Trailer demand likely will be “subdued” until economic uncertainty passes, according to Ken Vieth, senior partner/general manger of A.C.T. Research Co LLC.
In his “Commercial Vehicle and Demand Driver Update,” Vieth reiterated the strong correlation between trucker profits and trailer orders. And right now, truckers are being squeezed by the festering issue of fuel prices.
“Demand drivers point to below-trend economic growth,” he said. “There's housing, which is a drag; the cost of fuel, which is a drag; the credit problem, which is a drag. This is causing business and consumers in general to back off just enough that the rate of growth of freight has been slowing.
“The economy generates the freight needed to justify fleet replacement and expansion. Trucker profits remain under pressure, especially with smaller truckers that can't pass on higher fuel costs. We're seeing an increase in failures of some smaller truckers. They're just going out and parking trucks and saying to the bank, ‘Here are thekeys.’ ”
Vieth said that if you grow the fleet faster than you grow the freight, there is a price to pay.
“Freight has been coming down, and at the same time, the industry was overbuying on Class 8,” he said. “That set up an imbalance of equipment to the freight hauled. Truckers have been shedding capacity for the last year. When we get to the third or fourth quarter, basically the number of tractor-trailers and the amount of freight to be hauled as a nation will be back in equilibrium.
“In the past, when you got into this negative situation, you usually ended up with lots of trucks sitting around, parked against the fence. But a lot of used-truck inventory is heading overseas. These are trucks that usually would be entering the market here. That pressure has been taken off. So when the economy starts to generate a little additional freight, we're back in equilibrium and there's not a glut of used trucks. We're setting the stage for when the change happens, and then we're going to see some robust change.”
Downward pressure
Vieth said trailer orders hit a 15-month high in February, but that was just a “bubble” — orders then fell 53% in March.
“That follows three quarters of weak order activity,” he said. “If orders don't materialize right now, there will be downward pressure that will remain on build rates. One of the good things is that the industry has worked off the inventories.
“We're not out of the woods. Orders are soft. The order period is basically October through March. That's when you build up backlog orders, and that carries you through the summer and early fall months. When you see strong orders in the first three months of the year, that's seasonal. That's the way it should be. If you see strong orders in June, July, and August, then you can say, ‘That's great.’ If you see weak orders in June, July, and August, that's the way it is. Unfortunately, we need strong orders this year in June, July, and August.”
He said the build rate has come down as orders have come down, and there is nothing to suggest that orders will pick up.
“The next six months will probably be more of the same,” he said.
The good news is that he doesn't expect the trailer downturn to equal the one in 2001-02. His forecast for US trailer factory shipments in ‘08 is 180,000.
“Times are bad, but not as bad as they were,” he said. “It's unlikely they're going to get a lot worse. We're at the point where the industry needs some product. You just cannot not replace.
“Model metrics suggest when economy does turn around, trailer demand should post a healthy rebound. The stage is being set for improvement for trailer demand. The question becomes a matter of timing on the economy.”
Forecasting difficulties
And his forecast? “There are lots of viewpoints,” he said. “No one really knows. Forecasting is not a science. It's a imaginary science where you believe what you say is true. You put a lot of time and effort into it and do the best you can.”
He does feel confident enough to say the economy is “in trouble.” He doesn't think we're in a recession, but if the personal-consumption sector — which accounts for 70% of the 10-year share of the economy — starts to soften, that likely will take us into a recession.
“The more anchors the economy is pulling, the greater the likelihood of it slowing,” he said. “Presently, those anchors include the housing market, credit markets, and very high oil prices that are only now being reflected in higher gasoline and diesel prices. Those higher energy prices carry with them the potential for a tough couple of quarters as consumers divert dollars from goods to gas.
“Is the economy contracting? Maybe yes, maybe no. Whether GDP growth in the first quarter comes in positive or negative is really semantic. The bigger question today is the long-term implications of the tangle into which the US economy has worked itself. More specifically, is the US economy destined to downshift for the next decade as the problems created this decade are worked through?
“If there is a silver lining among the clouds, it is that a weakening dollar is good for exports of US manufactured goods. US-dollar-denominated goods will fall in cost relative to European and Japanese goods. At the same time, the consumption of imports slows, thereby bringing the US trade deficit down to healthier levels and ultimately restoring the dollar's value. This phenomenon can be observed in overseas demand for North American-produced new and used Class 8 trucks. In 2002, 2% of domestic build went beyond NAFTA's borders. In 2007, 14% did.”
Vieth said data suggests one of two scenarios:
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The economy is making a bottom, and a second-half recovery into 2009 is likely because housing measures, while not improving, are leveling; there could be a positive impact of the Fed's actions and the stimulus package; and strong productivity.
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The economic downturn will extend into and perhaps through 2009 because of the falling dollar, intractable commodities inflation, and financial crisis-limits investment.
He said the yield spread has been an infallible predictor of economic downturns.
“The way I think about the yield curve is, short-term rates are what bankers pay for money, and the long-term rate is what they charge for money,” he said. “The larger the spread, the more bankers make. If the spread inverts, there is no money in lending and credit contracts, thereby slowing the economy. Given nearly 17 months of inversion that ended in May of last year, is it any wonder that we're in, or bordering on, recession today? Bankers are starting to make a profit again. We're heading in the right direction, but likely to have a recession.”
Trailer breakdown
Vieth also provided an analysis of the trailer population, saying the average age is at a historically neutral level.
“The scrappage rate is expected to be rising by the end of the decade,” he said. “Scrappage is, in our estimation, 185,000 a year. Every year, you throw away some trailers and add. There are two kinds of demand: replacement, which is what scrappage is — replacing the old units; and if you grow your freight, you need to add a certain amount of population to cover that additional freight. Freight on average is a steady growth. We're not in negative freight growth right now. It's just slower.”
He said as manufacturing has gone offshore, van trailers have become a larger piece of the market. Flatbeds went from 18.6% of the market in 1980 to 11.1% last year.
“Where has the heavy industry gone? Offshore to Mexico and other locations,” he said. “Platform is the one that has lost share, and others have held their own. Vans have grown, and that fits a nation that's imported finished product. Going forward, are we going to see a change? Unlikely. I don't think we're going to return as a manufacturing nation. We may do more of the smaller, lighter assembly operation, but you're not going to see the smokestacks of steel.”
He said the average age of van trailers is the highest on record (7.4) and projected to rise incrementally. Outside of 1999-2000, reefer van age has remained in a very narrow range between 5.0 and 5.5 years since 1980, and now is 5.5.
Flatbeds have an average age of 7.
He said the model indicates that dry-van replacement volumes are flat at 120,000-125,000 from 2006 through 2010.
Reefer-van replacements should rise from 20,000 in 2006 to 25,000 in 2011. Flatbed replacements are projected to rise 1500 units a year through the forecast period.
“We would call this ‘The Subdued Cycle,’ ” he said. “Product-quality leaps in the past 15 to 20 years have boosted equipment durability. You've added quality without adding price. Higher trailer-to-tractor ratios equal fewer miles per trailer per year. A wider adoption of trailer tracking will increase trailer utilization, thereby putting downward pressure on trailer/tractor ratios.
“With tractor mileage static, a higher trailer-to-tractor ratio means fewer miles per year per trailer. In addition to being made better, they have been used less.”