Forecast for declining trailer market no cause for despair, Eric Starks tells TTMA

FTR’s Starks says that although the trailer market is expected to dip next year by 31,000 units, it’s still in great shape

THERE were 265,000 trailers produced in the United States last year, 297,000 are forecast for this year, and 266,000 for 2016.

According to FTR Associates president Eric Starks, the peak of the cycle was at the end of 2014, but there’s no reason to be downcast about the rest of this year and next year.

“Would any of you have complained about the 266,000 number before?” he asked. “266,000 is a good number. Even if we go below that, it’s a good number.”

Production peaked at 46,000 in October 2014, and there were 22,000 in March.

“It started earlier than we typically see it seasonally, and continued for a good bit of time,” he said. “The numbers are down year-over-year, but they’re clearly healthy numbers. This is normal seasonal behavior. But the upside is higher than the normal season high.

“During this whole cycle, there was significant stability. All of a sudden, in January, we hit another shift where production level moved higher. That’s not necessarily bad. We don’t want to see them go straight down. We still think these are reasonable numbers.”

Trailer backlogs were up 44% year-over-year, to 180,000 in March.

“On the dry van side, there was a noticeable increase in order activity,” he said. “Build levels are stable. This suggests that you normally would expect pressure in the system to increase dry van builds, but we don’t anticipate that happening. On the reefer side, reefers are going up, and we’ve seen really strong activity. There’s additional pressure in the system to bring up production rates. We don’t expect that to happen, and that’s OK. It suggests that we’ll stay at healthy levels for a steady period of time.”

He said most of the dry van OEMs are fully booked for 2015, there are even some orders for 2016.

“Q3 and Q4 orders are viewed as ‘rock solid’ at this point,” he said. “However, the dry van freight shows some weakening. It’s possible that the numbers we’re forecasting will be slightly lower than what we’re saying. While backlogs are good, most of the build spots are relatively decent as we get to the end of this year. I think there will be some cushion in there as we move into the latter part of 2015.

Eric Starks, FTR Associates

“Refrigerated van build slots are almost full for the year. They’re holding up stronger than other segments. They may be able to extend the cycle due to regulations boosting sales.

“Flatbeds are booking into December, and aluminum flatbeds are very robust. Liquid tankers remain steady—there’s no weakness in petro tankers yet. Orders are still holding up relatively well. That suggests the build can hold for some period of time. Cancellations are high on dry tanks. There have been negative net orders for the last three months. The tank market is collapsing. A lot of that has to do with the frack sand market. That’s just gone.

“The dump segment is the strongest of all. Some types are booking into January. Infrastructure spending is sparking demand. Scrap/refuse trailers are healthy. I’m not sure how long this will last, as scrap metal pricing has collapsed. So for any of you who deal with that market in any capacity, it’s a problem.”

He said new trailer lead time peaked at 8.5 months at the end of 2014, then fell back down to 6.3 in February: “There’s still some pressure in the system, and that’s not necessarily a bad thing.”

In terms of trailer scrappage, he said the total population is now growing again. Historically, scrappage has been the bottom for retail sales.

Trailer population age peaked at 8.2 years in 2010, was 7.7 in 2014, and is expected to be 7.3 this year, going to 7.2 in 2016.

“Age has come down noticeably,” Starks said. “The trend has come down noticeably over the last couple of years, and we expect it to come down over the next few years.”

Here are some of the highlights from his overall analysis of the US economy:

ISM Manufacturing Index.

“GDP can lie to you. I guarantee it will be revised higher or lower. One thing that’s the most important to you is the manufacturing side of it. That is the bulk of freight that gets moved out there in the nation—manufacturing. It’s not the retail sector. So we want to understand the dynamics.

“We’re barely expanding. It’s basically flat. One thing that troubles me is the downward trend. Does that mean we will go negative? We don’t think so. But it is possible we hover around the 50-50 mark. There’s only one commodity in short supply. It was trucking. You guys don’t see trucking as a commodity, but it is.”

Business activity.

“Business activity is a big deal. Businesses are going to purchase your goods. We have to understand orders. You don’t build something unless you get an order. Capital goods orders continue to go down—seven months of negative growth. That’s not good. The last time we saw this was in 2012. Sometimes people go, ‘Oh, it’s the environment.’ No, it’s not always the environment. If things are moving in the economy, businesses buy. The question is, will we see something similar to what we saw in 2012? My guess is it will not be as pronounced.”

Business inventories.

