Construction equipment prices have not budged since the mid-1990s. Through the record sales of 1998 to the current sales slump, the Bureau of Labor Statistics producer price index has remained remarkably flat. This April, the construction equipment price index was just 0.3% higher than a year ago.

The BLS index generally reflects the manufacturers' transaction price, including heavily discounted sales to rental firms, says Jason Sewell, the BLS economist responsible for the index. "The industry is very competitive and producers cannot make large price changes without hurting demand," he says.

This price stability is expected to continue for the near term. The forecasting firm DRI-WEFA calls for construction equipment prices to increase just 0.7% this year, following last year's 0.5% increase. This will mark the second consecutive year that prices failed to keep up with manufacturers' input costs. DRI-WEFA's model indicates that production costs for equipment manufacturers increased 1.6% last year and will rise another 1.1% in 2002.

(Source: Bureau of Labor Statistics, average quarterly producer price index for construction machinery and equipment. U.S Dept. of Commerce, average quartely value of shipments.)

This may be creating pent-up price pressure, which could be released in 2003 when the market is expected to pick back up. "There are signs of some life emerging on the demand side during the second half of this year but 2003 will be the year the market finally turns around," says Ken Kremar, the DRI-WEFA economist who tracks the construction equipment market. His forecast calls for equipment prices to increase 1.3% next year and another 2.3% in 2004.

"You can sum up the inability to pass along higher prices in one word-overcapacity," says Frank Manfredi, president of Manfredi & Associates, Mundelein, Ill. In North America, demand for equipment through April of this year was down 15% from the first four months of last year. In Japan, demand is down 25% from a year ago. "There is a tremendous amount of idle capacity in Japan alone," Manfredi says.

Despite this excess capacity, there is still some new plant construction under way. In particular, Manfredi points to China where an ambitious program is under way to increase production with an eye to exporting. "Overcapacity is going to plague the industry for quite a while," he adds.

Overcapacity and slumping sales are putting even greater downward pressure on prices at the retail level, where distributors are hard-pressed to even pass along the most modest manufacturer price increase. "Flat pricing is not the case at the retail level. I would be happy with flat," says Bob McNutt, current president of the Associated Equipment Distributors, Chicago, and CEO of Wolverine Tractor and Equipment Co., a distributor based in Southfield, Mich.

Prices for some product lines have fallen as much as a "couple percentage points," says Dennis Romanson, general sales manager for H.O. Penn Machinery Co. Inc., Poughkeepsie, N.Y. He notes that things might even be worse if not for low interest rates and the new capital depreciation rules that offer strong incentives to buy.

"I'm hearing that the market is down 10 to 40% compared to a year ago and that the decreased volume is significantly lowering distributor's margins," says McNutt. Ironically, the downturn is coming when the key highway market is rolling along.

But distributors are seeing contractors, who purchased large amounts of equipment in previous years in anticipation of a strong highway program, grow increasingly cautious. Several states are cutting back on their highway programs as they fight growing budget deficits. "In Michigan, the highway program is expected to be off 20 to 25% in 2003," says McNutt. "Right now, contractors are not in a real joyous mood to spend money on equipment."

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