GDP [gross domestic product] contraction, however, the peak to trough drop will only be 1.1 percent. The duration will be roughly equivalent to the 11 months of an average recession, but the peak to trough decline will be lower than the average 1.7 percent. We also have somewhat more durable inflation, which is driving a slightly higher interest rate profile from the Federal Reserve, which is what is pushing the economy into the recession.
The structural construction industry will be impacted by the higher interest rates, as will much of the manufacturing sector. Residential construction is most heavily impacted, which limits the exposure to the construction and industrial segment of equipment rental, but it does expose the general tool segment to a potential contraction in 2023.
Rental Management: Inflation and higher interest rates would seem to favor the equipment rental industry in that more contractors would turn to rental vs. tying up capital by buying their own equipment, so wouldn’t that lead to perhaps even greater growth for equipment rental revenue in 2023?
Hazelton: There are several factors that are both headwinds and tailwinds for the equipment rental industry. It is true that inflation and higher interest rates make capital investments more expensive, making rental more attractive to contractors. However, those factors also reduce the demand for investment in the economy, and hence the demand for equipment as a whole. On balance, one would expect the headwinds to be stronger than the tailwinds — rental revenue usually contracts in a recession. A unique feature of this downturn is the supply chain disruptions that partially induced it. These have created a shortage of machines in the market, and rental companies are more likely to see their machinery delivered because of their market size. The scarcity of machines also has allowed for rental rate increases.
“Inflation is a stubborn thing, particularly once it extends to labor markets.”
— Scott Hazelton, director,
S&P Global Market Intelligence
Rental Management: Several large infrastructure projects started this year or will start in 2023, potentially increasing demand for equipment rental for the large rental companies. Doesn’t that create a tailwind for the industry?
Hazelton: There are a number of federal initiatives that will drive infrastructure investments. The Infrastructure Investment and Jobs Act is the obvious one, which feeds roughly $80 billion into the economy in 2023, although not all of that will result in construction spending. However, there still is significant money from the American Rescue Plan Act that will be spent in 2023, and much of that will be spent on infrastructure. In addition, the CHIPS for America Act is leading to the construction of high value chip fabrication plants, and the Inflation Recovery Act is adding further impetus through its green energy investments. It is this combined spending that will create a net positive construction outlook and drive equipment rental revenues higher, even in a recession.
Rental Management: What could happen that would alter the forecast positively?
Hazelton: There was good news in early November that inflation came down more than expected. One month is not a trend, and the Federal Reserve will not change policy based on one observation. However, to the degree that inflation can be tamed sooner than expected, the Fed will not need to be as restrictive with monetary policy. A shorter and shallower interest rate spectrum would allow for greater economic growth. In addition, a cease fire in the Russian invasion of Ukraine could soften energy prices and boost business and consumer confidence. Lower energy prices would allow inflation to moderate further and the transition of money from fuel budgets would allow more spending elsewhere.
Rental Management: What could happen that would impact the forecast negatively?
Hazelton: Inflation is a stubborn thing, particularly once it extends to labor markets. It is possible that October was an aberration and that prices will pick up again with the next inflation reading. If the Fed acts more aggressively, potentially pushing the federal funds rate another 50 to 100 basis points higher, we will get greater demand destruction in the economy — a deeper recession with a steeper drop in private construction spending. There are, of course, a number of foreign policy risks lurking, any one of which could renew supply chain disruptions.
Rental Management: How does the forecast for Canada differ from the forecast for the U.S.?
Hazelton: Canada sees recession, but a slightly shorter one of two quarters. The risk to Canada comes from the U.S. recession, but also a global slowdown with parts of Europe in recession and China growing below-trend. Canada’s export markets, particularly for commodities will be adversely affected. Canada also had record high housing starts in 2022, which will be dropping significantly. On the whole, Canada’s outlook is very similar to that for the U.S., just a tad milder.
Accessing exclusive market intelligence
ARA Rentalytics™, the American Rental Association (ARA) annual paid subscription service, offers ARA members — rental store owners and managers as well as manufacturers and suppliers — up-to-date economic data specific to the equipment rental industry.
The service was expanded last year to include two valuable resources, an annual product group purchasing forecast and access to ARA’s rental consumer surveys. In addition, a low-cost state digest for local rental companies was launched.
“ARA members continue asking for more rental research and analytics, so we aim to meet those needs with ARA Rentalytics,” says Tom Doyle, ARA vice president, association program development.
Offered exclusively to ARA members, ARA Rentalytics has four levels to choose from with each successive level providing more data, services and benefits starting with the state digest, which provides a one-year revenue forecast for the national, state and metropolitan statistical areas (MSAs) as well as data related to the national and state forecast economic drivers affecting the rental industry.
Other levels include state, regional and North America subscriptions, expanding the available data beyond what the digest provides to subscribers.
“North America subscribers receive the exclusive rental revenue forecasts compiled by our expert partner, S&P Global Market Intelligence, get interactive and ready-built charts, and they are updated automatically with each quarterly release. This is a definite time-saver for professional rental managers, manufacturers and suppliers,” Doyle says.
Subscribers also are invited to timely webinars that provide additional information beyond what is available in the quarterly forecast as well as access to economic and rental experts.
For more information about ARA Rentalytics, visit ARArental.org/go/data. You also can contact Mike Savely, ARA director, association program development, at 800-334-2177, ext. 246, or firstname.lastname@example.org.