SLOW and modest improvement.
Ken Kremar, principal of the Industry Practices Group, used that phrase — or a variation of it — at least a half-dozen times in his presentation, “Does the Truck Trailer Recovery Have Staying Power?”
That doesn't sound very sexy, does it? Most companies would prefer terms such as skyrocketing growth and boom time. But the growth the trailer industry experienced over the past two years was not sustainable. So it will have to settle for “slow and modest improvement,” especially since the housing and construction sectors have been so slow to recover.
“We don't see anything in the immediate future that will cause this trailer recovery to fall on its face,” Kremar said. “This is a recovery that does have legs. It may not be as robust as we think it's going to be in our extended forecast. But we think 2013 will be a better year than 2012.
“Capital goods tend to be very volatile. When things go awry, things get ugly. The trailer business, truck, railcar, and machine businesses got whacked during the recession. Forecasting is a humbling experience, at best. The question is, where do we go from here? We put up some very impressive numbers over the past two years.”
He said there was very modest growth in the broad economy the past two years, but a very strong recovery in domestic manufacturing, and that has had a very positive influence on freight transportation.
“It revitalized the energy industry — shale gas, tight oil, and tar sands,” he said. “But there also has been a second effect, to the extent that economies around various locations are doing better, and that's having a positive impact on commodities that service those areas.”
Housing and construction remained “the weak sister,” he said, adding, “This economy is not going to ramp up in a meaningful way until housing and construction actually turn employment. We've seen signs of life, but it'll be awhile before we build momentum.”
Kremar said the major trucking companies posted back-to-back increases of nearly 6% in tonnage, with healthy revenue and earnings numbers fueling CAPEX programs. Private fleets also began to step up spending on new equipment.
Replacement demand has been the driving force behind the recovery. Capacity additions have remained on the back burner. Trailer orders increased by almost 40% in 2010 and then 50% in 2011.
“Fleet capacity expansion has yet to contribute to the recovery,” he said. “Over a million trailers were added to fleets from 2004-07. These units are being replaced. This is a replacement-driven recovery, and it will take awhile for the second part of the recovery to happen. We're reasonably optimistic about where the trailer business is headed.
“The trailer recovery will continue. The industry fell 72% from 2006-2009. The last few years, we've seen continuing strength, but there's a different profile in this recovery. In the past recovery, there was a dramatic surge upward, then back down. We've had leveling off for couple of years. The reason why you don't have an immediate explosion upward is because the construction industry segment is taking longer to recover. For that reason, we're tempering things.”
Continued growth
He said the optimism is based on the economy continuing to grow.
“The major buyers of equipment, trucking companies, and private fleets will perform reasonably well and will have the financial wherewithal to spend at aggressive levels,” he said.
He said that consumer confidence, supply-manager indexes for manufacturing and non-manufacturing, small-business optimism, and equipment finance and leasing confidence are all suggesting continued growth in the economy.
“Consumers and businesses are cautiously increasing their spending,” he said.
“The export outlook is favorable — after 2012. This year will be tough. Europe is in a recession and competition from those Europeans who also export products will intensify, particularly since their own markets are soft. The Chinese economy is slowing down. Things should start improving in 2013.
“Fiscal policies in the US will tighten, although the timing and scope is uncertain. Our macro-economists have made some assumptions in terms of a 2% payroll tax cut, and employment benefits are going to be extended. There are also some assumptions about tax cuts being extended through 2013. The shape and form will be driven by who wins the election. It's a real guessing game. We have our own model that plugs in the performance of the economy. The threat from the Eurozone's sovereign-debt problems has eased, but oil-price risks have risen. The probability of a return to recession is 20%.”
Sustained economic growth will reduce unemployment to a projected 7.7% this year.
He said real GDP and industrial-production growth signal additional growth in freight flows: 2.2% this year, 2.4% in 2013, and 3.4% in 2014.
Projected US economic growth by sector in the next three years: business fixed investment, up 6.8%, 6.1%, 7.0%; federal government spending, down 1.8%, 3.6%, 2.8%; state government spending, down 2.4% and 0.6%, then up 0.3%; exports, up 4.2%, 7.1%, 7.5%; imports, up 2.2%, 2.4%, 3.4%.
“Better days are ahead for the housing and construction industry, and supplier and feeder industries,” he said. “The budget situation at the state and local governments is not going to improve anytime soon. The bounce we're anticipating is largely housing and non-residential construction finally turning the corner. The percentage increases look impressive, but even with this growth, we're not getting back to pre-recession levels. Housing starts at 1.7 million units are still well below two million, and we'll probably never get back to those levels. Think of all the various commodities that go into housing and non-residential building. Building materials, draperies, furniture, and appliances will have very positive impact on freight flows, and this will allow the recovery in the trailer side to continue through 2012 and 2013.”
He said major trucking companies have a “bright future,” with the ATA Truck Tonnage Index projected to 3.5%, 3%, and 5% in the next three years.
“Earnings have been impressive, and that has allowed them to extend programs, and that has fueled to a great extent the recovery in trailer and truck demand we have seen in the last two years. There has been a slowdown in growth this year. Just based on our forecast, based on key commodities that trucking companies carry, the increase will be somewhere around 3.5% this year, and may very well be larger. We don't know if the bigger, more successful individual trucking companies will be able to gobble up additional tractors.
“Construction, trucking, manufacturing, and wholesale and retail are all trending up through 2017. They should have the financial wherewithal to continue buying equipment. We also think the willingness of lenders is going to improve. We do know the equipment finance and leasing industry is becoming more optimistic. That leads us to believe things will be easing up.”
Energy industry flourishing
He said a revitalized energy industry will provide additional support. Natural gas (12%), US tight oil (69%) and Canada Tar Sands (189%) will all grow significantly between this year and 2017.
“We believe the new energy industry will continue to be positive markets,” he said. “There may be a lull in natural gas, because prices have fallen dramatically. But the outlook is very positive. The energy industry will be a positive on demand for equipment. Those various economies — parts of the Dakotas and Pennsylvania, with shale gas operations — will all drift down and have a positive demand on equipment.
“We think the manufacturing sector remains viable. Wholesalers and retailers should put up impressive numbers, and construction should have a bounce-back.”
An expanding economy will translate into expanding trailer freight flows, he said.
“Highway combination vehicle mileage will be flat through 2017, but truck tonnage should spike in 2014,” he said. “The growth in our mind is pretty darned good. Traffic volume by major trailer type: tanks are projected to go down in 2013, but vans and flatbeds are projected to increase.”
He said rising demand and high crude oil prices will prevent any meaningful relief on the diesel fuel front.
“But that may actually end up working in your favor,” Kremar said. “As trucking companies fall by the wayside because of diesel prices, the bigger companies may gobble up their freight and probably not gobble up their equipment, so there could be more demand for equipment.”
Little help is expected on the steel and aluminum price front, he said. Aluminum sheet and steel mill products are projected to stay steady through 2013, while steel scrap increases in 2013.
He said the major global risks are:
- An oil-price shock resulting from supply disruptions in the Middle East. “The situation is always shaky. It can go from good to bad to worse overnight.”
- Financial contagion from the Eurozone sovereign-debt crisis. “It could get uglier than it already is.”
- A hard landing in China caused by the bursting of real-estate market bubbles.