EXPECT a down year in 2007, NTEA's Stephen Latin-Kasper said at this year's Work Truck Show. Just don't expect it to be down long.
Citing a variety of economic indicators, NTEA's director of market research and data made it clear that the industry would have had an off year in 2007, even without customers rushing to buy trucks in 2006 to beat the Environmental Protection Agency's stringent (and costly) emissions regulations that went into effect January 1.
However, he presented a case that the downturn in truck sales would not last long, and he pointed to several growing niches that truck equipment distributors could pursue to offset sales losses in other areas.
Expect great years in 2008 and 2009. That is when the next prebuy of trucks will occur.
“This industry is getting ridiculously easy to forecast,” Latin-Kasper said. “When emission rules change, we know we will have prebuy. And the next prebuy will probably be even more significant than the one we just went through.”
The reason is simple. The next round of emission regulations, Latin-Kasper said, will trigger an average price increase for heavy-duty trucks of approximately $20,000.
“Who will want to add $20,000 to the purchase price of a truck in 2010 when they can buy it in 2009?” Latin-Kasper asked.
He conceded that the $20,000 price tag is an estimate based on the technology that is likely to be used on 2010-compliant engines.
Much of Latin-Kasper's presentation involved the results from a monthly statistics program for chassis manufacturers and truck body manufacturers that the association began conducting two years ago.
“This is the only data set that looks at factory sales and factory shipments in terms of ‘box-off’ numbers,” he said.
Because the NTEA data only includes chassis, the NTEA numbers will be lower than those published by other sources — particularly when looking at factory sales and shipments of Class 2 and 3 trucks. The NTEA does not include vehicles such as pickups and cargo vans.
Using those numbers, Latin-Kasper said manufacturers built up an inventory of chassis in anticipation of last year's prebuy. That inventory has been reduced as the market moves through the final stages of the prebuy.
“The industry's timing on this was pretty good,” he said. “We are chewing up some of that inventory that was built up in the second half of 2006.”
The past three years have seen a boom in truck sales that has been fueled by customers wanting to buy trucks ahead of the tighter EPA emissions regulations that are now in effect. But according to Latin-Kasper, only conventional cabs posted substantially higher sales figures prior to the January 2007 implementation of the emissions standard. While these sales were booming between 2003 and 2006, sales of strip chassis, cutaways, and low-cab forward models remained flat.
Who buys trucks?
Latin-Kasper reviewed the industries that represent the major markets for commercial trucks — including markets that might provide sales opportunities this year.
One of the industries Latin-Kasper sees as a growth market is power generation.
“Starting with the brown-out of 2003 that knocked out electricity to almost the entire Northeast, there has been much less interference by local politicians when it comes to building new electrical plants,” he said. “There has been a lot of building activity, and there will be a lot more. In Texas alone, 10 new plants are being planned for the next 10 years. Demand for electricity will be strong in the United States in the coming years. In 2007, which is expected to be a downturn year, this market should offer opportunities.”
State and local governments also should be buying trucks at a higher level this year, Latin-Kasper said.
“Spending activity for state and local governments tends to lag economic activity as a whole by about a year,” he said. “That's because state and local governments base their budgets on tax revenues that have come in — not on revenues that have not come in yet. Last year was a good one for almost all state and local governments in the United States.”
Governments have full funding for their budgets in 2007, Latin-Kasper said. Many state and local governments may be using 2007 to catch up with equipment needs that went unmet in years when budgets were tighter. He believes state and local governments will offer opportunities for those selling truck bodies and equipment this year.
Construction: a mixed market
The construction market will be hot and cold this year, depending upon the segment. For example:
Residential construction will be worse in 2007 than it was in 2006. But the nonresidential side, particularly road and street construction, will be very active in 2007.
“Thanks to the highway funding bill, there will be a lot of construction for highways and streets,” Latin-Kasper said. “That's a big segment of the truck equipment industry.”
Private construction will be down this year, pulled down primarily by declines in housing starts.
Material prices stable
After meteoric rises in commodity prices — particularly steel — in recent years, stability returned to the market in 2006. Prices are expected to remain stable in 2007.
“Carbon steel scrap is what heated up the market the last time around,” Latin-Kasper said. “But prices were down 7% in 2006.”
Sheet and strip — down 15% in the last quarter, up 6% for the year.
Hot-rolled bars, plates, and shapes — down 3% in the last quarter, up 7% for the year.
Steel pipe and tube — flat in the last quarter and up 6% last year.
Aluminum plate — down 2% in the last quarter, up 8% for the year.
Aluminum sheet and strip — up 3% in the last quarter, up 14% for the year.
Hardwood plywood — up 1% for the quarter, up 3% for the year.
Although prices have stabilized recently, they may not stay that way.
“As we are seeing in the energy markets, things are heating up,” Latin-Kasper said. “Other commodity prices will start bumping up in 2007 for the same reason — very significant strong demand from a growing consumer class in China and India. They will be putting pressure on the commodities markets not just in 2007, but in the foreseeable future. This is something we will have to contend with for at least the next decade — continual upward pressure on prices. Commodity prices may stay relatively stable. But when they change, prices will be volatile. Remain prepared for that.”
