TRAILER MANUFACTURERS can expect 2004 to be their best year in quite a while. But just how good will depend on continued economic growth and strengthening profits of the trucking industry, according to Kenny Vieth, partner and senior analyst at ACT Research Company LLC.
Speaking at the CTEA 40th Manufacturers Conference in Surrey, British Columbia November 4, Vieth said manufacturers could produce 254,400 complete truck trailers this year, a strong increase from the 180,000 trailers that his company projected were shipped in 2003.
“Trailer shipments hit an 18-month low in August,” Vieth said. “Since then, they have rebounded in September and October. Order cancellations and backlogs are at low levels. You can get a trailer built in three weeks.”
Manufacturers were producing trailers at an annual rate of about 180,000 for the previous six months, Vieth said. However, the stage is set for an acceleration. Here's why:
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Freight volume has been increasing, and freight rates continue to head higher.
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Fuel costs are in line with the contract base.
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Capacity of carriers is tightening.
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The value of late model tractors is recovering.
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Fleets are aging, and maintenance costs are rising.
Beyond the favorable conditions for fleets, the overall economy has been improving rapidly. It is a matter of time before economic prosperity spills over into the trailer market.
“Trucks and trailers tend to lag on the upswing of economic cycles,” Vieth said. “It's only after truckers are convinced that the economy will remain strong that they begin to buy equipment.”
Mixed environment
Conditions are not completely favorable for fleets, however. Vieth cited rising insurance costs, security issues, a tightening supply for drivers which is forcing wages to move higher, and new hours of service regulations that are diverting funds that otherwise could go toward the purchase of trucks and trailers.
One negative economic development has been the loss of manufacturing jobs to companies operating overseas.
“This has a profound effect on trucking,” Vieth said. “If it takes six or seven truckloads to produce something here, it only requires two or three to transport the same goods that are produced overseas.”
Vieth expects a strong increase in retail truck sales this year, in spite of a mixed review of what was happening in the market at the time of his presentation. He summarized the Class 8 market as “waiting for the rebound,” pointing out that Class 8 orders stalled during the third quarter last year. However, he reported that order cancellations and backlogs are low and that build rates and retail sales are inching forward.
The Class 5-7 truck market has three major segments, Vieth said — trucks, buses, and recreational vehicles. Truck sales are affected primarily by consumer spending, including new and used home sales and the purchase of durable goods. Business spending and government budget issues are other factors.
Looking ahead, Vieth expects retail sales of Class 8 trucks to reach 229,500 in 2004, up 30% from the estimated total sold during 2003.
Unlike Class 8 trucks, which were down slightly from 2002, retail sales edged up slightly in 2003. This year should be even better, according to ACT Research. Vieth expects a 15% increase in the sales of Class 5-7 trucks. Sales should grow from the 202,700 that Vieth projected for the final totals for 2003 to 232,000 this year.
Ready to grow
The pump is primed for short-term economic growth, Vieth said. Low interest rates, recovering wealth, and low inflation are all conditions that help fuel the economy — and all are in place now.
However, some factors are holding back the economy. They include:
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Employment. The job market remains soft.
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Real growth in wages is slowing.
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Consumer confidence is weak.
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Home equity, which has served as a significant source of income for consumers, has been heavily tapped.
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Energy prices are nibbling at discretionary funds.
On the business side of the economy, Vieth expects productivity to grow and the recent tax cuts to improve corporate profits. A weak dollar is helping U S companies to be more competitive in international markets. Additionally, companies are not burdened with excessive inventories. Any up tick in retail sales will also boost production.
“Meaningful recovery for trailers and Class 8 trucks requires stronger economic activity and continued improvement in trucker profitability,” Vieth concluded. “More freight equals higher freight rates and faster equipment mortality. When the economy comes around, recoveries in trucker profitability and heavy commercial vehicle demand will be strong.”