Though the U.S. machinery industries have struggled of late with a strong dollar, sluggish global growth and political uncertainty, exports in the sector are poised for growth in the medium term. But first, the next few years will be more of the same.

Two trends lead economist Jeremy Leonard of Oxford Economics to the forecast: the investment cycle and demographics.

First, he notes that the U.S. is at a weak point in the machinery investment cycle, due to a very slow U.S. recovery. “The question is whether or not it’s going to pick up strongly or not strongly,” he says. “We tend to be of the view that investment will be fairly weak into the next couple of years.”

However, pent up demand, especially in Europe—which has been slowed by “crisis-upon-crisis” including the sovereign debt crisis, Brexit, immigration, etc.--eventually will give way to a global pick-up in investment. “We’re actually pretty bullish by European standards on investment over the next four to five years, precisely because investment has been so weak for the last five to six years,” Leonard explains.

As well, the recent slowdown in emerging markets is likely to dampen demand for U.S. exports in the near term, but these markets “are expected to be a key source of growth over the longer term,” according to an HSBC report based on Oxford Economics data.

China’s investment trends are likely to run counter, Leonard adds, as “we’ve seen a structural deceleration of investment demand in China.”

“Different regions have different things going on, but broadly speaking, there are pockets of strength looking ahead in machinery demand,” he concludes.

Overall, Oxford Economics/HSBC forecasts that the machinery sector will grow 5.9% per year from 2016 to 2030, and that it will contribute nearly 27% of the projected increase in total U.S. merchandise exports from 2016 to 2020, then 24.7% from 2021 to 2039.

The second trend, he asserts, will have a more significant impact, because it has to do with how things will be produced as the working age population declines throughout the industrialized world and slows elsewhere. “Because you have a working age population that is getting smaller, that’s going to push up wages, and therefore companies will, to the extent they can, try to become more capital intensive,” Leonard says. “That’s a big part of what’s driving what we think are pretty bullish forecasts on machinery and equipment exports and production generally as we look ahead.”

“It’s a mega-trend that’s going to continue for the next 10 to 15 years, and nothing can really stop it,” Leonard adds, noting that it applies to other emerging markets. “It’s not just a developed world story.”

“Paradoxically, even with China moving to become a more consumer-oriented or domestically focused economy, its production is going to have to become more capital intensive because of this demographic shift.”

The Impact of a Strong US dollar

The high value of the U.S. dollar will continue to bedevil U.S. exporters for the next one or two years, but Leonard says history suggests machinery manufacturers can—and will--adjust. He recalls a similar situation in the early 2000s: “After the dollar had strengthened, there was a reaction in the manufacturing sector to become more competitive, to cut costs and, as part of that, to invest in additional equipment and machinery, as well as in reorganizing how you do things with ERP and lean manufacturing, etc. So in a sense, there’s a response to this competitiveness shock.”

He adds: “U.S. manufacturers have typically been able to implement the kinds of things they need to do, to become cost competitive. So we think that’s going to happen. So, even if the dollar were to stay about where it is, and not weaken, we would argue that you would still see an improvement in trade prospects for US exporters.”

The HSBC report indicates similar optimism: “Exports are also expected to recover as—despite the strong U.S. dollar—the U.S. economy is still globally competitive thanks to high productivity, moderate wage growth, the benefits of a stable regulatory environment and low energy costs.”