STEPHEN LATIN-KASPER and Ken Kremar headed a group of industry analysts and American economists at the National Truck Equipment Association's Economic Outlook Conference who feel 2005 will be a solid year for the commercial truck and transportation equipment industry.
Latin-Kasper, in his “Truck Equipment Market Outlook Domestic and International” presentation September 22 to over 100 industry professionals in Dearborn, Michigan, said the forecast pros are pretty much what they were a year ago — moderate interest rates and inflation, low unemployment, high productivity, increased capital expenditures, trade, and government spending — with terrorism and consumer confidence the only cons.
“2005 looks very, very good, and 2006 probably also will be good,” he said, “but based on what we're seeing in the prime rate of interest, we might want to hedge our bets for 2006 until we get some corroboration from the other leading indicators.”
Latin-Kasper, the NTEA's director of market data and research, said total transportation and truck equipment shipments were projected to increase 15.6% in 2004, with trailers up 25% and trucks and truck chassis up 11%.
He said the NTEA Member Shipments Index (including data for buses, cranes, service, and van bodies) showed a 50% increase in the first six months of 2004 over 2003. Commercial truck shipments were up 11.3% ($64.687 billion) in 2004, compared to a 3.5% gain in 2003, and truck equipment shipments were up 25%, compared to a 4% gain in 2003.
Class 6 showed the largest gain of any class (48.7%), compared to Class 7's 12.6%. Class 3 was up just 4.2% and declined for the last three months of available statistics (May through July).
“Class 6 seems to be taking share from Class 7, year after year for the last four years,” he said. “(In Class 3), I haven't had a chance to do an analysis to figure out what's going on.”
He said the Business Truck Production Index showed that medium- and heavy-duty trucks bottomed out in 2002 and showed no positive growth until 2003.
“In real terms, we've been growing since the middle of 2003,” he said. “In percentage terms, we got back across the zero line in the middle of 2002. The heavy-duty segment of the industry started growing well before the medium-duty segment in terms of production.
“Right up until the beginning of 2004, production of medium trucks was lagging behind sales. In other words, they were still selling off inventories right up until the beginning of this year. They slowly started building inventories through 2004 in anticipation of future sales. Heavy duty was ahead of medium duty. They were anticipating growth in sales beginning in 2002. Production took off and was still ahead of sales, so they've been building inventories for a while. There is a fair number of chassis waiting to have bodies put on them. But the expectation is there, so no one is too concerned about inventories building.”
Trailer production
Trailer production, meanwhile, bottomed out at the end of 2001, hit its peak at 13% toward the end of 2003, and declined at the beginning of this year.
“In real terms, it bottomed out in 2001,” he said. “It had to do with the trailer segment of the industry cleaning up a glut in the used market a bit sooner than the truck side, so it started growing faster in terms of production.”
In the end-user markets, Latin-Kasper said electric utility production has remained steady even during the down cycle in business truck production.
“Even in a very bad business cycle, you're not going to lose a lot of sales in the utility industry,” he said. “Even when their productivity goes down, they still tend to have revenues going up. They rarely experience a lack of cash. They tend to be counter-cyclical to the rest of the economy. So this is an industry that has been very good to use the last couple of years and will continue to be in the next few years.”
Government spending
The picture was pretty much the same in terms of state and local government spending on equipment compared to business truck production.
“All 50 states have incurred rather large deficits as a result of the previous recession,” he said. “It wasn't that big of a deal in terms of overall spending from one time period to the next. Even though state and local spending was down, it's not usually down so much that it becomes a huge concern for this industry. They'll slow down spending, but they aren't going to stop buying trucks.”
He said that as vicious as the steel-price increases have been, they have been “improving a bit” — and the price of steel, hot rolled sheet and strip actually was 7% lower at the end of 2003 than it had been a year earlier.
“There's an expectation that steel prices are going to stabilize across the board by the end of this year and beginning of 2005, and stop getting worse toward the end of 2005,” he said. “That will be welcome news for all of us.”
Latin-Kasper said the world export market continues to be a desirable opportunity for the truck/truck equipment industry, with exports in 2004 expected to increase by 14.2% to Mexico and 13.2% to Canada.
“If you're still thinking strictly in terms of customers in the US, the first and most obvious thing you should be thinking about is how to find customers in Canada and Mexico — especially in Mexico, if you want to have a more significant impact on your long-run growth rate, because the long-run growth rate is going to far exceed Canada's. There are going to be some great opportunities.”
Between 1999 and 2004, exports of trucks, buses, bodies, and other truck equipment increased dramatically to Australia (211%), China (173%) and Russia (136%), while they declined 81.8% to Eastern Europe and 47.5% to Japan.
“We want lots of customers in lots of different places, so when a recession hits in the US — which hopefully won't happen again — you want to be able to be doing business with other parts of the world that won't be in recession at the same time,” he said. “Who are you going to look at?”
