Trailers: Finally, the upswing begins

June 1, 2003
TRAILER MANUFACTURERS finally can expect an up year in 2003, snapping a streak of three straight years of declines. And the market should strengthen even

TRAILER MANUFACTURERS finally can expect an up year in 2003, snapping a streak of three straight years of declines. And the market should strengthen even more as the decade unfolds.

To summarize Peter Toja's trailer forecast, the industry has bottomed out and is heading up. Toja is president of Economic Planning Associates in Smithtown, New York.

Toja predicts that trailer manufacturers will ship 181,000 complete trailers this year, an increase of 31% from last year's performance. He also expects 2003 to be the beginning of another prolonged growth period for the industry, one that could last to 2008.

At the time of the TTMA convention, two things were affecting Toja's short-term vision. One was emergency eye surgery, which forced him to miss his first TTMA convention in decades. Dick Bowling, TTMA president, was a last-minute substitute, delivering the data that Toja had prepared. The surgery was successful, and Toja was able to return to work quickly.

However, the war in Iraq also was being conducted at the time of the convention, which placed a huge smudge on the crystal ball.

“The Iraqi conflict tops the list (of variables affecting the trailer market at the time of the convention),” Bowling said. “It's affecting oil prices and again affecting the motor carriers, because they are paying more for their diesel fuel. It's affecting their bottom line. The money has to come from somewhere in their overall expenditures, and capital goods could conceivably be one of areas from which they take the money.”

But with the war over and diesel prices declining, the attention can shift to other variables affecting the demand for truck trailers.

“Peter sees further improvements in your customer markets,” Bowling said. “Consumer spending, construction activities, and housing starts are definitely on an upturn.”

Another positive are the economies of our NAFTA neighbors, Mexico and Canada.

“Peter has said before to this group that Mexico is a market that when it finally takes hold is going to be substantial. Seventy percent of the goods that people purchase in Mexico are US-built. Keep that in mind when they finally get everything together. They are going to be a big player in the shipment of goods, because you don't move goods to Mexico by ship. A vast amount of goods travel across that border by truck. It's a big market that has yet to come to full development, but it is going to happen.”

Long-term growth

Toja feels 2003 will be the beginning of long-term annual growth in trailer demand. The growth, however, is expected to be less dramatic than that seen in the industry at the end of the 1990s.

“You are not getting back to the 283,000 range overnight,” Bowling said. “It's going to be a gradual increase. Maybe in one sense, that is good for the industry.”

Bowling said that if demand suddenly surged to 1999 levels, the industry probably would face a capacity problem.

Toja's forecast included estimates for 2003 and 2008. But unlike previous presentations, he did not include anything in between.

“This is definitely not a misprint,” Bowling said. “Peter was concerned that companies could use his estimated forecasts for 2004, 2005, 2006, and 2007 for making marketing plans. If the companies were not Peter's clients, they would not receive his quarterly and monthly updates. He was afraid that if you took those numbers without the quarterly updates, you could make some uninformed decisions.”

Tracking the variables

Here is a look at some of the key factors affecting demand for trucks and trailers:

  • Truck tonnage. The ATA Truck Tonnage Index is designed to measure the volume of freight that motor carrier members carry. The trend definitely is up and expected to continue, Bowling said. “If you move freight, you need trailers. If you don't have enough trailers in your current inventory, you have to buy some. So when that line is going up, it's a positive for this industry.”

  • Consolidated Freightways. The failure of this major carrier did not appreciably affect freight volume — other carriers are picking up the slack. According to Toja, much of the equipment at Consolidated Freightways was old and was selling at scrap prices. The dumping of Consolidated Freightways trailers into the market, he believes, had a limited negative impact on trailer sales.

  • Consumer confidence. Fourth-quarter 2002 was slow and first-quarter 2003 was lethargic. Consumer confidence is down, consumer spending is soft, job markets are weak, and manufacturing is flat.

  • Consumer income is advancing at a healthy rate. Toja believes that consumers spending will recover and that business investment will revive.

  • Inventory/sales ratio is definitely low, which means businesses are not stocking excess inventory, particularly after Sept 11, 2001. They do not have excess inventory in their warehouses right now, and manufacturing is poised to rebound.

  • Retail sales are down but are starting to trend upward in 2003. Toja thinks the consumer is now getting to a point of being ready to make some purchases. He expected further growth in retail sales now that consumers are no longer watching Iraqi war coverage. By comparing personal income with consumer spending, it appeared to Toja that consumers have the money — they just are not spending it presently due to a number of circumstances.

  • Government interest rates are definitely on the downward trend. They are way down on a one-year and 30-year basis. “That has an effect on the entire market,” Bowling said.

  • Mortgage rates have never been lower. This means that people who otherwise would not have purchased a house are now able to do so. Buying a house carries with it a multiplier affect. It's not just a home and all the materials that go into the construction of that home. It's all the products to furnish that house, Bowling said — refrigerators, carpeting, drapes, and stoves. If housing starts are up, all the products that have to go into that home are also going to increase.

  • Home values are definitely increasing across the country, despite some isolated pockets where that is not happening. Because people have equity in their homes, they are taking out a second mortgage because interest rates are low. They have additional cash in their hands that they can use.

  • Light-vehicle sales are maintaining a relatively good pace of between 16 million and 17 million vehicles per year. Toja expects sales to continue to hold up well, citing one manufacturer that just announced a zero percent interest rate for 60 months. People are saying, “Why not buy the car today since it's not going to cost a dime in interest?”

  • Manufacturers' new orders are on a positive trend again, and Toja expects the trend to continue. It will not grow rapidly, but the direction is very encouraging, Bowling said.

  • Industrial production peaked a few years ago, but it remains strong. Toja considers this a positive factor, Bowling said.

  • Intermodal traffic will continue to see a shift away from piggyback trailers and toward containers. The reason is efficiency. The same rail car that may carry only one piggyback trailer may be able to transport four containers.

  • Construction spending is definitely maintaining a pace. It has dropped a little, but now it is going back up.

  • Farm net cash income took a hit in 2002 continuing into 2003, but it is coming back. The substantial drop in 2002 was due in part to government reduction of farm subsidies. When some of that money is gone, farmers can't buy equipment, but the money is now starting to come back. The farmers will now have to purchase new equipment to replace the equipment they have been holding.