In our September 2019 Short Term Forecast (North American Machinery Service), we projected relatively low sales growth potential for earthmoving and materials handling machinery for 2019 and 2020. We are now expecting growth for the various segments of machinery we cover to be closer to 4 - 5 percent in 2019 and 3 - 4 percent in 2020, not materially different from our earlier projections. However, there are signs that business is slowing at the retail side and dealers are reducing new machine inventories as we approach 2020, primarily because of uncertainties in the marketplace many having been generated by the media.
We are not headed for a recession despite the fact that many overseas markets including China, Japan, Korea, India, and the EU have very weak economies and some already are already in recession. Our economic situation with low interest rates and real GDP growth at 1.9 percent is moving forward and may even be stronger than indicated once strikes and other similar temporary bumps are over and people working again. Our unemployment rate is currently 3.6 percent, which is very low and points to a full-employment economy, and people in all classes are thriving with growing wages. Our U.S. banking system is strong and we have no housing bubbles or other worries that have generally in the past been major warning signs of financial trouble.
Housing is a question mark, particularly with very low mortgage rates available in the marketplace and low unemployment levels throughout the U.S. Housing starts have been declining and housing sales, while up from 2018 levels have been eroding. However, with low interest rates, mortgage applications in recent weeks have been stronger both for home purchases and for refinancing loans. We should note that the average fixed 30-year mortgage rate has declined to 3.98 percent according to the Mortgage Bankers Association, which is expected to boost housing within a few months.
Housing starts were at a level of 1,256 thousand units in September and there is very little growth there at the moment; however, lower interest rates are expected to increase building activity by housing contractors and developers in single family housing as we move into 2020. Construction spending has not change significantly for nearly two years, with public spending and private non-residential spending holding up very well and expected to remain so into 2020. Spending from these two elements usually come with longer-term investments, and therefore, create a more stable spending platform moving into the future.
Machinery suppliers are reducing output to adjust for lower order levels from dealers, and it appears that adjustments are being made because of uncertainties and lower growth opportunities ahead. We have not seen layoffs from the machinery industry, and we believe once a balance is obtained between orders and sales, the manufacturing side will “get back on track”. Caterpillar, for example, recently indicated that a loss of $400 million in its third quarter results came from reduced orders from dealers, attributed to inventory adjustments being made at the dealer side. This situation could continue for another quarter for Caterpillar or other suppliers as well, but is a short term adjustment for building inventories too high during the past two years when business was stronger. This problem backs down the pyramid when component inventories from vendors need to be corrected as well.
Tariffs and trade disagreements still persist in the U.S. but we feel confident that many of the problems related to these issues may get rectified in coming months. We are hopeful that an agreement between the U.S. and China will get approved before the end of 2019 and that this treaty will lead to other trade agreements beneficial to both countries in time. We see other countries including Japan, South Korea, and possibly the U.K. signing new trade agreements with the U.S. over the ensuing months, which we believe will be positive and uplift U.S. business if and when they occur.
As for the USMCA agreement (US, Mexico, and Canada trade), the U.S. Congress has “the ball in its court” and an approval, while helpful to many parties, is not forthcoming any time soon from our viewpoint. The House of Representatives needs to work out its differences regarding the details in the agreement, and the timing for a vote to move forward is unknown.
Our thinking for 2020 stands with the fact that machinery demand will be flat to modestly better for the year for most products, whereas on the production side will very likely be flat to slightly down for 2020. We consider this a good outcome for suppliers and vendors as long as there is a balance between the sales side and the manufacturing side achieved by the various suppliers quickly. We may not have any resolution to this so-so outlook until late in 2020, but we will be watching events along the way that point to changing conditions, which we will report on immediately and perhaps adjust or thinking accordingly. Our projections into 2021 may have to wait until later in 2020, as we will not make judgment on the longer term situation until then, which could vary considerably based on election results in November 2020.