Kremar, a principal at Global Insight's Industry Forecast Practices Group in Eddystone, Pennsylvania, delivered his “Truck Industry Market Forecast,” and said sales of medium-duty trucks (Classes 5-7) should increase from approximately 240,000 units in 2004 to 260,000 units in 2005. He said sales would increase again in 2006 to about 280,000 units.
In Class 1-3, he said production of commercial trucks would increase from 2.85 million units in 2004 to 2.9 million units in 2005, and to 2.95 million units in 2006. In the heavy-duty segment of the market, Kremar forecasted that sales would increase from about 240,000 units in 2004 to about 300,000 in 2005, and grow further to 320,000 in 2006.
“A year ago, we were optimistic about the economy, optimistic about the truck market, optimistic about trucks,” he said. “A year later, we're optimistic about the economy, optimistic about most truck markets, and pretty optimistic about truck sales.”
He said near-term prospects for the NAFTA economies remain bright, which bodes well for truck buyers and truck equipment manufacturers.
“Beyond this year, economic growth will be strong enough to filter down to key truck-buying markets,” Kremar said. “We think there's enough momentum in the market and enough underlying strength in the economy — not only in the United States, but in Canada and Mexico — to keep this recovery going so that 2005 and 2006 are also going to be decent years. We still expect a strong cyclical snapback in demand over the near term and generally healthy sales thereafter.”
Kremar said the commercial vehicle market in America and Canada has turned the corner, with Mexican demand improving slowly. He said most major truck-buying markets in the country have performed well this year, orders for new equipment have exhibited considerable strength when compared to a year ago, and the future direction will depend on the economic climate.
Kremar said the American economy's “so-called soft patch” has proven to be softer and more persistent than anticipated, adding that the economy lost momentum, from 4.5% growth in the first quarter to about 3% in the second, as consumer spending slowed. Sky-high oil prices, hefty debt levels, and the waning impact of tax cuts took their toll.
But the recovery has not been derailed, he said.
“We think the economy is heating up,” he said. “We don't think the consumer is going to be rip-roaring along for the rest of the year, but he also won't be running for the hills. The consumer is no longer in shape to be a driving force of the expansion, but is not expected to step to the sidelines. Business should be the key engine of economic growth, with greater fixed investment spending. There is solid export growth, and improved hiring will help pull the economy forward.”
What does the consumer think? Kremar said the consumer confidence indexes of the Conference Board and the University of Michigan have both increased in 2004 after bottoming out in early 2003 with their lowest levels since 1993.
“Oil prices are high, the situation in Iraq, terrorism — there's a lot of bad news out there,” he said. “But consumer confidence is reasonably high. Nothing in the numbers would suggest that consumers will stop spending. If something dramatic happens, then this thing will drop like a rock. But unless you're going to tell me you know that's going to happen, as long as we get decent numbers on employment, consumers are going to remain in the game.”
Construction market
Construction is up 8-9% over a year ago, but he said it's an “interesting mix” because one segment is doing well while the rest are “treading water.”
He described the housing market as “very strong,” saying current spending on residential construction is up 14% and is “one of the bright lights of the economy.” He said non-residential and public construction spending are “going to take awhile to get going. There are very strong numbers on the housing side and residential side, some signs of life in public construction, and the non-residential is treading water. It's up in current dollars relative to a year ago, but the level of activity is still abysmal.”
Describing the 6.5% increase in the ATA Truck Tonnage Index in 2004, he said: “The trend among carriers is to outsource transportation. At the same time, railroads had another lousy year. Trucking companies' HOS regulations didn't seem to be the disaster some were expecting. The driver situation has become critical. In volume terms, big trucking is doing well.”
He said oil and gas well-drilling activity peaked in 2001, bottomed out in 2002, and has remained steady since then.
“We believe we are now in a climate where we'll see prices remain high for quite some time, and that eventually you'll start to see a push in activity within the United States as well as exploration activity outside the country,” he said. “It's just a matter of time. It should be a much better market for trucks and truck equipment than it has been lately.”
Eli Lustgarten, an analyst at J B Hanauer & Co who has been recognized six times by The Wall Street Journal All-Star Analyst Poll, said in “Industrial Markets 2003-2005 and Beyond” that the outlook for the US economy is favorable for 2005, with a similar outlook for 2006.
He said capital spending is likely to lead the continuation of the economic recovery in the second half of 2004 and into 2005.
Lustgarten said he expects a heavy-duty truck pre-buy situation in 2006 as a result of diesel engine manufacturers responding to the new emissions regulations for 2007.
Mustafah Mohatarem, chief economist for General Motors Corp, said the economy is performing well and is near full employment, despite the shocks experienced in the past three years. He attributed the good economic performance in part to continually increasing productivity, timely increases in government spending, and good application of monetary policy by the Federal Reserve.
He said the outlook for the economy in 2005 is rosy, but must be tempered as a result of the oil price spike and a large U S trade imbalance that threatens to drive down the value of the dollar.
Other speakers were: Ken Simonson, chief economist of the Associated General Contractors of America; Ron Luginbill, an analyst with SBC Communications Inc; and Gene Huang, chief economist of FedEx Corporation.