Price Stability in the Construction Equipment Market
Like all other subsections of any thriving economy, used equipment markets host prices which fluctuate due to a variety of external and internal factors. Variation in price can be incredibly beneficial—it is one of the most powerful aspects of a free market. Even so, extreme variation is not so desirable, and can have a detrimental effect on producer and consumer willingness to participate in these markets. As such, having an understanding of price stability is crucial to successfully navigating the ebbs and flows of the used equipment markets. But what is price stability, and how can it be properly measured, given all of the other factors that play into prices? In this article, we will attempt to address these questions, alongside providing some important insights into how price stability has historically appeared in the market for used construction equipment.
Over the past two centuries, economists have developed a variety of ways to track the movement of prices, typically in an effort to better understand the impact of inflation. As most readers will remember from economics classes, prices in a market increase or decrease with respect to the quantity of goods available. When the quantity available is low, prices tend to increase; when quantity is high, prices tend to decrease. Considering price on a market without considering quantity can only tell half of the story; as a result, all major accepted indices of price stability tend to anchor prices, quantity, or both in a given time period and analyze the resulting difference between the anchor period and the current period.
One of the most commonly accepted measure of price stability in the United States is the Consumer Price Index (CPI) from the Bureau of Labor Statistics (BLS). The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected each month. The Bureau of Labor Statistics uses the CPI to measure changes in the price level of a market basket of consumer goods and services purchased by household, in order to measure changes in the price level in an overall economy.
EquipmentWatch has adopted the same concept of using a market basket and applied it to four different equipment markets: Construction, Agriculture, Lift/Access, and Commercial Trucks. For each market, we have selected a market basket of equipment types and brands. We have selected 6 equipment types each for agriculture, lift/access and commercial trucks and 12 equipment types for construction as the construction market is much bigger than the other equipment. In addition, we have selected 6 brands for each market. In order to compare right products and reduce any variance caused from equipment with different characteristics, using a market basket was the best approach to most accurately measure price stability in the overall used equipment markets.
To calculate the Price Stability Index™, we have adapted Laspeyres Index equation, which is also used by the BLS and widely used for monitoring price changes. To calculate, we used month-over-month resale values data from EquipmentWatch Values and volume of supply in resale markets.
[su_table caption=”Price Stability Index™ and percentage change in price and volume over a 13 month period (Feb 2015 – Feb 2016)”]
|Period||Price Stability Index™||% ΔP||% ΔV|
|Feb – Mar||102.2||2.23%||-11.65%|
|Mar – Apr||100.42||0.41%||19.61%|
|Apr – May||96.7||-3.08%||0.00%|
|May – Jun||94.92||-5.39%||-31.97%|
|Jun – Jul||97.3||-3.59%||2.17%|
|Jul – Aug||95.2||-5.06%||-1.82%|
|Aug – Sep||99.34||-0.57%||3.47%|
|Sep – Oct||99.66||-0.26%||30.50%|
|Oct – Nov||99.56||-0.40%||5.23%|
|Nov – Dec||99.67||-0.06%||17.43%|
|Dec – Jan||102.36||2.35%||-0.91%|
|Jan – Feb||98.9||-1.03%||6.44%|
The Price Stability Index™ sums the product of prices in the current month and volume of the previous month and divides that by the product of prices in the previous month and volume in the previous month. Because the Laspeyres Index uses the prices in the current and previous month but only uses the volume in the previous month, the index value is impacted more by the change in price than the change in volume. This is observed in the table above that if the price goes up from the previous month (positive value in %ΔP), the index value will likely be greater than 100 (e.g. Feb-Mar, Mar-Apr, Dec-Jan) which is at an equilibrium meaning that the price stability has not changed at all from the previous month. In this sense, market activity serves as a counter-balance to market values—as values fluctuate, the volume of equipment available in each market moves to accommodate the higher or lower prices. This can, in turn, lead to later adjustments in the value of equipment on the market as sellers adjust prices and they impact equipment values.
Looking at the period ‘February -March’ from the above table, you will notice the Price Stability Index™ is above stable range (99-101), which we call “inflated”. A possible explanation is that this time of a year is when a series of mega auctions occur and annual budgets are still being spent, both of which lead to a strong demand. As a result, equipment values went up (+2.23%) while volume went down (-11.65%) because a high proportion of equipment available for sale were sold in this period. In other words, people bought more than they sold in this period. In the following period, ‘March – April’, the Price Stability Index™ returns to its stable range (100.42) while price (+0.41%) and volume (+19.61%) both went up. This results from the previous month’s market activity, where we estimate that the markets tried to sell more than buy, expecting to dispose of equipment at higher prices.
In ‘April – May’, the Price Stability Index™ is deflated (96.70) while prices went down (-3.08%) and volume essentially showed no change (+0.001%). Since more equipment was available for sale in the previous period, the price of equipment went down and volume showed no fluctuation in this period. A deflation continued until ‘July – August’, after which a stable period started taking place between ‘August – September’ and ‘November – December’. A possible explanation for this shift in price stability from deflation to a stable range is that it is around the time when state and federal fiscal years begin—which again leads to a higher demand. An interesting point from the stable period is that during ‘September – October’, one can see a big jump in volume (+30.50%). It was likely caused by the price decreases in ‘July – August’ (-5.06%) and ‘August – September’ (-0.57%), which implies that the price and volume tend to lag a month or two behind each other based on business cycles in used markets.
The last period, ‘January – February’, is usually when the lowest market activity is observed. As a result, there was a deflation (98.90) and a low volume increase (+6.44%) despite the highest price increase (+2.35%) from the previous period.
The EquipmentWatch Price Stability Index™ provides a simple and intuitive way to look ahead at estimated changes in values and activity across any market. This can be a very useful tool for any person interested in heavy equipment markets, whether from a macro or a micro perspective. For readers with an interest in the high-level trends of the markets, the Price Stability Index™ helps identify shifts in business cycles and overall trends in values and activity. It can even assist in single asset decisions by lending support to disposition timing—buying or selling decisions are made easier when both parties know when market prices are inflated or deflated.
This new perspective on the resale channel is not without its dangers, however. One primary point of concern is that many readers naturally believe that a higher rating on the Price Stability Index™ implies that used markets are better than a lower rating implies. This is not true, as price deflation is desirable for some, whereas inflation is desirable for others. Yet all parties involved in buying or selling equipment on used markets can use the Price Stability Index™ to easily understand how prices in the resale channel are moving relative to the previous month. Like any index, the EquipmentWatch Price Index is not intended for use as an isolated statistic. It is important to understand the changes in values and activity that go into creating the metric. Attempting to rate an entire market encompassing 2 countries, 14 regions, and hundreds of equipment types will naturally lead to some broad analysis. As a result, it is very important to know and understand how particular equipment types and brands fare, given changes in average age, usage, asking prices, and more. The EquipmentWatch Market Report™ was created to add this additional context to many well-known metrics.
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