Reacting to the weak freight environment and the expectation that the US is entering a four-quarter recession, FTR Associates has reduced its 2009 North American factory shipment Class 8 forecast by 76,000 units, to 150,000 units.
“You kind of have to ask yourself, ‘Why do you buy a truck, trailer, or rail car?” said Eric Starks, president of FTR Associates. “That is to move freight. Period. If you don't have freight to move, you don't buy equipment. Over the past several weeks, it has become clear that the underlying fundamentals for the heavy-truck market are unlikely to strengthen, as we initially expected. Order activity over the past two months is running at an annual rate of 155,000 units. And it's getting worse. The September rate was running at a 130,000 annual rate.
“We really pulled out that pre-buy or overbuy expectation in our 2009 forecast, as well as there was weaker demand due to the freight environment. This is one of the worst equipment environments we've seen for the past 30 years — and the underlying fundamentals continue to deteriorate.”
Starks said that to put the 150,000-unit projection in perspective, factory shipments fell to 145,000 in the last downturn in 2001.
“Many people are looking at the 150,000 number and asking, ‘Can it get lower?’ ” he said. “My sense is, yes, the number could go down to 125,000 units for North America. Everything's on the table right now. You need to have some plans for worst case, for planning purposes. There's a slight upside potential for the numbers. We could see an additional 25,000-30,000 above the base case if the recession is not as long as expected and some of the fleets say, ‘Yeah, I really want to lower the age of my fleet,’ and pre-buy to beat the EPA mandate. If that's going to happen, we would start seeing order activity pick up in 2009. It's happened in the past two EPA mandate cycles. I think it's going to be tough, given credit availability at the moment.”
The trailer market isn't looking any better.
FTR Associates has reduced its 2009 forecast by 38,000 units to 98,200 — the lowest level since 1982.
“Without that additional freight to haul, and with longer-lasting equipment in this sector, the sector is going to be mired in low demand for several years,” he said. “The last time we saw trailer builds sink below 100,000 units was '82. Order activity over the last three months is running at a rate of only 78,000 units. We've seen this type of thing in the last downturn. But the difference this time is, we don't see orders returning over the forecast horizon. In past cycles, you'd hit bottom and start to edge higher. There's nothing in the system to suggest orders will return anytime soon.”
Starks said the Class 4-7 market is “showing tremendous weakness,” so FTR has reduced its 2009 forecast by 15,500 units, to 135,000 units.
“This is substantially lower than the last downturn, when factory shipments only dropped to 165,000,” he said. “But with a weak consumer sector and struggling state governments and businesses unable to purchase equipment, this is going to be a drag on the sector for the foreseeable future.”