“You don’t like inventories because it’s cash sitting on the ground, not doing anything. I have to have inventory to meet the customer demand. We have found that businesses are trying to figure that out. Through the ‘90s, it came down and we hit bottom. This is a new dynamic. This is a big deal for transportation. Transportation was in an environment where they were expecting their customers to get leaner. As they got leaner, the pressure for transportation would go up. Things hit bottom in 2006 with 1.25 months of inventory. We are very lean. Shippers now are trying to figure out where their inventory level needs to be. For them, it was just leaner.

“Things are now holding steady. What concern I have is we’ve seen a jump the last several months in inventory up to 1.35 months of inventory. We don’t want to see that because it creates less pressure on the transportation system. Also, when that number goes up, that tells us shippers have too much inventory and the economy growth stops for a period of time. Is this a short-term issue or a long-term issue? We haven’t seen these levels since the Great Recession. We don’t want to see that much inventory sitting around.”

Fuel.

“It is level. You want stability and to understand where things are going in the future so you can plan and manage business. You don’t want the volatility. What kills your customers, the carriers, is the volatility up or down. They get excited when they see a huge move down. But the reality is that it’s likely to come back up. So $2, $4, $6—some of it is about understanding where you are going to be. We have seen that the number of fleets going out of business has dropped dramatically in the last two quarters. But as we see fuel prices start going up, if there’s any kind of spike, you will start seeing carriers going out of business.”

Employment.

“Growth is slowing. It got noticeably better in 2014, adding 260,000 jobs per month. As we get into 2015, that number has gone back down. The latest number was 100,000 jobs. We want to see somewhere north of 200,000 on a monthly basis. That is an environment considered self-sustaining economic growth.”

Housing.

“It’s stagnant. That’s new construction and the existing home market. The new construction market has been stable. It was on a slow upward trend, but the last six months has flattened out. We see a significant opportunity as we look at the longer term structure. We’re seeing just below one million annual starts. We would expect we need to get closer to 1.5 million. There is some opportunity there. That’s 50% growth there. On the existing home market, it’s also starting to flatten out. But it’s way above the average we saw in the ‘90s. We want to see growth because it generates freight.”

Consumer demand.

“When we look at data over the last several months, retail sales dropped three months in a row. That’s concerning because fuel prices went down. People aren’t spending it on something else and instead are holding onto it. We’re not back to the levels in late 2014. My hope and guess in the next several months is that consumers will start to buy.”

Automobiles.

“Robust. It’s in the 16.5 million, 17 million range—that’s a lot of cars. If people are going out and buying brand new cars, that typically tells me you’re feeling OK about things. It tells me people are still going to spend and lenders are willing to lend.”

Global markets.

“This is a bigger issue. We do not believe the global markets are enough to push us into recession right now. Export numbers are positive to GDP, and import numbers are negative. From a freight perspective, if you have strong imports, that still might mean a net positive from the freight perspective. Europe seems to be stuck in mud. But it’s more encouraging than we have seen. We expect they are going to be stuck in mud for a period of time.”

West Coast port impact.

The Pacific Maritime Association (PMA) voted overwhelmingly in favor of a new labor contract with dockworkers and representatives from the International Longshore and Warehouse Union (ILWU) agreed to ratify the new agreement, officially ending what was an 11-month disagreement.

The dispute had led to disruptions in maritime commerce for 29 major West Coast ports that together see roughly $1 trillion worth of goods each year. There was a shift in favor of cheaper alternatives. According to The Journal of Commerce, activity at East and Gulf Coast ports grew 12% and 20%, respectively, while West Coast port activity declined 4%. Resolution between the PMA and ILWU will help bring West Coast ports back to full capacity in the years to 2019 and drive some lost shipping demand back to Western ports.

“They finally have gotten rid of that issue,” Starks said. “Backlogs that were there have finally moved out. It is a net positive as we get into the second quarter.”

Starks analyzed the trucking environment:

Freight levels.

“The freight market has been healthy, given that manufacturing has in essence stalled out. There was concern we’d see softness. Both indexes, the FTR and ATA, are telling us there is healthy growth in the market. Both were just under 5% in April. When one starts to diverge, it’s a problem, but we’re not seeing that.”

Freight loadings.

“It’s going to look decent for the next couple of years in the number of loads. We saw the last peak in 2006, and we’re only now getting back to those levels. It’s taken us almost 10 years to get back to just where we were. For those of you who survived, kudos. Because it was painful. There are better days to come as we go forward.”

Trucking Conditions Index.

“Anytime it’s positive suggests the trucking environment is positive. Anytime it’s above a reading of 10, it’s a carrier market. They hold the cards. We’ve seen that number dipping down, and don’t expect it to get back to 10 until late in the year. It was 12 at the end of 2014 and 8 in March.” ♦

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