Selling truck bodies and equipment into international markets also has potential, according to Latin-Kasper.
Trade has been growing sharply with Canada. Trade between the two countries represents more business than with the other top five U S trading partners combined.
Citing U S Department of Commerce figures, Latin-Kasper said that the U S imported more than $12 billion in commercial truck and trailer products during 2005 and $12.6 billion in 2006. U S companies exported $10.3 billion in 2005 and $12.3 billion in 2006. Because of a declining U S dollar, that $2-billion trade deficit with Canada was all but erased in 2006.
“On current trends, our industry will probably export more trucks and trailers to Canada in 2007 than we will import,” Latin-Kasper said. “And the decline in the value of the U S dollar is pretty much happening in the rest of the world, too. Think of that as an opportunity. The rest of the world now views our products as being less expensive than they were the last couple of years. It's all about the currency — it's not about the product. And as things become less expensive from the world's point of view, the world will buy more of it.”
Where are other grow opportunities? Between 2005 and 2006:
Exports to Russia increased 95%. “Yes, the total exports to Russia were much less than those to Canada, but do you want to play in a market that is growing 95%? I think the answer is yes. While exports won't continue to increase by 95% annually, the beauty of the Russian market — and China — is that they have the same road sizes that we do in the U S. The trucks that work well here should work well in those two places — which is not the case in Europe. The roads there are smaller than ours, which is one reason we don't export much to Europe. They have a different transportation model.”
China bought 19% more truck and trailer products from the U S last year.
Brazil bought 91% more. “Good things are happening there, along with Chile and Argentina,” Latin-Kasper said.
Australia bought almost $1 billion in U S truck and trailer products in 2006, up from just over a half-billion in 2005.
“If you would like to export, but you haven't already done so, you can visit the local Department of Commerce office with an International Trade Administration division in any major city in the United States,” Latin-Kasper said. “Someone at that ITA office will be able to help you.”
Expect a downturn in producers' durable equipment. Latin-Kasper bases that expectation on a downturn in consumer spending. The logic: as consumers spend less, producers have less need for durable equipment.
Pointing out how heavy-duty truck production tends to track with changes in demand for durable equipment, Latin-Kasper illustrated the effect of the prebuy during 2003. Heavy truck sales turned up sharply at a time that producer's durable equipment sales were just beginning to turn upward.
“If you have a pretty good handle on what is expected to happen with capital equipment spending in general, you also have a pretty good handle on what is expected to happen with expenditures on trucks and equipment,” Latin-Kasper said.
The prime interest rate is another indicator of changes in demand for trucks and trailers, Latin-Kasper said. Because reductions in interest rates tend to encourage spending on trucks, invert the interest rate when tracking it on a graph. Overlay business truck production on the graph, and the result will be a fairly reliable indicator. When inverted rates reach their peak or trough, business truck production will shortly do the same.
The inverted interest rate curve has been falling (interest rates have been rising), and Latin-Kasper believes that decline could extend throughout 2007.
“We don't know for sure,” he said. “But whatever the inverted interest rate does, our industry will follow. This leading indicator has never failed to predict a turn in our cycle. Currently, it looks like it will swing up toward the end of 2007 or the beginning of 2008. That's our best guess.”
Another indicator Latin-Kasper tracks is the COLAG — a ratio between the coincident indicator of the U S economy and the lagging indicator.
“Put those two together in a ratio, they produce a more consistent and longer leading indicator of activity in the work truck industry. It generally gives us a six to nine-month lead for changes in the business cycle,” Latin-Kasper said. “The COLAG is telling us that the downturn that we are experiencing was to be expected in this timeframe. And it is already turning up.”
Housing starts, a good but not great leading indicator, are going down now. Truck sales are going down with the same slope.
“All of these factors were telling us that 2007 would not be a good year — even without the prebuy,” Latin-Kasper said. “With the prebuy, we can almost guarantee a downturn and that it would be worse than it otherwise would have been,” Latin-Kasper said.
Latin-Kasper cited two other indicators to follow. One is the prime with 18-month lead compared to the business truck index year-to-year percent change. The second is the yields of two-year and 10-year treasury bills.
When the yield is higher on a two-year treasury bill instead of a 10-year, economists call that an inverted yield curve. Under normal circumstances, the longer the term of the bill, the higher the yield because of the greater risk that the longer-term bill poses. When the short-term bill is higher, it is a sign of economic uncertainty — which tends to lead to recessions.
“Recently we have had a flat yield curve where the two yields essentially are the same,” Latin-Kasper said. “In a couple of months, we may get an obvious inverted yield curve. This has been a very good predictor of recession in the U S economy for a long period of time. A lot of economists are paying close attention to the yield curve, and you should, too. Because if that gap widens in the wrong direction, we may have a much worse economy in 2007 than currently is anticipated.”