Marc Johnson, market champion for equipment dealerships and distribution at Pinion, hasn’t read a Golden Book in a long time, but he is familiar with the story of Chicken Little and her cry of “the sky is falling.”

“You might remember that she gets hit with a little bitty acorn that fell from a tree,” Johnson says in his recent webinar, Debunking Rumors and Understanding the Realities of Recession. “And from that, she determines that the world is ending.” Johnson adds that such is the typical reaction people have to economic issues like a recession and inflation.

He’s not the only one to invoke the Chicken Little analogy in terms of a recession. Chris Johnson, senior research analyst with Cleveland Research, spoke at the 2023 Dealership Minds Summit on the 2024 economic outlook. “The key question in any discussion in the macro economy is are we going into a recession, and if so, is the sky falling?” 

His answer was there might be a recession, but if there is, it will be a small one. Johnson’s thoughts were similar. “So is the sky really falling? I don't think so. But do we have some inflation concerns? Yes. Are there market fluctuations? Absolutely.”

Johnson says recessions are narrowly defined events in which economic trade and gross domestic product (GDP) has fallen in 2 successive quarters. “In 2020, clearly we did when everything got shut down,” he says. “We had a very short period that you could define as a recession because everything shut down and GDP went backward, but it came back very quickly.” Johnson adds that right now, we are not in a recession.

Inflation, however, is another thing. “In the last year and a half, inflation has gotten real,” Johnson says, adding that inflation is broadly defined as a general increase in prices and a decline in the purchasing power of the dollar. 

“I tend to think right now we've got inflation going on. We don't have a recession going on, but we might have instability going on.” That tends to lead to buying behavior affecting both dealers and their customers, he says. “When we don't know what things are going to look like, we tend to conserve and hold back and not purchase things — hold onto our cash and things like that. And that could be what our customers are ultimately going to do soon. If they do that long enough — or if the general economy does that long enough — then that could lead to a recession.”

When looking at recessions going back to the first few decades of the 20th century, Johnson notes that with the exception of the 2021 recession, the ag economy (as measured by net farm income) generally went backward following a recession. “The good news of that is we're not in a recession right now — we're still in a period of growth. So if we're going to go backward, maybe that's gotten delayed a little bit longer."

Johnson adds that for equipment dealerships, it looks like the earliest that there might be a pullback on income is in 2024 because of supply issues and the age of the fleet as a result. This means that dealers should end 2023 on a high note because both farm income and expenses are up.

Regarding the former, while cash receipts fell from a high in 2022 of $601 billion to a projected $575 this year, it's still a significant increase from 2021 when it was about $495 billion. “The biggest difference is the government payment section of that,” Johnson says, noting that USDA pandemic assistance has declined dramatically since 2020. “Farm income has grown. The livestock has grown tremendously. The crops have grown tremendously.”

Cash expenses are also at an all time high. “Both on the nominal side and the inflation-adjusted side — either way you look at expenses, they're up, particularly in their input costs.” He adds that farmers complained last year about a 50-75% increase in the cost of fertilizer.

“So when the farmer looks at that, they go back to the instability thing and say, ‘Yeah, I'm making more receipts than ever, but I'm spending more than ever, and I don't know where I'm going to wind up.’” That status is not fully defined until farmers talk to their accountants in September or October, Johnson says, which is why many have already made fourth-quarter purchases that benefit equipment dealers.

How are these things making the farmer feel? Johnson says he tracks this via sentiment reports — 2 in particular. One, which is published by Creighton University in Omaha, Neb., looks specifically at major Midwest row-crop-producing states. The Creighton report considers any result above an index of 50 to represent a positive outlook. In April 2022, the index for the overall economy came in at 62. Unfortunately, Johnson adds, May 2022 saw the start of big inflation numbers, causing the index to fall. It reached a low point in October 2022 of 46.3. After November’s midterm elections, there was a small spike in the following months ending at a high of 53.8 in January 2023. In April, the index was right on the line at 50.1. After spending a few months in the mid-50s, by August it had declined to 44.

“I don't know that I believe all that because that's a sentiment report based on farmer opinion, not farmer fact,” Johnson says. “And farmer opinion is usually quite a bit conservative on how they think things are gonna play out.”

The other report, by comparison — the Purdue University/CME Group Ag Economy Barometer — is a national poll. It accounts for not only the Midwestern farmers, Johnson says, but also the smaller northeast farms and dairies as well as the permanent California crops. It also tells a slightly different story.

For the Ag Economy Barometer, Johnson says that any index over 100 shows a positive attitude. The report’s index of both current conditions and future expectations shows that it has consistently been above 100 since March 2022, with a single dip below 100 right before the midterm elections last November. Nonetheless, Johnson says it is not without concerns.

“The numbers have clearly fallen,” Johnson says. “If I back up to the high point of this graph, which was a couple years ago, it was in the 160 range, and now it's in the 126 and 113 range. So I never read too much into how far above a hundred, just is it above a hundred.”

Johnson adds that the index regarding future expectations is lower than the index of current conditions. He says Johnson adds that he is always more apprehensive when the future expectation is worse than the current expectation. 

In preparing for the webinar, Johnson spoke with colleague Brian Kuehl, Pinion’s government public affairs team lead. According to Kuehl, during the recent negotiation period regarding the debt ceiling, the government kept discretionary growth at 1%.

“That could have some pressure on inflation,” Johnson says. “It should have some pressure on inflation. We want pressure on inflation. We don't want so much pressure on inflation that it brings the price of equipment down, because all of a sudden we’ve got used inventory we traded high for, and we don't wanna sell it low, but we do need it to come down enough that they’ll reduce the interest rates a little bit.”

There are other KPIs that point to a positive outlook for equipment dealerships. When looking at average gross sales of wholegoods, parts and service for the dealers that Pinion works with going back to 2014, Johnson notes that following a decline over several years, there has been a steady recovery since 2017. “We're still growing,” he says. “So even when we thought, man, last year was the biggest it's ever going to get, which is the same thing we thought the year before that and the year before that, even right now our rolling 12 — our total sales track for these dealers — is still growing and growing in every component.”

Looking at margins and profits for the same categories, there have been similar increases in all categories since 2020 with the exception of a recent pullback in parts and service.

“Service is wage-based,” Johnson says. “We've just flushed too many wage increases through there and have not gotten the return on all those. But the parts margin, I think it's more a function of last year that there was a pretty significant increase. That's because the retail price went up while the cost of it — we were still selling stuff that we bought before the price increase went through. So we got a bump up for free last year on our parts margins, and we're giving some of that back this year.”

Johnson cites improvements in other KPIs, as well. “Our dealership group was at $1.2 million of sales per employee, which is well above that $1 million goal that we've always shot for and never made.” Gross profit per employee has also risen, he says, to about $171,000 per full-time equivalent of gross margin.

He adds that wages as a percent of revenue, which is currently below 6%, is a little too low, but he isn’t especially concerned. “Normally I would define that as 7%, which is what it was until 2021. But what happened in 2021-23 is our sales took off and our sales mix changed, and everything was on bigger equipment with expensive equipment. And so wages as a percent of revenue isn't as concern to me right now because it's just a fact that our revenue was so high, not our wages.”

As far as his barometer for how he evaluates the economy, Johnson says that while the economy appears to be slowing, that’s likely more due to inflation than an impending recessionary period.

“We are seeing somewhere in that 5-6% growth range for our dealers this year,” he says. “And while that sounds terrible, if you had 40% growth last year, that's 5% growth or 6% growth on top of 40% growth. And that's actually not a bad thing.”