Trailer Market: Bad but Getting Great

June 1, 2001
IT HAS BEEN a roller coaster ride for virtually anyone in the trailer industry in recent years from unprecedented demand in 1999 to what threatens to

IT HAS BEEN a roller coaster ride for virtually anyone in the trailer industry in recent years — from unprecedented demand in 1999 to what threatens to be the worst year for trailers in a decade.

But Peter Toja, economist and noted trailer industry forecaster, told TTMA members to hang tough for a few months. Customers are on the way.

“How did things get this bad?” Toja asked rhetorically. “Whether the subject is trucks, trailers, railcars, or machine tools, capital goods industries have been suffering for the past six to nine months. They will continue to feel the pinch over the next two to three quarters.

“We have had eight years of steady advances in our economy and huge run-ups in equipment demand from consumers and businesses.”

Toja, who has addressed the TTMA convention annually since 1984, reminded those who do not see hope on the horizon that he had skeptics last year, too.

“Last year after giving my forecast for 2000, some people did not believe trailers could drop off so fast. But in the first half of 2000, manufacturers were trimming trailers from their backlogs. The second half, especially the fourth quarter, was a bloodbath. But the total number forecast — 270,000 trailers — missed the final official total by 2,800 units,” he said.

“Thanks to good participation in our survey, we have a good fix on how many trailers were shipped during the first quarter of 2001 — approximately 42,000. We expect declines to bottom out by the second quarter, and certainly by the third quarter.”

Toja pointed out that his forecast and supporting statistics were almost a month old when he addressed the TTMA convention May 18. Initially he predicted the industry would ship 185,000 complete trailers during 2001.

“If I were to adjust this forecast, I would say that the total for the year would range between 170,000 and 185,000 trailers,” Toja said. “The reason for the revision is based on feedback from industry sources who tell me that the situation is not improving that well across the board. Select types of trailers are responding, but many are not coming in as fast as anticipated. But I believe the worst is over. By the second half of this year, the situation should look better than the first half.”

Toja, with Economic Planning Associates of Smithtown, New York, expects average annual deliveries over the next five years — which includes 2001 — will compare favorably with the last five, during which trailer shipments reached unprecedented levels.

“After the drop this year, we expect a snap-back in 2002 and steady growth out to 2006,” Toja said.

Even with steady growth, Toja does not expect trailer manufacturers to exceed the record year the industry had in 1999. But neither does he see anything but better times than what trailer manufacturers are experiencing now.

“The coming five years represent a steady level of demand for equipment,” Toja said. “That is because there is too much potential in our economy, too much potential for export growth, and too much pressure and constraints on our transportation system.”

The “Why” of the Forecast

Toja spent the bulk of his presentation summarizing trends in the economy and why these trends point to improving conditions in the trailer market.

“The most important thing you want to take away from this session is not the ‘what’ of the forecast, but the ‘why.’”

Toja traces the plunge in trailer shipments back to a drop in consumer spending.

“The consumer accounts for two-thirds of the economy. He has been spending as though there is no tomorrow, due to a large percent on his perception of increased wealth,” Toja said. “Consumer spending has slowed primarily because the consumer's wealth has declined as a result of the stock market.”

With less demand from consumers and a subsequent decision on the part of industry to thin inventories, industrial production has flattened. The rundown of inventories, however, is now complete, at least in the old economy sectors. The high-tech sector still has a lot of excess inventory, Toja said.

“We believe excess inventories will be cleared out by the end of the summer at the latest,” Toja said. “At that point, this economy should start moving up again.”

Reasons to Believe

Toja listed a series of positive factors that point to increased demand for trailers.

  • Import and export growth is sluggish — but Toja placed his emphasis on growth. US trade with the rest of the world continues to increase.

  • Easing of interest rates definitely will stimulate further activity.

  • Business and consumer spending are expected to increase, leading to a far stronger economy next year.

“Retail sales, for example, are still increasing,” Toja said. “The rate of spending growth has decelerated, but retail sales growth remains in positive territory. A lot of this slowdown in spending involves high tech. Consumers are not buying computers like they used to.”

Sales of light vehicles and household goods are slowing down. The gap between consumer spending and income is narrowing, and that is good news to an economist, Toja said. The consumer is getting his spending in line with income growth, which will make for a healthy pattern of consumer spending.

One of the reasons for the decrease in consumer spending has been the “wealth effect,” or more accurately the “lack-of-wealth effect” caused by the recent plunge in the stock market. Even old economy companies have seen stock prices decline, primarily due to low profit performance. “Lower interest rates should help companies in a number of industries, and we should see a pick-up in stock market valuations over the next 18 months,” Toja said.

Home valuations are an area where the consumer continues to do well. And as interest rates stay low, a larger percentage of the population is able to buy a home. “We believe this will prop up the economy until other sectors start to move up,” Toja said. “With lower rates, more homes will be refinanced, putting more money in consumer pockets every month.”

Inflation is a key point. Inflation is increasing, primarily due to oil prices. But Toja believes the worst of the oil price escalation is behind us and will not enter into the equation when the Federal Reserve decides what economic action to take. “Instead, they will look at what appears to be a slumping economy and continue to lower interest rates at least once or twice more this year,” he said.

Lighter Vehicle Sales

Sales of light vehicles were at record levels in 1999 and 2000.

“We expect to see an easing in light-duty vehicle sales this year, but some magnificent incentive programs from the OEMs have led consumers to continue to purchase automobiles,” Toja said. “But with a record 17.2 million vehicles sold last year, sales should be approximately 16.6 million this year and another 16.6 million next year. From a historical perspective, these are extremely strong numbers.”

Housing is already responding to lower mortgage rates. This will be a good sector of construction activity, Toja believes.

“The effect of this will be a rebound in real consumer spending,” he said. “Next year we will be back on par, with good growth in consumer spending.”

The slowdown in consumer spending has translated into decreased demand for capital goods. A number of industries have excess capacity. As a result, business investment has slowed. But as consumer spending picks up later this year and into 2002, capital goods orders also will pick up, according to Toja.

Trucking Industry Issues

The trucking industry has been plagued by a series of issues. Add them up, and the result is a loss in trailer demand. Among the negative factors Toja cited:

  • A huge influx of new equipment in recent years.

  • At the same time, carrier profitability slowed because of rising fuel costs, insurance premiums, and the compensation required to attract and retain drivers.

  • Sluggish traffic as a result of reductions in consumer and manufacturing spending.

  • Low asset valuations. The flood of late-model used equipment has knocked prices down. As a result, the existing equipment does not have the value the fleet expected.

  • Tight credit conditions.

“We believe these conditions will begin to ease as traffic improves and carrier profitability strengthens,” Toja said. “Diesel prices have begun to ease after the big run-up last year. They may increase some in the coming months, but we should then see more reasonable prices later this year.”

But according to Toja, the major weakness in demand for trucks and trailers continues to be a lack of traffic.

“Manufacturing has taken a tremendous hit over the last nine months,” he said. “We expect industrial production to improve in the next couple of months. Manufacturing should turn around again. And when manufacturing turns around, so does the transportation of raw materials and component parts associated with that final product.”

After a flat year in 2001, Toja expects manufacturing to increase 4% during 2002. He said that once manufacturing picks up, so will truck traffic.

On the Bright Side

Positive factors that Toja said will affect demand for trailers include:

  • Aggressive rate cuts. They are working now, Toja said, spurring the housing market and promising to affect other sectors of the economy in time.

  • The inventory drawdown is almost complete. Major exceptions are the high-tech sector and imports. Inventories also are high for imported goods, with a lot of foreign-made products stored in bonded warehouses. Inventories of domestic goods, however, generally are under control.

  • Manufacturing activities will revive. Once consumer demand begins to pick up, manufacturers will have to produce more to meet that demand — and to restock shelves. “We took our hit when inventories had to be cut, but we should get a boost because those shelves were drawn down during this lean period,” Toja said.

  • Merchandise trade will continue to expand. “This is the most dynamic element in our economy,” he said. “Goods don't just miraculously show up at the port — they have to be transported. The NAFTA economies in particular will grow. Canada and Mexico will turn in decent growth this year and next year. The interest rate cuts by the Fed should weaken the U S dollar and strengthen our exports next year. Merchandise trade (our imports and exports) as a percentage of the economy continues to rise. The U S truly is becoming a global player. We are going to need an efficient transportation system to help move imported and exported goods through the system. The next five years should be quite nice for all modes of transportation, particularly intermodal shipments with Mexico. Mexico must get product across the border a lot more efficiently.”

  • High levels of construction activity. The highway program in particular will be strong.

Toja expects good growth in intermodal traffic. Container-on-flatcar will continue to win traffic from trailer-on-flatcar. Even with the inroads being made by RoadRailer-type equipment, the container will be the dominant type of intermodal equipment long-term, he said.

Construction will grow because of increased highway spending. Highway spending was down 8% last year because of delays in how federal and state governments would share revenues. Expect strong spending later this year and next year. The turnaround here has already begun, Toja said.

He also expects other types of construction to hold up. Lower interest rates will support the residential sector. The only areas Toja expects to be weak are commercial and industrial construction.

In the agriculture sector, supply exceeds demand. “The farm market has only one problem these days — income,” Toja said. “The problem is low crop prices caused by the farmer's own efficiency. We have some of the highest yields per acre, regardless of whether the crop is corn, wheat, or soybeans. Unfortunately, we will be producing these record crops at a time when foreign demand is weakened. However, prices have begun to firm, and the Department of Agriculture expects exports to be up about 10%.”

Another positive from the perspective of trailer manufacturers involves the price of steel and aluminum. Prices for raw materials — steel and aluminum sheet — have been going down.

Final Words

Toja emphasized the role he expects world trade to play in maintaining demand for trucks and trailers.

“Keep in mind that one key ingredient in the sales price of a product is its transportation cost,” he said. “If America is to be competitive in a global market, the pressure will be on to deliver the most efficient and flexible equipment available.”

He also is bullish about internal demand. “The domestic economy will continue to expand,” he said. “If our citizens do not spend as much of their current income as they can, they consider themselves unpatriotic.

“The final message to you is that it will be tight for the next few quarters. But you cannot escape the fact that there is a lot of pressure in the system to upgrade equipment in the next three or four quarters. By the time we get together next year, there will be a lot more happy faces in this audience.”